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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 128
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A7/05
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OPINION OF LORD REED
in the cause
MRS JESSIE DUNCAN
AND ANOTHER
Pursuers
against
THE MFV MARIGOLD PD145 AND OTHERS
Defenders:
________________
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Pursuers: Ennis;
Brodies, WS (for Messrs Stewart & Watson,
Peterhead)
Defenders: Artis; Balfour & Manson, WS (for Iain Smith
& Co, Aberdeen)
22 August 2006
Introduction
[1] The late Michael Duncan
("the deceased") was one of four partners in a firm which operated a fishing
boat, the Marigold. He died on 18 March 2000.
Cessation accounts were drawn up as at that date, without the agreement
of the surviving partners. The accounts
brought out a balance in the deceased's capital account of £133,537. That sum was not however paid to the
deceased's executors, who are the pursuers in the present action. The surviving partners, who are the defenders
in the present action, continued to operate the Marigold for several years, but eventually wound up the
business. The assets were realised for
much less than the amount which appeared in the cessation accounts. On the basis of the amounts realised, the
defenders calculate that the share of the final surplus due to the pursuers is
£14,323. The central issue between the
parties is whether the pursuers should receive the sum brought out as due to
the deceased's estate in the cessation accounts, or the deceased's share of the
surplus of assets over liabilities at the completion of the winding up. There is also an issue as to the sum payable
to the pursuers in respect of the defenders' use of the assets of the former
partnership between the date of the deceased's death and the completion of the
winding up.
[2] The
stage which the action has reached is a discussion of the parties' preliminary
pleas. The court is therefore concerned
primarily with their respective cases as pleaded, rather than with evidence. It was however a matter of agreement that the
court should have regard to the cessation accounts, to which both parties'
pleadings refer.
The parties' positions
[3] It
may be helpful to begin by explaining the parties' respective positions. It is not in dispute that the deceased and
the defenders were partners in a partnership at will governed by Scots law, and
that the partnership was dissolved upon the death of the deceased. It is equally not in dispute that the
partnership engaged in commercial fishing;
that its principal asset was the Marigold,
together with the pressure stock licence and quota pertaining to it; and that the profits from the business were
divided in specified proportions, the deceased's share being 22/64ths. The pursuers' averment that the assets of the
business should, on dissolution, be divided in the same proportions is not
formally admitted but does not appear to be in dispute, the defenders'
calculation of the sum due to the pursuers being 22/64ths of what is said to
have been the final surplus on winding up.
[4] The
pursuers aver that, after the deceased died, the books and records of the
partnership were forwarded by the partnership's agents, Caley
Fisheries, to the partnership's accountants, Messrs Leiper
& Summers. Caley
Fisheries also provided the accountants with valuations of the partnership's
assets. The accountants then prepared
cessation accounts as at the date of death.
I was informed, and it was not disputed, that the accounts were prepared
without instructions to do so. It is
averred that the accounts were prepared in accordance with appropriate
accounting practice, and that they are a true and accurate statement of the
partnership's profit and loss account and balance sheet, and of the partners'
capital accounts, as at the date of death.
[5] The
accounts cover the period from 1
January 2000 to 17 March
2000, the previous accounts having been for the year ended 31 December 1999. It is apparent from the accounts that they
are based on a revaluation of the fishing boat, its value being stated at
£825,000 as at 17 March 2000,
compared with a figure of £360,000 as at 1 January
2000. Generally, the
accounts are detailed and specific.
[6] In
these circumstances, the pursuers conclude, first, for declarator
that the accounts are true and accurate, and that the pursuers are entitled to
payment of the share standing at credit of the deceased in his capital account,
and secondly, for payment of £133,537 with interest from 18 March 2000.
[7] The
defenders on the other hand aver:
"Following [the
deceased's] death, the surviving partners decided with the concurrence of the
pursuers to maintain the business and assets of the partnership whilst seeking
an agreed settlement of the net capital value attributable to the share of the
deceased. The pursuers sought agreement
from the defenders to purchase the share.
They sought a price which the defenders considered to be
unrealistic. Various proposals were
exchanged but no agreement was reached.
Eventually, in about August 2002 the defenders as the surviving partners
decided that, absent agreement, a winding up of the partnership could not be
delayed further and that the vessel, licence and quotas must be sold. At that time the first pursuer [the widow of
the deceased] refused to countenance the sale of the vessel. After further discussion with the pursuers
the winding up was put in hand by the defenders in about October 2002".
[8] The
defenders go on to aver that they were advised by Caley
Fisheries that the best return would be achieved by decommissioning the vessel
under a statutory scheme, and by selling the quota. The pursuers were consulted on the
decommissioning proposal and agreed, the first pursuer signing the necessary
application form. The application for a
decommissioning grant was initially unsuccessful. In August 2003, however, the Scottish
Executive made a conditional offer of a grant of £312,000, which was accepted
in October 2003 with the concurrence of the pursuers, the first pursuer
signing the acceptance form. The
fishing quota was transferred to a "dummy vessel", and was finally sold and
transferred to the Scottish Fishermen's Organisation for £150,000 under a
written agreement entered into in March and April 2005. It is averred that the sums of £312,000 and £150,000
were "paid into the partnership's account with the Bank of Scotland and applied
by them to the extinction of partnership debts to the bank". After paying "partnership debts", a surplus
of £41,688 remained. The defenders
maintain that the deceased's share of that sum - £14,323 - is the amount due to
the pursuers. In relation to the
difference between the £462,000 received in total for the Marigold and its quota, and the £825,000 figure in the accounts
prepared by Leiper & Summers, I was informed that
the value of the quota had diminished considerably between 2000 and 2005 as a
result of changes in the Common Fisheries Policy, and that the vessel itself
had suffered wear and tear, having undergone an extensive refit (costing over
£200,000) not long before the death of the deceased, and having continued to be
used for fishing between 2000 and its eventual decommissioning. The defenders also aver that Leiper & Summers in any event overstated the value of
the deceased's share.
[9] In
response to the defenders' averments, the pursuers maintain that the correct
construction to place upon the conduct of the defenders after the death of the
deceased, in continuing to engage in commercial fishing using the Marigold, is that they formed a new
partnership at will. That second
partnership continued to use the assets of the original partnership. It borrowed additional amounts. Eventually, under pressure from its
creditors, the second partnership decided to wind up its affairs, and proceeded
to decommission the Marigold and to
sell the quota. The executors were
required to execute documentation in order for that process to be
completed. It was the second partnership
which received the resultant proceeds.
[10] In these circumstances, in addition to a capital sum of
£133,537, the pursuers also seek a payment in respect of the use by the
defenders of the deceased's share of the assets of the original
partnership. The amount sought is
calculated as 5 per cent per annum of the value of the deceased's share of
the Marigold and its quota as at the
date of death. In that regard, the
pursuers aver that the value of the Marigold,
and of the quota, were £422,300 and £618,730 respectively as at the date of
death. These figures are higher than
those in the accounts, and are based on valuations subsequently obtained. On the basis of those valuations, the amount
due has been calculated as £53,678, and there is a conclusion for payment of
that sum. It is acknowledged that the
first pursuer has received certain payments from the defenders.
