Gill v Sandhu

The issue in this appeal centres on the meaning of the words “his share of the partnership assets” in section 42(1) of the Partnership Act 1890 (“the 1890 Act”, and references in this judgment to sections are to sections of that Act). In his judgment, which is reported at [2005] 1 All ER 990, Lightman J, upholding Master Bowles, held that the reference to a share in section 42(1) was to the partner’s share in the proprietary ownership of the assets belonging to the partnership. He also held that, in a case such as this, where there were two partners and there was nothing to displace what might be called the presumption of equality, it effectively meant half the gross assets of the partnership.

The relevant facts are as follows. The claimant, Mr Kulbir Singh Sandhu, and the defendant, Mr Hardip Singh Gill, agreed, as partners at will, to purchase a property (“the property”) at 59 Mountdale Gardens, Leigh-on-Sea, Essex with a view to converting it into, and then running it as, an old people’s home. To that end, they executed a deed (“the deed”) on 12 September 1995 setting out the terms of the partnership. Under the deed, it was agreed that Mr Sandhu would manage the home, and that the net profits, after paying Mr Sandhu for his services, would be divided equally between the partners.

Mr Gill had purchased the property with his own money on 21 July 1995 for £171,450. It was agreed that each partner would pay about £85,000 by way of capital contribution to the partnership, and that the balance required to fund the development of the property and set up the business would be raised by way of a bank loan. Mr Sandhu was, as I understand it, to pay his contribution to Mr Gill, given Mr Gill had paid for the property. Mr Sandhu could only pay a limited amount until he had sold two flats that he owned. Accordingly, he agreed to pay the balance of his contribution, £70,000, referred to as “the Contribution” in the deed, to Mr Gill, when he had sold the flats.

Clause 10 of the deed dealt with “partnership property”. By Clause 10.1, it was agreed that “as soon as practicable… Mr Sandhu shall pay the Contribution to Mr Gill”, and that, in the mean time, Mr Gill was to be entitled to receive the rent from the two flats. Clause 10.2 provided that, “after payment of the Contribution” the property “shall become partnership property”, and that Mr Gill would declare a trust of the same on the basis that the partners would be tenants in common. Clause 10.3 recorded that all other partnership assets were to “belong to the partners jointly”.

Apart from the fact that Mr Sandhu paid to Mr Gill only £21,250 of the £70,000, or any part thereof, the project proceeded, at least initially, as anticipated. Appropriate works of alteration were carried out to the property, and it was then run as a home by Mr Sandhu. For that he was allowed a salary (later agreed at £22,000 a year) from the net profits generated, and the net profits, if any, thereafter were shared equally between the two partners.

On 12 April 1999, following differences between the parties, Mr Gill excluded Mr Sandhu from the property. It is common ground that the partnership determined on that date. Thereafter, Mr Gill carried on the business on his own account. As the Judge explained in paragraph [6] of his judgment, “the business proved profitable under the management of Mr Gill and, indeed, as well as producing revenue profits, the business over that period increased in value from £600,000 to £850,000 producing a capital profit of £250,000”.

On 7 May 1999 Mr Sandhu began the instant proceedings seeking an Order that the partnership be wound up. There were a number of contentious issues. They included Mr Gill’s contentions that there had in fact been no partnership between him and Mr Sandhu and that the property was not a partnership asset, and Mr Sandhu’s contention that the deed should be rectified so that, in effect, the property was subject to clause 10(3), and not clause 10(2). Most of those issues were resolved by a consent order made by Pumfrey J on 24 November 2000. The terms of that order (“the consent order”) included an agreement that the property “constitute[s an] asset … of the partnership”. The consent order also directed the taking of post-dissolution accounts.

The parties were unable to agree various points relating to the post-dissolution accounts and those points were argued before Master Bowles. The centrally relevant dispute for present purposes was “what share of the post-dissolution profits, if any, … Mr Sandhu is entitled to …”. In a full and careful written judgment, delivered on 24 September 2004, the Master gave his opinion on the various points. His determination on the relevant dispute was favourable to Mr Sandhu, namely that he was entitled to half of the post-dissolution annual profits, after making a deduction of £22,000 for Mr Gill’s services. (Mr Gill’s entitlement to that annual sum is not in dispute, and I shall say no more about it). On appeal, Lightman J upheld that decision.

As the Judge recorded in paragraph [6] of his judgment:

It was also common ground that Mr Sandhu was entitled to share the capital profit of £250,000 equally with Mr Gill. The centrally relevant issue, which the parties could not agree, was the extent, if any, of Mr Sandhu’s entitlement to a share of the revenue profits made by Mr Gill between 12 April 1999, when the partnership was dissolved, and the date of the conclusion of the winding up.

On behalf of Mr Sandhu, Mr Timothy Walker (who appeared below) contends that Mr Sandhu is entitled to half the post-dissolution profits earned from the running of the home pursuant to section 42(1), a contention which he says is reinforced by the provisions of clause 10(2) of the deed and of the consent order. For Mr Gill, Mr Mark Blackett-Ord (who also appeared below, although not before Pumfrey J) agrees that section 42(1) is of central importance, but denies that the consent order is of relevance, and he contends that Mr Sandhu is not entitled to any share of the post-dissolution profits.

Mr Blackett-Ord’s contention is that the effect of section 42(1) is that the extent of Mr Sandhu’s entitlement to the post-dissolution profits is equal to his share (if any) in the net assets of the partnership as at the date of dissolution. He says that one has to assess the existence and extent of Mr Sandhu’s interest in the net assets of the partnership on a notional winding up as at the date of dissolution, and that, on the evidence, that interest would be negative because any financial entitlement of Mr Sandhu would have been more than cancelled out by his debt of £70,000 unpaid capital to Mr Gill.

Mr Walker has two answers to this contention, which encapsulate the two issues on this appeal. First, he says that this contention involves a misinterpretation of section 42(1), which, on his case, requires Mr Sandhu’s share of the post-dissolution profits to be assessed by reference to his share of the gross assets of the partnership as at dissolution, which, in the absence of any evidence to the contrary, is a 50% share. Secondly, he says that, in any event, the effect of the deed and the consent order is to give rise to an agreement that Mr Sandhu has a 50% share in the partnership, and therefore a right to half the post-dissolution profits.

The resolution of the first issue turns substantially on section 42(1), which provides as follows:

Section 42 is in that part of the 1890 Act, consisting of sections 32 to 44 inclusive, which are under the heading “Dissolution of Partnership, and its Consequences”. Sections 32 to 35 are concerned with methods of dissolution, and sections 36 to 38 deal with miscellaneous matters concerning outsiders to the partnership. Sections 39 to 44 deal with the rights of the partners following dissolution. Section 39 is concerned with the “Rights of Partners as to application of partnership property”, and section 41 with “Rights where partnership dissolves for fraud or misrepresentation”, section 42 with “Right of outgoing partner in certain cases to share profits made after dissolution” and section 44 is the “Rule for distribution of assets on final settlement of accounts”.

It is worth referring to section 44 in a little more detail. Section 44(a) deals with the sharing of losses. Section 44(b) provides that “the assets … shall be applied in the following manner and order”:

The only other provision of the 1890 Act to which I should make reference is section 24, which, according to its title, sets out certain “Rules as to interests and duties of partners subject to special agreement”. As the title indicates, the section sets out some rules which are to apply, save where something different has been expressly or impliedly agreed. Section 24(1) provides that “All partners are entitled to share equally in the capital and profits of the business …”.

With that, I now turn to the meaning of section 42(1). The concept of “a partner’s share of the partnership assets”, at any time before the end of the winding up process in accordance with section 44, is conceptually somewhat opaque. In a case to which I will have to return, Popat –v- Shonchhatra [1997] 1 WLR 1367, in an uncontroversial passage at 1372B-D, Nourse LJ said this:

In the current (eighteenth) edition of Lindley & Banks on Partnership, the topic of “partnership shares” is dealt with in Chapter 19. Lord Lindley’s “classic definition” is quoted in paragraph 19-05. He said that “the share of a partner is his proportion of the partnership assets after they have been all realised and converted into money, and all the debts and liabilities have been paid and discharged.” In the following paragraph, the editors effectively endorse this definition, albeit stating that “it would be more accurate to speak of a partner’s entitlement to a proportion of the net proceeds of sale of the assets”. The editors go on to explore a little further the nature of a partner’s share in three circumstances, namely while the partnership is continuing, after “general dissolution” and after “death, retirement or expulsion of a partner”.

