Partnership Assets – Decision Overturned

The Court of Appeal has reversed a decision in a case of significance to many partnerships.

The partnership in question was carried on by a Mr Gill and a Mr Sandhu, who purchased a residential care home which was then managed by Mr Gill, who had lent Mr Sandhu a considerable proportion of the purchase price. Mr Gill was paid a salary out of the partnership profits and the balance of the profits was split equally. The partners had agreed that the partnership assets were to be owned equally.

The business ran at a loss and in April 1999 the partnership was dissolved. In May 1999, Mr Sandhu applied to have the partnership wound up. Mr Gill continued to operate the care home after the dissolution and it then began to make profits.

Mr Gill claimed that the profits earned during the period between the dissolution of the partnership and its winding-up belonged exclusively to him. Mr Sandhu disagreed, claiming that there was a ‘presumption of equality’ which entitled him to a half share of the post-dissolution profits, claiming in effect that his share should be based on the gross partnership assets, not the net assets on the date of dissolution. On behalf of Mr Gill, it was argued that on the date of dissolution, any entitlement of Mr Sandhu to the assets of the partnership would be more than outweighed by his debt (of £70,000) to Mr Gill.

The Court of Appeal considered section 42 of the Partnership Act 1890, which deals with the dissolution of partnerships. The Court concluded that the words ‘share of partnership assets’ means a share of the partnership assets on dissolution and therefore the post-dissolution profits belonged to Mr Gill. Accordingly, the division of the partnership assets would be based on the April 1999 values. The problem this raises, in the words of Lord Justice Neuberger, is that, “The practical consequences of accepting the appellant's case can be said to be somewhat unsatisfactory, in that, in the absence of agreement, the court would have to carry out, or at least to commission, a fairly detailed account both of the assets and liabilities of the partnership and of the value of each partner's share of the net assets, as at the date of dissolution, in order to determine the amount to which the excluded partner is entitled."

Conclusion

It may be surprising to some that a piece of legislation well over a century old (the Partnership Act 1890) still provides controversy. The practical implication of this decision is that when a partnership ceases yet the trading continues, until the winding up any partners who continue to trade using the partnership assets do so at their own risk and will need to ensure that the values of assets at the date of dissolution are ascertainable, so that the net assets of each partner can be calculated. A written Partnership Agreement is a worthwhile consideration.