England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
(HIS HONOUR JUDGE BEHRENS)

		Royal Courts of Justice Strand London, WC2
		5 February 2004

1. LORD JUSTICE BROOKE: I invite Lord Justice Chadwick to give the first judgment.
2. LORD JUSTICE CHADWICK: This is an appeal from an order made on 2nd May 2003 by His Honour Judge Behrens, sitting as a judge of the High Court at Leeds, in proceedings brought following the dissolution of a farming partnership. The principal issue raised by the appeal is as to the treatment of compensation monies received from the Department of Environment, Food and Rural Affairs (DEFRA) following a cull of livestock carried out after the dissolution of the partnership in pursuance of the government's measures to contain the spread of foot and mouth disease.
3. The partnership business had been carried on by two brothers, Harry Emerson and Thomas Emerson, on two farms, Luttrington and Wheatside farms, together comprising about 190 acres near Bishop Auckland in Durham. Harry Emerson died in August 1998. The effect of his death was to dissolve the partnership -- see section 33(1) of the Partnership Act 1890. Nevertheless, as is not unusual in the case of a small family farm, the surviving brother Thomas carried on the farming business following the death; in particular, he carried on the livestock enterprises comprising a flock of sheep and a dairy herd.
4. There was an outbreak of foot and mouth disease in this country in the spring of 2001. Large areas of the north of England and elsewhere were effected. The government, through the Ministry of Agriculture Fisheries and Food (MAFF), as it then was, adopted a policy of containment by slaughter. Where an animal showed symptoms of the disease the whole herd or flock of which it was a member was slaughtered under the direction of ministry officials. Further, neighbouring or contiguous herds or flocks were also slaughtered; notwithstanding that no animals on those neighbouring farms had been diagnosed as suffering from foot and mouth disease. That policy was applied to Luttrington and Wheatside farms in April 2001. The sheep and cattle on those farms were slaughtered and in due course Thomas Emerson, as the farmer in respect of the relevant holding or holdings, received compensation monies from DEFRA, to which the functions of MAFF had been transferred. The amount of those monies was £119,000 or thereabouts.
5. It has been common ground that those monies were paid in respect of livestock which, or the herd predecessors of which, had been on the farms at the death of Harry Emerson some two and a half years earlier and so were then, at his death, assets of the partnership of which he was a member.
6. The question is how those monies should be divided between Thomas Emerson and the estate of his brother Harry. I should mention for completeness that Thomas Emerson has since died, but nothing turns on that.
7. The starting point, as it seems to me, is section 39 of the Partnership Act 1890:

"On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm; and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or his representatives may on the termination of the partnership apply to the Court to wind up the business and affairs of the firm."

So that, following the death of Harry Emerson in August 1998, the obligations imposed on his brother were to realise the assets of the partnership; to apply the proceeds in paying the debts and liabilities of the partnership as at the date of Harry Emerson's death; and to distribute the surplus remaining after payment of debts and liabilities between Thomas and Harry Emerson.

8. But, of course, in a situation where the partnership business is carried on for the purposes of winding up, there will or may be profits or losses generated in the course of carrying on the business. The possibility that there may be profits generated between dissolution and the completion of winding up is provided for by section 42(1) of the 1890 Act, which is in these terms:

"Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent. per annum on the amount of his share of the partnership assets."

9. The judge approached the question in relation to the compensation monies by asking himself whether the compensation monies were profits made since the dissolution for the purposes of section 42 of the 1890 Act. If so, then, as he thought, the court had a discretion to exercise; if not, then the compensation monies represented a capital payment to be shared between the surviving and the deceased partner equally. At paragraph 25 of his judgment the judge put the position in these terms:

"If it is a capital payment it seems to me that it simply falls to be divided equally between the two competitors, Harry Emerson and his uncle, but if it is an income payment then other matters are relevant because if it is an income payment the only way Mr Harry Emerson can claim any part of it, and he clearly can, is by virtue of Section 42 of the Partnership Act 1890 and that gives the Court a discretion as to the share of the profits, and in any event one would have to take into account the other losses that had been made in order to determine what the profit was. So if it is an income profit the position is very much more flexible so far as the Court is concerned, but if it is a capital profit, as I have indicated, it seems to me that one simply divides the -- Mr Harry Emerson is simply entitled to 50% of it."