As to the position while the partnership is continuing, Lindley & Banks suggest in paragraph 19-09 that:

In paragraph 19-10, the editors turn to the position on the general dissolution, and “submit” that “each partner’s share will have the same proprietary character as it had prior to the dissolution”. They immediately go on to state that “in terms of value, the share must still be expressed as a net entitlement, since, in the absence of some specific agreement between the partner, it cannot properly be viewed in any other light”. That is also stated to be supported by the passage I have quoted from Popat’s case.

One can find support for this conclusion in at least some of the authorities referred to in the footnotes to the passages that I have cited in Lindley & Banks. Thus, in Re Ritson [1899] 1 Ch. 128, Chitty LJ said at 131 of a deceased partner that his “interest in the joint assets [of the partnership] was only his share of the surplus after payment of the joint debts”, echoing a similar observation of Lindley MR himself at 130-131. In Rodriguez –v- Speyer Brothers [1919] AC 59 at 68, Lord Finlay LC said this at 68:

The concept of an interest in such a “surplus” is also to be found in a judgment of Buckley J, Burdett-Coutts –v- Inland Revenue Commissioners [1960] 1 WLR 1027 where he said this at 1035, when he observed that the analysis of Romer J in Manley –v- Sartori [1927] 1 Ch. 157:

So far, I have referred to authorities after the 1890 Act, but it is worth observing that it seems to have been the same before that Act came into force. Thus, in Ashworth –v- Munn (1880)15 Ch. D. 363, James LJ said this at 368:

Although this observation was, as mentioned, made before the 1890 Act came into force, it should be noted that, as stated in Lindley & Banks at paragraph 1-06, the 1890 Act “introduced no great change in the law”.

The situation catered for by section 42(1), namely the entitlement of what I shall call an excluded partner to compensation in light of post-dissolution profits made by his former partner or partners from continuing the partnership business, was the subject of a number of decisions prior to the 1890 Act. In one of those decisions, Featherstonhaugh –v- Fenwick (1810) 17 Ves. Jun. 291, Grant MR made the point that, once the partnership is dissolved, all the partners had the same right, namely “to have the whole concern wound up by a sale and a division of the profits” and that, if one partner carried on the business to the exclusion of the other and without the consent of the other, which was something which he was not in principle entitled to do, and he would therefore “come under a liability for whatever profits might be produced”.

Those observations, and also observations to which we were referred of Lord Eldon LC in Crawshay –v- Collins (1826) 2 Russ. 325 at 344-345, do not seem to me to impinge on the essential issue which we have to determine. They serve to emphasise the justice of the excluded partner (or his estate) being entitled to benefit from the carrying on of the partnership business after dissolution, given that the immediate right of all the partners is to have the partnership wound up, and that any profits earned after dissolution will, at least normally, be in part attributable to the earning capacity of assets in which the excluded partner or his estate has an interest, albeit an interest which will not crystallise until the winding up is completed. However, what those cases do not do, in my view, is to indicate how the excluded partner’s share of the post dissolution profits was to be assessed.

Based on the decision of Wigram V-C in Willett –v- Blanford (1842) 1 Hare 253, Lightman J said at paragraph [16] of his judgment that, before the 1890 Act, the approach of the courts to the question of the entitlement of the excluded partner to share in the post-dissolution profits was based on the particular circumstances of the case, and was relatively flexible. I think there is some force in that, with one exception, I shall say no more about those cases, save to say that I agree with Black J’s analysis in paragraphs 83 to 87 below. Yates –v- Finn (1880) 13 Ch. D. 839 was a decision which suggests that, prior to the 1890 Act the courts did adopt an underlying principle, albeit that it was one which could be modified, or even departed from, where the facts justified it.

In that case, the excluded partner had provided about 75% of the capital, and under the partnership agreement it was agreed that profits would be shared equally between the partners. After dissolution, and both before and after the excluded partner’s death, the business was carried on profitably by the other partner, who had provided about 25% of the capital. After deducting in favour of the surviving partner a sum to compensate him for running the business after the dissolution, the Chief Clerk apportioned the post-dissolution profits equally between the two partners. That decision was successfully appealed to Hall V-C, and it is interesting to note that, at 841, he “remarked that it might be necessary to continue a business for the purpose of winding it up”.

Even more to the point, at 843-844, Hall V-C said this:

It is fair to say that, in that case, the partnership agreement was for a fixed term, which had expired well before the excluded partner died, but I cannot think that makes any difference. Indeed, if anything, it could be said to be a stronger case than the present, where, for virtually the whole of the post-dissolution period of trading, the winding up of the partnership could be said to have been underway (bearing in mind that Mr. Sandhu applied for the partnership to be wound up within a month of the dissolution).

At least on the basis of the authorities we were referred to, Yates’s case is the clearest and most recent reported decision on this issue prior to the passing of the 1890 Act. Bearing in mind the fact that, as already mentioned, the purpose of that Act was more to codify (albeit partially) and clarify the law on the topic, rather than to change it, I consider that the decision is one which can justifiably be invoked to support the case advanced by Mr Blackett-Ord.

So far, it appears to me that the judicial and textbook analyses of the concept of a partner’s “share of the partnership assets” accords more with that advanced on behalf of the appellant Mr. Gill, than that favoured by the Judge and advanced on behalf of the respondent, Mr. Sandhu.

In my judgment, that view is reinforced if one examines the effect of the closing words of section 42(1). Confining oneself to a case of only two partners, the section applies in a case where, after dissolution has occurred, but before the winding up has been concluded, one of the partners carries on the partnership business, to the exclusion of the other. In such a case, the excluded partner can elect between receiving a proportion of the profits or receiving interest at 5% per annum. The proportion of the profits is assessed by reference to “the use of his share of the partnership assets” and the interest is assessed on “the amount of his share of the partnership assets”. It is very difficult to avoid the conclusion that the expression I have emphasised in those two quotations has the same meaning in each case. In the present instance, Mr. Sandhu appears to have elected for the first alternative, but I am currently concentrating on the second alternative.

In that connection, in agreement with Mr. Blackett-Ord, it would seem to me quite remarkable if the partner who carries on the business could be obliged to pay the excluded partner interest based on a sum equal to the value of the latter’s interest in the gross assets of the partnership, i.e. his interest in the assets of the partnership, without taking into account the liabilities of the partnership. Yet that is what Mr. Walker accepts his submission, and therefore the Judge’s conclusion, mean. Consider a case, which would be common, and indeed the present is an example, where the main asset of the partnership consists of real property. Very often, that asset will be charged to the bank, possibly for a sum which is equal to or conceivably even more than its value. If the Judge’s conclusion in the present case is right, it would mean that the excluded partner would be entitled to interest based on the unencumbered value of the property, which would seem surprising and unfair.

Mr Blackett-Ord conjured up an even more extreme example. It involved a partnership running a hotel business where one partner had contributed the building as a partnership asset, albeit that it was wholly owned by him and would be returned to him on winding up (unless needed to repay the partnership liabilities) and where the partners agreed an equal share of profits (because the other, subsequently excluded, partner was to run the business). In such a case, it would be surprising if the hotel-owning partner, who carried on the business after dissolution, had to account to the excluded partner for interest at 5% per annum on half the value of the hotel. It would be even more surprising if he had so to account if the hotel was 100% charged to secure a loan to the partnership (or to the hotel-owning partner). Yet that would be the effect of the Judge’s conclusion (unless “share of the partnership assets” at the end of section 42(1) is given a different meaning from that which it has earlier in the same subsection, which is unlikely and was not suggested by Mr Walker).

It is no answer, in my view, to this analysis to say that a partner who carries on the partnership business with partnership assets, to the exclusion, and without the authority, of the excluded partner, after the partnership has been dissolved, does so at his own risk, and therefore cannot complain if he is effectively penalised in this way. In the first place, the first alternative for which the excluded partner can opt, namely an appropriate share of the profits has no such penal element; it would be very surprising if the two options were based on different principles.