[11] In answer to this claim, the defenders aver:
"[F]rom the date of [the deceased's] death the first pursuer
continued to receive his share [of earnings] until the cessation of
fishing. On the occasion of each fishing
trip settlement she was paid a sum equal to that of the crew members ....Esto, which is
denied, the surviving partners comprised a new partnership (the Second
Partnership) the first pursuer was a partner thereof and assumed her husband's
share of the assets. In the course of a
meeting with [one of the defenders] in the Autumn of 2001 she volunteered that
she would 'step into his [the deceased's] shoes' until such time as her
circumstances changed. She assumed his
share as her own. On the hypothesis of a
Second Partnership she contributed to the assets, as her own to give, the
deceased's share of the assets in the former partnership. Thereafter she received all payments due to a
partner in respect of that share.....The first pursuer has received the profit
attributable to her husband's share of the partnership assets, and continued to
do so until those assets ceased to be used".
[12] The defenders also maintain that, in the event that the
contention that there was a second partnership is accepted, they have a right
against the first pursuer:
"Esto, which is
denied, the defenders are a Second Partnership and as such are obliged to
account to the pursuers for the value of the deceased's capital account, the
first pursuer is liable to account for her use thereof and dealings therein and
the defenders are entitled to contribution et
separatim relief from her to the extent of her rateable
share thereof. Separatim, the first pursuer is
the deceased's executor nominate. In the
circumstances and on the hypothesis that, contrary to the defenders'
contentions, there is such a Second Partnership and it assumed the assets of
the former partnership the first pursuer is liable to account for her
intromissions with the estate of the deceased and in particular for her actions
in assuming her husband's share and contributing it to the Second Partnership
as her share of its assets. She is
liable to account to the estate for any diminution in its value following upon
those intromissions. The pursuers should
look to the first pursuer as an individual for her liability to them in respect
of such intromissions. Accordingly the
defenders are entitled to a contribution from the first pursuer to the extent
that the defenders are held liable to the pursuers for any sum exceeding that
deposited to the account of the deceased on the winding up of the business,
namely £14,323.42".
The legal context
[13] The Scottish law of partnership has a number of aspects which
are not altogether straightforward, and on which there is little modern
authority. Several are relevant to the
present case. The parties' submissions
did not address these issues in depth. Rather
than proceed directly to a discussion of the parties' submissions, it appears
to me to be preferable to begin by attempting to understand, primarily with the
assistance of the provisions and authorities cited by counsel, the overall
structure of the relevant law. With that
structure in mind, the submissions can then be considered in that context.
[14] Considering first the position prior to the death of the
deceased, it is helpful to have at least some idea of the nature of the rights
that existed in relation to the partnership's assets: in particular, the Marigold and its quota. In
Scots law, "a firm is a legal person distinct from the partners of whom it is
composed": Partnership Act 1890, section
4(2). It follows that, in general, a
partnership is regarded in Scots law as being capable of owning property and of
holding rights and assuming obligations.
[15] In the present case, notwithstanding an averment by the
pursuers that the Marigold was owned
by "the partners" in the proportions 22//64ths to the deceased, and
22/64ths, 10/64ths and 10/64ths respectively to the three other partners, it
was made clear by counsel for both parties that their common position was that
the Marigold was owned by the
partnership; and that was said to be the
intended meaning of the averment to which I have just referred. Counsel's submissions proceeded on the basis
that the Marigold was owned by the
partnership in the same way as other corporeal moveable property. The position
is however not so simple. The ownership
of ships (including fishing vessels) has long been the subject of special
rules, by virtue of the provisions of the Merchant Shipping Acts. The relevant provisions are currently
contained in the Merchant Shipping Act 1995 and the Merchant Shipping
(Registration of Ships) Regulations 1993 (S.I.1993 No. 3138), as amended. The effect of those provisions is not however
critical to my decision, which would be the same even if they did not
apply. In the circumstances, I need say
little about them, other than in general terms.
[16] Under the Merchant Shipping Acts, the property in a British
ship registered in the United Kingdom
is divided into sixty-four shares, the ownership of which must be
registered. A distinction is drawn by
the legislation between the legal title to the shares, which is held by the
registered owner, and equitable interests (an expression employed in the 1995
Act, at paragraph 1(2) of Schedule 1), including beneficial ownership (an
expression employed in the Regulations, at regulation 1(2)), which may be held
by another person. No trust can be
registered (regulation 6); and the
registered owner has an absolute power of disposal of the shares held in his
name, subject to any rights appearing from the register to be vested in any
other person (paragraph 1(1) of
Schedule 1 to the 1995 Act). A
Scottish partnership is not qualified to be the registered owner of a British
ship, including a fishing vessel (regulations 12 and 13). When, therefore, the parties to the present
action are agreed that the Marigold
was owned by the partnership, that would appear to mean that the shares were
registered in the names of the partners but that they held the shares for the
benefit of the partnership.
[17] So far as the licence and the quota are concerned, the parties'
submissions proceeded on the basis that the licence and the quota were
incorporeal moveable property owned by the partnership. Counsel were however unable to explain either
the licensing system or the quota system.
In the circumstances, it would be inappropriate to embark on a detailed
analysis of these complex matters. As
with the Marigold, however, it is
helpful to have at least some idea of the legal position. In broad terms, a fishing boat requires a
fishing licence, under the Sea Fish (Conservation) Act 1967 (as amended) and
regulations made thereunder, for the purpose of
fishing within specified areas. The
licence is granted to the owner (or charterer, as the
case may be) in respect of a named vessel.
The quota system created by EU law for the conservation of fish stocks
has been implemented in the United Kingdom
in a way which makes use of this licensing system. In outline, a fixed quota allocation,
consisting of a number of quota units in respect of each fish stock, is
attached to the licence; and the
quantity of each fish stock which can be caught by the vessel depends on the
quota units. As the pleadings in the
present case indicate, it is possible in practice for the quota units attached
to the licence issued in respect of a given vessel to be transferred to another
licence. Such a transfer may take place
when a fishing vessel is decommissioned, and its licence therefore has to be
surrendered. Such transfers commonly
take place for value. Whether or not the
quota units constitute any form of property known to the law (a matter on which
I express no opinion), they have a value, as a matter of economic reality,
which is capable of realisation by the holder of the licence to which they are
attached. In the present case, it is
implicit in the pleadings (and is apparent from productions to which reference
was made in the course of parties' submissions) that the licence was held in
the name of the four partners, presumably on the basis that they were the
registered owners of the vessel. As with
the vessel itself, the individual partners will have held the licence for the
benefit of the partnership.
[18] It is necessary to consider next the position following the
death of the deceased. It is a matter of
admission that, immediately on the death of the deceased, the partnership was
"brought to an end". The defenders'
pleadings also refer to the "dissolution" of the partnership; and it is apparent from the submissions that
both parties are proceeding on the basis that the partnership was
dissolved. That is consistent with the
agreed description of the partnership as a partnership at will, and with
section 33(1) of the 1890 Act:
"Subject to any
agreement between the partners, every partnership is dissolved as regards all
the partners by the death or bankruptcy of any partner".
[19] The dissolution of the partnership has the consequence (unless
otherwise agreed) that its affairs must be wound up and the assets distributed
in accordance with section 44 of the 1890 Act. Although that proposition was disputed in
the present case by counsel for the pursuers, it appears to me to be
established by the authorities. As Romer L.J stated in Re Bourne [1906] 2 Ch.427 at pages 431-432:
"When a partner
dies and the partnership comes to an end, it is not only the right, but the
duty, of the surviving partner to realize the assets for the purpose of winding
up the partnership affairs, including the payment of the partnership debts".
