Sandhu v Gill
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE RIX,Lord Justice Neuberger,Mrs Justice Black,Lord Justice Mummery,LORD JUSTICE MUMMERY |
| Judgment Date | 02 November 2005 |
| Neutral Citation | [2005] EWCA Civ 1476,[2005] EWCA Civ 523,[2005] EWCA Civ 1297 |
| Docket Number | A3/2005/0258,Case No: A3/2005/0258 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 November 2005 |
[2005] EWCA Civ 1297
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Lightman
CH2004PTA0618
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Neuberger and
Mrs Justice Black
Case No: A3/2005/0258
Mr Mark Blackett-Ord (instructed by Messrs S.K.T. Thobhani) for the Appellant
Mr Timothy Walker (instructed by Messrs Lindops) for the Respondent
The issue in this appeal centres on the meaning of the words "his share of the partnership assets" in section 42(1) of the Partnership Act 1890 ("the 1890 Act", and references in this judgment to sections are to sections of that Act). In his judgment, which is reported at [2005] 1 All ER 990, Lightman J, upholding Master Bowles, held that the reference to a share in section 42(1) was to the partner's share in the proprietary ownership of the assets belonging to the partnership. He also held that, in a case such as this, where there were two partners and there was nothing to displace what might be called the presumption of equality, it effectively meant half the gross assets of the partnership.
The facts
The relevant facts are as follows. The claimant, Mr Kulbir Singh Sandhu, and the defendant, Mr Hardip Singh Gill, agreed, as partners at will, to purchase a property ("the property") at 59 Mountdale Gardens, Leigh-on-Sea, Essex with a view to converting it into, and then running it as, an old people's home. To that end, they executed a deed ("the deed") on 12 September 1995 setting out the terms of the partnership. Under the deed, it was agreed that Mr Sandhu would manage the home, and that the net profits, after paying Mr Sandhu for his services, would be divided equally between the partners.
Mr Gill had purchased the property with his own money on 21 July 1995 for £171,450. It was agreed that each partner would pay about £85,000 by way of capital contribution to the partnership, and that the balance required to fund the development of the property and set up the business would be raised by way of a bank loan. Mr Sandhu was, as I understand it, to pay his contribution to Mr Gill, given Mr Gill had paid for the property. Mr Sandhu could only pay a limited amount until he had sold two flats that he owned. Accordingly, he agreed to pay the balance of his contribution, £70,000, referred to as "the Contribution" in the deed, to Mr Gill, when he had sold the flats.
Clause 10 of the deed dealt with "partnership property". By Clause 10.1, it was agreed that "as soon as practicable… Mr Sandhu shall pay the Contribution to Mr Gill", and that, in the mean time, Mr Gill was to be entitled to receive the rent from the two flats. Clause 10.2 provided that, "after payment of the Contribution" the property "shall become partnership property", and that Mr Gill would declare a trust of the same on the basis that the partners would be tenants in common. Clause 10.3 recorded that all other partnership assets were to "belong to the partners jointly".
Apart from the fact that Mr Sandhu paid to Mr Gill only £21,250 of the £70,000, or any part thereof, the project proceeded, at least initially, as anticipated. Appropriate works of alteration were carried out to the property, and it was then run as a home by Mr Sandhu. For that he was allowed a salary (later agreed at £22,000 a year) from the net profits generated, and the net profits, if any, thereafter were shared equally between the two partners.
On 12 April 1999, following differences between the parties, Mr Gill excluded Mr Sandhu from the property. It is common ground that the partnership determined on that date. Thereafter, Mr Gill carried on the business on his own account. As the Judge explained in paragraph [6] of his judgment, "the business proved profitable under the management of Mr Gill and, indeed, as well as producing revenue profits, the business over that period increased in value from £600,000 to £850,000 producing a capital profit of £250,000".