10. In that context 'Mr Harry Emerson' is the son of the deceased partner, whose name he shared. The competing interests, on a true analysis, are those of Mr Thomas Emerson (or, now, his estate) and the estate of his late brother Harry, the father of the 'Harry Emerson' to whom the judge refers in that passage.
11. The judge then reminded himself of the observations of Mr H.E. Francis QC (sitting as a deputy judge of the High Court) in Barclays Bank Trust Co Ltd v Bluff [1982] Chancery 172 at pages 181D to 182B. He went on to say this at paragraph 27:

"Now of course there is a distinction between that case [Bluff] and this because in that case what happened was some land was sold at a profit. But I think there are also a large number of analogies because it cannot in my view even be argued that this, the cull of all this livestock was in the ordinary course of business. As was pointed out in argument, and indeed in evidence, the Emersons did not really sell most of their herd, they kept it, and they kept it and used it for milking purposes, it was a dairy herd. So it does seem to me that there are significant analogies between this passage and the facts of this case, and I have come to the conclusion that, despite the submissions of Mr Hirst, that the profit that we have here is indeed a capital profit."

12. In my view the judge was plainly correct to take the view that section 42(1) of the Partnership Act 1890 had no application in relation to the compensation monies. It is clear, as this Court pointed out in Popat v Shonchhatra [1997] 1 WLR 1367 at 1374G, that post-dissolution capital profits cannot properly be regarded as "profits" for the purposes of section 42(1). The true position is that, to the extent that the compensation monies payable as a result of the slaughter of livestock in 2001 was in an amount greater than the value of that livestock, or corresponding livestock in the herd, as at the date of the dissolution of the partnership -- that is to say as at the date of the death of Mr Harry Emerson Senior in August 1998 -- the excess is to be treated as a profit for the purposes of section 24(1) of the 1890 Act. The reasons are those explained by Nourse LJ in Popat v Shonchhatra at the passage to which I have referred. Section 24 is in these terms:

"The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules:-

(1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm."

13. In Popat v Shonchhatra the problem that arose was that the share in capital under the partnership deed were not equal. So it became necessary to consider whether the increased value of the partnership assets between the date of the dissolution and the date of realisation was "profits", to be shared in equal shares, or "capital" to be shared in the shares provided for by the partnership deed. That is not a problem which arises in the present case. There is no dispute that Mr Thomas Emerson and his brother were partners in equal shares for all purposes.
14. The only issue in the present case, as it seems to me, is whether Mr Thomas Emerson should be entitled to some allowance as surviving partner and trustee for the cost to him of keeping the livestock between the death of his brother in August 1998 and the cull in April 2001. At the risk of stating the obvious, animals kept on a farm are unlikely to stay alive and in good condition unless they are fed and cared for. If they are to be fed then either grass has to be fertilised for that purpose or hay or other food stocks have to be bought in. It may well be that grass has to be cut to be made into hay, haylage or silage. That costs money. Is there to be any recompense for that outlay; or is the estate of Mr Harry Emerson to have the value of the herd, as realised following the cull, free of any obligation to contribute to the cost of keeping the cattle alive, so that there was a herd to be culled in April 2001?
15. The principle, as it seems to me, is conveniently found in a sentence at the beginning of the speech of Lord Templeman in Carver v Duncan [1985] 1 AC 1082 at 1120 between B and C:

"Trustees are entitled to be indemnified out of the capital and income of their trust fund against all obligations incurred by the trustees in the due performance of their duties and the due exercise of their powers."