Although that case was concerned
with a situation where there was only one surviving partner, and where there
was therefore no possibility of the firm continuing (in the sense in which the
relationship of partnership may continue between surviving partners, under their
contract of partnership, notwithstanding the death, retirement or expulsion of
a partner), the principle is not confined to that situation. It was, for example, expressed in general
terms by Viscount Haldane in Hugh Stevenson & Sons Ltd v Aktiengesellschaft fűr Cartonnagen-Industrie [1918] A.C.239 at page 246:
"In the absence
of a special agreement to the contrary, and there is none such in the contract
before us, the rule is that on a dissolution of partnership all the property of
the partnership shall be converted into money by a sale, and that the proceeds
of the sale, after discharging all the partnership debts and liabilities, shall
be divided among the partners according to their shares".
[20] These dicta do not depend on any special feature of English
law. The necessity of a winding up
(unless otherwise agreed) has also long been established in Scots law. Clark
on Partnership, for example, states (at Vol. II, page 682):
"When a company
[i.e. a partnership] is dissolved by death, the concern must, as in the case of
dissolution from any other cause, be wound up with as little delay as
possible. The whole company property
must be realized, the debts constituted and collected, the personalty
and heritable property brought to a sale;
and even the good-will, when it is of a nature to go with the premises,
must in like manner be disposed of".
[21] The duty to wind up the affairs of the partnership is reflected
in section 39 of the 1890 Act:
"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".
[22] Winding up can be carried out in two ways: either by the former partners, as envisaged
by section 38 of the 1890 Act, or by the court, under section 39. In the present case, it is the former
provision which is relevant. Winding up
can also take different forms. In some
cases the business may be disposed of as a going concern; and in some such cases, the acquirers may be
a new partnership, comprising the surviving partners of the dissolved
partnership. In other cases, the
business may have to be broken up and the assets sold.
[23] The dissolution of the partnership, and the consequent duty of
the surviving partners to wind up its affairs, give rise to numerous possible
questions, several of which are relevant to the present case. First, what happens to the rights and
property of the partnership on dissolution, if the partnership then ceases to
exist? Secondly, can the surviving
partners continue to carry on the business of the dissolved partnership as part
of the winding up? Thirdly, if they
continue the business, whether as part of the winding up or otherwise, in what
capacity do they do so? In particular,
are they to be regarded as a new partnership (as counsel for the pursuers submitted
in the present case), or as acting in some other capacity (for example, as
trustees, as counsel for the defenders submitted)? Fourthly, how are post-dissolution profits
(or losses) resulting from the use of partnership assets, and increases (or decreases)
in the value of those assets, to be treated?
[24] In attempting to answer these questions, the starting point is
the 1890 Act. It is important at the
outset to understand the nature of that Act, and its relationship to the
pre-existing common law. The 1890 Act
began life in the form of a Private Member's Bill drafted by the young
Frederick Pollock for the Associated Chambers of Commerce, following the
publication of the first edition of his Digest
of the Law of Partnership (as Pollock explained in the 2nd edition at pages xxv-xxvi,
and in the 4th edition at pages 161-162). As Pollock later narrated (in the 5th edition,
at page v), the Bill was:
"intended,
first, to codify the general law of partnership; secondly, to authorize and regulate the formation
of private partnerships with limited liability ....; and, thirdly, to establish
universal and compulsory registration of firms".
The second and third of these
objectives were later dropped, so that the provisions eventually enacted (which
were substantially those of Pollock's Bill, subject to some amendments) were
designed, for the most part, to codify the existing law.
[25] As Lord Rodger of Earlsferry
explained in his 1991 Maccabaean Lecture,
"In its original
form [the Bill] did not apply to Scotland
but in the final stages of its passage through Parliament this was
changed. The change was supported by the
Faculty of Advocates who thought that the addition of a few words would be
enough 'so to frame the Bill as to make it the means of effecting a complete
assimilation of the laws of the two kingdoms on partnership'"
("The Codification of Commercial
Law in Victorian Britain" (1992) 108 LQR 570 at page 578).
[26] The 1890 Act was not drafted in the manner of most modern
statutes. As Pollock explained (e.g. in
the introduction to the 2nd edition), he deliberately eschewed the
style of the Parliamentary draftsman, and instead took as his model the Indian
Codes of Macaulay and Stephen, which stated the central principles of the
existing law in a series of general propositions. Nor did the Act purport to be an exhaustive
statement of the law. As Pollock
explained (in the 5th edition, at pages vii-viii):
"It will be
observed that the Partnership Act does not purport to abrogate the case-law on
the subject, but on the contrary declares that 'the rules of equity and common
law applicable to partnership shall continue in force except so far as they are
inconsistent with the express provisions of this Act' (section 46). The Act, therefore, will doubtless be read
and applied in the light of the decisions which have built up the existing
rules. Should any practitioner imagine
that he might now relegate Lord Justice Lindley's book, for example, to an
upper shelf, he would soon be undeceived".
The last sentence in that passage referred
to Lindley on Partnership, the 5th
edition of which had been published in 1888.
[27] As a measure designed to codify the law (albeit partially), the
1890 Act has to be approached, in the first instance, in the manner described
by Lord Herschell in Bank of England v Vagliano Brothers [1891]
A.C.107 at pages 144-145:
"I think the
proper course is in the first instance to examine the language of the statute
and to ask what is its natural meaning, uninfluenced by any considerations derived
from the previous state of the law, and not to start with inquiring how the law
previously stood, and then, assuming that it was probably intended to leave it
unaltered, to see if the words of the enactment will bear an interpretation in
conformity with this view".
At the same time, his Lordship
said, at page 145:
"I am of course
far from asserting that recourse may never be had to the previous state of the
law for the purpose of aiding in the construction of the provisions of the
code. If, for example, a provision be of
doubtful import, such resort would be perfectly legitimate".
Those dicta related to the Bills of
Exchange Act 1882 (which contained a provision similar to section 46 of the
1890 Act), but would appear to be equally applicable to the 1890 Act.
[28] Sections 32 to 44 of the 1890 Act, in particular, form a group
of sections headed "Dissolution of Partnership, and its consequences". They are, in effect, the part of the
partnership code contained in the 1890 Act concerned with dissolution and its
consequences. As such, they should in my
opinion be read together.
[29] The provision of the 1890 Act most directly concerned with the
effect of dissolution upon the partnership is section 38. So far as material, section 38 provides:
"After the dissolution
of a partnership the authority of each partner to bind the firm, and the other
rights and obligations of the partners, continue notwithstanding the
dissolution so far as may be necessary to wind up the affairs of the
partnership, and to complete transactions begun but unfinished at the time of
the dissolution, but not otherwise".
[30] Following Bank of England
v Vagliano Brothers the starting point, in
considering section 38, is the language of the section itself. The section provides for the continuation,
notwithstanding the dissolution of the partnership, of "the authority of each
partner to bind the firm, and the other rights and obligations of the
partners". The authority of each partner
to bind the firm, prior to dissolution, is succinctly described in section 5
(the sidenote to which is "Power of partner to bind
the firm"):
"Every partner
is an agent of the firm and his other partners for the purpose of the business
of the partnership; and the acts of
every partner who does any act for carrying on in the usual way business of the
kind carried on by the firm ..... bind the firm and his partners.....".
[31] If the agency described in section 5 is not continued in force
after dissolution by the reference in section 38 to "the authority of each partner
to bind the firm" (on the view that the "firm", as defined by section 4 in
relation to Scotland, ceases to exist on dissolution), it is in any event continued
in force by the reference to "the other rights and obligations of the
partners". The other rights and
obligations which exist during the subsistence of a partnership are
manifold. They include rights and
obligations of partners in relation to third parties, such as the joint and
several liability of individual partners for the debts and obligations of the
firm, under section 9. They also include
rights and obligations of partners as between one another, such as the
obligation to render accounts, under section 28. Insofar as the continuation of those rights
and obligations may be necessary to wind up the affairs of the partnership, and
to complete unfinished transactions, that continuation is effected by
section 38. As will appear,
however, rights and obligations in respect of matters which are collateral to
the winding up or the completion of unfinished transactions, such as the use of
the partnership assets to derive private profits or to continue the business of
the partnership, are dealt with by other provisions (sections 29 and 42
respectively, so far as those examples are concerned).
