Partnership Insolvency

Partnerships and Insolvency

Partnerships constitute an important mechanism for undertaking business.  In certain sectors, such as the legal profession, a business may not be incorporated as a company and must practice as sole traders or partnerships.  A partnership will arise automatically, where persons undertake business in common.

A partnership is not a separate legal entity.  Ultimately, the partners are fully and personally liable for the debts of the partnership. There are special bankruptcy rules in respect of partnership.   The primary recourse is to partnership assets before there is recourse to the partners’ private assets.

The High Court has jurisdiction to wind up and dissolve partnerships. An important basis, in the context of insolvency, is that the partnership business is being carried on at a loss.  A partnership with more than eight members is subject to Companies legislation, by which it can be wound up as an unincorporated body.


Insolvent Partnership

An insolvent partnership can be wound up on most of the same grounds, as an individual may be adjudicated bankrupt. A petition may be presented on a number of bases. The principal basis is that the partnership has failed to make payment on foot a statutory demand for a debt of a minimum specified amount, on foot of formal demand, within three weeks. The most common other ground is the failure to satisfy a money judgment.

The partners may be made bankrupt collectively.  A joint petition against partners may be made, where the partners as such have committed an act of bankruptcy. A debt owing by the firm is deemed owing by all partners, so that default on it may form the basis of a petition against all of the partners in the firm.

Where the partners are jointly declared bankrupt, all the partnership assets vest in Official Assignee. The Official Assignee does not become a partner. He has an interest in the same way as a deceased partner. He can take action in order to recover the bankrupt share in the firm.


Insolvency of Some Partners Only

The bankruptcy of a partner leads to the dissolution of the partnership. All of the bankrupt’s assets including the partner’s interest in the partnership, vest in the Official Assignee for the benefits of his creditors. The solvent partners are entitled to get in and to wind up the affairs of the firm and complete transactions.

The Official Assignee can apply to the court to wind up the affairs of the partnership, where this would be in the interests of the bankrupt partner. The Official Assignee may make alternative arrangements with the other partners for the realisation of the insolvent partner’s share, so that does not necessarily lead to the winding up of the partnership.

The solvent partners are to contribute their shares of capital losses in accordance with the prescribed profit-sharing ratio and receive capital rateably, in accordance with their capital contribution. Shortfalls in the capital are borne by partners proportionately relative to their capital contributions and not in equal shares.

On the dissolution of the partnership, where one or more partners is insolvent, the solvent partners are obliged ultimately, to account for any shortfall in the partnership assets. Potentially, the last standing solvent partner can be left with full liability for the partnership’s debts and liabilities.


Partnership and Individual Partner Insolvent

The bankruptcy rules distinguish between joint partnership assets and partnership liabilities and personal assets and personal liabilities. In the first instance, partnership assets are applied in full towards satisfaction of partnership liabilities. Similarly, separate assets are applied primarily to separate liabilities.

A joint (partnership) creditor is not entitled to receive anything from the individual partner’s separate assets until the separate (the individual’s) creditors have been paid in full if both are insolvent. The joint property of the firm (the partnership) is used first to meet the firm’s debts.

The separate property of the partner is used to meet his own separate debts. It is only after the debts of the joint (partnership) creditors are paid out of the joint (partnership) estate, that the separate (individual partner’s) creditors are entitled to have recourse to the joint estate (partnership).

Similarly, it is only after the separate creditors of the partner’s separate estate are paid, that the joint creditors are entitled to recourse to the individual partner’s separate estate. There are some exceptions to this principle, which are set out below.

If the partnership is not insolvent, the bankrupt partner’s creditors are entitled to his share of the surplus of the partnership assets.


Bankruptcy Petition against Partners

The Bankruptcy Act allows for a petition for bankruptcy against one, several or all partners.  A creditor may petition for bankruptcy against the partners collectively, in the name of the firm. Alternatively, a creditor may petition for the bankruptcy of one or more partners only. The court may accept the petition against all, one or more of the partners or dismiss it in whole or in part.

The court may on an application, order the names of the partners to be disclosed and verified on oath by the known partners.  Ultimately if an order is made, it is made against the partners concerned and not against the firm.

The court may adjudicate all or certain partners bankrupt, while not adjudicating others bankrupt.The adjudication of any partner bankrupt dissolves the firm.   The partnership, not being an entity in itself, cannot be adjudicated bankrupt itself.

Where a number of petitions are issued against different members of the same firm, the first presented is entitled to be heard first.


Insolvent Partnership

An insolvent partnership can be wound up on most of the same grounds, as an individual may be adjudicated bankrupt. A petition may be presented on a number of bases. The principal basis is that the partnership has failed to make payment on foot a statutory demand for a debt of a minimum specified amount, on foot of formal demand, within three weeks. The most common other ground is the failure to satisfy a money judgment.

The partners may be made bankrupt collectively.  A joint petition against partners may be made, where the partners as such have committed an act of bankruptcy. A debt owing by the firm is deemed owing by all partners, so that default on it may form the basis of a petition against all of the partners in the firm.

Where the partners are jointly declared bankrupt, all the partnership assets vest in Official Assignee. The Official Assignee does not become a partner. He has an interest in the same way as a deceased partner. He can take action in order to recover the bankrupt share in the firm.


Insolvency of Some Partners Only

The bankruptcy of a partner leads to the dissolution of the partnership. All of the bankrupt’s assets including the partner’s interest in the partnership, vests in the Official Assignee for the benefits of his creditors. The solvent partners are entitled to get in and to wind up the affairs of the firm and complete transactions.

The Official Assignee can apply to the court to wind up the affairs of the partnership, where this would be in the interests of the bankrupt partner. The Official Assignee may make alternative arrangements with the other partners for the realisation of the insolvent partner’s share, so that does not necessarily lead to the winding up of the partnership.

The solvent partners are to contribute their shares of capital losses in accordance with the prescribed profit-sharing ratio and receive capital rateably, in accordance with their capital contribution. Shortfalls in the capital are borne by partners proportionately relative to their capital contributions and not in equal shares.

On the dissolution of the partnership, where one or more partners is insolvent, the solvent partners are obliged ultimately, to account for any shortfall in the partnership assets. Potentially, the last standing solvent partner can be left with full liability for the partnership’s debts and liabilities.


Dissolution and Winding up

Winding up is separate to dissolution for partnership purposes. The default position is that any partner may dissolve the partnership by notice at any time. This is commonly followed by a voluntary winding. In many cases, this right will be varied by the partnership or other agreement.

A partner may seek dissolution of the partnership by the court on the ground that the business may be carried on, only at a loss or on the grounds that it is just and equitable to do so, regardless of what the agreement provides.  Dissolution may be granted by court order followed by voluntary winding up, without court supervision.

Once dissolution occurs or is ordered, each partner is entitled as against the other to a winding up by way of the realisation of the partnership assets and payment for the partnership debts or by way of an alternative realisation provided by the partnership agreement or other agreement of the partners.


Court Winding Up

A partner may apply to the court to have the affairs of the partnership wound up. Unlike the position with a company, the creditors do not have the right to apply to the court to have a partnership wound up under the Partnership Act.

A partnership of eight or more persons may be wound up under the Companies Act. A creditor may seek winding up under this provision.  This is in contrast to the position of partnerships of less than eight persons. Certain partnerships formed outside the State may be wound up under the Act, even if they have less than eight members.

In this case, a creditor may seek an adjudication of bankruptcy of the partners of an insolvent partnership.

The provisions relating to the liquidation of companies apply.  A liquidator may exercise most of the powers applicable in a corporate liquidation.


Criteria forCourt Winding Up

The criteria for winding up of a partnership are broadly similar to those in respect of winding up of a company.  They include

  • a statutory demand for debt of €10,000 is not paid within 21 days;
  • proceedings have been taken against a member for a partnership debt due where notice in writing of the commencement of the proceedings has been served on the partnership, which has not within 10 days, paid or secured the debt or indemnified the defendant claimed against to his reasonable satisfaction in respect of the proceedings and against all costs, damages and expenses to be incurred.  The proceedings against the member must be in respect of the claim or debt dues in his capacity as a member;
  • in the State or any certain other states, execution is returned unsatisfied;
  • it is just and equitable to wind up the firm

Application of Assets I

In the dissolution of the partnership, the partners are entitled to have the property of the partnership applied towards payment of the debts and liabilities of the firm and had the surplus applied towards whatever sums may be due to them as partners. The partners may require the partnership assets to be sold and realised.

If a dissolution and winding up of the partnership is ordered, the partnership property is to be sold, and the debts paid off. This may be done under the direction of the court, but this is not necessarily required if done by agreement.

A partner has a lien on partnership property for these purposes.  The lien is enforceable, only against the partners, their personal representatives, and assignees.  This includes the Official Assignee or trustee in bankruptcy of a bankrupt partner.

Court orders may be required to affect the sale of partnership property. If a dissolution is ordered, the court may appoint a receiver and manager, for the purpose of winding up the partnership affairs. Generally, the court has the power to make such declarations of the rights and obligations of the parties, as is required. This may be under the agreement or under the default legal position.


Application of the Assets II

Where a partnership is dissolved, the accounts must be settled in order to reflect the rights, entitlements, and obligations of the parties. The Partnership Act provides that losses, including losses of capital, are paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:

The assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

  • in paying the debts and liabilities of the firm to persons who are not partners therein;
  • in paying to each partner rateably what is due from the firm to him for advances as distinguished from capital;
  • in paying to each partner rateably what is due from the firm to him in respect of capital:
  • the ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.

Losses are to be borne in the same proportions as profits. Where partners have not contributed capital equally, but share profits and losses equally, losses relating to capital are shared equally. The proceeds of the realisation of the assets are distributed to ensure that capital losses are shared equally.


Assets Vesting

If one partner is adjudicated bankrupt, this of itself will lead to the dissolution of the partnership, unless the partnership agreement otherwise provides.  Bankruptcy terminates the partner’s authority to bind the firm.  By general law, the partner’s assets, including his entitlement in the partnership vests in the Official Assignee.