Quite apart from this, section 42(1) is not, in my opinion, concerned with penalising a partner who continues the partnership business in such circumstances. It is specifically stated to apply, inter alia, where the excluded partner has in fact died; in other words, it applies where the partner who carries on the business really has no alternative but to do so, and indeed where the estate of the deceased partner would often expect to benefit from the fact that the business is being continued, so that, for instance, it could be sold as a going concern. Indeed, where the partnership takes a long time to wind up, as in the present case, it is similarly desirable that one partner should be able to continue the business essentially for the same reason.

In any event, if the excluded partner is entitled to be accorded some sort of extra right for the “insult” of the partnership business being continued against his will, it seems to me that the right he is given to elect between interest and a share of the profits, is quite sufficient. Any further right, such as that contended for by Mr Walker, could frequently turn out to be wholly disproportionate to any perceived injustice to him, and could also work arbitrarily.

It also seems to me that this conclusion receives a little indirect support from section 42(2), to which I have not so far referred. It provides that, where the continuing partners exercise an option to buy out an outgoing partner, the outgoing partner cannot rely on section 42(1), unless the continuing partners fail to comply with the terms of the option. Given that the amount payable under any such option would be likely to be based on the outgoing partner’s share of the net, rather than the gross, value of the partnership assets, it seems likely that the share of the profits, and the 5% per annum interest, in section 42(1) would be assessed on a similar basis.

In paragraph [18] of his judgment, Lightman J observed that the conclusion that the reference to a partner’s “share of partnership assets” was a reference to the gross assets and not to the net assets was supported by section 41(a) which applies where a partnership contract is rescinded on grounds of fraud or misrepresentation. In such a case, the rescinding party is entitled inter alia to:

That is a point with some force. On the construction of section 42(1) advanced by Mr. Blackett-Ord, the reference to “the surplus of the partnership assets, after satisfying the partnership liabilities” in section 41(a) has the same meaning as “the partnership assets” in section 42(1), whereas on the Judge’s construction, supported by Mr. Walker, the expression “the partnership assets” has the same meaning in the two sections.

However, I do not consider the point to be particularly powerful. First, section 41(a) is concerned with the actual net assets of the partnership after the payment of all liabilities, i.e. just before distribution of those net assets among the partners. On the other hand, section 42(1) is dealing with a period which may, and normally does, extend to a period before the winding up process has even begun, so the net assets are, as it were, prospective in nature. Further, the “share of the partnership assets” in section 42(1) is, in a sense, a composite expression which, as the passages I have quoted from Lindley & Banks demonstrate, had an established meaning when the 1890 Act was passed.

In any event, when one turns to another provision of the 1890 Act which has a reference to a partner’s “share of the partnership assets”, namely section 31, it appears to me that the expression is used in a way which is consistent with the case advanced by Mr. Blackett-Ord rather than that adopted by the Judge. Section 31(2) provides that an assignee of a partner’s share is entitled to receive “the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners”. In my view, that must be a reference to the share of the net assets, or the “surplus assets” referred to, for instance, by Buckley J in Burdett-Coutts’s case. Support for that interpretation may be found in Hadlee –v- Commissioner of Inland Revenue [1993] AC 524 at 533B, where the Privy Council appears to have taken the view that the identically worded New Zealand statutory provision was a reference to “the right on dissolution to a share in assets”, which seems to me to refer back to the description of a partner’s right “to share in the surplus assets of the partnership on a dissolution” on the previous page of the judgment at 532H.

It may be added that this interpretation appears to coincide with the view expressed in the current, eighth, edition of Higgins & Fletcher on The Law of Partnership in Australia and New Zealand. At page 250, when discussing the antipodean equivalent of section 42(1), they suggest that “the relevant share” there referred to is “the amount owing to the outgoing partner from the remaining partners”. It is also worth mentioning that, in paragraph [21] of his judgment, Lightman J referred to the New Zealand decision, De Renzy –v- De Renzy (1924) 43 NZLR 1065, and said that he had “some difficulty” with the approach of Stringer J to the apportionment of post dissolution profits between the surviving partner, who continued to carry on the partnership business, and the estate of the deceased partner. It appears to me that, if Mr. Blackett-Ord’s analysis in the present case is correct, no such difficulty arises.

In paragraph [17] of his judgment, Lightman J referred to Manley’s case, and cited rather more extensively the observations of Romer J which were quoted by Buckley J in Burdett-Coutts’s case. Rather contrary to the view of Buckley J, it appears that Lightman J took the view that those observations rather assisted Mr. Walker’s submissions in the present case. I am rather dubious whether the observations in Manley’s case, despite their authoritative source, are of much assistance, because Romer J was not really concerned with the issue which we have to decide.

However, as I have probably already implied, it seems to me that, if anything, the analysis of the law in Manley’s case assists Mr Blackett-Ord rather than Mr Walker. The passage I have in mind is at 162 where Romer J said this:

The reason I consider that passage to be important in the present context is this. For the respondent, Mr Sandhu, Mr Walker contends that all the partners have an interest in the assets of the partnership until it is completely wound up, and, indeed, that all their interests are equal, unless there is an agreement to the contrary; this is no doubt because their right to have the assets dealt with in accordance with the rules of the partnership and the provisions of the 1890 Act can be said to be equal. On this basis, at least in the absence of an agreement to the contrary, post-dissolution profits are to be shared equally. If that were correct, then it seems to me that the example given by Romer J cannot be right. Even though the deceased partner in the example had not contributed any capital, he would still, on Mr. Walker’s case, have an interest in the assets of the partnership, in the sense of having been a partner and having an interest, which was prima facie “equal” of that of the other partner, in having the assets distributed in accordance with the provisions of the 1890 Act (or as varied, if at all, by the provisions of the relevant partnership agreement). Yet, under Romer J’s analysis he would not be entitled to any share of the post dissolution profits which appears to me to be entirely consistent with the analysis put forward by Mr. Blackett-Ord, on behalf of the appellant, Mr Gill.

In these circumstances, I am disposed to reach a different conclusion from that reached by Lightman J in that it appears to me that the reference in section 42(1) to “the partnership assets” is to the net partnership assets, and not the gross partnership assets. However, that would not necessarily be determinative of the first of the two issues on this appeal, because the basis for assessing the “share” in that section must also be determined. Having said that, many of the reasons for arriving at the conclusion that the reference to “assets” is to net assets appear to me to carry with them the notion that the “share” referred to is the actual share of those assets attributable to the partner concerned in the net assets in the winding up process in accordance with section 44. Further, logic and commercial common sense (which often, but not invariably, march together) suggest that if the value of “the partnership assets” in section 42(1) is to be assessed by reference to the present value of the prospective surplus, then the partner’s “share” under that section must be based on the actual proportion of those assets to which he would be entitled.

In other words, if the reference to “the partnership assets” in section 42(1) is to what Buckley J called the surplus, i.e. what remains out of the gross assets, for distribution between the partners, after all debts and other liabilities of the partnership have been met, it seems to follow that the “share” for the purposes of section 42(1) is to be assessed by reference to the share which the partner in question is entitled to receive at the conclusion of the winding up process. Indeed, it seems to me that the way in which the observations in the cases and textbook to which I have referred are expressed make that conclusion virtually inescapable.

Further, if the excluded partner’s share of net assets under section 42(1) is not to be assessed in this way, and the Judge is right, there would appear to be only two alternatives for assessing that share (subject to the possibility of agreement, which is specifically mentioned in the section). The first is that it is to be assessed in accordance with section 24(1). The alternative is that the excluded partner would be intended to have a share which was equal to that of each of the other partners. Either conclusion would be hard to reconcile with justice or authority, as discussed above. Also, if either had been the legislature’s intention, one would have expected section 42(1) to have been differently drafted. Either section 24(1) (together with the opening words of section 24 if the first alternative was intended) would have been referred to in section 42(1), or the latter section would have used the same language as the former. As it is, section 42(1) uses a different basis for the distribution of profits from that used in section 24(1), the basis involving an expression, which, when used elsewhere in section 42(1) itself (i.e. at the end) and in section 31, suggests a meaning consistent with the appellant’s case.