On 7 May 1999 Mr Sandhu began the instant proceedings seeking an Order that the partnership be wound up. There were a number of contentious issues. They included Mr Gill's contentions that there had in fact been no partnership between him and Mr Sandhu and that the property was not a partnership asset, and Mr Sandhu's contention that the deed should be rectified so that, in effect, the property was subject to clause 10(3), and not clause 10(2). Most of those issues were resolved by a consent order made by Pumfrey J on 24 November 2000. The terms of that order ("the consent order") included an agreement that the property "constitute[s an] asset … of the partnership". The consent order also directed the taking of post-dissolution accounts.
The parties were unable to agree various points relating to the post-dissolution accounts and those points were argued before Master Bowles. The centrally relevant dispute for present purposes was "what share of the post-dissolution profits, if any, … Mr Sandhu is entitled to …". In a full and careful written judgment, delivered on 24 September 2004, the Master gave his opinion on the various points. His determination on the relevant dispute was favourable to Mr Sandhu, namely that he was entitled to half of the post-dissolution annual profits, after making a deduction of £22,000 for Mr Gill's services. (Mr Gill's entitlement to that annual sum is not in dispute, and I shall say no more about it). On appeal, Lightman J upheld that decision.
As the Judge recorded in paragraph [6] of his judgment:
"It is common ground that: (1) substantially more was due to Mr Gill than to Mr Sandhu in respect of payment of capital and advances and that Mr Sandhu owed a substantial sum to Mr Gill in respect of his loan of the larger part of his share of capital; and (2) at the date of dissolution of the partnership the assets of the partnership were sufficient to pay debts to non partners and advances from the partners, but were insufficient to repay to the partners their capital in full."
It was also common ground that Mr Sandhu was entitled to share the capital profit of £250,000 equally with Mr Gill. The centrally relevant issue, which the parties could not agree, was the extent, if any, of Mr Sandhu's entitlement to a share of the revenue profits made by Mr Gill between 12 April 1999, when the partnership was dissolved, and the date of the conclusion of the winding up.
The rival contentions
On behalf of Mr Sandhu, Mr Timothy Walker (who appeared below) contends that Mr Sandhu is entitled to half the post-dissolution profits earned from the running of the home pursuant to section 42(1), a contention which he says is reinforced by the provisions of clause 10(2) of the deed and of the consent order. For Mr Gill, Mr Mark Blackett-Ord (who also appeared below, although not before Pumfrey J) agrees that section 42(1) is of central importance, but denies that the consent order is of relevance, and he contends that Mr Sandhu is not entitled to any share of the post-dissolution profits.
Mr Blackett-Ord's contention is that the effect of section 42(1) is that the extent of Mr Sandhu's entitlement to the post-dissolution profits is equal to his share (if any) in the net assets of the partnership as at the date of dissolution. He says that one has to assess the existence and extent of Mr Sandhu's interest in the net assets of the partnership on a notional winding up as at the date of dissolution, and that, on the evidence, that interest would be negative because any financial entitlement of Mr Sandhu would have been more than cancelled out by his debt of £70,000 unpaid capital to Mr Gill.
Mr Walker has two answers to this contention, which encapsulate the two issues on this appeal. First, he says that this contention involves a misinterpretation of section 42(1), which, on his case, requires Mr Sandhu's share of the post-dissolution profits to be assessed by reference to his share of the gross assets of the partnership as at dissolution, which, in the absence of any evidence to the contrary, is a 50% share. Secondly, he says that, in any event, the effect of the deed and the consent order is to give rise to an agreement that Mr Sandhu has a 50% share in the partnership, and therefore a right to half the post-dissolution profits.
The meaning of section 42(1): preliminary
The resolution of the first issue turns substantially on section 42(1), which provides as follows:
"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."
Section 42 is in that part of the 1890 Act, consisting of sections 32 to 44 inclusive, which are under the heading "Dissolution of Partnership, and its Consequences". Sections 32 to 35 are concerned with methods of dissolution, and sections 36 to 38 deal with miscellaneous matters concerning outsiders to the partnership. Sections 39 to 44 deal with the rights of the partners following dissolution....
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