[32] The background to section 38, including the pre-existing law
which it was intended to summarise, is consistent with this approach to its
interpretation, and provides additional assistance in so far as section 38
can be described (for the reasons discussed below) as being, in Lord Herschell's words, "of doubtful import". Section 38 was modelled on
clause 55 of Pollock's Bill, but was more widely expressed. Clause 55 had been in almost the same
terms as section 38, but instead of the phrase "so far as may be necessary
to wind up the affairs of the partnership", clause 55 had employed the
phrase "so far as may be necessary to settle and liquidate existing
demands". In that regard, clause 55 had
followed almost verbatim a passage in the then current edition of Lindley on Partnership (4th
edition, 1878, Vol.I at page 412) in which the
continuing agency of a partner after the dissolution of the partnership was
described:
"The doctrine
now in question cannot, it is submitted, be carried further than this, viz, that notwithstanding dissolution, a partner has
implied authority to bind the firm so far as may be necessary to settle and
liquidate existing demands, and to complete transactions begun, but unfinished,
at the time of the dissolution".
Lindley
also acknowledged that a partner had the power to dispose of partnership assets
following dissolution.
[33] As I have explained, section 38 adopted more general wording,
resembling that of the corresponding provision (section 263) of the Indian
Contract Act 1872 ("After a dissolution of partnership, the rights and
obligations of the partners continue in all things necessary for winding up the
business of the partnership"). As a
result, section 38 might be interpreted (as it was by Lord Justice Clerk
Scott Dickson in Dickson v National Bank of Scotland 1916 S.C.589
at page 594) as stating two alternative purposes for which a partner's rights
and obligations would continue notwithstanding dissolution: first, "to wind up the affairs of the
partnership", and secondly, "to complete transactions begun but unfinished at
the time of the dissolution".
[34] It is apparent, both from Pollock's Digest and from a commentary on the 1890 Act, by Lord Lindley and
others, which was published in 1891 as a Supplement
to Lindley on Partnership, that section 38 was understood at the time to
reflect the existing law. The Supplement is of particular interest as
it contains separate commentaries on the 1890 Act from an English and a
Scottish perspective, the author of the Scottish commentary being J.C. Lorimer, who had been a member of the Faculty of Advocates'
Committee on the Bill.
[35] Lorimer's commentary on section 38
states that "this is the existing law" and refers to the decision in Douglas Heron & Co v Gordon (1795) 3 Paton 428,
where the House of Lords had affirmed an interlocutor finding "that every copartnery must, from its nature, subsist after it has been
dissolved, or the term for which it was entered into expired, to the effect of
winding up its affairs". Lorimer also refers to Bell's
Commentaries (Vol.2, page 527,
in McLaren's edition):
"The partnership
is dissolved in so far as the power of contracting new debts is concerned, but
continued to the effect of levying the debts, paying the engagements of the
company, and calling on the partners to answer the demands".
The position in Scots law prior to
the 1890 Act is described more fully in Clark
on Partnership, Vol.II, at pages 672-673:
"When a
partnership is brought to a termination, it still continues to subsist for the
purposes of winding up; and until this
has been accomplished, the partnership relation cannot be said to have entirely
ceased. In the absence of special
agreement to the contrary, the former partners have the right and power of
winding up. ....In the case of dissolution by death, the power vests in the
surviving partners, to the exclusion of the representatives of the deceased
partner .....
But the
partnership, and with it the agency of the former partners to bind their
fellows, at once ceases as to all future contracts; it subsists only for the purposes of winding
up, which will be strictly construed to mean recovering of debts, fulfilling
existing obligations, and calling on the former partners to contribute ....Such
powers of agency as the partners retain is strictly confined to winding up or
completing transactions begun, and not terminated at the date of dissolution".
[36] The effect of section 38, in relation to Scots law, was
considered in Dickson v National Bank of Scotland 1917
S.C.(H.L.) 50, where Lord Finlay L.C. said, at
page 52:
"Section 38 of
the Partnership Act 1890, really embodied the old law relating to partnership
derived originally from the Roman law, and it is this - that for certain
purposes a partnership continues notwithstanding dissolution. There is an interesting passage quoted from Paulus in the Digest by Sir Frederick Pollock in his
edition of the Partnership Act, where it is pointed out that, although when one
of a firm dies the survivors cannot undertake new transactions on behalf of the
firm, they can complete what is left unfinished, and that distinction is really
what animates this section 38 and the law of which section 38 is the
embodiment".
In relation to Paulus,
the reference is to Justinian's Digest
III 5.21:
"Si vivo Titio negotia
eius administrare coepi, intermittere mortuo eo non debeo: nova tamen inchoare necesse mihi non est, vetera
explicare ac conservare necessarium est. Ut accidit cum alter ex socius mortuus est: nam quaecumque prioris negotii explicandi causa geruntur, nihilum refert, quo tempore consummentur,
sed quo tempore inchoarentur"
("If I began to manage Titius's affairs during his lifetime, I ought not to leave
off at his death. However, there is no
necessity for me to enter into new transactions, though it is necessary to
complete and look after old ones. It is
the same as when one of two partners has died;
for as regards any transactions to complete previous business, the issue
is not when these are finished, but when they were begun"). For present purposes, the important point to
be taken from Lord Finlay's speech, with which
Lord Dunedin, Lord Shaw of Dunfermline and Lord Parker of Waddington
expressed their agreement, is that "the survivors cannot undertake new
transactions on behalf of the firm".
[37] Section 38 was considered again by the House of Lords in Inland Revenue v Graham's Trustees 1971 S.C.(H.L.)1, where the issue was whether a
non-assignable lease to a partnership continued in existence after the firm had
been dissolved as a consequence of the death of one of the partners. One of the arguments was that the surviving
partners were entitled to remain in occupation of the subjects under the lease
(which had not been due to expire until a date subsequent to that of the death)
by virtue of section 38, reliance being placed on the authority "to
complete transactions begun but unfinished".
Although no argument of that kind arises in the present case, the
speeches contain some observations of wider relevance.
[38] As a matter of construction of the partnership agreement,
Lord Reid concluded (at page 20) that the contract of co-partnery came to an end on the death of any of the
partners, and that the partnership therefore ceased to exist. In relation to section 38,
Lord Reid said (at page 21):
"It was argued
that 'transactions' means bargains. But
that would deprive this provision of all content, for it is clear that
surviving partners have no right to bind the assets of the dissolved firm by
making new bargains or contracts. Their
right and duty is to wind up its affairs.
In my view this must mean that the surviving partners have the right and
duty to complete all unfinished operations necessary to fulfil contracts of the
firm which were still in force when the firm was dissolved .....
In my opinion, section
38 does not make the surviving partners parties to the firm's contracts and so keep those contracts
alive. That would involve a radical
change in Scots law. But I see no
difficulty in holding that this section does require unfinished operations to
be completed under the conditions which would have applied if the contract had
still existed".