Where one or some only of the partners are adjudicated bankrupt, all his or their non-partnership assets and his or their interest in the partnership vests in the Official Assignee.  The partner’s interest / entitlement in the partnership is to the net post winding up or accounting value of the partnership assets as a whole, rather than to any particular asset or a share of it.

Neither the partners themselves nor their assignee, in the event of their personal bankruptcy, are entitled to direct recourse to the partnership assets. There must be a winding up or another realisation.


Realising Share in Partnership

The Official Assignee of the individual bankrupt partner cannot claim the partner’s share in the bankruptcy until it has been wound up or an account has been taken to measure the share concerned of the net partnership assets. The partnership assets as such are not available, without the partnership being wound up or an account taken and the assets distributed.

In some cases, the partnership agreement may make specific provision for a buyout of a partner’s shares in the event of his leaving the partnership, either by bankruptcy, death or voluntarily. The valuation basis should be provided and must be reasonable.

An assignee or successor to the partner, including the Official Assignee / a trustee, does not become a partner. He may become a co-owner of the partnership assets. However, his entitlement remains limited to the net amount of partnership assets available on winding up.


Information and Realisation

A bankrupt partner is obliged to deliver separate statements of his non-partnership affairs and partnership affairs to the Official Assignee. The bankrupt partner must give a statement of affairs in respect of the partnership and his interest in it. The Official Assignee may require the bankrupt’s fellow partners to provide information regarding the bankrupt’s interest in the partnership.

The Official Assignee is entitled to require the solvent partners to account to him in respect of the bankrupt’s share in the same way as the partner himself could do He may require the sale of the partnership assets for this purpose.

There is a procedure by which the Official Assignee may recover partnership assets in the name of the partners. He may call on the partners to recover the assets or debts concerned, and if they refuse to do so, he may apply for and obtain the consent of the High Court to proceed on behalf of the partnership.  The other partners are not entitled to release the partnership debt.


Partnership Property / Assets

The property used by the partnership does not necessarily belong to it.  It may belong to one or more partners.  Partnership property may be held by particular partners and used by the partnership.  There may be a lease or some other arrangement which accounts for the use of the property, which is in place between the partner(s) who owns the property and the partnership.

All partners may be co-owners of property, and it may be partnership property.  The legal title may be in the name of one or more partners, but it may be nonetheless partnership property. Its status may be governed by terms of the partnership agreement.

Title to property may be held by one or more partners but be used by the partnership in circumstances where it is not partnership property. In this case, it belongs to the individual partner who has a legal and beneficial title. The property or the bankrupt’s interest in it is available to his creditors and not those of the partnership.


Nature of Partnership Debts and Obligations

In the absence of agreement otherwise, a debt owed to or by a firm (partnership) is a joint debt and not a joint and several debt.  It is presumptively a single debt owed by the partners collectively. Often, the relevant contract, such as a loan agreement changes this default position so as to provide for joint and several liabilities.

Some important consequences follow from joint liability. There is one debt or liability only. The release of one partner releases them all. In the bankruptcy of a third party or the bankruptcy of a partner, the separate debts of either may not be set off.

The Partnership Act provides that liability on foot of torts (civil wrongs) and breaches of trust is owed jointly and severally. However, they are not usually liquidated sums, but they are in principle capable of set off.

In the case of ordinary debt collection, a creditor of a partnership may take proceedings against all, or one or more of the partners. The other partners may be joined to the proceedings. There are procedures in the court rules which facilitate disclosure of the identities of the partners of a partnership, which is sued. The nature of the proceeding does not affect the substantive liability of the parties.


Partner and his Creditors subordinated to Partnership Creditors

The fundamental rule is that the partnership assets are applied primarily for partnership debts. The partners’ separate individually owned assets are applied primarily in respect of their individual separate debts. Generally, it is only in the event of a shortfall in one and a surplus in the other that recourse may be had to the other pool of assets.

A partner who is owed money by the firm, may not prove, claim or recover it in an actual or technical winding up before the external creditors have been paid or provided for.  The principle also applies to creditors whose return is based on a share of profits.  This could be an external investor or seller of the partnership business itself or of its goodwill concerned.

There is an exception in respect of funds which have been fraudulently misappropriated by another partner. The principal does not apply where the partnerships creditors are not prejudiced such where it has no debts.

Where a bankrupt partner is owed money by the partnership, this may not be repaid, without a full account of the partner’s net position being taken. A (separate) creditor of an individual partner is not entitled to prove in the bankruptcy of the partnership, as he is not a creditor of the partnership.  His claim is limited to any surplus (if any) on the winding up of the partner’s interest in the partnership. If there is no surplus for the partners, he has no recourse to the assets of an insolvent partnership.


Partnership Creditors effectively subordinated to Partner’s Separate Creditors

The general principle is that the (joint) creditors of the partnership itself are subordinated to the partners’ separate/ individual creditors (for non-partnership debts). Equally, the other partners must  also yield to the claims of the separate creditors in the bankruptcy of individual partners.

While partners are usually jointly (and or and severally) liable for the partnership debts, a partnership creditor may not prove  both in the insolvency of the firm and the individual partner at the same time. 

However, if there are no partnership assets available whatsoever, partnership (joint) creditors may prove as separate creditors of the partners. This may arise where there are no partnership (and therefore no joint estate) assets and there are no solvent partners..

The principle does not apply where a partner has fraudulently taken partnership assets. It appears, that the (joint) creditors of the partnership may claim in that partner’s bankruptcy, at least to the limit of the assets converted.

There is a further exception   where the  individual partner has carried on a separate trade and thereby become indebted to the partnership under an arms length contract. In this case the firm or the joint estate may recover these debts in competition with the separate creditors.


References and Sources

Irish Books

Burke & Comyn Personal Insolvency Law               2014

Bracken Practioner’s Personal Insolvency Handbook 2013

Law Society (Wright)       Insolvency Law                  2009

Sanfey & Holohan            Bankruptcy Law & Practice2nd Ed             2010

Farry, Holohan  Consolidated Bankruptcy & Personal Insolvency Legislation2013

Forde, Kennedy & Simms              Company Insolvency                      2015

Forde & Simms Bankruptcy Law 2nd Ed 2009

UK Books

Insolvency Law and Practice (Report of the review committee chaired by Sir Kenneth Cork CBE, 1982, Cmnd 8558) (the Cork report)

V Finch, Corporate Insolvency Law: Perspectives and Principles 3rd Ed 2017

RM Goode, Principles of Corporate Insolvency Law (4th Ed, 2011)

A Keay and P Walton, Insolvency law: corporate and personal (4rd Ed, 2017)

Marsh Bankruptcy Insolvency and the Law 2016

WW McBryde, Bankruptcy 2nd Ed, 1995

Butterworths Insolvency Law Handbook 14th Ed 2012

Core Statutes on Insolvency Law and Corporate Rescue (annual editions)

Legislation

Personal Insolvency Legislation

Personal Insolvency Act 2012

Personal Insolvency (Amendment) Act 2015

Personal Insolvency Act 2012 (Part 6) (Commencement) Order 2013, S.I. No. 14 of 2013

Personal Insolvency Act 2012 (Commencement) (No. 2) Order 2013, S.I. No. 63 of 2013

Personal Insolvency Act 2012 (Establishment Day) Order 2013, S.I. No. 64 of 2013

Personal Insolvency Act 2012 (Authorisation and Supervision of Personal Insolvency Practitioners) Regulations 2013, S.I. No. 209 of 2013

Personal Insolvency Act 2012 (Authorisation of Approved Intermediaries) Regulations 2013, S.I. No. 216 of 2013

Personal Insolvency Act 2012 (Personal Insolvency Practitioner Authorisation and Renewal of Authorisation Prescribed Fees) Regulations 2013, S.I. No. 246 of 2013

Personal Insolvency Act 2012 (Accounts and Related Matters) Regulations 2013, S.I. No. 247 of 2013

Personal Insolvency Act 2012 (Commencement) (No. 3) Order 2013, S.I. No. 285 of 2013

Personal Insolvency Act 2012 (Value of interest in property) Regulations 2013, S.I. No. 330 of 2013

Personal Insolvency Act 2012 (Prescribed Protective Certificate Personal Insolvency Arrangement Application Form) Regulations 2013, S.I. No. 331 of 2013

Personal Insolvency Act 2012 (Prescribed Protective Certificate Debt Settlement Arrangement Application Form) Regulations 2013, S.I. No. 332 of 2013

Personal Insolvency Act 2012 (Prescribed Debt Relief Notice Application Form) Regulations 2013, S.I. No. 333 of 2013

Personal Insolvency Act 2012 (Schedule of Creditors) Regulations 2013, S.I. No. 334 of 2013

Personal Insolvency Act 2012 (Procedures for the Conduct of Creditors’ Meetings) Regulations 2013, S.I. No. 335 of 2013

Personal Insolvency Act 2012 (Notification in relation to Excludable Debt) Regulations 2013, S.I. No. 337 of 2013

Personal Insolvency Act 2012 (Additional Information to be contained in the Registers) Regulations 2013, S.I. No. 356 of 2013

Personal Insolvency Act 2012 (Part 4) (Commencement) Order 2013, S.I. No. 462 of 2013

Personal Insolvency Act 2012 (Prescribed Fees in Bankruptcy Matters) Regulations 2013, S.I. No. 465 of 2013

Personal Insolvency Act 2012 (Prescribed Financial Statement) Regulations 2014, S.I. No. 259 of 2014

Personal Insolvency Act 2012 (Regulatory Disclosure Statement of a Personal Insolvency Practitioner) Regulations 2014, S.I. No.319 of 2014

Personal Insolvency Act 2012 (Written Statement Disclosing All of the Debtor’s Financial Affairs) Regulations 2015, S.I. No. 416 of 2015

Personal Insolvency Act 2012 (Prescribed Fees) Regulations 2015, S.I. No. 620 of 2015

Personal Insolvency Act 2012 (Renewal of Authorisation of Personal Insolvency Practitioners) Regulations 2016, S.I. No.226 of 2016

