Chahal v Mahal & Anor

The issue on this appeal is whether the trial Judge was right to decide that a partnership between the claimant and the two defendants continued for a period of 18 years, notwithstanding the fact that the partnership business and assets were transferred to a limited company, which then operated the business. Like many points which can be expressed shortly, it is not particularly easy to resolve, and the resolution is rendered harder by the unsatisfactory nature of the evidence.

Although there were substantial disputes of fact and law, many of those issues are accepted by both sides as having been resolved by the judgment below (although a number have yet to be resolved). Accordingly the relevant factual background for present purposes can be explained in relatively summary terms.

The claimant, Nirmal Singh Chahal, and the first defendant, Krishan Dev Mahal, became friends in around 1970. On 3 June 1980, Mr. Mahal and the second defendant, his daughter Pooja Deol, acquired the freehold of a property called Ranksborough Hall, together with the goodwill of a leisure caravan site business (“the business”) carried on there. The price paid was about £325,000, of which Mr. Chahal contributed £30,000. Quite how the balance was made up is not entirely clear, but it would appear that Mr. Mahal and Mrs Deol may each have contributed a little less than £30,000 of their own money, and the balance may have been made up by a loan to Mr. Mahal (and, possibly, Mrs Deol).

As illustrated by this uncertainty, it is a very unsatisfactory feature of this case that there is a remarkable dearth of relevant documentation and apparent ignorance or lack of recollection on the part of the parties involved. Whether the explanation for the absence of documentary evidence and the vagueness of the oral evidence is sinister or innocent is not of relevance, at least for present purposes.

According to the finding of the Deputy Judge, Ms Hazel Williamson QC, in paragraph [75] of her judgment:

After the acquisition, the day to day management of the business was duly carried on by Mr. Mahal, as envisaged. Mrs Deol was agreed by all to have been a sleeping partner. There was some limited dispute as to Mr. Chahal’s involvement in the business, but, on any view, it was pretty exiguous.

Ranksborough Hall had been purchased from a limited company called Hillgrounds Park Limited (“HPL”) which had retained a piece of adjoining land (“the adjoining property”), which was of value to the business. For the purpose of acquiring the adjoining property, about 18 months after the original transaction, i.e. around the end of 1981 or beginning of 1982, Mr. Mahal and Mrs Deol, purchased all the issued shares in HPL, 2537 of which were transferred to Mrs Deol and 2538 to Mr. Mahal (although, once again there were no documents recording this transfer).

Shortly thereafter, during 1982, the freehold of Ranksborough Hall was transferred back to HPL for £310,000, and from about the same time the business started to be run entirely through HPL. The precise way in which the various transactions around the end of 1981 and during 1982 were arranged or financed is pretty unclear. It appears that whatever loan had been advanced to Mr. Mahal and/or Mrs Deol had either been redeemed or replaced by a rather smaller loan to HPL. As the Judge put it, “presumably the bank’s security and so forth was arranged appropriately”.

Some time in 1982, or shortly thereafter, Mr. Mahal built a house (“the house”) on the additional property, which he moved into, and he has lived there ever since. Around 1995, the possibility of selling the land (i.e. Ranksborough Hall and the additional property) and the business was contemplated.

Eventually, it was decided to sell the whole of the land (with the exception of the house) together with the business. This was effectively achieved in April 2001 when all the shares in HPL were sold by Mr. Mahal and Ms Deol (“the defendants”) for £1.48m (apparently on the basis that the freehold of the house was transferred out of HPL to Mr. Mahal). The gross payment of £1.48m amounted to a net receipt of £1.21m, because £270,000 of the proceeds were used to repay loans which Mr. Mahal had made to HPL.

After this sale, Mr. Chahal and Mr. Mahal could not agree how much of the £1.21m should be paid to Mr. Chahal. Mr. Mahal’s case (supported by Mrs Deol) was that the £30,000 contributed by Mr. Chahal towards the original purchase of Ranksborough Hall was no more than a loan. He accordingly contended that Mr. Chahal was entitled to around £77,000, consisting of repayment of the £30,000 loan, with the balance being interest. Mr. Chahal, however, contended that there had been a partnership to which he had contributed significantly, and that he was entitled to substantially more. The parties were unable to compromise, and accordingly Mr. Chahal brought the present proceedings.