Lord Upjohn similarly proceeded on
the basis that the partnership ceased to exist on the date of death. In relation to section 38, his Lordship said
(at pages 26-27):
"It seems to me
that the primary purpose of that section is to enable the surviving partners to
bind the deceased or outgoing partners or their estates in order that the
affairs of the partnership may be properly wound up. In England
it may be that it is not often that this section is required to justify the
completion of contracts with other parties, because such rights and obligations
can normally and usually be dealt with by reference to the general law. Thus, for example, if a firm contracts to
build a bridge, that contract is not affected by its dissolution. The remaining partners and the outgoing or
the estate of a deceased partner will normally remain both entitled and jointly
and severally liable under the general law to complete the bargain. Section 38 makes it plain that the continuing
partners can in doing so bind the ex-partners or their estates. But I can well understand that in Scots law,
without giving it any different a construction, it may be necessary to invoke
the section more often than under English law because of section 4(2) of the
Partnership Act, and, the partnership having come to an end as a legal person
on dissolution, the contract presumably must come to an end. But, nevertheless, this section makes it
plain that the ex-partners will remain entitled and bound to carry out the
contracts made in the name of the partnership and must complete all those
contracts and other matters which are in medio when the partnership was a going concern. But their rights under section 38 are limited
by the provision that they may do so only so far as it may be necessary to wind
up the affairs of the partnership and - this is the important passage - to
complete transactions begun but unfinished at the time of the dissolution".
[39] The approach adopted in Inland
Revenue v Graham's Trustees was
followed in Lujo Properties Limited v Green 1997 S.L.T. 225. The question in that case was whether an
assignable lease remained an asset of the partnership, which could be assigned
in the course of the winding up, notwithstanding that the tenant (the
partnership) had ceased to exist. That
question does not arise in the present case;
but the opinion of Lord Penrose (at page 236) also contains observations
concerned with the effect of dissolution on a partnership's interest in shares
in a company, which are relevant in considering the effect of dissolution on a
partnership's interest in shares in a vessel:
"Where a
partnership was beneficial owner of shares in a private limited company whose
articles restricted transfer, none of the former partners might be acceptable
to the directors of the company as shareholders following dissolution. But the shares would not disappear simply
because there was no subsisting member-company relationship involving the
firm. The dissolution of the firm would
imply that the persona recognised as beneficial owner perhaps under a trust
registration had disappeared. But the
shares would remain in existence and would be capable of transfer to someone
acceptable to the directors as a member".
[40] The approach adopted in Inland
Revenue v Graham's Trustees
creates a difficulty in relation to property rights in partnership assets,
following the dissolution of the partnership, which the earlier authorities
avoided by deeming the partnership to continue in existence until the winding
up had been completed. In the present
case, it might be necessary to consider the question of property rights if the
defenders' contention that the first pursuer had wrongfully intromitted
with the estate of the deceased required to be examined: for the reasons explained below, however, it
is unnecessary to examine that contention at present. The more relevant issue, for present
purposes, concerns the "partnership assets" (or "assets of the firm") within
the meaning of the 1890 Act (in particular, sections 42 and 44). Whatever the property rights might be
following dissolution, it can hardly be doubted that the Marigold would continue to constitute an asset of the firm for the
purposes of those provisions. Although,
as explained earlier, the 64 shares in the Marigold
appear to have been registered in the names of the partners, they held those
shares for the benefit of the partnership.
When the partnership was dissolved, it follows (on the approach adopted
in Inland Revenue v Graham's Trustees and Lujo Properties Limited v Green) that the holder of the beneficial
interest in the shares prior to dissolution ceased to exist. The shares would have to continue to be
regarded as "partnership assets" for the purposes of the 1890 Act, and would be
held by the registered owners for the purpose of winding up the affairs of the
partnership. The quota units attached to
the licence would equally fall to be realised as part of the winding up.
[41] Another question which arises, in the light of the authorities
discussed, concerns whether the surviving partners are entitled under section
38 to carry on the partnership business.
Lord Finlay L.C. said in Dickson v National Bank of
Scotland that "the survivors cannot undertake new transactions on behalf of
the firm", and Lord Reid said in Inland
Revenue v Graham's Trustees, that
"the surviving partners have no right to bind the assets of the dissolved firm
by making new bargains or contracts". So
construed, section 38 reflects the pre-existing Scots law, as stated in the
passages from Bell's Commentaries and
Clark on Partnership which were
quoted earlier. At the same time,
certain contracts may be "necessary to wind up the affairs of the
partnership": a partner must, in
particular, have authority to sell the partnership assets if the affairs of the
partnership are to be wound up (cf. Hurst
v Bryk [2002]
1 A.C.185, 196 per Lord Millett) and
therefore must be authorised to some extent, by section 38, to make new contracts.
[42] Whether section 38 authorises the carrying on of the business
of the dissolved partnership (other than the completion of unfinished
transactions), in order to facilitate its eventual realisation, is not a
straightforward question. In Re Bourne it was conceded that there is
a duty to carry on the business if it is necessary to do so; but the court appears to have been of the
view that the concession was correctly made, Vaughan Williams L.J. stating
at pages 430-431:
"The real truth
of the matter is that, leaving out all questions of legal estate, there is, as
between the surviving partner and the representatives of the deceased partner,
an overriding duty to wind up the partnership assets and to do such acts as are
necessary for that purpose, and if it is necessary for that winding up either
to continue the business or borrow money or to sell assets, whether those
assets are real or personal, the right and the duty are co-extensive".
A similar approach was adopted by
the Court of Appeal in Don King
Productions Inc v Warren
[2000] Ch.291, which was concerned with the renewal of management contracts by
former partners in a dissolved firm of boxing promoters, prior to the
completion of the winding up. Morritt L.J., with whose judgment the other members of the
court agreed, referred (at paragraph 42) to:
"[t]he duty of a
partner to renew a management or promotion agreement for the benefit of the
partnership so as to facilitate the beneficial winding up of its affairs, cf section 38 of the Partnership Act 1890".
[43] From a practical point of view, there may be advantages in
enabling the business of a dissolved partnership to be carried on during the
twilight period of winding up: a
business may be realised to best advantage as a going concern, and the
continuation of trading may be necessary to maintain the value of the
goodwill. On any view, however, section
38 cannot warrant the continuation of the business for more than a temporary
period. On the approach adopted in Re Bourne and Don King Productions, it would appear to be necessary to examine
the facts in order to determine whether a given transaction arose from the conduct
of the business of the dissolved partnership by former partners for the purpose
of winding up the affairs of the partnership, and was "necessary" for that
purpose, or whether it was attributable to some other relationship between the
former partners.
[44] In the light of the Scottish authorities, on the other hand,
there appear to me to be doubts as to the extent of the surviving partners'
authority under section 38 to enter into new contractual commitments: in particular, the authorities suggest that
the surviving partners do not have authority under section 38 to enter into new
trading contracts. That approach is
arguably more consistent than the alternative with section 43 of the 1890
Act (discussed below), in terms of which the outgoing or deceased partner's
share is a debt accruing at the date of the dissolution. Reading sections 38 and 43 together, they
might be thought to suggest that winding up is a procedure whereby the amount
of the debt which accrued at the date of dissolution is ascertained and paid,
in which event the winding up would not be expected to encompass new trading
contracts. That conclusion might also be
thought to be consistent with section 42, under which profits earned through
the continuation of the partnership business after dissolution are dealt with
separately and on a different basis from pre-dissolution profits. It is however unnecessary to express any
concluded view on these matters at present:
for the reasons explained below, my decision does not turn on these
matters, although they may require to be considered again once the issues
between the parties come to be addressed on a proper footing.