Justice Courts and Civil Law (Miscellaneous Provisions) Act 2013

Courts and Civil Law (Miscellaneous Provisions) Act 2013 (Part8) (Commencement) Order 2013, S.I. No. 286 of 2013

Courts and Civil Law (Miscellaneous Provisions) Act 2013 (Part 7) (Commencement) Order 2013, S.I. No. 463 of 2013

Courts and Civil Law (Miscellaneous Provisions) Act 2013 (Section 2) (Commencement) Order 2014, S.I. No. 334 of 2014

Personal Insolvency (Amendment) Act 2015 (Commencement) Order 2015, S.I. No. 414 of 2015

Personal Insolvency (Amendment) Act 2015 (Commencement) (No. 2) Order 2015, S.I. No. 514 of 2015

Bankruptcy Act 1988

Bankruptcy (Amendment) Act 2015

Bankruptcy Act 1988 (Commencement) Order 1988, S.I. No. 348 of 1988

Bankruptcy Act, 1988 (Alteration of Monetary Limits) Order 2001, S.I. No. 595 of 2001

Bankruptcy Act 1988 (Official Assignee Accounts and Related Matters) Regulations 2013, S.I. No. 464 of 2013

Bankruptcy (Amendment) Act 2015 (Commencement) Order2016, S.I. No. 34 of 2016

Rules of the Superior Courts (Bankruptcy) 2013, S.I. No. 461 of 2013

Rules of the Superior Courts (Bankruptcy) 2016, S.I. No. 232 of 2016

Rules of the Superior Courts (Bankruptcy) 2012, S.I. No. 120 of 2012

Bankruptcy (Amendment) Act 2015 (Commencement) (No. 2) Order 2016, S.I. No. 253 of 2016


Partnership Act 1890

Dissolution by bankruptcy, death, or charge.

33.—(1) Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.

(2) A partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt.


Dissolution by illegality of partnership.

34. A partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership.

Dissolution by the Court.

35. On application by a partner the Court may decree a dissolution of the partnership in any of the following cases:

(a) When a partner is found lunatic by inquisition, or in Scotland by cognition, or is shown to the satisfaction of the Court to be of permanently unsound mind, in either of which cases the application may be made as well on behalf of that partner by his committee or next friend or person having title to intervene as by any other partner:

(b) When a partner, other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract:

(c) When a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the Court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business:

(d) When a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him:

(e) When the business of the partnership can only be carried on at a loss:

(f) Whenever in any case circumstances have arisen which, in the opinion of the Court, render it just and equitable that the partnership be dissolved.


Rights of persons dealing with firm against apparent members of firm.

36.—(1) Where a person deals with a firm after a change in its constitution he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change.

(2) An advertisement in the London Gazette as to a firm whose principal place of business is in England or Wales, in the Edinburgh Gazette as to a firm whose principal place of business is in Scotland, and in the Dublin Gazette as to a firm whose principal place of business is in Ireland, shall be notice as to persons who had not dealings with the firm before the date of the dissolution or change so advertised.

(3) The estate of a partner who dies, or who becomes bankrupt, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, bankruptcy, or retirement respectively.


Right of partners to notify dissolution.

37. On the dissolution of a partnership or retirement of a partner any partner may publicly notify the same, and may require the other partner or partners to concur for that purpose in all necessary or proper acts, if any, which cannot be done without his or their concurrence.

Continuing authority of partners for purposes of winding up.

38. After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.

Provided that the firm is in no case bound by the acts of a partner who has become bankrupt; but this proviso does not affect the liability of any person who has after the bankruptcy represented himself or knowingly suffered himself to be represented as a partner of the bankrupt.


Rights of partners as to application of partnership property.

39. On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or his representatives may on the termination of the partnership apply to the Court to wind up the business and affairs of the firm.


Apportionment of premium where partnership prematurely dissolved.

40. Where one partner has paid a premium to another on entering into a partnership for a fixed term, and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the Court may order the repayment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract and to the length of time during which the partnership has continued; unless

(a) the dissolution is, in the judgment of the Court, wholly or chiefly due to the misconduct of the partner who paid the premium, or

(b) the partnership has been dissolved by an agreement containing no provision for a return of any part of the premium.


Rights where partnership dissolved for fraud or misrepresentation.

41. Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled—

(a) to a lien on, or right of retention of, the surplus of the partnership assets, after satisfying the partnership liabilities, for any sum of money paid by him for the purchase of a share in the partnership and for any capital contributed by him, and is

(b) to stand in the place of the creditors of the firm for any payments made by him in respect of the partnership liabilities, and

(c) to be indemnified by the person guilty of the fraud or making the representation against all the debts and liabilities of the firm.


Right of outgoing partner in certain cases to share profits made after dissolution.

42.—(1) 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.

(2) Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as they case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.


Retiring or deceased partner’s share to be a debt.

43. Subject to any agreement between the partners, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner in respect of the outgoing or deceased partner’s share is a debt accruing at the date of the dissolution or death.

Rule for distribution of assets on final settlement of accounts.

44. In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:

(a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:

(b) The assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

1. In paying the debts and liabilities of the firm to persons who are not partners therein:

2. In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital:

3. In paying to each partner rateably what is due from the firm to him in respect of capital:

4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.


Supplemental.

Definitions of “court” and “business.”

45. In this Act, unless the contrary intention appears,—

The expression “court” includes every court and judge having jurisdiction in the case:

The expression “business” includes every trade, occupation, or profession.

Saving for rules of equity and common law.

46. The rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act.


BANKRUPTCY ACT 1988

REVISED

Updated to 1 June 2016

AN ACT TO CONSOLIDATE WITH AMENDMENTS THE LAW RELATING TO BANKRUPTCY AND TO PROVIDE FOR RELATED MATTERS. [13th July, 1988]

BE IT ENACTED BY THE OIREACHTAS AS FOLLOWS:

PART I

Preliminary and General

Short title.

1.—This Act may be cited as the Bankruptcy Act, 1988.

Commencement.

2.—This Act shall come into operation on such day not later than 1 January, 1989 as the Minister by order appoints.

Annotations:

Editorial Notes:

E8

Power pursuant to section exercised (1.01.1989) by Bankruptcy Act 1988 (Commencement) Order 1988 (S.I. No. 348 of 1988).

2. The 1st day of January, 1989, is hereby appointed as the day on which the Bankruptcy Act, 1988, shall come into operation.


Interpretation.

3.—In this Act, unless the context otherwise requires,—

“adjudication” means adjudication in bankruptcy;

“after-acquired property” has the meaning assigned to it by section 44 (5);

“arrangement” means an arrangement in pursuance of an order for protection under Part IV;

“arranging debtor” means a debtor who has been granted an order for protection under Part IV;

“assignees” means the Official Assignee and the creditors’ assignee, if any;

F1[‘Bankruptcy Inspector’ means a person standing appointed for the time being—

(i) to the position of Bankruptcy Inspector in the Office of the Official Assignee in Bankruptcy on the day before the coming into operation of section 29 of the Courts and Civil Law (Miscellaneous Provisions) Act 2013, or

(ii) to the position of Bankruptcy Inspector pursuant to section 12 of the Personal Insolvency Act 2012;]

“bankruptcy summons” has the meaning assigned to it by section 8 (1);

“conveyance”, in relation to land, includes assignment and transfer;

“the Court” means the High Court;

“creditors’ assignee” means a person chosen and appointed as such under section 18 (1);

F2[‘Debt Settlement Arrangement’ has the same meaning as in the Personal Insolvency Act 2012;]

F3[‘Director’ means the Director of the Insolvency Service;]

F4[‘insolvency proceedings’ means insolvency proceedings opened in a member state under Article 3 of the Insolvency Regulation where the debtor or each debtor is an individual or deceased;

‘Insolvency Regulation’ means Council Regulation (EC) No. 1346/2000 of 29 May 20001 on insolvency proceedings;]

“land” includes any estate or interest in or charge over land;

F4[‘liquidator’ means a liquidator appointed in insolvency proceedings;]

F4[‘member state’ means a member state of the European Communities other than the State and Denmark;]

“the Minister” means the Minister for Justice;

F1[‘Official Assignee’ means a person standing appointed for the time being—

(i) to the position of Official Assignee in Bankruptcy in the Office of the Official Assignee in Bankruptcy on the day before the coming into operation of section 29 of the Courts and Civil Law (Miscellaneous Provisions) Act 2013, or

(ii) to the position of Official Assignee pursuant to section 12 of the Personal Insolvency Act 2012;]

F2[‘Personal Insolvency Arrangement’ has the same meaning as it has in the Personal Insolvency Act 2012;]

“prescribed”, except in relation to court fees, means prescribed by rules of court;

F5[‘principal private residence’ has the same meaning as it has in section 2 of the Personal Insolvency Act 2012 subject to the modification that a reference to the debtor shall be taken to be a reference to the bankrupt;]

F6[‘property’—

(a) includes money, goods, things in action, land and every description of property, whether real or personal,

(b) includes obligations, easements and every description of estate, interest, and profit, present or future, vested or contingent, arising out of or incident to property,

(c) in relation to proceedings opened in the State under Article 3(1) of the Insolvency Regulation, includes property situated outside the State, and

(d) in relation to proceedings so opened under Article 3(2) of the Regulation, does not include property so situated;]

“registered”, in relation to land, means registered in the Registry of Deeds or the Land Registry, as may be appropriate;

“secured creditor” means any creditor holding any mortgage, charge or lien on the debtor’s estate or any part thereof as security for a debt due to him;

F2[‘statement of affairs’ means a statement of the debtor’s or bankrupt’s affairs in the form specified in rules of court;]

F2[‘trustee’ means a person appointed as trustee under Part V;]

“vesting arrangement” has the meaning assigned to it by section 93 (2).

F7[(2) Parts II, III, IV (in so far as it relates to vesting arrangements), V, VI and VIII and the First Schedule are subject to Chapters I (general provisions) and III (secondary insolvency proceedings) of the Insolvency Regulation.]