In his claim form, Mr. Chahal sought a declaration that there was a partnership between the three parties, an order for dissolution of the partnership, and consequential accounts and inquiries. On 25 November 2002, District Judge Jenkins ordered a trial of a preliminary issue, namely whether there was a partnership between the three parties (i.e. Mr. Chahal and the two defendants), and, if so, what the terms of the partnership were. When the matter came before Ms Williamson, she acceded to Mr. Jonathan Russen’s proposal on behalf of Mr. Mahal, over the objection of Mr. James Corbett QC, who appeared, as he does before us, with Mr. Paul Dean for Mr. Chahal, that the preliminary issue extend to the question of when the partnership (if there was one) had determined.

As I have already mentioned, the Judge decided that there was a partnership between the three parties, namely Mr. Chahal and the two defendants. She also decided what the terms of the partnership were, as is reflected in the passage I have already quoted for my judgment. Paragraph 2 of the Order (“the Order”), which was drawn up by agreement between the parties, as reflecting the Judge’s judgment, included the following:

None of those provisions of the Order are in dispute any longer. However, the next paragraph of the Order, paragraph 4, contains the provision which is the subject of this appeal. It is in these terms:

In this connection, the issue before the Judge was whether the partnership between the three parties had determined when the freehold ownership in possession of the land, and the business carried on there, had been transferred to HPL in or around early 1982, as was contended by the defendants, or whether the partnership had nonetheless continued beyond that time, as contended by Mr. Chahal. As I understand it, if the partnership had continued beyond early 1982, at any rate for any significant time, it was agreed or assumed by all concerned that the partnership would have determined on the sale of the shares in HPL in 2001. Hence the date identified in paragraph 4 of the order.

In paragraph [89] of her judgment, the Judge observed that she “initially found this point quite difficult”, but ultimately had “reached the firm conclusion” that the partnership had continued until 2001. In paragraph [92], she stated that she considered that the partnership was one “for the duration of an undertaking”. She then went on to say in paragraph [93] that the question she therefore had to decide was whether it was proper to infer an agreement to dissolve as a result of the transfer of the land and business of the partnership to HPL. She said that the mere fact that the land and business of the partnership had been transferred was not of itself determinative of the issue – paragraph [95]. She then concluded in paragraph [96] that the proper inference was that there was to be no dissolution, at least unless and until Mr. Chahal was given shares in HPL.

Where a business is carried on by two or more people in partnership, and the assets and operation of the business are then transferred in their entirety to a limited company, in which shares are issued to the partners (and particularly where each partner’s allocation of shares is proportionate to his interest in the partnership), it appears to me that the natural conclusion, both as a matter of commercial common sense and as a matter of law, will normally be that the partnership had been dissolved.

So far as commercial common sense is concerned, in such a case there would seem be no purpose in the partnership continuing. There would simply be nothing, whether in conceptual or practical terms, to which any partnership relationship could relate, other than for the purpose of winding up. The business and the assets, previously treated as operated and owned by the partnership would have become vested in the company, and the shares in the company would be beneficially owned by the respective shareholders, the former partners. In the absence of further facts to support such a proposition, it would be surprising if the shares, having apparently all been allocated to the partners beneficially to reflect their respective interests in the partnership, were to be treated as being partnership property.

So far as the law of partnership is concerned, it is governed by the 1890 Act, which “codified (though not exhaustively) the Law of Partnership and reflected the pre-existing principles of equity which had been developed by the Court of Chancery” – per Lord Millett in Hurst v Bryk [2002] 1AC 185 at 194 E-F.

Section 1(1) of the 1890 Act defines partnership as “the relationship which subsists between persons carrying on a business in common with a view of profit”. The circumstances in which a partnership can be determined or, to use the correct term, dissolved, are set out in Sections 32 to 35 of the 1890 Act. In Hurst v Bryk at 195 B-C, Lord Millett said:

As was pointed out by Carnwath LJ during argument, it may be that determination by agreement is actually covered by the opening words of Section 32, rather than by the more indirect way identified by Lord Millett.

