Gill v Sandhu

Under section 42(1) of the Partnership Act 1890, an outgoing partner’s entitlement to post-dissolution revenue profits is calculated by reference to the partner’s share of the net partnership assets. That share is ascertained through the accounting process governing the winding up, including liabilities, advances and capital contributions. It is not an equal proprietary share of the gross assets merely because the partners shared profits equally while the partnership continued.

The outgoing partner may claim the proportion of profits attributable to the continuing use of that net share, or interest at the statutory rate on its amount. A contrary partnership agreement may displace the statutory accounting rules.

Two partners acquired and developed a property as an old people’s home. After the partnership was dissolved, the appellant excluded the respondent and continued the profitable business using partnership assets. The respondent sought a share of the post-dissolution revenue profits.

Master Bowles held that the respondent was entitled to half the profits, after an allowance for the appellant’s management. Lightman J upheld that decision in a judgment reported at [2005] 1 All ER 990. Both treated the respondent’s section 42(1) share as an equal proprietary share of the partnership’s gross assets.

The appeal concerned whether “his share of the partnership assets” in section 42(1) of the Partnership Act 1890 meant the outgoing partner’s share of the gross assets or the amount attributable to him after the statutory winding-up account. A further issue concerned the effect of the partnership deed and a consent order declaring the property to be a partnership asset.

1. Appeal allowed. The phrase “his share of the partnership assets” in section 42(1) of the Partnership Act 1890 refers to the outgoing partner’s share of the net partnership assets. It does not refer to an equal share of the gross assets used by the continuing partner. Neuberger LJ gave the principal judgment; Mummery LJ and Black J agreed. (See paras [49]–[63], [99] and [102]–[104].)

2. The share must be ascertained as at dissolution by applying the winding-up account in section 44, subject to any contrary agreement. Third-party liabilities are met first. Advances and capital are then accounted for, and only the ultimate residue is divided in the proportions in which profits were divisible. The presumption of equality therefore operates only at the final residue stage. (See paras [50]–[58], [99] and [102]–[103].)

3. Section 42(1) gives the outgoing partner alternative remedies which use the same concept of “share of the partnership assets”. For the interest option, the statutory percentage applies to the amount calculated as due to the outgoing partner. For the profits option, the court determines the proportion of post-dissolution profits attributable to the continuing use of that share. Profits attributable instead to the continuing partner’s skill, labour or management are excluded or allowed for separately. (See paras [34]–[40], [81], [96], [99] and [102].)

4. The contrary observations in Popat v Shonchhatra [1997] 1 WLR 1367, suggesting equal division of post-dissolution revenue profits, were expressly obiter because that part of the first-instance order had not been appealed. The court declined to follow them. The statutory language, the pre-1890 authorities, the winding-up scheme and the avoidance of commercially unjust results supported the net-assets construction. (See paras [59]–[62] and [92]–[99].)

5. The consent order nevertheless meant that the property was partnership property beneficially owned in equal shares. That did not eliminate the respondent’s unpaid contribution or determine the final winding-up account. The parties were invited to agree the necessary order and accounts; if agreement proved impossible, remittal to Master Bowles might be required. (See paras [65]–[71] and [104].)

1. Court of Appeal (Civil Division): Allowed the appeal from Lightman J on the construction of section 42(1) of the Partnership Act 1890, while holding that the consent order made the property partnership property beneficially owned in equal shares. [2005] EWCA Civ 1297.
2. High Court, Chancery Division: Lightman J dismissed the appeal from Master Bowles and upheld an award of half the post-dissolution revenue profits, subject to a management allowance. The judgment was reported at [2005] 1 All ER 990.
3. Master Bowles: By a written judgment delivered on 24 September 2004, held that the outgoing partner was entitled to half the post-dissolution annual profits after deducting £22,000 for the continuing partner’s services.