Annotations:

Amendments:

F1

Substituted (3.12.2013) by Courts and Civil Law (Miscellaneous Provisions) Act 2013 (32/2013), s. 27, S.I. No. 463 of 2013.

F2

Inserted (3.12.2013) by Personal Insolvency Act 2012 (44/2012), s. 142, S.I. No. 462 of 2013.

F3

Inserted (3.12.2013) by Courts and Civil Law (Miscellaneous Provisions) Act 2013 (32/2013), s. 27, S.I. No. 463 of 2013.

F4

Inserted (2.07.2002) by European Communities (Personal Insolvency) Regulations 2002 (S.I. No. 334 of 2002), reg. 3(a)(i).

F5

Inserted (29.01.2016) by Bankruptcy (Amendment) Act 2015 (60/2015), s. 2, S.I. No. 34 of 2016.

F6

Substituted (2.07.2002) by European Communities (Personal Insolvency) Regulations 2002 (S.I. No. 334 of 2002), reg. 3(a)(ii).

F7

Inserted (2.07.2002) by European Communities (Personal Insolvency) Regulations 2002 (S.I. No. 334 of 2002), reg. 3(a)(iii).

1OJ L160 of 30.6.2000


Presenting petition.

(1872, s. 20)

11.—(1) A creditor shall be entitled to present a petition for adjudication against a debtor if—

(a) the debt owing by the debtor to the petitioning creditor (or, if two or more creditors join in presenting the petition, the aggregate amount of debts owing to them) F12[amounts to more than €20,000],

(1872, s. 21 in pt.)

(b) the debt is a liquidated sum,

(cf. 1857, s. 115)

(c) the act of bankruptcy on which the petition is founded has occurred within three months before the presentation of the petition, and

(New: cf. 1857, s. 409)

(d) the debtor (whether a citizen or not) is domiciled in the State or, F13[within 3 years] before the date of the presentation of the petition, has ordinarily resided or had a dwelling-house or place of business in the State or has carried on business in the State personally or by means of an agent or manager, or is or within the said period has been a member of a partnership which has carried on business in the State by means of a partner, agent or manager.

(1872, s. 21 in pt.)

(2) If a creditor who presents or joins in presenting the petition is a secured creditor, he shall in his petition set out particulars of his security and shall either state that he is willing to give up his security for the benefit of the creditors in the event of the debtor being adjudicated bankrupt or give an estimate of the value of his security. Where a secured creditor gives an estimate of the value of his security, he may be admitted as a petitioning creditor or joint petitioning creditor to the extent of the balance of the debt due to him after deducting the value so estimated in the same manner as if he were an unsecured creditor but he shall on application being made by the Official Assignee after the date of adjudication give up his security to the Official Assignee for the benefit of the creditors upon payment of such estimated value.

(1857, s. 120)

F14[(3) Subject to subsections (4) and (5) a debtor may petition for adjudication against himself.

(4) A debtor may not present a petition for adjudication unless the petition is accompanied by an affidavit sworn by the debtor that he has, prior to presenting the petition, made reasonable efforts to reach an appropriate arrangement with his creditors relating to his debts by making a proposal for a Debt Settlement Arrangement or a Personal Insolvency Arrangement to the extent that the circumstances of the debtor would permit him to enter into such an arrangement.

(5) A debtor may not present a petition for adjudication unless the petition is accompanied by a statement of affairs and such statement of affairs discloses that the debts of the debtor exceed the assets of the debtor by any amount greater than €20,000. ]

Annotations:

Amendments:

F12

Substituted (3.12.2013) by Personal Insolvency Act 2012 (44/2012), s. 145(a), S.I. No. 462 of 2013.

F13

Substituted (2.08.2011) by Civil Law (Miscellaneous Provisions) Act 2011 (23/2011), s. 30(a), commenced on enactment.

F14

Substituted and inserted (3.12.2013) by Personal Insolvency Act 2012 (44/2012), s. 145(b), S.I. No. 462 of 2013.

Modifications (not altering text):

C12

Application of Act extended (1.03.2009) by Taxes Consolidation Act (39/1997), s. 960M, as inserted by Finance (No. 2) Act 2008 (25/2008), s. 97 and sch. 4 para. 1, commenced as per s. 97 and sch. 4 para. 6.

Taking by Collector-General of proceedings in bankruptcy.

960M.— (1) The Collector-General may in his or her own name apply for the grant of a bankruptcy summons under section 8 of the Bankruptcy Act 1988 or present a petition for adjudication under section 11 of that Act in respect of tax (except corporation tax) due and payable or any balance of such tax.

(2) Subject to this section, the rules of court for the time being applicable and the enactments relating to bankruptcy shall apply to proceedings under this section.

Editorial Notes:

E12

Previous affecting provision: subs. (1) amended (1.01.2002) by Bankruptcy Act 1988 (Alteration of Monetary Limits) Order 2001 (S.I. No. 595 of 2001), art. 2 and sch., in effect as per art. 2; further amended as per F-note above.


Actions by Official Assignee and bankrupt’s partners.

(cf. 1857, s. 278)

30.—Where a member of a partnership is adjudicated bankrupt the Court may authorise the Official Assignee to commence and prosecute any action in the names of the Official Assignee and of the bankrupt’s partner to recover any debt due to or any property of the partners, and any release by such partner of the debt or demand to which the action relates shall be void; but notice of the application for authority to commence the action shall be given to the bankrupt’s partner and he may show cause against it and on his application the Court may, if it thinks fit, direct that he shall receive his proper share of the proceeds of the action. If the partner does not claim any benefit from the action he shall be indemnified against costs in respect thereof as the Court directs.

Annotations:

Modifications (not altering text):

C13

Application of section restricted (25.07.1994) by Investment Limited Partnerships Act 1994 (24/1994), s. 23, S.I. No. 213 of 1994.

Bankruptcy Act, 1988.

23.— For the purposes of the application of sections 30, 31, 32 and 36 of the Bankruptcy Act, 1988, a limited partner shall not be regarded as a partner of an investment limited partnership.


Petition against one or more partners.

(cf. 1857, s. 122)

31.—(1) Any creditor whose debt is sufficient to entitle him to present a petition for adjudication against all the partners of a firm may present a petition against any one or more partners of the firm without including the others.

(2) Where a petition for adjudication is presented against more than one person the Court may make an order of adjudication against one or more of them and dismiss the petition as to the remainder.

Annotations:

Modifications (not altering text):

C14

Application of section restricted (25.07.1994) by Investment Limited Partnerships Act 1994 (24/1994), s. 23, S.I. No. 213 of 1994.

Bankruptcy Act, 1988.

23.— For the purposes of the application of sections 30, 31, 32 and 36 of the Bankruptcy Act, 1988, a limited partner shall not be regarded as a partner of an investment limited partnership.


Furnishing of partnership accounts to Official Assignee.

(New)

32.—Where a member of a partnership is adjudicated bankrupt the Official Assignee may require the other partner or partners to deliver to the Official Assignee such accounts and information relating to the partnership estate and the bankrupt’s interest therein (duly verified by affidavit if necessary) as the Official Assignee may deem necessary.

Annotations:

Modifications (not altering text):

C15

Application of section restricted (25.07.1994) by Investment Limited Partnerships Act 1994 (24/1994), s. 23, S.I. No. 213 of 1994.

Bankruptcy Act, 1988.

23.— For the purposes of the application of sections 30, 31, 32 and 36 of the Bankruptcy Act, 1988, a limited partner shall not be regarded as a partner of an investment limited partnership.


Duty of bankrupt partner.

(New)

33.—Where a member of a partnership is adjudicated bankrupt he shall deliver to the Official Assignee within the prescribed time a separate statement of affairs in respect of the partnership in the prescribed form.


Joint and separate properties.

(New)

34.—(1) In the case of partners the joint property shall be applicable in the first instance in payment of their joint debts, and the separate property of each partner shall be applicable in the first instance in payment of his separate debts.

(2) Where there is a surplus of the joint property, it shall be dealt with as part of the respective separate properties in proportion to the right and interest of each partner in the joint property.

(3) Where there is a surplus of any separate property it shall be dealt with as part of the joint property so far as necessary to meet any deficiency in the joint property.


Actions on joint contracts.

(New)

35.—Where a bankrupt is a party to a contract jointly with any other person, that other person may sue or be sued in respect of the contract without joining the bankrupt.


Proceedings in partnership name.

(New)

36.—(1) Any two or more persons, being partners, or any person carrying on business under a partnership name, may take proceedings or be proceeded against under this Act in the name of the firm, but in such case the Court may, on application by any person interested, order the names of the persons to be disclosed in such manner, and verified on oath or otherwise, as the Court may direct.

(2) Notwithstanding anything contained in subsection (1) no order of adjudication shall be made against a firm in the firm name but it shall be made against the partners individually with the addition of the firm name.

Annotations:

Modifications (not altering text):

C16

Application of section restricted (25.07.1994) by Investment Limited Partnerships Act 1994 (24/1994), s. 23, S.I. No. 213 of 1994.

Bankruptcy Act, 1988.

23.— For the purposes of the application of sections 30, 31, 32 and 36 of the Bankruptcy Act, 1988, a limited partner shall not be regarded as a partner of an investment limited partnership.


Limited partnerships.

(33/1963, s. 345 (8))

37.—Subject to such modifications as may be made by rules of court, the provisions of this Act shall apply to limited partnerships in like manner as if limited partnerships were ordinary partnerships and, on all the general partners of a limited partnership being adjudicated bankrupt, the assets of the limited partnership shall vest in the Official Assignee.


Joint and separate dividends.

(cf. 1857, s. 266)

74.—If one or more of the partners of a firm is a bankrupt, any creditor of the firm shall be entitled to prove his debt or be admitted as a creditor for the purpose of voting in the choice and appointment of a creditors’ assignee but such creditor shall not receive any dividend out of the separate estate of the bankrupt until all the separate creditors shall have received the full amount of their respective debts.