Bearing in mind these provisions, Mr. Christopher Pymont QC, who now appears with Mr. Russen for the defendants, puts forward, on two different bases, the argument that, as a matter of law, a partnership will normally be dissolved, when all the assets and operational functions of the partnership are transferred to a limited company, whose shares are issued to the partners.

The first basis is that, once all the assets and operational functions of the partnership have been transferred to a company, it cannot be said that the partners (or, perhaps more accurately, the former partners) are “persons carrying on a business”, whether at all or “in common with a view to profit”. They have become shareholders in a company which is carrying on the business. Hence, section 1 of the 1890 Act cannot apply.

The second argument is that, by transferring all the assets and operational activities of the partnership to a company, in which the partners (or former partners) are issued with shares for their own personal benefit, it is to be inferred, from their conduct, that they have agreed that the partnership should come to an end. In other words, the partnership is brought to an end in a way recognised by the 1890 Act, as explained by Lord Millett and Carnwath LJ, namely by mutual agreement, which, according to normal legal principles and in light of the way in which Section 19 of the 1890 Act is expressed, can be inferred from conduct.

Of those two analyses, I consider that the latter is to be preferred, albeit that, on closer analysis, they may amount to much the same thing. In other words, it appears to me that, in general, where all the business and assets of a partnership are transferred to a limited company, especially where the shares in that company are issued to all partners pro rata to their respective interests in the partnership, it would be easy, in the absence of other facts, indeed natural, to infer that the partners, now the shareholders, did thereby intend the partnership relationship to come to an end. Just as much as the assets and business are no longer owned by the partnership, but by the company, so the relationship changes from that of partners in the partnership to that of shareholders in the company.

The first way in which the point is put by Mr. Pymont appears to me to be too absolute in its effect. In my judgment, it is relatively easy to think of circumstances which could arise where a partnership ceased to have any assets or any business, and yet the partners intend the partnership relationship to continue. For instance, for the purpose of starting up a fresh business or venture, reviving the previous business, improving or maintaining their position with regard to tax liability, or crystallising certain rights or obligations. Mr. Pymont does not really challenge this proposition, which was treated as correct in National Westminster Bank PLC v Jones [2001] 1 BCLC 98 at paragraphs [113] to [114].

It is fair to say that, in that case, some of the reasons I mentioned as to why a partnership may not have determined, even though all its assets and operations had been transferred to a company, may not be justifiable, on the basis that they are really concerned with winding up, as opposed to dissolving, a partnership. As Mr. Pymont rightly says, dissolution is what brings a partnership to an end, and winding up is what occurs thereafter, as is clear from Sections 39 and 44 of the 1890 Act. (The potential for confusion in this field is reinforced by the fact that, whereas a limited company’s winding up occurs before its dissolution, the dissolution of a partnership occurs before its winding up).

On the basis of this analysis, it appears to me that, as pointed out in argument by Arden LJ, the two ways in which Mr. Pymont puts his case as a matter of principle may very well amount to the same thing. So far as his second, and less controversial, proposition is concerned, the transfer of all the assets and operations of a partnership to a company may result in dissolution of the partnership by agreement, on the ground that that is the proper inference to draw from all the circumstances. As to his first proposition, it appears to me that the fact that the partners have ceased carrying on business together, but have transferred its business together with all its assets to a company, in which shares are issued to the partners pro rata, can be said, at least in the absence of reasons to the contrary, to raise the inference that there is no longer a partnership because of the provisions of section 1 (1) of the 1890 Act.

In other words, I would accept Mr. Pymont’s general point that the law, like business common sense, would presume, in the absence of any reason to the contrary, that the transfer of all the business and assets of a partnership to a limited company, in which all the partners are given shares pro rata to their interests in the partnership, raises the presumption that the partnership is thereby determined. Of course, that does not mean that there will be no continuing liabilities, which will be governed by the partnership relationship, such as liability for any tax or other debts of the partnership which may arise, but, as Mr. Pymont says, that is part of the post-dissolution winding up. The point is that the fact that there has been dissolution does not mean that the relationship between the former partners is no longer governed by the terms of the dissolved partnership agreement.