However, there are three points that give me considerable pause for thought before I go firm on the conclusion that section 42(1) has the meaning contended for by Mr Blackett-Ord on behalf of the appellant. The first is the practical consequences of this conclusion. The second is what is said in paragraphs 19-18ff. of Lindley & Banks under the heading “The Size of Each Partner’s Share”. The third is part of the reasoning of the Court of Appeal, to which I have not so far referred, in Popat’s case.

The practical consequences of accepting the appellant’s case can be said to be somewhat unsatisfactory, in that, in the absence of agreement, the court would have to carry out, or at least to commission, a fairly detailed account both of the assets and liabilities of the partnership and of the value of each partner’s share of the net assets, as at the date of dissolution, in order to determine the amount to which the excluded partner is entitled pursuant to the provisions of section 42(1). In other words, there would virtually have to be a hypothetical winding-up exercise as at the date of dissolution. If the Judge’s conclusion is right, such an exercise would be required more rarely, and it would be easier to carry out. It would be required more rarely because in the normal run of cases, each partner’s share would be equal, and it would therefore be unnecessary to determine the precise value of the partnership assets, unless the excluded partner opted for 5% per annum interest rather than a share of the profits. However, given that the 5% per annum interest would be based on proportion of the gross assets of the partnership, it would frequently be the preferred option, and therefore a valuation exercise would have to be carried out. However, because that accounting exercise would involve valuing only the assets, and not the liabilities, of the partnership, it would be a cheaper and simpler exercise than that of valuing the net assets.

While such considerations cannot be ignored when determining the meaning of section 42(1), it seems to me that the practical consequences of the appellant’s construction is not so startling as to call the construction which he contends into question if it is otherwise correct.

In paragraph 19-19, the editors of Lindley & Banks quote Lord Lindley as saying that, in the absence of agreement to the contrary, “the shares of all the partners will be adjudged equal”, and that this is now supported by section 24(1), which provides that, in the absence of agreement to the contrary, all partners “are entitled to share equally in the capital and profits of the business”. They go on to explain in paragraph 19-20 that this rule applies even where the capital has been contributed, and is owned, unequally. They also point out, in paragraph 19-21, that this analysis is based on convenience, and that it was approved by this court in Joyce –v- Morrisey [1999] EMLR 233 at 243.

I was initially impressed by the submission that, while they might be difficult to reconcile with the thrust of the authorities I have so far discussed (including earlier passages in the same Chapter), these observations in Lindley & Banks were of considerable assistance to the respondent’s case here. However, on further reflection, it appears to me that this is not so. In paragraph 19-20, Lord Lindley is quoted as saying:

In other words, as one would expect, the position as laid down by the 1890 Act, and, in this connection, in particular by section 44, reflects the position as developed by the Judges. After the assets of the dissolved partnership have been converted into money and have been used to pay off the debts and other liabilities of the partnership, any balance that remains is for the benefit of the partners individually, and is to be apportioned between them as laid down by section 44(b). The presumption of equality only comes into play in that connection at stage 4 of that subsection; it has no part to play at stage 3, or indeed stage 2. In these circumstances, it seems to me that the partners will only be presumed to have equal shares in any sum that remains after they have been paid what is due to each of them in respect of advances and of capital.

Accordingly, I do not consider that the contents of paragraphs 19-18ff of Lindley & Banks undermine the conclusion I have reached. Where the business of the partnership is carried on after dissolution by one partner to the exclusion of the other, the excluded partner’s entitlement to a payment under section 42(1) is to be calculated by reference to his share of the partnership assets, and that share is to be assessed in accordance with section 44, which does involve a rebuttable presumption of equality but only at stage 4.

So far as Popat’s case is concerned Mr. Walker for the respondent understandably relies on what Nourse LJ said at 1372E-G about the “size” of “a partner’s share of the assets”. He said that, in light of the absence of any express guidance on the topic from the 1890 Act, it was “necessary to have resort to the rule, established well before the Act of 1890 and no doubt recognised by section 24, that, subject to any agreement, all the partners are entitled to share equally in the partnership property”. At 1373G to 1374A, Nourse LJ then expressed the view that, in light of the terms of section 42(1) and of Manley’s case, the post dissolution profits made by a partner who carried on the business on his own should, in his view, have been divided “between the partners in equal shares”, and not by reference to the interest of the partners in the net assets of the partnership, valued as at the date of dissolution. It is plain that those observations were obiter, because, as Nourse LJ immediately went on to say at 1374A “the plaintiff has not appealed against that part of the Judge’s order”.

While it therefore follows that the analysis in Popat’s case was and is strictly obiter so far as this case is concerned, I accept that this court should be reluctant not to follow a clear (and unanimous) observation in the Court of Appeal on this very point. Indeed, it is clear that Lightman J justifiably relied on it in assisting the conclusion that he reached. It is particularly difficult not to follow, given that it can fairly be said that the whole thrust of the conclusion in Popat’s case, which was concerned with the apportionment of increase in the value of the capital assets of the partnership after it dissolution, can be said to be consistent with the Lightman J’s decision here. It is only right to add that the difficulty is reinforced in my case, not only because it was my judgment at first instance which was successfully appealed in Popat’s case, but also because in that judgment I decided (at [1985] 1 WLR 908 at 913C-914D) the present point at issue (although, as mentioned above, that part of my decision was not appealed).

Notwithstanding this difficulty (and, indeed, the real diffidence I feel in these somewhat invidious circumstances), I have come to the conclusion that the reasoning and observations in Popat’s case should not deflect me from the conclusion which I would otherwise had reached in relation to this appeal. First, as already mentioned, this court’s observations in relation to the effect of section 42(1) in Popat’s case were plainly obiter. Secondly, as explained above, the editors of Lindley & Banks appear to take the view that Nourse LJ had the same opinion as to the meaning of the expression “share of the partnership assets” in section 42(1) as I have formed. Thirdly, neither Yates’s case nor Burdett-Coutts’s case (nor a number of other cases to which I have referred on post-dissolution income) were cited to the court in Popat’s case.

Fourthly, I do not think that section 24 is of any assistance in a case where, as is common ground, section 42(1) applies; further, the passage in what was then the current, and is now the previous, edition of Lindley & Banks, cited at 1372H-1373A in the judgment of Nourse LJ, and relied on by him, is plainly concerned purely with capital, which was what was an issue in that case, and not with income, which is what this case is concerned with. Fifthly, I contributed to any difficulty faced by the Court of Appeal in Popat’s case by confusing in my judgment at first instance, the capital of the partnership with the assets of the partnership, as Nourse LJ observed at 1372A, although it appears to me that I was guilty of using the wrong terminology rather than the wrong figures (see at [1995] 1 WLR 908 at 914B-C). Sixthly, the commercial unjustness of giving section 42(1) the meaning adopted below was simply not considered in Popat’s case.

Accordingly, I have come to the conclusion that the appellant’s case, as advanced by Mr Blackett-Ord, on this issue is correct. It is therefore appropriate to turn to the second issue, namely, what, in the light of this conclusion, is the effect of the terms of the deed and of the consent order so far as the entitlement of Mr Sandhu, the respondent, to any part of the post-dissolution profits.

In that connection, it is right to emphasise that, at any rate at this stage, it has not been suggested by either party that we should carry out a detailed assessment of the respondent’s share of the partnership assets. In other words, we are concerned with questions of principle, not with detailed assessments. I mention this because, in their respective skeleton arguments, Mr Blackett-Ord and Mr Walker have each put forward calculations, on the assumption that section 42(1) has the meaning for which the appellant contends, with a view to establishing that the respondent, Mr Sandhu has no, or as the case may be, a substantial, such share. We did not hear any argument on these calculations, any more than we heard any argument on the disputed facts relating to what contribution (other than financial) each party had made to the success of the home, although these issues were also debated in the skeleton arguments.

In the absence of any subsequent variation by agreement or otherwise, or an order for rectification, it seems to me that the effect of clauses 10.1 and 10.2 of the deed would be that the beneficial ownership of the property was vested solely in the appellant, Mr Gill. That was the position, at least on the face of it, when the deed was executed, as Mr Gill had bought the property with his own money and had registered as the sole proprietor at H.M. Land Registry. Clause 10.2 appears to envisage that that should remain the position until Mr Sandhu pays “the Contribution”, which to this day he has not done.