Winding up of partnerships and deceased persons’ estates.

(New)

138.—(1) The Court may, upon giving notice to such persons as it may direct, make such orders and give such directions as it thinks proper for winding up and settling the affairs of any partnership or the estate of a deceased person in which the bankrupt has an interest.

(2) All consequential accounts and enquiries shall be taken and made in such office of the Court as the Court may direct.


Cases

M Young Legal Associates Ltd v Zahid (a firm) & Ors

[2006] EWCA Civ 613 ([2006] 1 WLR 2562, [2006] WLR 2562, [2006] EWCA Civ 613

ORD JUSTICE WILSON: Is it possible for a person to be a partner in a firm, and thus liable jointly with the other partners to creditors of the firm, if his agreement with them is not that he should be entitled to participate in its profits but that he should be paid by the firm a specified sum, irrespective of profits, for work to be done by him on its behalf? Such is the question raised by this appeal.

The appeal is against a declaration made by HHJ Howarth, sitting as a judge of the High Court, Chancery Division, Manchester District Registry, on 26 August 2005. The declaration was made by way of determination of a preliminary issue in an action brought by M. Young Legal Associates Ltd (“the claimant”) against five defendants.

The claimant acts as an intermediary between commercial institutions and prospective litigants who need funding for their claims and/or insurance in the event that they incur liabilities for costs whether to their own solicitors or to the prospective defendants. The claimant alleges that in February 2003 it entered into a contract with a firm of solicitors, namely Zahid, in practice in Rochdale, under which it was to arrange funding and/or insurance for a large number of prospective clients of the firm who were proposing to sue their landlords for the disrepair of their homes and under which, in prescribed circumstances, the firm agreed to make payments to the claimant. The allegation in the action is that sums became payable by the firm thereunder and have not been paid.

There are five defendants to the action:

(a)        the firm Zahid itself; but in February 2004 it was dissolved and so it takes no part in the action;

(b)        Mrs Sharif; she was a partner in the firm from 1 November 2002 until its dissolution;

(c)        her husband, Mr Sharif; in that he was at no time other than a legal executive in the firm, there is an issue, as yet unresolved, as to whether the claimant has any cause of action against him;

(d)        Mr Bashir; he was a partner in the firm from the date when it began to practise, namely 4 March 2002, until 1 September 2003; and

(e)        Mr Lees; it is in relation to his status in the firm that the preliminary issue arose.

It is the contention of the claimant that Mr Lees was a partner in the firm from the date when it began to practise, namely 4 March 2002, until 31 October 2003 and that accordingly, pursuant to section 9 of the Partnership Act 1890 (“the Act of 1890”), he is liable to it, jointly with the other partners, under the contract entered into between the claimant and the firm in February 2003. Mr Lees however included in his defence a denial that he had ever been a partner in the firm so the court directed the trial of the preliminary issue thus raised. It is agreed that, if he ever was a partner, Mr Lees was indeed a partner between 4 March 2002 and 31 October 2003.

In the event the judge declared that Mr Lees was a partner in the firm. Against that declaration Mr Lees appeals; in opposition to the appeal stands the claimant. At yesterday’s hearing Mr Bashir, who appeared in person before the judge, again appeared in person: in relation to the preliminary issue he made and makes no submission one way or the other. The stance of Mr and Mrs Sharif is confusing. Before the judge they were represented by counsel and actively supported the claimant’s argument that Mr Lees had been a partner. Indeed, by a skeleton argument drafted by counsel and filed in this court, it seemed clear that they were supporting the claimant’s opposition to this appeal. But, days prior to this hearing, they ceased to be legally represented. At yesterday’s hearing Mr Sharif appeared in person, presumably with authority to speak also on behalf of Mrs Sharif; and in a few words he told us that in his view Mr Lees had not “really” been a partner. Such is, so it would appear, Mr Sharif’s analysis of the evidence and, presumably, of the law. We have to decide whether we agree with it.

The primary proposition of Mr Blackett-Ord on behalf of Mr Lees is that, unless he is entitled to participate in the profits of the firm (including being entitled to a fixed payment directly linked to and dependent upon its profits), a person cannot in law be a partner of it. Thus he commends a negative answer to the question set out at [1] above. But he has two alternative, subsidiary propositions, each scarcely pressed. The first is that, unless he is either entitled to participate in the profits of the firm or entitled to an interest in its capital, a person cannot in law be a partner of it. The second is that, unless he is either entitled to participate in the profits of the firm or entitled to an interest in its capital or is intended to assume a dominant role in its management, a person cannot in law be a partner of it. A person’s entitlement to an interest in a firm’s capital and his dominant role in its management may each be a strong indication of his status as a partner in it; but, in that, with respect, Mr Blackett-Ord has failed to make any arguable case, whether by reference to principle or to authority, that the law will always refuse to recognise that person as a partner in the absence of those features, I consider it unnecessary further to address the subsidiary propositions.

Section 14 of the Act of 1890 can render an issue of this character academic. For it provides that:

“1. Everyone who … represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to anyone who has on the faith of any such representation given credit to the firm …”

The claimant presented to the judge an alternative argument that, even were he not to have been a partner in the firm, Mr Lees had held himself out as being a partner of it within the meaning of section 14 and so was liable to the claimant for the indebtedness of the firm incurred under the contract. But the judge rejected the alternative argument: he held that the claimant had failed to establish that its giving credit to the firm had been on the faith of the representations which had on any view been made by Mr Lees to the effect that he was a partner. The claimant does not cross-appeal against that conclusion; thus there is no escape from the need to consider whether the judge was both correct in law and entitled on the facts to conclude that Mr Lees was a partner in the firm.

In considering the history it is helpful to have in mind the following definition of partnership in section 1(1) of the Act of 1890:

“Partnership is the relationship which subsists between persons carrying on a business in common with a view of profit.”

Section 2, supplementary to section 1, provides as follows:

“In determining whether a partnership does or does not exist, regard shall be had to the following rules:

(3) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but receipt of such a share, or of a payment contingent on or varyingwith the profits of a business, does not of itself make him a partner in the business; …”

In November 2001 Mr Bashir, who had been admitted as a solicitor and obtained a practising certificate in November 1999, wanted to set up in practice in Rochdale. The idea was that Mr Sharif would act as his legal executive and office manager and that Mrs Sharif, who was in the course of qualifying as a solicitor, would join him as a partner once she had done so. There was, however, a problem. It was set by rule 13 of the Solicitors’ Practice Rules 1990. By paragraph (2) of the rule:

“Every practice must have at least one principal who is a solicitor qualified to supervise.”

The words “qualified to supervise” are italicised in the paragraph because they are defined in one of the notes to the rule, namely note (d), as follows:

“A solicitor is qualified to supervise if he or she:

(i). has held practising certificates for at least 36 months within the last ten years; …”

Mr Bashir had held practising certificates only for about 24 months.

In November 2001 Mr Bashir thus approached Mr Lees, who had been admitted as a solicitor in 1968 and who had recently retired after many years in partnership in a firm in Oldham. In his witness statement Mr Lees said:

“[Mr Bashir and Mrs Sharif] asked whether I would be prepared to join the practice so that they could satisfy the Law Society Regulations. Following a number of meetings and discussions between myself, [Mr] Bashir and [Mr] Sharif, I agreed to do so.” (emphasis supplied)

In his oral evidence Mr Lees’ words were that Mr Bashir approached him:

“to satisfy the Law Society’s requirement for somebody to be a partner until he had satisfied the three years post-qualification time.” (emphasis supplied)

So the initial arrangement was that, when in about November 2002 Mr Bashir would become qualified to supervise, the association of Mr Lees with the proposed firm would cease.

There was no document by which the nature of the association of Mr Lees with the proposed firm was recorded.

In November 2001 Mr Bashir and Mr Lees orally agreed upon the level of payments to Mr Lees out of the proposed firm, namely at the rate of £18,000 per annum, payable gross monthly, on the basis that Mr Lees would himself provide for payment of tax and National Insurance contribution referable thereto.

They also orally agreed that Mr Lees would not contribute any capital to the proposed firm. Furthermore Mr Lees told Mr Bashir that he would be prepared to become associated with it only if Mr Bashir was to extract a letter from the firm’s proposed bankers, The Royal Bank of Scotland, confirming that, he, Mr Lees, would not be liable for its debts to the bank; Mr Bashir procured such a letter from the bank and forwarded it to Mr Lees under cover of a letter in which he pointed out that the effect was that Mr Lees was not liable to the bank for the debts of the “partnership”. Oral discussion between the two men also extended to the indebtedness of the proposed firm to other creditors. In the course of cross-examination by Mr McGee, counsel for the claimant, Mr Lees said:

“I wanted an indemnity from any bank overdraft and an assurance that I would get an indemnity from the people running the practice for any debts. I didn’t get it in writing. I wish I had done now otherwise I would have been able to show you. But I can assure you I was told that I would not be responsible for any of the firm’s debts.”

In a later answer to Mr McGee Mr Lees repeated that Mr Bashir had assured him that he would not be “responsible for” the debts and that he would be “indemnified against” the debts; and he added that in his view both phrases had the same meaning.

In his judgment the judge summarised the agreement as follows:

“There is no suggestion in any of the evidence that either of these gentlemen was seeking in any way to deceive the Law Society.

It seems to me that what at that time Mr Bashir and Mr Lees were agreeing was … to come together in such a relationship as would entitle the firm to practise, in other words to practise in accordance with [rule 13 of the Rules of 1990]. Mr Lees says, and I think on the whole I accept, that he said to Mr Bashir that he was not going to be liable for the debts of the practice and that he should, whatever the situation was, clear matters with the Law Society so that they could practise properly as solicitors. Neither of them desired to circumvent what the Law Society required.”

Thus on 4 March 2002 the firm was set up and began to practise. As Mr Lees was well aware, the firm’s writing-paper initially indicated that there were two partners, namely Mr Bashir and Mr Lees.

