Phantom Partnerships and Post-Dissolution Profits: Sheveleu v Brown and Ducker

Date01 May 2019
Pages230-236
DOI10.3366/elr.2019.0550
Published date01 May 2019
INTRODUCTION

In May 2013, the pursuer and two defenders, all general practitioners, began operating a medical practice in Dumfries and Galloway. They ran the practice as a partnership called the Southern Machars Group Practice. The firm's profits were to be shared equally between the three doctors. The medical services that the practice was required to provide, and the basis upon which the firm was paid by the Dumfries and Galloway Health Board, were set out in a general medical services contract (the “DGNHS contract”).

By February 2014, the relationship between the pursuer and the defenders had broken down due to the pursuer's alleged unacceptable behaviour towards patients. The firm was dissolved on 12 March 2014. Under the DGNHS contract, the practice was obliged to give six months’ notice before ceasing to provide services. The Health Board required the practice to continue operating until the earlier of the end of this notice period and the date on which a new contractual relationship was established. The two defenders continued to carry out the functions which had been required of the firm until 30 June 2014 (by which point they had formed a new partnership and entered into a new general medical services contract with the Health Board). The Health Board paid the defenders for these services, in accordance with the terms of the DGNHS contract. The defenders did not, however, share these payments with the pursuer, their former partner. The pursuer considered that the payments constituted partnership profits and sought to recover his proportionate share by raising an action of count, reckoning and payment against the defenders.1

DECISION

Overturning the decision of the Sheriff Appeal Court,2 the First Division of the Inner House held that the pursuer was entitled to a share of these profits. The court's starting point with respect to dissolution was that “[d]issolution brings a partnership to an end; but only to an extent”,3 relying upon the remark of the Lord Chancellor (Finlay) in the 1917 case of Dickson v National Bank of Scotland that “for certain purposes a partnership continues notwithstanding dissolution”.4 The court adopted counsel's analogy that the position was akin to the “ghost of the former firm continuing to manifest its presence until it is finally laid to rest by the completion of winding up”.5 One of the main mechanisms by which a firm continues notwithstanding dissolution is to be found in section 38 of the Partnership Act 1890 (the “1890 Act”), which “provides that after dissolution every partner (in the sense of former partner) has authority, albeit limited authority, ‘to bind the firm’”.6 The two defenders had used this authority to discharge the dissolved firm's obligations under the DGNHS contract and had been paid for their services. Since the pursuer had been entitled to share in the profits arising from this contract prior to dissolution, the First Division concluded that he was also entitled to share in the profits arising in the course of winding the contract up, even though he did not play an active role in this process.7

ANALYSIS

The First Division's decision certainly has intuitive appeal and it is suggested that the court reached the correct outcome. However, as this section will show, there are aspects of the court's analysis which appear to be inconsistent with the prior authorities on the dissolution of Scottish partnerships.

The pre-1890 Act common law position

One might think that the dissolution of a partnership must mark the end of the road for the firm. Yet, the notion that there can be some sort of post-dissolution afterlife to facilitate the winding up process has lengthy pedigree in both English and Scots law. The case summary for the 1675 English case of Beak v Beak notes that “[a] partnership in trade is continued for some purposes after a dissolution”.8 By the latter half of the following century, this idea was gaining...

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