However, it is contended by Mr Walker that this arrangement has been changed by the agreement embodied in the consent order. He says that, as a result of the parties agreeing that the property was an “asset … of the partnership”, it should now be treated as owned beneficially in equal shares by Mr Gill and Mr Sandhu. Mr Blackett-Ord suggests that that would be a surprising concession for Mr Gill to have made, given that it was after the parties had fallen out, and that it is misconceived, because the terms of the consent order nowhere deal with the beneficial ownership of the property, let alone the shares in which that beneficial interest is held.

Although Mr Walker’s argument can arguably be said to mean that Mr Gill did make a significant concession in the consent order as to the way in which the beneficial interest in the property is owned, I do not consider that the concession can be characterised as particularly surprising. First, the consent order settled a number of different disputes between the parties, and would almost inevitably have involved a degree of give and take on each side. Secondly, the proceedings included a claim by Mr Sandhu for rectification of the deed so that the property would have been held in accordance with clause 10.3, i.e. in equal shares beneficially. Thirdly, Mr Gill’s concession would not alter the fact that he had not received the full Contribution from Mr Sandhu, and, at least as I currently see it, Mr Gill would be entitled to require that debt from Mr Sandhu to be taken into account when settling the final account in accordance with clause 20 of the deed, which reflects the provisions of section 44. After all, Mr Sandhu’s liability to pay the Contribution, as expressed in clause 10.1, has still not been fully satisfied, and would therefore appear to be enforceable.

In my judgment, Mr Walker is correct on this second issue. The natural meaning and effect of the parties having agreed in writing, well after the partnership had determined, that the property was a partnership asset, when read in the context of clause 10.2, and Mr Sandhu’s claim for rectification, is that the parties intended that the beneficial interest in the property should be treated as be owned equally. First, it appears very difficult to discern any other purpose in the parties having made such an agreement. Secondly, if Mr Sandhu is still liable for the Contribution (as Clause 10.1 suggests he is), and this is to be recognised in the final accounts in the winding up, it would seem unfair if he was not entitled to benefit from the intended consequences of such payment as expressed in clause 10.2. Thirdly, although the expression “asset … of the partnership”, used in the consent order, is different from “partnership property”, used in clause 10.2 of the deed, the words have the same effect. Once the property is “partnership property”, the parties have agreed in clause 10.2 that it becomes effectively equally owned beneficially.

Indeed, given that Mr Gill appears to have contributed his share of the capital through the provision of the property (which cost almost exactly twice each party’s agreed capital contribution), it seems particularly sensible for the parties to have made the agreement contended for by Mr Walker, provided always that Mr Sandhu is still treated as liable to Mr Gill for the Contribution. (Mr Blackett-Ord makes the point that there is no reference to shares, let alone to equal shares in clause 10.2, but, on normal principles and in the light of the commercial realities, as just discussed, I think that there is nothing in that point). Finally, the consent order involved Mr Sandhu effectively abandoning his claim for rectification, which forms part of the factual matrix against which the consent order must be construed, and which renders it more likely (or at least more explicable) why Mr Gill would have made such a concession (if, indeed, it is fair to characterise it as such).

I do not believe that it would be appropriate to go any further, at any rate at this stage, in identifying how the final accounts are to be drawn up, or how Mr Sandhu’s “share of the partnership assets” is to be assessed. I would hope that, despite the differences which still appear to exist between them, the parties, with the assistance of their respective legal advisers, will be able now to agree those matters. If that is not possible, then it may be necessary for the case to be remitted to the capable hands of Master Bowles.

In these circumstances, for the reasons I have given, and indeed for the reasons given by Mummery LJ and Black J, I would allow this appeal to this extent.

The present appeal concerns the interpretation of s 42(1) Partnership Act 1890.

I agree with the judgments of my Lords, Lord Justice Mummery and Lord Justice Neuberger which deal far more fully with the issues in this case than I could attempt to do. However, in the light of the difficulty of the points at issue, it may be appropriate for me to add some remarks of my own to explain why I share their view.

S 42(1) defines the right of an outgoing partner to share in the profits made by the firm after his departure. Provided there is no agreement to the contrary, it applies where there has been no final settlement of accounts as between the firm and the outgoing partner and where the business has been continued other than purely to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution.

The final settlement of accounts to which s 42 refers is to be carried out according to the rules set out in s 44, subject to any contrary agreement. S 43 provides that the amount due from the surviving partners to the outgoing partner in respect of the outgoing partner’s share is a debt accruing at the date of the dissolution of the partnership. In the event that accounting does not occur as expeditiously as might be, any partner may apply to the court to wind up the business and affairs of the firm in accordance with s 39 and, of course, the outgoing partner can bring a civil action as a creditor of the firm in respect of the debt owed to him.

In this case, Master Bowles and Lightman J held that Mr Sandhu, the outgoing partner, was entitled under s 42 to one half of the post-dissolution revenue profits of the business, after deduction of a sum to recompense Mr Gill, the continuing partner, for his management of the business.

Master Bowles’ basis for this was that,

“the assets of the partnership comprehend everything belonging to the partnership having a money value as at the date of dissolution” (Master Bowles’ judgment paragraph 93),

unless there is a contrary agreement, all partners are entitled to share equally in the assets of the partnership (ibid paragraph 95)

there being no contrary agreement here, Mr Sandhu’s share of the assets at the date of dissolution was an equal share with Mr Gill (ibid paragraph 96)

therefore, subject to Mr Gill’s management allowance, Mr Sandhu is entitled to one half of such of the post-dissolution profits as were attributable to the assets of the partnership (ibid paragraph 96).

Mr Gill argued in front of the Master, as he does on appeal, that “assets” in s 42 means “net assets” so that if, at the date of dissolution, the outgoing partner would not have been entitled to any payment in respect of his partnership share after all liabilities had been paid, then he has no entitlement to a share in the post-dissolution profits. The Master did not accept that. He considered that it confused the partner’s share in the partnership (i.e. what he would get once liabilities were paid) and his share in the assets of the partnership (i.e. his share in all the property belonging to the partnership). He also considered that it failed to reflect the fact that s 42 was concerned with a situation in which there was no winding up and therefore no sale of the assets and payment of the liabilities. His view was that s 42 was concerned with the actual assets of the business in specie and not with the notional debt that the partnership would owe to the outgoing partner. His thinking is perhaps best summarised in paragraph 104 of his judgment where he says:

Lightman J agreed with this approach, considering that “share of the partnership assets” in s 42 means the outgoing partner’s share in the proprietary ownership of assets belonging to the partnership. He considered the question of the outgoing partner’s share in the partnership and the sum which may be payable to him by the continuing partner to be irrelevant. He considered himself supported in this conclusion by, amongst other things, the decision of Romer J in Manley v Sartori [1927] Ch 157, the decision of the Court of Appeal in Popat v Shonchhatra [1997] 1 WLR 1367 and the contrasting terminology of s 41(a) Partnership Act 1890.

The issue on appeal has therefore been whether the interpretation adopted by the Master and Lightman J is correct or whether the Act intends that the outgoing partner’s right to share profits under s 42 is a right to share the profits attributable to what might be described, loosely, as his continuing (albeit involuntary) actual investment in the partnership business i.e. the figure that would be payable to him if the accounting exercise contemplated by s 44 were to be undertaken.

