Khan v Mohammed & Anor

A partnership may acquire beneficial ownership of land even where legal title is taken in one partner’s name. The legal owner must hold the property for the partnership and comply with fiduciary duties of honesty, good faith and accounting.

Where a partner secretly arranges for another person to acquire an interest in partnership property in order to exclude a fellow partner, that interest ranks subject to the innocent partner’s equitable interest. A common intention constructive trust may arise from the parties’ agreement without recourse to resulting trust principles.

The claimant alleged that he and the first defendant had operated Express Auto Spares as equal partners and had agreed to acquire the business premises as a partnership asset. The property was acquired in the first defendant’s name. The defendants maintained that the claimant was not a partner and that the property was bought jointly by the defendants, with the second defendant acquiring a beneficial interest.

The central issues were whether the partnership existed and continued after the acquisition, whether the property was acquired for it, the nature and priority of the parties’ equitable interests, and the effect of the subsequent declaration of trust.

1. Partnership. The claimant and first defendant were equal partners before and after 2002. The partnership was dissolved by written notice served on 20 April 2006.
2. Partnership property and fiduciary duties. The parties had agreed that the property would be acquired as an asset of the partnership. Although legal title was taken in the first defendant’s name, he was required to hold his interest for the partnership. As a partner, he owed duties of good faith, honesty, proper accounting and not seeking personal benefit at the expense of his co-partner.
3. The first defendant breached those duties by retaining and mingling partnership funds without proper accounting, secretly arranging with the second defendant to acquire the property to the claimant’s exclusion, and conferring an interest on the second defendant without the claimant’s consent.
4. Second defendant’s interest. As between the defendants, their agreement gave the second defendant a 50 per cent beneficial interest under a common intention constructive trust. It was unnecessary to rely on resulting trust principles. The 2006 declaration of trust did not create or improve that interest, which arose from the date of acquisition.
5. Priority and relief. The first defendant was bound to give effect to both equitable interests. Because the second defendant’s interest arose from a dishonest arrangement intended to cheat the claimant, it ranked subject to the claimant’s partnership interest. The property was therefore declared to be held on trust for the first defendant and claimant as partners. In the partnership accounts, payments towards the purchase price and receipts from the second defendant were to be treated as partnership funds. Any resulting liability to the second defendant was the first defendant’s alone. The first defendant’s beneficial interest as partner was held on further trust for the second defendant.