Chapter 8
Financial Issues
8.1 GENERAL PARTNERSHIPS
8.1.1 Internal financial arrangements
Profits
Subject to contrary agreement, partners share equally in the profits and losses of the business (s 24(1) of the Partnership Act). If a different arrangement is required (for example, to recompense a partner who has contributed a substantial share of the capital, or who has more experience or qualifications) this must be agreed, preferably in a written partnership agreement. In Joyce v Morissey and Others,1the Court of Appeal ruled that the presumption of equality was not displaced by the fact that two of the four partners controlled the management and had a greater commitment to the business, or by the fact that the other partners had received accounts showing an unequal division of profits.
In Popat v Shonchhatra2(see also below), the Court of Appeal held that ‘profits’ in s 24(1) included capital profits (assets over and above the firm’s capital) as well as income profits. In that case, two partners in a firm of newsagents had made unequal capital contributions but shared profits and losses equally. The defendant, who had made the greater contribution, continued the business alone on the dissolution of the partnership and sold the assets two years later at a profit. The court concluded that after the return of the capital, the proceeds of the asset sale should therefore be divided equally between the partners in accordance with s 24(1). In contrast, in Amin and
1Joyce v Morissey and Others [1999] EMLR 233.
2Popat v Shonchhatra [1997] 3 All ER 800.
Amin v Amin and others,3the court held that the presumption of equality in s 24(1) of the Partnership Act was displaced. In reaching this conclusion, it took into account a variety of factors, including the apparent acceptance by the other partners of the unequal profit shares proposed at the outset; the actual capital contributions made by the partners, which were unequal; the provisions of the accounts and the fact that they had been signed by all the partners other than the dissenting partner; the terms of the deeds relating to the disputed properties; the habitual making of drawings for personal use (which suggested that property purchased with that money was not necessarily partnership property); the source of the funds used to make mortgage repayments on partnership property; and the intention of the parties in relation to particular property and whether this was sufficient to create a trust over that property for the benefit of a person who was not the legal owner.
Section 42(1) of the Partnership Act provides an exception to the rule of equality in s 24(1), in the case of certain post-dissolution profits. It states that where the surviving or continuing partners carry on the business of the firm after dissolution, with its capital or assets and without any final settlement of accounts as between the partnership 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 his departure as is attributable to the use of his share of the partnership assets, or to interest at 5% per annum on that share. If the partnership agreement gives an option to the other partners to purchase the interest of an outgoing partner and that option is exercised, the outgoing partner or his estate is not entitled to any further share of profits (s 42(2) of the Partnership Act).
In Gill v Sandhu,4the Court of Appeal held that the reference to ‘the partnership assets’ in s 42 was to net rather than gross assets, that is to say, what remained for distribution between partners after all debts and liabilities of the partnership had been met. In Barclays Bank Trust Co Ltd v Bluff,5the court ruled that the reference to partnership ‘profits’ in s 42(1) applied only to post-dissolution income profits accruing in the ordinary course of business, and not to post-dissolution capital profits such as an increase in the value of the partnership assets. Capital profits after dissolution were therefore to be
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