In providing that,

The law which preceded s 42 had a more overtly discretionary flavour. The courts had resisted declaring any rule of general application. Willett v Blanford 1 Hare 253 was determined in 1842 by the Vice Chancellor of the day. He was satisfied that previous authorities did not establish a general rule applicable to all cases and that the facts of each case had to be considered by the court before it could make a determination as to the proper accounting for profits made since the ending of a partnership. He considered himself:

Some of the examples that the Vice Chancellor cites of the possible circumstances and their likely outcomes are instructive, foreshadowing as they do, the positions of the parties in this appeal. In some cases he would have considered the court virtually compelled to order that the profits would be allocated according to the shares of the several partners in the business when it was a going concern, as had been the outcome in an earlier case, Crawshay v Collins (15 Ves. 218). But he gives examples of situations in which that approach would be dislodged. He says:

The Court of Appeal in Simpson v Chapman (4 De G M & G 154) in 1853 endorsed the reasoning in Willett v Blanford and there is no reason to suppose that it was not current at the time the Partnership Act 1890 came into being. Yates v Finn 13 Ch D 839 was determined by Hall VC in 1880. A and B had carried on business in partnership for a term of years with articles that provided for an equal division of profits after payment of interest upon their respective capitals which were unequal. A died. By then his capital was very significantly more than B’s. B carried on the business without the consent of A’s representatives, using A’s capital. Proper allowance was to be made from the profits earned since A’s death for B’s management of the business and then the profits were to be divided according to the proportion in which the partners were entitled to the capital employed in the business. The decision of the Vice Chancellor was made on a summons seeking to vary the determination of the Chief Clerk who had made a finding as to “the surplus assets” and the net profits since A’s death and provided for an allowance for B for management and then equal division of the profits. Willett v Blanford receives further endorsement and the Vice Chancellor comments:

In so far as a philosophy can be extracted from these 19^th century cases, it appears to be that recompense for the continuing use of assets in business after the ending of a partnership should be tailored to the degree to which the outgoing partner continues to have an investment in the business and to which that investment is the source of the later profits rather than being determined by, for example, an artificial extension of the principles that applied as between the partners when the partnership was extant. This is not, of course, in any way determinative of the proper interpretation of s 42 but it may be of assistance in considering the question.

It is of note also that Sir Frederick Pollock (the draftsman of the 1890 Act), in his annotation to s 42 in the 1920 edition of A Digest of the Law of Partnership, said:

As the statement of the law in Higgins and Fletcher “The Law of Partnership in Australia and New Zealand” 8^th edition shows, the Australian and New Zealand courts have developed this philosophy in their interpretation of s 45 of their Partnership Act 1908 which can be taken, for present purposes, to correspond to the English s 42.

A New Zealand case particularly cited to us and referred to by Lightman J is De Renzy v De Renzy [1924] NZLR 1065, a decision of Stringer J in the Supreme Court. This was a partnership between brothers, one of whom contributed the technical knowledge, managed the business and owned about 9/10ths of the capital. The other brother died. The survivor made a payment to his estate thinking, erroneously, he was acting in furtherance of an agreement to purchase his brother’s interest. He then continued the business. The deceased brother’s beneficiaries sought an account relating to the profits. S 45 applied. Stringer J dismissed the contention of the beneficiaries that no regard should be paid to the sum paid to the estate in supposed purchase of the deceased’s interest. He said:

De Renzy troubled Lightman J who could not see why the beneficiaries’ share of the profits was reduced by the erroneous payment; the learned judge thought that it should rather have been treated merely as payment on account of the sum found due to the estate. However, it seems to me that Stringer J’s approach to the issue of the erroneous payment is entirely understandable when viewed in the context of what I have inferred is the philosophy of the 19^th century cases, adopted in New Zealand. The payment had reduced the continuing investment of the estate in the business and their share of the profits made thereafter had to be reduced accordingly.

I turn to the English authorities which post-date the Partnership Act 1890, of which there are few. In reaching his conclusion that the share of partnership assets to which s 42 refers is the outgoing partner’s share in the proprietary ownership of assets belonging to the partnership, Lightman J placed considerable reliance on Manley v Sartori [1927] Ch 157, a decision of Romer J in the Chancery Division. From Romer J’s judgment, the following propositions can be extracted, Romer J’s stated source for his view being included in square brackets after each proposition:

“Where … the surviving partners, instead of realising the assets and distributing the proceeds amongst the parties in accordance with their rights and interests, choose to carry on the business and make profits by virtue of the employment of any of the partnership assets, then, subject no doubt to making a proper allowance to the surviving partners for their trouble in so carrying on the business, such profits belong to all the persons interested in the partnership assets by means of which the profits have been earned in accordance with their rights and interests in those assets; that is to say proportionately to their interests in those assets.” [laid down in “numerous cases” and affirmed by s 42];

The partners are not interested in the profits in the shares in which they would have been entitled whilst the partnership was a going concern. [as explained in Willett v Blanford and expressed in s 42];

“the rights of the deceased partner or his legal personal representatives are rights over all the assets of the partnership. He has an unascertained interest in every single asset of the partnership, and it is not right to regard him as being merely entitled to a particular sum of cash ascertained from the balance-sheet of the partnership as drawn up at the date of his death. So that if, after the death …, any profits were in fact earned by using any single partnership asset, the profits so far as attributable to the use of that partnership asset are profits in which the executors … have a share to the extent of their share in that particular asset; that is to say, in proportion to their share in the total assets of the partnership.”

Neither the wording of the judgment nor of the order reveals whether the judge, when he used expressions such as the “total assets of the partnership” and contemplated the effect of his order in fact had in mind the net or the gross assets. He was not determining the issue that falls for determination in this case. His comment that it was not right to regard the deceased partner as merely entitled to a particular sum of cash at the foot of the balance sheet of the partnership at the date of his death might look at first sight to support the interpretation of s 42 adopted by the Master and the Judge below. It is important to understand, however, that it was provoked by the submission that had been made to Romer J that the deceased partner was not entitled to any share in the revenue profits because there was, at all times, sufficient liquid cash to pay him out implying, one supposes, that he was not therefore interested in any part of the assets that had generated the profit. It would be wrong to interpret what he said in that particular context as suggesting that he was inclined to the interpretation advanced by Mr Walker. Indeed, it seems to me that if anything, his remarks taken as a whole suggest that he would have been of the opposite view. The passage at page 162 which Neuberger LJ quotes in paragraph 47 of his judgment in which Romer J refers, with apparent approval, to Willett v Blanford gives this impression. It is probably a mistake to focus too sharply upon individual phrases in a judgment of this type, especially as Romer J seems in this passage to be concentrating upon the question whether post-dissolution profits were divisible between the parties in accordance with their rights and interests in profits earned while the partnership was a going concern, which is not necessarily the same question as whether they may be divisible between the parties in the proportions that they may have been interested in the partnership assets during the partnership given that there may, for example, have been an express agreement as to the sharing of revenue profits which did not tally with the interests of the partners in the assets. However, with that caveat, I note particularly that Romer J appears to be endorsing this proposition:

The remaining English authority is Popat v Schonchhatra [1997] 1 WLR 1373, in which Nourse LJ gave a judgment with which the other two members of the Court of Appeal agreed. My Lord, Neuberger LJ, sitting at first instance, had decided that subject to a management allowance, the revenue profits made in the post-dissolution period should be divided between the partners in accordance with their shares in the partnership which were unequal, rather than equally in accordance with their entitlement to the partnership assets. It is not surprising that Nourse LJ’s comment upon this decision is brief in the extreme, given that it had not been appealed (or presumably argued) and whatever he had to say was very much obiter. He simply said:

That Nourse LJ was of this opinion, even if it is not binding, must make one pause long and hard before adopting another interpretation of s 42. Furthermore, to determine otherwise would mean that post-dissolution capital profits and post-dissolution revenue would be dealt with differently. The point at issue on appeal in Popat v Shonchhatra was how the capital profit realised on a sale after dissolution of the assets of a partnership should be divided between the partners. Was the division to be equal pursuant to s 24 Partnership Act 1890 or, as the court below had held, in shares corresponding to their respective shares of the capital of the partnership as at the date of dissolution, one partner having contributed significantly more capital than the other? In the course of his judgment, Nourse LJ emphasised:

The distinction between the capital of a partnership (which is a fixed sum, being the aggregate of the contributions made by the partners) and its assets (which may vary from day to day and include everything belonging to the firm that has any money value).

The fact that, whilst the partnership is a going concern, a partner has a proprietary interest in each and every asset of the partnership but no entitlement to any specific asset. It is only once the accounting process has been carried out upon the dissolution of a partnership that a partner can accurately be said to be entitled to a share in anything.

The balance of the reasoning for the decision in relation to the capital profits is not directly applicable to the interpretation of s 42 although it is of note. There having been no agreement to the contrary, the partners were entitled during the partnership to share equally in its assets in accordance with the rule established before the Act of 1890 and, in Nourse LJ’s view, probably recognised by s 24 of that Act. They were not entitled to equal shares in the capital of the partnership but shares in proportion to their contributions to the cost of acquiring the leasehold premises, fixtures and fittings and goodwill. However, the issue was not about the “capital” of the partnership within s 24 but about the “profits”, a term which includes both capital and revenue profits. Nourse LJ’s reasoning was that s 24 applied not only to profits up to the date of the dissolution of the partnership but also thereafter. He considered that s 42(1) was an exception to this in certain circumstances and authority established that it covered revenue profits only, not post-dissolution capital profits. In relation to the capital profits of the business under consideration, he therefore held that the governing provision was s 24(1) which, there being no agreement to the contrary, imposed equal shares.