It has not been suggested -- and could not sensibly be suggested -- that Mr Thomas Emerson was acting in excess of his powers in keeping this herd intact following the death of his brother in August 1998. Indeed, had Mr Thomas Emerson allowed the herd to deteriorate in condition and die through lack of food no doubt the estate of his brother would be loud in complaint; and rightly so. The only question therefore is: what amount should be allowed to Mr Thomas Emerson in respect of the performance of his obligations in preserving the partnership assets pending realisation by sale or, as happened in this case, compulsory slaughter and compensation?

16. The amount of compensation which is sought on this appeal is £28,850. That is said to comprise the trading losses incurred by the defendant between the death of Mr Harry Emerson on 14th August 1998 and 31st March 2001, that latter date being a convenient date -- being the end of the accounting year of the business -- just before the cull in April 2001; together with a further £5,100 paid by Mr Thomas Emerson to Mr Harry Emerson (junior) between 14th August 1998 and 31st July 2000.
17. The first of those sums is said to be the aggregate of the net losses as shown from Mr Thomas Emerson's trading accounts for the period from 14th August 1998 to 31st March 1999 and then for the two 12-month periods to 31st March 2001. But the arithmetic is incorrect. The true figure of that aggregate is £28,650. And there needs to be deducted from that a further £570, representing the cost of purchase of replacement sheep during those years. That is an amount which is allowed for in the accounts; but which has already been deducted by the judge in his order. So the true figure as it appears from the accounts would be an additional £28,080.
18. The amount of £5,100 represents monies paid at the rate of £50 a week to Mr Harry Emerson (junior) by his uncle Mr Thomas Emerson. There was obviously some doubt as to the basis upon which those payments were made. The payments were not included in the accounts of the business following 14th August 1998 as a deduction for wages. The judge, however, found that the payments were wages. He said that he thought it was almost unarguable that the £50 a week should be taken into account in any form of accounts:

"They were monies that were paid to Harry Emerson not on account of drawings, they were paid as the result of the work that he was doing. Whether it is right to call them wages or anything else I know not. They were certainly not said to be on account of his capital share in anything. In my view, those monies were paid to Harry Emerson and he is entitled to keep them."

Again as appears from context the Harry Emerson there referred to is Harry Emerson (junior).

19. The position, therefore, is that that £5,100, as the judge has found, was paid to Harry Emerson (junior) not to the estate of Harry Emerson (senior) and that it was paid by way of wages. And so the sum could and should if Mr Thomas Emerson had thought fit, have been included as a deduction in the accounts for the farming business after 14th August 1998.
20. One outcome of this appeal would have been to remit the matter to the county court with a direction that there be an enquiry as to what monies were actually expended in the upkeep of the cattle and sheep between 14th August 1998 and the date of the cull; and, indeed, possibly thereafter in realising the compensation monies by assisting in the cull and cleaning up the farm. But the parties have very sensibly come to the view that that would involve disproportionate expense. No challenge is made to the accounts as presented -- save in the respects of arithmetical error and double counting which I have identified -- and the estate of Harry Emerson does not seek to have the account re-opened (as it would be entitled to do). But the quid pro quo of that concession is that the account stands as it is -- and, the £5,100 not having been deducted as wages, it is now too late to seek to bring those payments into the accounts. That sum is not to be brought into the accounts of the business; and it is not to be set off against the amount otherwise payable to the estate of Harry Emerson (senior) because it was never paid to the estate. It was paid to Harry Emerson (junior) for his own benefit.
21. For those reasons I would allow this appeal to the extent of adding to the relevant paragraph of the order of 2nd May 2003 a further deduction in the amount of £28,080.
22. LORD JUSTICE SCOTT BAKER: I agree.
23. LORD JUSTICE BROOKE: I also agree.

ORDER: Appeal allowed to the extent of adding to the relevant paragraph of the order 2nd May 2003 a deduction in the amount of £28,080. Miss Margaret Emerson to be appointed to represent the estate of the defendant. Appellant entitled to full costs of the appeal.