[45] Where there is a delay in winding up the affairs of a
partnership, sections 29 and 42 of the 1890 Act may also apply. Section 29 provides:
"(1) Every
partner must account to the firm for any benefit derived by him without the
consent of the other partners from any transaction concerning the partnership,
or from any use by him of the partnership property, name, or business
connection.
(2) This section
applies also to transactions undertaken after a partnership has been dissolved
by the death of a partner, and before the affairs thereof have been completely
wound up, either by any surviving partner or by the representatives of the
deceased partner".
The principle expressed in section
29(1) can be regarded as following from the relation of agency between each
partner and the firm and his other partners, established in accordance with
section 5, and the good faith which is required in all transactions
between partners. The applicability of
the same principle during the period between a dissolution and the completion
of winding up is made clear by section 29(2), and reflects the
pre-existing law in both England
and Scotland. Indeed, although section 29(2) is concerned
only with the situation where the dissolution has resulted from the death of a
partner, section 29 also applies to other dissolutions (Pathirana v Pathirana [1967] 1 A.C.233).
[46] Section 42 of the 1890 Act deals with the situation where the
surviving or continuing partners carry on the partnership business with its
capital or assets without any final settlement of accounts with the outgoing
partner or his estate. It applies not
only where the partnership continues but also where the partnership assets are
used by a new partnership (Chandroutie v Gajadhar [1987] A.C.147).
It confers on the outgoing partner or his estate an option:
"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".
This reflects the pre-existing
Scots law (summarised in Lorimer's commentary on section 42), under
which interest, or a share of the profits, was awarded in respect of the funds
of the deceased or outgoing partner which were retained and employed in the
business. The rationale is explained in Clark on Partnership (at page 669) as
follows:
"If on the
retirement, bankruptcy, or death of a partner, the others continue to carry on
the business as before, without coming to any settlement with the late partner,
they will be liable to account to him or his representatives for so much of the
subsequent share of the profits as can be fairly attributed to such share of
the capital as he was entitled to, but had not yet received. The principle upon which this doctrine is
based is the very equitable one, that no one can make use of the capital of
another for purposes of gain, especially involving risk of its loss, without
the knowledge and consent of its owner;
and that if this be done, the user must communicate the proceeds of the
speculation to the true owner".
[47] Section 29(2) and section 42 may both apply in a situation
where the partnership assets are used by surviving partners during the period
between dissolution and the completion of winding up (Pathirana v Pathirana; John Taylors v Masons
[2001] EWCA Civ.2106):
section 29(2) is concerned with the obligation of the surviving
partners to account for benefits which they have derived, and section 42 is
concerned with the right of the representatives of the deceased partner to be compensated
for the use of the deceased's capital.
[48] It is also necessary to consider section 43 of the 1890 Act,
which provides:
"Subject to any
agreement between the partners, the amount due from surviving or continuing
partners to an outgoing partner or the representatives of a deceased partner in
respect of the outgoing or deceased partner's share is a debt accruing at the
date of the dissolution or death".
[49] The interpretation of this provision has given rise to
difficulty. The current (18th)
edition of Lindley & Banks on
Partnership states (at paragraph 23-34):
"It is, however,
difficult to see how this section can apply in the case of a general
dissolution: if the outgoing/deceased
partner's share is indeed converted into a debt, it is of a most unusual
nature, since it is clear that he or his estate is entitled to a full share of
any increase in the value of the partnership assets accruing in the period
between the date of dissolution and the date of realisation and, conversely,
must bear a full share of any diminution in value during that period".
[50] One conclusion which might be drawn is that section 43 is
not intended to apply to a dissolution where there is to be a winding up. That
was the view taken by Lorimer in his commentary on
the 1890 Act (at page 111):
"This section
proceeds on the footing that there is no winding up, but that by contract, the
value of a deceased or retiring partner's share is to be ascertained and paid
out. Accordingly the date, unless
otherwise stipulated, at which the value falls to be ascertained will be the
date of dissolution. The amount thus
becomes a debt bearing interest from that date".
The same view is expressed in the
current edition of Lindley & Banks on
Partnership at paragraphs 23-34 and 26-04.
The Law Commission and the Scottish Law Commission in their Joint
Consultation Paper on Partnership Law (Law Commission Consultation Paper
No.159, Scottish Law Commission Paper No.111, 2000) likewise distinguished
between "the position where a partner leaves a continuing partnership and the
position where the partnership comes to an end as regards all the partners",
and expressed the view (at paragraph 7.5) that "section 43 seems to be
confined to the continuing partnership".
[51] I have reservations about this approach to section 43. The language of the provision is general in
its scope: it does not bear to be
restricted to any particular type of dissolution of a partnership. It is concerned with "the amount due ....in
respect of the outgoing or deceased partner's share". The share of a partner has long been
understood to mean "his proportion of the partnership assets after they all
have been realised and converted into money, and all the debts and liabilities
have been paid and discharged" (Lindley & Banks on Partnership,
paragraph 19-05). The amount due in
respect of the outgoing or deceased partner's share is therefore an amount
which (unless otherwise agreed) is ascertained by a realisation of the assets
and the payment of partnership debts: in
other words, by a winding up. The
outgoing or deceased partner's share does not appear to include his interest in
post-dissolution profits, which is covered instead by section 42, and
possibly also by other provisions such as section 29. To describe the outgoing or deceased
partner's share, so understood, as "a debt accruing at the date of the
dissolution" does not appear to me to cause an insuperable difficulty. Where there is to be a winding up, the debt can
be understood as being debitum in praesenti, solvendum in futuro, and also
as being in an amount which is unascertained when the debt accrues but
ascertainable through the procedure of winding up.
[52] A consideration of the background to section 43 tends to
support the view that it applies to all dissolutions. The discussion of section 43 in Pollock's Digest suggests that an objective of
the provision was to ensure that claims by an outgoing partner, or by the
representatives of a deceased partner, were subject to the limitation period
under English law (or, under Scots law, to the prescriptive period) applicable
to ordinary debts, with time running from the date of dissolution. The section was regarded, in particular, as
giving statutory effect to the decision of the House of Lords in Knox v Gye (1872) L.R. 5 H.L.656. In the leading speech in that case,
Lord Westbury said (at page 675):
"In deciding
this case, it must be recollected that the representative of a deceased partner
has no specific interest in, or claim upon, any particular part of the
partnership estate. The whole property
therein accrues to the surviving partner, and he is the owner thereof both at
law and in equity. The right of the
deceased partner's representative consists in having an account of the
property, of its collection and application, and in recovering that portion of
the clear balance that accrues to the deceased's share and interest in the
partnership.
Another source
of error in this matter is the looseness with which the word 'trustee' is
frequently used. The surviving partner
is often called a 'trustee' but the term is used inaccurately. He is not a trustee, either expressly or by
implication. On the death of a partner
the law confers on his representatives certain rights as against the surviving
partner, and imposes upon the latter correspondent obligations".
The intended significance of the
use of the word "debt", in section 43, appears to have been to make it clear
that the surviving partners were not trustees for the deceased partner's
representatives in respect of his interest in the partnership, and that the
claim of the representatives against the surviving partners was therefore
subject to the Statute of Limitations.
Lord Lindley's commentary on the section, in its application to
English law (in the Supplement), is
to the same effect. Interpreted as a
provision concerned primarily with prescription and limitation, and with the
related question whether the surviving partners should be regarded as trustees,
section 43 can be understood as applicable to all dissolutions.
[53] Finally, section 44 of the 1890 Act sets out rules which are to
be observed (subject to any agreement), "in settling accounts between the
partners after a dissolution of partnership".