The fact that Nourse LJ viewed s 42 as an exception to s 24, imposing a discrete regime in relation to revenue profits in certain circumstances, reduces my anxiety about the differential treatment of post-dissolution capital and revenue profits. I remain, however, extremely diffident in contemplating a different interpretation of s 42 from his. Nevertheless, the tenor of the pre-1890 Act authorities forces me to consider this possibility seriously. It seems to me that whereas they concentrate upon the reality of the post-dissolution period, the Popat v Shonchhatra solution operates artificially to extend into that period the position as it was during the partnership.

There are other features which also incline me, reluctantly, against the Popat interpretation. It seems to me necessary that the phrase “his share of the partnership assets” should, if at all possible, be given the same meaning on both occasions on which it appears in s 42(1). The outgoing partner has two choices under the section as to how to take recompense on what has been retained and used in the partnership business. The phrase is used in defining each of these choices (the share of the profits that the court may find to be attributable to “the use of his share of the partnership assets” or interest at the rate of five per cent per annum “on the amount of his share of the partnership assets”). It is almost inconceivable that the draftsman would have intended it to have two different meanings. It is perhaps easier to contemplate the practical outcome of the two proposed interpretations of the phrase in relation to the simple concept of five per cent interest than in relation to the more sophisticated concept of a share of profits. It seems to me that such an exercise enables one to identify the potentially unsatisfactory results that would flow if the “share of the partnership assets” were taken to be a share of the gross assets rather than of the surplus assets after proper accounting. I am grateful to Mr Blackett-Ord for the examples he gives. I will not labour the point in this judgment because I am in agreement with Lord Justice Neuberger’s analysis of them. Two will be sufficient to underline the apparent injustices that could be produced. Firstly, take the partnership where the partners have equal entitlements to the partnership assets and which has only one asset, the business premises which are subject to a 100% loan. Can the outgoing partner really be intended to have the option to demand of the continuing partner, who may, in fact, be serving the interests of both of them by continuing the business for a period rather than embarking immediately upon winding it up, 5% interest on the unencumbered value of the property? This would have to be discharged from the actual profits of the business which, in reality, may be seriously diminished by servicing the loan in relation to the property. Secondly, take the partnership where the partners again have equal entitlements to the partnership assets but where the outgoing partner made his contribution by hard work during the currency of the partnership and the continuing partner put up all the capital. Assuming for the moment that no valuable goodwill has been generated to complicate the issue, can it be intended that the outgoing partner can claim 5% interest on 50% of the value of the assets which have all come from the other partner? It must be remembered that whereas the option for a share of the profits is subject to the filter that those profits must be attributable to the use of the partner’s share of the assets, there is no such filter on the interest option. The mere fact that he is entitled to a share of the partnership assets is sufficient and the continuing partner can only seek to redress the balance through the medium of a management allowance.

There are, however, also valid points to be made in support of the interpretation adopted by the Master and Lightman J, quite apart from the fact that it accords with the approach of the Court of Appeal in Popat.

Lightman J pointed out that in s 41(a) Partnership Act 1890, where reference to the net assets of the partnership is intended, explicit language is used (“the surplus of the partnership assets, after satisfying the partnership liabilities”). Section 39 is similarly explicit. Section 31, however, which deals with the assignment of a share in a partnership, and in particular s 31(2) which deals with the assignee’s entitlement in the case of a dissolution of the partnership, speaks of the assignee’s entitlement to receive “the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners, and for the purpose of ascertaining that share, to an account as from the date of the dissolution”. This provision, it seems to me, contemplates the assignee receiving a share which reflects the accounting process in s 44 and therefore utilises the phrase “share of the partnership assets” in a sense which is in line with the proposed net asset interpretation of s 42. Furthermore, I am not convinced that the use of language is sufficiently homogenised in the Act to draw any particular inference from s 41. It seems to me more important to look at the sections that immediately surround s 42 to examine how it fits into that context. My impression of the part of the Act commencing at s 32 and dealing with dissolution of partnership and its consequences is that it can be subdivided into groups of sections dealing with particular features of the topic. So, sections 32 to 35 deal with methods of dissolution, sections 36 to 38 concern the dealings of the partnership with the outside world in the aftermath of the dissolution, sections 39 to 44 deal with the rights as between the partners. Within the last group of sections, it makes a great deal of sense to read sections 42 to 44 together. Section 43 utilises the word “share” when providing that the amount due from the continuing partners to the outgoing partner in respect of the outgoing or deceased partner’s share is a debt to him. This use of “share” is a reference to the share as calculated in s 44. It is also arguable, in my view, that its use here is a shorthand version of “share of the partnership assets” in s 42(1) which strengthens the case for the net asset interpretation of s 42.

So it is that, albeit with considerable difficult, I have reached the conclusion that the correct interpretation of s 42(1) is that which reflects the reality of the outgoing partner’s position vis-à-vis the partnership and not the interpretation adopted in the courts below. I am quite satisfied that the phrase “share of the partnership assets” has the same meaning on both occasions when it is used in the section. In my judgment, the section contemplates that a figure will be ascertained, as at the date of dissolution, for the assets after payment of third party liabilities in accordance with s 44(b)1 and thereafter a calculation carried out as to what is due to the outgoing partner by way of advances, capital and share in any surplus. For the five per cent interest option in s 42, no further calculation is necessary (except possibly in relation to a management allowance); the outgoing partner can claim 5 per cent per annum on the figure calculated to be due to him. For the profit option, it will be necessary to work out the proportion that that figures bears to the total of the assets after discharge of third party liabilities; subject to arguments as to other factors that have contributed to the making of profit, the outgoing partner can claim the proportion of profit that his figure bears to the total assets. I have referred in this judgment to the accounting exercise as set out in s 44. As that section makes clear, however, contrary agreement will displace its provisions. Here, paragraph 20 of the partnership deed is relevant, although in fact to similar effect, in determining what is due to the out going partner.

I agree with Neuberger LJ and Black J that the appeal should be allowed.

We are differing from detailed reasoned judgments of Master Bowles and Lightman J on a point of principle arising on section 42(1) of the Partnership Act 1890. As it is not an easy point of construction, permission for a second appeal was granted. The authorities on the attributability of profits, when an outgoing partner claims a share of the post-dissolution profits made by a partner who continues the business using partnership assets, cover a variety of circumstances. Although my Lords have dealt with all the legal and factual points in depth, I think that this is a case in which my opinion should be expressed in my own words.

In my judgment the legal position of Mr Gill and Mr Sandhu is as follows.

It is common ground that section 42 of the Partnership Act 1890 applies to Mr Sandhu’s claim to a share of the post-dissolution “revenue profits” made by Mr Gill. (It is also common ground that the section does not apply to the “capital profits” realised by the continuing partner post-dissolution: Barclays Bank Trust Co Ltd v. Bluff [1982] Ch 172.)

Mr Sandhu ceased to be a partner on 12 April 1999, when the partnership was dissolved. He was the “outgoing partner” within section 42(1). Mr Gill carried on the business of an old people’s home at 59 Mountdale Gardens with the capital and assets of the partnership. He did so without any final settlement of accounts as between the firm and Mr Sandhu. Mr Gill was accordingly in the position of a “continuing partner” within section 42(1). On Mr Sandhu’s exercise of his statutory option under section 42(1) he is entitled to claim a share of the profits made by Mr Gill in the period between the date of dissolution and the conclusion of the winding up of the partnership.