It was the evidence of Mr Lees that, pursuant to the arrangement with Mr Bashir, and reflective of the low level of payments which had been agreed, his position in the firm should be little more than a figurehead. He said that in the early months he went into the firm’s offices for two or three hours a day on two or three days a week; that his role was to help Mr Bashir and Mr and Mrs Sharif, if requested; but that he found himself seldom requested to do so; that he helped to draft odd letters and a couple of wills; and that he surveyed various files in order to assess their suitability for conditional fee arrangements. It was suggested to him on behalf of Mr and Mrs Sharif that he had adopted a much more active supervisory role in the firm; but the judge rejected that suggestion.

On 1 November 2002, having qualified as a solicitor, Mrs Sharif became a partner of the firm. Notwithstanding that at the same time Mr Bashir became qualified to supervise the practice under rule 13, he and Mrs Sharif asked Mr Lees to continue for the time being to play his role in the firm. Pointing out, however, that he was proposing to travel to New Zealand for a substantial part of the summer 2003, Mr Lees agreed to continue. The firm’s writing-paper was reprinted so as to recite the partners as Mr Bashir, Mr Lees and Mrs Sharif. The evidence of Mr Lees was that, after November 2002, his attendance at the offices of the firm decreased and that he indeed was away in New Zealand for a substantial part of the summer 2003.

When in July 2003 Mr Lees signed his tax return for the year 2002/03 he included his payments from the firm under the heading “Consultancies” in the extra pages of the return referable to “Self-Employment”. But he also completed the extra pages referable to “Partnership”. Therein he described the partnership as “Solicitors”, which was a reference to the firm “Zahid”; and he stated that his share of the partnership’s profit for the year was nil.

In the late summer 2003 the firm began to implode. On 1 September 2003 Mr Bashir, who had been unwell, resigned from the partnership, although he remained a consultant to it for a few weeks. In his place another solicitor joined the firm. On 14 October 2003 the Office for the Supervision of Solicitors (“the OSS”) appointed an officer to inspect the firm’s books; and a cash shortage of £108,000 was discovered. On 31 October 2003 Mr Lees ceased his association with the firm.

Under cover of a letter to the OSS dated 8 December 2003, Mr Lees enclosed comments upon its interim report dated 17 November 2003. He wrote:

“The background to my involvement with the Firm is that I was approached by Mr Bashir and Mr Sharif, whose wife was in the process of qualifying as a Solicitor, to be a Partner in a new firm they intended to start named “Zahid”. I was not to have an active role in the firm but to help and advise as to the running of the firm and to be there on a regular basis in order to satisfy the Law Society’s requirements as Mr Bashir had not been qualified for 3 yrs.” (emphasis supplied)

Apparently in answer to a letter, Mr Lees added:

“10. In view of my earlier remarks I would not say the Partnership was a Sham up to Nov 2003.”

I now set out the core paragraphs of the judge’s judgment, his first reference being to the written comments of Mr Lees set out immediately above:

“13. Those remarks are remarks which he made far more contemporaneously than anything that has been said in relation to these proceedings. It seems to me that they have a considerable significance. I take the view that what was entered into and agreed between Mr. Bashir and Mr. Lees was that they would enter into such a relationship as they then understood was required by the Law Society under rule [13] involving perhaps less supervision than the Law Society would ideally want from Mr. Lees but, nonetheless, entering into what was a true partnership. In that regard there is only Mr. Lees’ evidence and the documents I have before me as to what the nature of that initial agreement was. I accept that the evidence as set out in Mr. Lees’ witness statement skirts round the question of whether there was a partnership or no.

14. Whether there was a partnership or no may, in fact, depend to a considerable extent on the provisions of the Partnership Act 1890, and on the question of whether or no this was a relationship between two people carrying on business in common with a view of profit. That is section 1(1) of the Partnership Act 1890. A simple test, factually not necessarily simple at all. I accept also that whatever label the parties chose to describe themselves by on their own notepaper is not determinative. You look at the reality, you do not look at the form or the window dressing.

….

16. At the end of the day a firm was set up and, in my judgment, it was set up as a firm between Mr. Bashir and Mr. Lees on the basis that they would do what they understood was required of them to set up such a firm by the Law Society, i.e. that Mr. Lees would be a partner in accordance with rule [13]. It seems to me that I can derive comfort from Mr. Lees’ response to the forensic investigation report where he says that he was approached by Mr. Bashir and Mr Sharif to be a partner in a new firm, and he accepted that approach, that offer, and that is what happened.

22. If that was the agreement between Mr. Bashir and Mr. Lees, when Mrs. Sharif came in as partner, as she undoubtedly did towards the end of 2002, she came in and joined a firm as it was then set up. In other words, it seems to me that the people who were partners in the two man firm became two of the partners in a three person firm … Thus, the answer to the question I am asked to answer is: yes, there was a partnership.”

In his submissions in support of this appeal Mr Blackett-Ord seeks to conduct us upon an interesting excursion into legal history. With an infectious enthusiasm he seeks to establish, as a preliminary argument, that, prior to the Act of 1890, a provision to participate in profits was an essential component of a contract of partnership. Thus in Burnell v Hunt (1841) 5 Jur 650, Coleridge J observed (at 651):

“There is no partnership, unless there is an agreement that the party shall have immediate participation in the profits.”

Then, in Pooley v Driver (1876) 5 Ch. D 458, Jessel MR referred (at 472) to “a business bringing profit and dividing the profit in some shape or other between the partners”; and with emphasis he added “That certainly partnership is”. Later, in Walker v Hirsch (1884) 27 Ch. D 460, this court held that an agreement for participation in profits, although prima facie evidence of partnership, was not conclusive and that other features of the agreement demonstrated that instead it created a relationship of master and servant.

Mr McGee complains with some force that these authorities do not clearly establish Mr Blackett-Ord’s preliminary argument. Although it would be disproportionate to descend into the detail of them, I broadly accept Mr McGee’s complaint that, although in Burnell’s case and in Pooley’s case, there are dicta helpful to Mr Blackett-Ord, neither was a case in which a discrete issue arose as to whether partnership could exist in the absence of participation in profits. Moreover on any view Walker’s case carries the argument no further: for to say that participation is not determinative is not to say that it is necessary.

Nevertheless I for my part accept Mr Blackett-Ord’s preliminary argument. I do so largely by reference to emphatic statements in support of it in the fifth edition of Lindley’s Treatise on the Law of Partnership, published in 1888. In his introductory chapter Lord Lindley, as he was to become, wrote (at 1 and 2) that:

“An agreement that something shall be attempted with a view to gain, and that the gain shall be shared by the parties to the agreement, is the grand characteristic of every partnership…”

Then he cited 18 definitions of a partnership, taken from what he called “works of celebrity” including (at 3) that of Sir Frederick Pollock in his Digest of the Law of Partnership that:

“Partnership is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all them.”

The Act of 1890 was, however, entitled “An Act to declare and amend the Law of Partnership”. And it was soon noticed not only that the effect of section 2(3) of the Act, set out in [9] above, was to re-iterate that an agreement to share profits was not conclusive that it created a partnership but also that the core definition in section 1(1) of the Act, also set out in [9] above, provided only that, in order to be partners, it was necessary for persons to carry on a business in common with a view to profit and not that they should also share it. Was therefore the effect of section 1(1) so to amend the law as to render the sharing of profits no longer a necessary condition of partnership? In 1891 Lord Lindley wrote a supplement to his book in which he set out the terms of the Act of 1890 with annotations. In his note on the words “with a view of profit” in section 1(1), he wrote (at 14):

“Hitherto, it has been considered essential for a partnership to have for its object not only the acquisition, but also the division, in some way or another, of profit and consequently mutual insurance societies have not hitherto been treated as partnerships. Such societies are, however, associations “which have for their object gain” … It may therefore be that societies of this nature … will be held to be partnerships under this Act.”

Later editions of Lord Lindley’s book adhered to this suggestion and expanded upon it.

Thus arose a protracted debate. In 1920, in writing the 11th edition of his Digest, Sir Frederick Pollock, the great draftsman of the bill which became the Act of 1890, wrote (at 8):

“But the Act, while it speaks of “a view of profit”, says nothing about the profits being shared between the partners at all; and it has accordingly been suggested that under the Act persons who jointly carry on a business resulting in profit, though without any intention of dividing that profit among themselves, or giving any one of them the right to claim a share, are partners, and even that this was always the law, and the division of profits, notwithstanding the uniform language of judges and text-writers, is “rather an accident than of the essence of the partnership relation”. This opinion is certainly novel, and I am unable, with great respect for the present learned editors of Lindley on Partnership, to see any sufficient reason for accepting it.”

But in the 15th and last edition of Pollock’s Digest, published in 1952 and edited by Professor Gower, Sir Frederick’s protest was watered down. The opinion in Lindley was said only to be open to objection. And then, almost inconsistently, the following was insinuated into the text (at 11):

“On the other hand, it is thought that a salaried partner is a true partner notwithstanding that he is paid a fixed salary irrespective of profits and that as between himself and his co-partner he is not liable for the partnership debts.”

Whether the authorities cited for that proposition truly supported it is a hare which I will not attempt to chase.

The debate continues. In Lindley and Banks on Partnership, 18th edition, 2002, the submission of the inheriting editor, at the end of rather an opaque paragraph, namely [2 – 10], is “that the division of profits is no more than a common incident of the partnership relation, rather than of its very essence”. But in The Law of Partnership in Australia and New Zealand by Higgins and Fletcher, 8th edition (2002), the debate is analysed in part by reference to the provision in section 46 of the Act of 1890, reflected by analogous sections of the Acts of Australia and New Zealand, that:

“The rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act .”

The editor concludes (at 34) that:

“The wording of the statutory definition does not seem to be sufficiently unambiguous to make it clearly inconsistent with the common law and therefore it seems it is still essential for a partner to participate to some extent in the profits.”