These rules provide for the payment of losses, and then for the
application of the assets of the firm, any surplus being divided between the
partners.
The parties' submissions
The
pursuers' claim based on accounts as at
the date of death
[54] On behalf of the defenders, it was submitted in the first place
that, in the absence of agreement, there was no basis for the deceased's share
of the assets to be determined by accounts drawn up as at the date of his
death: the affairs of the partnership
had to be wound up by the surviving partners and distributed in accordance with
section 44 of the 1890 Act.
Reference was made to Thomson,
Petitioner, 1893 S.L.T.59, Re Bourne,
Hugh Stevenson & Sons Ltd v Aktiengesellschaft für Cartonnagen-Industrie and
Hurst
v Bryk. The pursuers' averments in support of their
conclusion for declarator that they were entitled to
payment of the sum brought out by the cessation accounts, and their conclusion
for payment of that sum, were based on a valuation of the deceased's share as
at the date of death rather than on the amount to which the estate was entitled
under section 44, and were accordingly irrelevant. The defenders maintained that they had
carried out a winding up, after they had attempted, unsuccessfully, to agree a
negotiated settlement with the pursuers.
If the pursuers were dissatisfied with the defenders' calculation of the
amount due to the estate on winding up, their remedy lay in an action of count,
reckoning and payment. Reference was
made to Cruikshank v Sutherland
(1923) 92 L.J.(Ch.)136,
Noble v Noble 1965 S.L.T.415, 1983 S.L.T.339 (Appendix), Shaw v Shaw 1968 S.L.T.94 and Clark
v Watson 1982 S.L.T.450.
[55] In response, counsel for the pursuers submitted that since the
death of the deceased brought about the dissolution of the partnership,
section 43 of the 1890 Act applied.
The debt to the deceased's estate accrued as at the date of death. The deceased's entitlement must therefore be
based on a valuation as at the date of death.
Any change in value between the date of death and the date of
realisation must be ignored. Reference
was made to Noble v Noble, Shaw v Shaw, Clark
v Watson, and Thom's Executors v Russell
& Aitken 1983 S.L.T.335. Although section 39 conferred on an outgoing
partner (or the representatives of a deceased partner) a right to have a
winding up, there was no duty to carry out a winding up.
[56] In a brief reply on this aspect of the case, counsel for the
defenders did not dispute that section 43 was applicable, but submitted
that it was only at the end of the winding up that the amount of the debt due
to the estate could be ascertained, notwithstanding that the debt accrued at
the date of death.
[57] For the reasons I have explained, it appears to me that, unless
otherwise agreed, there must be a winding up of the affairs of a partnership
when the partnership is dissolved. As
discussed earlier, there is room for argument as to whether section 43 is
applicable to all dissolutions. I am
content to proceed on the basis, adopted by counsel for both parties, that
section 43 is so applicable: a basis
which accords with my own provisional view.
Even on that view, however, the proposition that, because section 43
characterises the amount due by the defenders in respect of the deceased's
share as a debt accruing at the date of dissolution, that amount must therefore
be ascertained by a valuation as at that date, rather than by a winding up,
appears to me to be a non sequitur. In addition, as I have indicated, the
proposition is inconsistent with the duty of the surviving partners to wind up
the affairs of the partnership (unless otherwise agreed) and to distribute any surplus
in accordance with section 44. It
is also inconsistent with the principle that the outgoing partner, or the estate
of the deceased partner, is entitled to a full share of any increase in the
value of the partnership assets accruing in the period between the date of
dissolution and the date of realisation:
Barclays Bank Trust Co Ltd v Bluff [1982] 1 Ch.172, Chandroutie v Gajadhar and Popat v Shonchhatra
[1997] 1 W.L.R.1367.
[58] A cessation account prepared as at the date of dissolution is
not therefore (unless otherwise agreed) the measure of the amount due to the
estate of a deceased partner. The
balance due to the estate must (unless otherwise agreed) be ascertained by
winding up the affairs of the partnership and following the rules prescribed in
section 44. If the pursuers do not
accept the defenders' calculation of the amount due to them under section 44,
the appropriate remedy under Scots law is (normally, at least) an action of
accounting.
[59] In the circumstances, I can deal briefly with a second basis on
which the pursuers' case, so far as based on the cessation accounts, was
challenged. It was argued that, since
the defenders were under an obligation to account to the pursuers, the
pursuers' remedy must inevitably be an action of count, reckoning and
payment: the pursuers could not
themselves produce an account and seek payment of the amount shown as being due
to them (unless the account was agreed to be the measure of the defenders'
liability). Reference was made to Green v Moran 2002 S.C.575.
[60] The latter case does not however support the proposition that
an action of count, reckoning and payment must always be raised. On the contrary, Lord Macfadyen in that case accepted (at paragraph 12) that the
pursuer could sue for payment of a specific sum, but must in that event make
"relevant averments addressing the proper measure of his entitlement, and sufficiently
specific averments giving fair notice to the defenders of the way in which he
contends the valuation of the assets should be undertaken". It was because the pursuers' pleadings in
that case did not measure up to that standard that the action was
dismissed. Reference might also be made
to Marchmont Ltd v Clayton 1989 S.L.T.725, where Lord President Emslie, delivering the Opinion of the Court, said (at
page 728):
"where, as here,
the actual sum allegedly due by the defender is known to the pursuers the
appropriate remedy is an ordinary action for payment".
If, contrary to my view, this was a
case in which the pursuers' entitlement could be established by accounts drawn
up as at the date of death, I would not have refused to allow the pursuers' case
to proceed to proof on the basis of the accounts produced.
The
pursuers' claim under section 42 of the 1890 Act
[61] On behalf of the defenders, certain criticisms were made of the
pursuers' pleadings in support of their claim under section 42 of the 1890
Act: that the pleadings as to the
ownership of the vessel and the quota were unclear as to whether ownership was
held by the partnership or by the individual partners, and that the pursuers
had failed to take account of the payment made by the defenders to the first
pursuer.
62] Although
not perhaps a model of clarity, the pursuers' pleadings about these matters
nevertheless appear to me to give fair notice of the pursuers' position. So far as the payments made to the first
pursuer are concerned, counsel for the pursuers conceded that they ought to be
taken into account. Any amount awarded
under section 42 will therefore have to reflect those payments, once their
amount has been established. Precisely
how the payments ought to be taken into account - whether merely as payments on
account of the sum due to the estate, or as reducing the deceased's share in
the partnership assets - was not discussed in the present case. In the circumstances, I express no opinion on
the matter, which I note was discussed in Sandhu v Gill [2005] EWCA Civ.1297, [2006] 2 W.L.R.8, to which reference was
made by counsel.
[63] It was also noted during the discussion in the present case that
the sum sued for has been calculated by taking five per cent per annum of the
deceased's profit share and applying that fraction to the value of the capital
assets of the firm, disregarding liabilities.
The reference in section 42(1) to the outgoing or deceased
partner's "share of the partnership assets" must however in my view be intended
to refer to his share of the net assets of the partnership, rather than to a proportion
of the gross assets: the object of
section 42 is to compensate the outgoing partner or his estate for the
retention and use of his funds, and it is therefore the amount of those funds
which is relevant to the calculation of interest. I note that the same conclusion was reached
by the Court of Appeal in Sandhu v Gill. As Neuberger L.J. observed in that case
(at paragraph 35):
"[I]t would seem
to me quite remarkable if the partner who carries on the business could be
obliged to pay the excluded partner interest based on a sum equal to the value
of the latter's interest in the gross assets of the partnership, i.e. his
interest in the assets of the partnership, without taking into account the
liabilities of the partnership".