Mr Sandhu’s entitlement is to “such share of the profits made since the dissolution as the court may find attributable to the use of his share of the partnership assets.” Mr Sandhu’s claim for one half of the revenue profits is advanced on the basis that, under the 1995 partnership agreement and the consent order by Pumfrey J in this litigation, he is entitled to an equal half share in all the gross assets of the partnership. His claim was upheld by the Master and by Lightman J, subject only to deduction of a sum (£22,000) to reflect the contribution by Mr Gill’s work in running the old people’s home to the making of the post-dissolution profits. That part of the profits was found by the court to be attributable to Mr Gill’s exertions in carrying on the business, not to his use of Mr Sandhu’s share of the partnership assets. No financial adjustment was made by the Master to reflect the fact that Mr Sandhu’s contribution to the capital of the partnership was less than the contribution to the capital made by Mr Gill.

In answer to Mr Sandhu’s claim for an equal share of the revenue profits Mr Gill points to the inequality of the respective amounts of their investment of capital in the partnership. Mr Gill made by far the larger investment. Mr Blackett-Ord appearing for Mr Gill contended that Mr Sandhu was accordingly not entitled to an equal half share of the net revenue profits post-dissolution: he was only entitled to a share of the net post-dissolution profits proportionate to his share of the net assets of the partnership. In ascertaining Mr Sandhu’s share of the partnership assets within section 42(1) it was necessary to make an adjustment to reflect the inequality of capital contributions. If that approach is applied to the figures Mr Sandhu had a nil share in the net assets of the partnership. Accordingly he had no claim in respect of the post-dissolution trading profits made by Mr Gill.

In deciding which of the rival contentions is correct, four points on the construction of the statutory option exercised by Mr Sandhu are worth noting.

First, the context in which Mr Sandhu’s claim is made is critical. Section 42 is in the group of sections in the 1890 Act (sections 32 to 44) governing dissolution of partnership and its consequences. The sections should be read together. They are the part of the partnership code relevant to dissolution. They include rules for the distribution of assets on final settlement of accounts: section 44. The partnership between Mr Sandhu and Mr Gill was dissolved with effect from 12 April 1999. After that date the business ceased to be carried on by the partnership as a going concern. The business was carried on by Mr Gill thereafter using the partnership capital and assets. But the partnership had to be wound up. Accounts between the partners had to be settled. Before any division of ultimate residue could be made between the partners in the proportions in which profits are divisible certain payments had to be made out of the assets of the firm: debts and liabilities of the firm, advances by partners and sums due from the partners in respect of capital: section 44.

Secondly, the reference in section 42(1) to a share of “partnership assets” is strongly relied on by Mr Gill. “Partnership assets” are, as he correctly submits, to be distinguished from the “capital” of the partnership: Popat v. Shonchhatra [1997] 1 WLR 1367. The shares of Mr Sandhu and Mr Gill in the assets and profits of the partnership were equal, but the respective contributions by them to the capital of the partnership were not equal. On a dissolution of the partnership the capital would fall to be shared in proportions corresponding to their respective contributions of capital, but the partnership assets would be shared equally between them.

Thirdly, the claim of Mr Sandhu, as the outgoing partner, arises from Mr Gill’s “use” of something to which Mr Sandhu was entitled when he ceased to be a partner. That something was not “the partnership assets” themselves, with which Mr Gill has carried on the business formerly carried on by the partnership. The relevant use by Mr Gill for the purposes of section 42(1) is of Mr Sandhu’s “share” of the partnership assets. The critical question is what was Mr Sandhu’s “share” of those assets when the partnership was dissolved? Mr Sandhu does not claim to be entitled to all the profits made by Mr Gill with the partnership assets. He only claims that he is entitled to receive those profits, which the court finds to be attributable to “the use of his share” of the partnership assets.

Fourthly, notwithstanding the distinction between partnership assets and the capital of the partnership, it is important to note that Mr Sandhu’s “share” of the partnership assets on the dissolution of the partnership is governed by the rules laid down, subject, of course, to any contrary agreement, for the distribution of assets on a final settlement of accounts between the partners. The rules cover the treatment of capital contributions in the settlement of accounts. The rules provide that Mr Sandhu’s “share” of the partnership assets is ascertained after taking into account, inter alia, the respective capital contributions of Mr Sandhu and Mr Gill to the partnership. Mr Sandhu’s “share” of the partnership assets is determined on the equal division of the ultimate residue between the partners after all relevant payments have been made out of the assets of the firm, including payments of what is due to each partner in respect of capital.

As explained by Neuberger LJ this approach to section 42(1) is consistent with the authorities. I refer to the observations on section 42 in Manley v. Santori [1927] 1 Ch 157 at 162, 163 and 165 (Romer J) and Popat v. Schonchhatra [1997] 1 WLR 1367 at 1371F-1372G and 1373H-1374A per Nourse LJ. The passages, which are cited in the judgment of Neuberger LJ, make clear that entitlement to a share of the profits of the partnership business is changed on the dissolution of the partnership. It is not the same as the division of profits between the partners while the partnership is running the business as a going concern. The outgoing partner on a dissolution is “only entitled to his proper proportion of the profits earned by the partnership assets” on the basis that the outgoing partner has an unascertained interest or share in every single asset of the partnership. As Nourse LJ said in Popat at 1372B-D “each partner has a proprietary interest in each and every asset”, though no entitlement to any specific asset. The profits claimed must, however, be attributable to the use of the outgoing partner’s “share”, which they are not if, for example, they are earned by and attributable to the skill and labour of the continuing partner.

The importance of observing the distinction between (a) entitlement of the partners to repayment of capital invested by them in fixed amounts of cash or kind in the partnership and (b) entitlement of the partners to shares in the assets of the partnership which vary from time to time was emphasised by Nourse LJ in Popat at p.1371,1372 and 1374. His comments were made in the context of determining shares in post dissolution profits, in that case both capital profits and revenue profits. The distinction is relied on by Mr Walker appearing for Mr Sandhu. He submitted that his client was entitled to a continuing interest or share in all the assets of the partnership, not just to a particular sum of cash surplus ascertained at the date of dissolution. He submitted that Mr Gill had continued the business utilising all of the partnership assets. He had made the profits from his use of them. Hence Mr Sandhu’s claim to a half share of the profits based on a half share of the gross assets of the partnership, save only to the extent that the profits are attributable to the skill and exertion of Mr Gill rather than the use of the one half share.

I appreciate the attraction of the arguments advanced on behalf of Mr Sandhu and accepted in the courts below, but, in my judgment, the submissions of Mr Blackett-Ord for Mr Gill fit better into the scheme of the provisions in the 1890 Act governing the distribution of assets on the dissolution of a partnership, including post-dissolution profits made by a continuing partner. They also lead to a more sensible result. Two important points were made in Popat: first, that the partners’ capital contributions do not include partnership assets and “are not determinative of the size of the partners’ respective shares of the assets.” Mr Gill does not argue that they are. Secondly, however, on the dissolution of a partnership, the position is that a partner has a “share” in the assets of the partnership at the stage when division is made between the partners of the ultimate residue: that is after payment of what is due from the firm to the partners in respect of capital. The second point, in particular, supports the position taken by Mr Gill rather than the position of Mr Sandhu.

I agree with Lightman J that the issue on post-dissolution profits focuses on the meaning of the words “share of the partnership assets” in section 42(1). I also agree with him that each partner has a proprietary interest or share in all the assets of the partnership and that the size of the interest is determined by the agreement between the parties, in default of which the partners are entitled to equal shares. As indicated in the preceding paragraph, however, I am unable to agree with his approach, in the context of a dissolution, to the determination of the assets of the partnership, in which the outgoing partner has a share for the purposes of establishing his claim for a share in the post-dissolution profits made by the continuing partner with the partnership assets. The approach proposed by Mr Blackett-Ord does not involve, as Lightman J said (see paragraph 20 of his judgment) either “valuing” the outgoing partner’s share of the partnership assets or taking account of sums which may be payable by the outgoing partner to the continuing partner. What it does involve is ascertaining, in accordance with the partnership accounting rules in section 44, what, on the dissolution and winding up of the partnership, are the net assets of the partnership that fall to be divided between the partners in equal shares. It is for the use of that “share” of the outgoing partner after dissolution of the partnership, not for the use of the share of the pre-dissolution gross assets of the partnership while it was being carried on as a going concern, that Mr Sandhu is entitled to claim a proportionate share of the post-dissolution revenue profits made by Mr Gill.

I would allow the appeal. The parties should attempt to agree a draft order in accordance with the judgments handed down on this appeal.