But what, more importantly, are the authorities upon which Mr Blackett-Ord relies for his main argument that provision for participation in profits still remains necessary to the existence of a contract of partnership? He relies upon three:

(a)        First, Blackpool Marton Rotary Club v Martin [1988] STC 823. The inspector issued an assessment to tax against the Rotary Club which was invalid if, as it contended on appeal to Hoffmann J as he then was, the club was a partnership. Among its other activities the club organised modest fund-raising events. In dismissing the club’s appeal the judge said (at 830 j):

“[The argument of the club] seems to me to involve a misconception about what the Partnership Act means when it speaks of “carrying on a business … with a view of profit”. It means, in my judgment, with a view to a profit to which the partners will in some proportion or other each be individually entitled … In the case of a club the position is quite different.”

But I agree with Mr McGee that it is impossible to consider that, in pursuing their fund-raising activities, the Rotarians were even “carrying on a business” within the statutory definition.

(b)        Second, Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd (1996) SLT 186. A sublessee alleged that the nature of the arrangement between it and the headlessee referable to development land in Cumbernauld was such as to make them partners in relation to its proposed development. The Act of 1890 applies in Scotland. The Lord Ordinary, Lord Coulsfield, rejected the allegation. He said (at 195 F – J):

“… it is undoubtedly true that there is no one provision or feature which can be said to be absolutely necessary to the existence of a partnership, so that the absence of that feature inevitably negates the existence of a partnership … Nevertheless it seems to me that … a sharing of profits and losses and mutual agency are typical of partnerships, and delectus personae [viz., the limited rights of assignees] may be said to be a further such feature. The absence of one or even more than one of these features might be reconcilable with the existence of a partnership. In the present case, however, it seems to me that none of them are present. That is a situation which I find irreconcilable with the existence of a partnership …”

It is obvious that such words are a wholly insufficient foundation for Mr Blackett-Ord’s submission. I am not even persuaded that the Lord Ordinary was suggesting that absence of the three features would always negative partnership (for why should that be?) rather than that such was its effect in that case.

(c)        Third, Memec plc v. Inland Revenue Commissioners [1998] STC 754. This court had to analyse for tax purposes the nature of a so-called silent partnership between a company and its subsidiary. Peter Gibson LJ set out (at 764 e–f) five “relevant characteristics of an … English partnership”. The fifth was that “the partners own the business, having a beneficial interest, in the form of an undivided share in the partnership assets … including any profits of the business.” The proposition is uncontroversial for on any view participation in profits is a characteristic of a partnership. The question, not raised in the Memec case, is whether it is a pre-requisite.

I trust that I do not obscure my profound respect for the judges responsible for them if I say that the remarks in the above three cases represent a thin collection of authority in support of Mr Blackett-Ord’s main argument, particularly in the light of the passage of a century during which, were it valid, one might expect a court clearly so to have stated.

The case of Stekel v Ellice [1973] 1 WLR 191 runs counter to Mr Blackett-Ord’s submissions; and in effect he accepts that, if we are to uphold his submissions, we need to hold that it was wrongly decided. The dispute, which was between two chartered accountants, was whether, as the claimant alleged, they had been in partnership or whether, as the defendant alleged, the claimant had been his employee. The written agreement between them had provided that the claimant should be “a salaried partner at £2000 per annum”; that, apart from the claimant’s furniture, the “capital of the partnership” should be provided by, and solely belong to, the defendant; and that the defendant should be entitled to all the profits and bear all the losses. So the agreement required Megarry J to grapple not only with the point of principle, namely whether provision for fixed payment rather than for a share of profits precluded the existence of a partnership, but with the significance of the phrase “a salaried partner”. Having observed (at 198E) that the phrase was not a term of art and to some extent might be said to be a contradiction in terms, he continued as follows (at 199G – 200C):

“It seems to me impossible to say that as a matter of law a salaried partner is or is not necessarily a partner in the true sense. He may or may not be a partner, depending on the facts. What must be done, I think, is to look at the substance of the relationship between the parties; and there is ample authority for saying that the question whether or not there is a partnership depends on what the true relationship is, and not on any mere label attached to that relationship. A relationship that is plainly not a partnership is no more made into a partnership by calling it one than a relationship which is plainly a partnership is prevented from being one by a clause negativing partnership: see, for example, Lindley on Partnership, 13th ed. (1971), p. 66.

If, then, there is a plain contract of master and servant, and the only qualification of that relationship is that the servant is being held out as being a partner, the name “salaried partner” seems perfectly apt for him; and yet he will be no partner in relation to the members of the firm. At the other extreme, there may be a full partnership deed under which all the partners save one take a share of the profits, with that one being paid a fixed salary not dependent on profits. Again, “salaried partner” seems to me an apt description of that one: yet I do not see why he should not be a true partner, at all events if he is entitled to share in the profits on a winding up, thereby satisfying the point made on section 39 by Lindley at p. 13. However, I do not think it could be said it would be impossible to exclude or vary section 39 by the terms of the partnership agreement, or even by subsequent variation (see section 19), and so I think that there could well be cases in which a salaried partner will be a true partner even though he would not benefit from section 39. It may be that most salaried partners are persons whose only title to partnership is that they are held out as being partners; but even if “salaried partners” who are true partners, though at a salary, are in a minority, that does not mean that they are non-existent.”

The judge proceeded to hold that the parties had been in partnership.

It is largely by reference to the case of Stekel that, in his excellent book on Partnership, 2nd edition (2002), Mr Blackett-Ord himself writes as follows (at 11.15):

“The phrase ‘salaried partner’ should be avoided because it has no single meaning and its use creates confusion.

The expression ‘salaried partner’ is used loosely to describe a person who is less than a full profit-sharing or ‘equity’ partner because he is one or other of the following:

(a)        An employee who is not a partner but who is described as a partner to enhance his own status or that of the firm …

(b)        A true partner who receives all or most of his remuneration in the form of a salary rather than a simple share of profits.

Whether he is a true partner will be decided according to whether his agreement with the firm leans … towards an agreement for partnership rather than an employment agreement, and whether his relationship with the firm satisfies the other requirements of partnership … The mere fact that he is called an ‘equity’ partner or ‘salaried’ partner is not of itself decisive, although the usual modern meaning of the latter term is in the first of the two senses given above.”

I agree with the decision in the case of Stekel and with the propositions in the books on Partnership by Lindley and Banks and by Mr Blackett-Ord himself to the effect that an agreement for a person to be paid a specified sum for work to be done by him on behalf of a firm does not preclude his thereby becoming a partner of it. No authority for the contrary proposition can be derived from the Act of 1890 even though it would have been simple to provide for it either in the core definition in section 1(1) or, in particular, in section 2(3) in which the significance of receipt of a share of profits in determining whether a partnership exists is expressly addressed. On the contrary, the words of the core definition are wide enough to render the recipient of payments in a fixed sum a partner provided that there is a business, that it is carried on with a view to profit and, crucially for present purposes, that he is carrying it on in common with another or others. Indeed, in that a definition is a precise statement of a thing’s essential nature, I would regard it as inconsistent with section 1(1) – and so not permitted by section 46 – to graft on to its words the previous requirement at common law for participation in profits. Nor do I see any logic behind a situation in which

(a)        an agreement that a person should receive a share of profits, however nominal that share might be, could make him a partner and indeed was prima facie evidence thereof (section 2(3)); and

(b)        an agreement that a person should receive a share of profits limited to payments in a fixed sum could make him a partner (In Re Hill [1934] 1 Ch 623); but

(c)        an agreement that a person should receive payments in a fixed sum, irrespective of profits, precluded his being a partner.

It is idle to deny that, indirectly, an employee has an interest in the profitability of the firm for the continuation of his job may well depend on it. Nevertheless the absence of a direct link between the level of payments and the profits of the firm is in most cases a strongly negative pointer towards the crucial conclusion as to whether the recipient is among those who are carrying on its business. But the conclusion must be informed by reference to all the features of the agreement. Thus, for example, provision or otherwise for a contribution on his part to the working capital of the firm will be relevant. And it will be important to discern whether, expressly or impliedly, the agreement provides not only that acts within his authority should bind the acknowledged partners but also that their such acts should bind him; for such is provided by section 5 of the Act to be a necessary incident of partnership but would, of course, be inconsistent with his status as an employee.

In the present case, partly because Mr Bashir chose not to give evidence, there was limited exploration before the judge as to whether the agreement between him and Mr Lees was for the latter to be paid £18,000 per annum by way of quantification of his share of the profits and thus only if the profits proved to be at least of that size. The result of a fuller exploration might have been interesting; but we have to proceed, as did the judge, on the basis that the agreement was for payment to Mr Lees irrespective of whether the firm generated profits of that size or indeed proved to be profitable at all. As I have indicated, the provisions for payments to Mr Lees of a fixed sum and for him not to be required to contribute capital to the firm each point to the absence of partnership.

In my view, however, the judge’s conclusion was correct. There was one feature of the context to the agreement between the two men which was determinative, namely the need for a solicitor’s practice to comply with rule 13 of the Rules of 1990. Its effect was that the firm could lawfully practise between March 2002 and November 2002 only if Mr Lees was a partner in it. The evidence of both men was that it was in order to comply with rule 13 that they entered into the agreement and indeed that Mr Lees became associated with the firm at all.

Let me hasten to accept that, in the absence of one crucial though uncontroversial finding, the presence of rule 13 in the context of the agreement would not have been determinative. It would be perfectly possible for two men in the position of Mr Bashir and Mr Lees to decide that they would only pretend to comply with rule 13 and that in fact they would not enter into partnership together. Had such been the facts then, subject only to a difficult argument raised on behalf of Mr and Mrs Sharif by their former lawyers in a Respondent’s Notice that any assertion of such facts should be subject to an estoppel, there would indeed have been no partnership. But it was never asserted, whether by Mr Lees or otherwise, that the agreement was reached in order only to pretend to comply with rule 13. On the contrary Mr Lees asserted to the OSS that the partnership had not been a sham; and in his evidence in the proceedings he never sought to withdraw or to qualify that assertion. Thus it was inevitable that the judge should make the crucial finding that neither of the men intended to circumvent what rule 13 required.