One implication is that the amount
payable under section 42 cannot be calculated until the amount of the
outgoing or deceased partner's share of the partnership assets has first been
determined: something which, in the
present case, will have to be determined (in the absence of agreement) by an
action of accounting.
The
pursuers' averments of a second partnership
[64] A further matter raised on
behalf of the defenders concerned the pursuers' averments that, following the
death of the deceased, the defenders formed a new partnership, which continued
to use the Marigold and the quota to
engage in commercial fishing. In her
submissions, counsel for the pursuers argued that the existence of the new
partnership supported her argument that the pursuers should receive the
deceased's share of the assets of the original partnership as valued at the
date of dissolution, rather than the lower value eventually realised. In essence, her argument was that, if the surviving
partners elected to form a new partnership which traded using the assets of the
original partnership, instead of winding up the affairs of the original
partnership, that new partnership should bear the risk of any diminution in the
value of the assets (including the diminution in value attributable to their
use of the assets), rather than the deceased's estate having to bear any part
of that loss.
[65] In response, counsel for the defenders argued that the
pursuers' averments about a new partnership were insufficiently specific, and
in any event irrelevant: the correct
analysis, it was said, was that the defenders had acted as trustees of the
assets of the original partnership, holding those assets in trust for those
entitled to benefit from them, and for the creditors of the dissolved
partnership. They had carried on the
business in that capacity. In that
regard, reliance was placed on a dictum of Lord Dunedin, in Hugh Stevenson & Sons Ltd v Aktiengesellschaft für Cartonnagen-Industrie (at page 248), in which the
appellants were one of the partners of an Anglo-German partnership which had
been dissolved by the outbreak of the First World War:
"The appellants
have at their own hand continued the business.
The result in law is that they carry on the business as trustees for the
partners until the winding up is effected".
Counsel also referred to Barclays Bank Trust Co Ltd v Bluff, which concerned a farming
partnership of a father and son, which was dissolved by the death of the
father. The son continued the business,
using the farm land and buildings.
Counsel cited a short passage from the judgment of
H E Francis, Q.C., sitting as a deputy judge, at page 182:
"After all, the
[surviving partner] is not the sole beneficial owner of the farm. He is a trustee of it for the deceased's
estate and himself".
In the present case, since the
partnership assets were held by the defenders in trust, the pursuers as
beneficiaries of the trust were affected, in the same way as the other
beneficiaries (including the defenders), by any diminution in the value of the
trust assets. Equally, if the defenders
entered into new contracts, it followed from Inland Revenue v Graham's
Trustees that they did not do so by virtue of section 38 of the 1890
Act: they must therefore be taken as
entering into such contracts as trustees for all persons interested in the
firm.
[66] Whether surviving or continuing partners who carry on the
business of the firm using the assets of the partnership are to be regarded as
having formed a new partnership, or as continuing to exercise the rights of
partners in the original partnership by virtue of section 38 of the 1890 Act,
depends on whether they are acting within the scope of section 38. As explained earlier, the scope of the powers
conferred by section 38 is not entirely clear, particularly in relation to the
undertaking of new transactions, and therefore to the continuation of a trading
business. On the basis of the Scottish
authorities discussed earlier, my provisional view is that the carrying on of
commercial fishing by the defenders for a period of several years after the
dissolution of the original partnership could not be regarded as falling within
the scope of section 38, but would be consistent with the formation of a
new partnership. It is however
unnecessary to express a concluded view, since no question requires to be
determined at this stage which appears to me to turn on whether a particular
transaction entered into by the defenders fell within the scope of
section 38, and was therefore binding on the pursuers, or not. If such an issue were to arise (e.g. in
relation to the bank borrowings), it would require more detailed
consideration. The contention actually
advanced on behalf of the pursuers - that, if there was a new partnership, that
partnership bore the risk of any diminution in the value of the assets of the
original partnership - was unsupported by any reference to authority, and is in
my opinion fallacious. On a winding up,
the assets are to be realised and any surplus distributed in accordance with
the relevant provisions of the 1890 Act.
The operation of those provisions is not ousted by a delay in the
winding up (subject to any question of prescription). If the executors of a deceased partner are
concerned about such delay, their remedy is to seek an order for winding up
under section 39, and (if need be) the appointment of a judicial factor to
carry out the winding up. If, pending
the winding up, the surviving partners continue the business, the estate of the
deceased partner is entitled to share in the post-dissolution profits, and in
any increase in the value of the partnership assets, in accordance with the
relevant statutory provisions. As
Neuberger L.J. noted in Sandhu v Gill
(at paragraphs 37-39), those provisions are not concerned to penalise a partner
who continues the business pending the completion of winding up. If an outgoing partner or his estate is
entitled to a full share of any increase in the value of the partnership assets
accruing in the period between the date of dissolution and the date of
realisation (as is apparent from such authorities as Barclays Bank Trust Co Ltd v Bluff
and Chandroutie
v Gajadhar),
the corollary is that they must equally bear a full share of any diminution in
value during that period (subject to any liability of the surviving partners
for losses due to their misconduct or negligence, of the kind considered in Ross Harper & Murphy v Banks 2000 S.C.500). If the executors wish to guard against the
risk of a diminution in the value of the partnership assets, their remedy is
again to seek an order for winding up, and (if need be) the appointment of a
judicial factor.
[67] It is unnecessary in the circumstances to determine whether the
defenders continued the business in the capacity of partners (whether in a new
partnership, or by virtue of section 38) or in the capacity of trustees. It is not however in my view accurate in
Scots law, in general at least, to describe surviving or continuing partners,
who continue the business of a dissolved partnership pending its winding up, as
doing so in the capacity of trustees. I
refer in that regard to the earlier discussion of section 43 of the 1890 Act,
and its background in Knox v Gye.
There are of course situations where partnership assets are vested,
prior to the dissolution of the partnership, in individual partners as trustees
for the firm. Even in that situation,
however, the partners carry on the business of the firm as partners and not in
the capacity of trustees; and, on dissolution,
section 38 will apply.
Other
issues
[68] Counsel for the pursuers challenged the relevancy of the
defenders' averments that, in the event that a second partnership was formed,
the first pursuer was a partner in that firm and contributed the deceased's
share of the assets of the original partnership to that firm. Counsel also challenged the relevancy of the
consequential averments that the first pursuer had wrongfully intromitted with the estate of the deceased, and that the
defenders were therefore entitled to a contribution from the first pursuer, as
an individual, to the extent that they were found liable to the pursuers as
executors for any sum exceeding the figure which they calculated as the
deceased's share of the surplus on the winding up.
[69] In reply, counsel for the defenders said that the averments had
been made as a basis for convening the first pursuer as a third party. It was accepted that, since no third party
claim had in fact been made against the first pursuer, the averments were
irrelevant to any issue presently before the court. In the circumstances, I need say nothing
further about these matters.
Conclusion
[70] For the foregoing reasons, the action appears to me to be
misconceived in so far as it seeks declarator that
the pursuers are entitled to payment of the balance on the deceased's capital
account brought out by the cessation accounts, and payment of that amount. The remaining substantive conclusion, for
payment of the sums said to be due as interest under section 42 of the
1890 Act, proceeds on a basis (namely, that interest is due on a proportion of
the gross assets of the partnership, as valued at the date of dissolution)
which also appears to me to be misconceived.
In the circumstances, I shall sustain the defenders' plea to the
relevancy of the pursuers' averments and dismiss the action.