In that the two men intended to comply with rule 13, they must have intended to enter into a contract of partnership. I believe that the judge was entitled to infer, indeed correct to infer, that, notwithstanding the nature of the provisions for the firm’s payment to Mr Lees and for the absence of a contribution on his part to its capital, they succeeded in implementing their intention.

The answer to the question set out at [1] above is yes. I would dismiss the appeal.

LORD JUSTICE HUGHES: I agree.

For my part I prefer to leave open the question whether prior to the Act of 1890 it was a necessary condition of partnership that there be an agreement to share profits. I do not for a moment doubt the great weight to be accorded to the opinion of Lord Lindley in the fifth edition of his celebrated work, which my Lord has cited at paragraph 24. So far, however, as the researches of Counsel have been able to discover, his proposition on this topic was never submitted to the test of a case in which the question with which we are now faced arose for necessary decision. That the sharing of profits is a characteristic of partnership, as distinct from an essential ingredient of it, was and is uncontroversial.

However that may be, the words of section 1 of the Act of 1890 seem to me to put the matter beyond doubt. They refer to the making of profit as an aim, but studiously abstain from reference to any necessity that it be shared. On principle it seems to me that if there is an essential element of partnership it is the carrying on of business in common, that is to say in such manner as to make each the agent of the other for all acts done in the course of the business. Having thus constituted themselves, the partners are free under the Act to arrange for the remuneration of themselves in any manner they choose, including by agreement that one or more shall receive specific sums, or that one or more receive nothing, in either case irrespective of profits.

For the reasons set out by my Lord I too would dismiss this appeal.

LORD JUSTICE TUCKEY: I agree for the reasons given in both judgments that this appeal should be dismissed. There is a difference between them as to what the law was before 1890 which does not I think matter for the purpose of our decision in this case. If in any future case it does, like Hughes LJ, I would prefer to leave the matter open.

Order: Appeal dismissed.


Provincial Bank v. Tallon.

[1938]  IR 361

Johnston J.     

 This is a case which came before me just at the end of last sittings and which required careful consideration, presenting as it did certain features of novelty and difficulty in regard to the law of bankruptcy.

 It comes before me on an allocation of funds in a suit by the Provincial Bank of Ireland to raise the amount of a debt owing by one, Patrick Tallon, and Elizabeth Tallon, his wife (who have been carrying on business in partnership as grocers and provision merchants), and secured by a deposit of the title deeds of certain premises belonging to the Tallons as joint tenants. There is no question that the deposit was made, in favour of the bank, by both owners, with the result that the premises having been sold for a substantial sum, the bank have been paid the amount of their debt and costs in full, and they no longer have any interest in the matter. The present question arises in regard to the balance of the purchase moneya sum of £977 17s. 7d.which, on the one hand, is claimed in its entirety by the Assignees in the bankruptcy of Patrick Tallon, and on the other, as to one moiety, by Mr. Thomas O’Connor, a wholesale provision merchant, in reduction of a debt of £823 16s. 8d. owing to him by Mrs. Tallon on foot of a judgment mortgage which he registered against the premises on March 19th, 1934.

 The facts are shortly these:On July 29th, 1931, the premises in questiona dwellinghouse and shop, known as No. 124 Upper Drumcondra Roadwere leased to Patrick and Elizabeth Tallon as joint tenants for a term of 150 years, and the lessees as partners carried on therein the business of grocers and provision merchants. About a year and a half later they jointly deposited the lease with the bank as security for a debt owing by them to the mortgagees. It appears that in addition they owed a large and increasing debt to Mr. Thomas O’Connor for goods that he had supplied. Towards the end of 1933 the wife wrote a letter to Mr. O’Connor for the purpose apparently of setting his mind at rest in regard to his debt, and in that letter she appears to take full responsibility for it, suggesting that she was the sole trader. Mrs. Tallon can scarcely be blamed for this attitude. Her husband was drinking heavily, and she herself was in actual fact carrying the entire management of the business. Mr. O’Connor, in his reply, accepts Mrs. Tallon’s view as to the situation and makes a number of suggestions as to the payment of his debt.

 On February 10th, 1934, Patrick Tallon presented a petition for an arrangement with his creditors, offering a composition of one shilling and sixpence in the pound, and in the statement submitted to the creditors the premises are set out as “held jointly.” This is important in the light of what happened subsequently. This statement was entitled, “Statement of affairs of Patrick Tallon, trading as P. J. Tallon of 124 Upper Drumcondra Road, Dublin, and late of 12 Moore Street, Dublin, grocer and provision merchant”a clear statement that Tallon was carrying on business as a sole trader; but at the meeting of creditors held on February 15th, 1934 (which Mr. O’Connor attended), it was indicated that he and his wife were trading in partnership, and that “for the purpose of the offer of composition the assets of both husband and wife were being taken into consideration.” It appears that “the creditors were very dissatisfied with the position,” and a resolution was proposed, and was seconded by Mr. O’Connor, that “the debtor’s offer of one shilling and sixpence in the pound in cash be refused and the matter be turned into bankruptcy.” I do not think that in so acting Mr. O’Connor in any way prejudiced his position or his rights, except in so far as he might subsequently allege that he was unaware of the partnership.

 On February 19th, an action was brought by O’Connor against Elizabeth Tallon for the amount of the debt, and judgment against her was marked on March 9th. On the same day Patrick failed to carry the first private sitting and his arrangement matter was turned into bankruptcy.

 On March 19th, O’Connor registered his judgment as a mortgage against the wife’s interest in the premises. An order was made in this action for the sale of the house and shop, and a sum of £2,650 was realised by the sale. The premises were then assigned to the purchaser, all the parties joining in the deed, including Patrick and Elizabeth Tallon, the Assignees in Patrick’s bankruptcy, the Provincial Bank and Thomas O’Connor; the bank were paid their debt and costs in full; and the Assignees have brought the present application claiming that the balance of the purchase money should be paid out to them.

 When Patrick Tallon became a bankrupt, the position of affairs was this:The whole of the property owned separately by him vested absolutely and at once in his Assignees, and such interest as he had in property held jointly by himself and any other person also vested in the Assignees to the extent of that interest. On the bankruptcy, therefore, the Assignees and Mrs. Tallon became entitled to equal undivided moieties as joint tenants in the Drumcondra property. The partnership became dissolved when the adjudication took place (Partnership Act, 1890, sect. 33), but the title of each party to the joint property was not affected. It was decided by Lord Mansfield as long ago as 1776, in the case of  Fox v. Hanbury (1), that the Assignees under a commission in bankruptcy against one partner “can only be tenants in common of an undivided moiety subject to all the rights of the other partner.” It was decided by Lord O’Hagan as Lord Chancellor in the case of  M’Ilroy v. Edgar (2) that the effect of the registration of a judgment as a mortgage against the interest of a joint tenant is a severance of the joint tenancy, and I have no doubt that such a change took place in this case when O’Connor registered his judgment as a mortgage against the interest of Elizabeth Tallon.

 What were the practical steps that the Assignees could take when they found themselves in the position of being the owners of an undivided share of property of which a person not a bankrupt was the joint owner? The Assignees could of course enter into possession of property of which the bankrupt was in sole possession and of property (if such existed) which was derelict and in the occupation of no one. They have a further right. In the case of”any debt due to or any estate or effects” of a partnership the Court of Bankruptcy is empowered by sect. 278 of the Act of 1857, where the bankrupt is at the time of  the bankruptcy a member of a firm, to make an order authorising the Assignees to recover such debt, estate or effects, in the name of the Assignees and of the remaining partner; and it is provided further that if the non-bankrupt partner executes a release of the claim such release shall be void. This is a very old statutory provision going back as far as the year 1825 (6 Geo. 4, c. 16, sec. 89), and was embodied in the Irish Bankruptcy Act of 1857.

 The Court of Bankruptcy, however, cannot interfere with the rights of a solvent partner who has joint assets in his hands or who wishes to gct joint assets into his hands in order to administer them in due course. This point was dealt with in the case of  Ex parte Owen (1) in 1884, where Cotton L.J. put the matter in this way: “It is said that the passing of the liquidation resolutions and the appointment of the trustee vested the property of Edward Peyton in the trustee as from the 12th of December. That, however, could not prevent the solvent partner from getting in the partnership assets. In my opinion, when one partner in a firm has become a bankrupt, the solvent partner has a right to get in, and to insist on getting in, the assets of the dissolved partnership, and has even a right to use for that purpose the name of the trustee in the bankruptcy on giving him an indemnity.” In referring to this right I must, however, emphasise the fact that it exists only in favour of, and to assist a solvent partner. Further it must be observed that the right is one personal to the solvent partner himself and cannot be transferred to another; and consequently it has been decided that the solvent partner cannot, by suffering a writ of fi. fa. to be executed against himself, authorise the sheriff to dispose of the partnership assets. In the case of  Fraser v. Kershaw (2)Page Wood V.C. said (at p. 501):”The sheriff can have no such power. It is a power confined to the partner himself, which, when exercised bona fide, the Courts have maintained to enable him to proceed in winding up the partnership affairs in due course.”

 Mr. Lavery, on behalf of O’Connor, contends that the balance of the money should be retained by and distributed in this Court where it had come into existence as the result of the sale. I cannot accede to that argument. I am satisfied that the fund must be administered in the Court of Bankruptcy where the rights of the creditors of the bankrupt will be determined; and if any balance remains the question can be determined whether Mr. O’Connor is entitled to be paid such balance by virtue of his mortgage. In the determination of that question, the Court will consider the circumstances under which that mortgage came into existence and in particular the provisions of sect. 331 of the Act of 1857.

 But that question can scarcely arise. I am informed that the fund when it is transferred to the Assignees will do no more than enable a small dividend to be paid to the joint creditors of the firm. I am satisfied that it can be devoted to that object by virtue of the combined effect, express or implied, of sects. 122 256 and 278 of the Act of 1857 and Rule 88 of Order LXXXVIII of the Rules of 1905.

 Accordingly the entirety of the balance in Court will be paid out to the Official Assignee less such sum as I shall allow for costs.