As I see it, therefore, the question in the present case is whether the Judge was right (or, arguably, entitled) to conclude, on the evidence, that, notwithstanding the fact that all the assets and operational responsibilities of the partnership were transferred to HPL, the partnership nonetheless continued for around 18 years. In that connection, as Mr. Pymont says, during those 18 years no partnership accounts were prepared, and nothing else of significance was done to support the notion that the partnership was continuing. (It does appear that Mr. Chahal may have occasionally received documents relating to the business during that period, but I am very dubious whether that can take matters any further.)

The absence of any accounts or other documents supporting the notion that a partnership existed during those 18 years can fairly be said to reinforce the notion that the partnership came to an end in, or at any rate shortly after, 1982. However, it does not seem to me to that such evidence is particularly powerful. Even during the two years or so during which the partnership undoubtedly subsisted, no accounts were drawn up: they were only prepared rather later, under pressure from the Inland Revenue, and even those accounts did not record Mr. Chahal as a partner. Furthermore, Mr. Chahal was not involved in the running of the business during the time that there was undoubtedly a partnership. In addition, the absence of any annual accounts is not particularly surprising, because there were no distributions to shareholders (or partners) during the 18 years in question. It is also relevant to note that, if there had been a dissolution in 1982, one would, as Mr. Pymont accepts, have expected that there would have been dissolution accounts, and there were none.

Mr. Pymont makes the further point that there is an arguable inconsistency of approach in the Judge holding, on the one hand, that the transfer of the assets and the business out of the partnership did not put an end to the partnership, but that the transfer of the shares in HPL did put an end to the partnership. I see the force of that (and I shall refer to it in a little more detail later). However, as Mr. Pymont fairly accepts, the notion that the partnership was dissolved as a result of all the HPL shares being sold was not the subject of any argument or submission before the Judge, but was more of a common assumption. In truth, if the Judge was right in her conclusion that the partnership continued notwithstanding the events of 1981 and 1982, then, first, it is very hard to identify a rationally defensible moment for dissolution before 2001, and, secondly, whether the partnership was dissolved in 2001 or during the course of these proceedings appears to be of little moment.

I turn to consider why the facts of the present case could fairly be said to justify the Judge’s conclusion that the partnership between Mr. Chahal and the defendants continued notwithstanding the transfer of the land and business to HPL. In other words, do the facts of this case justify a departure from what would normally be the natural presumption, namely that the effect of the transfer of the land and business to a company put an end to the partnership?

In my judgment, the facts of this case, as found by the Judge or agreed between the parties, were such as can fairly be said to cast doubt on, and indeed justify departing from, what I accept would otherwise be the natural inference, namely that the partnership had been dissolved in 1981/2. In this connection, there are, in my judgment, two principal factors.

First, there is the fact which carried particular weight with the Judge. There was no allocation of shares in the company to which the business and assets of the partnership were transferred, namely HPL, to one of the partners, namely Mr. Chahal. As already explained, the shares in HPL were allocated equally (to all intents and purposes) between the other two partners, namely Mr. Mahal and Mrs Deol. If there had been an agreement that some (particularly if it was a third) of those shares were held on trust beneficially for Mr. Chahal, this point would be of little, if any, assistance to Mr. Chahal’s case. However, even though Mr. Chahal said in evidence that he understood that he would be looked after as a result of the land and the business being transferred to a company, it seems clear there was no agreement as to how many shares he was to be beneficially entitled to, and how those shares were distributed, in terms of legal ownership, between the other two shareholders.

Unless all the shares are effectively treated as partnership property, it is not entirely easy to see how one could decide with confidence how many shares are to be treated as beneficially owned by Mr. Chahal, and whether the shares in question are to be, as it were, taken equally from the other two shareholders or in some other way. As I have already implied, where the transfer of the business and assets of a partnership to a company leads to the inference that the partnership has thereby been dissolved, the arrangement will normally involve the allocation of shares to the partners as individual shareholders beneficially pro rata to their respective interests in the partnership.

I do not accept that this point can be readily met by the contention that the shares are impressed with the partnership relationship even though the partnership is to be treated as dissolved when the shares were issued. It appears to me that, in the normal case of transfer, the reason, or at least an important reason, why the partnership relationship ceases when the shares are issued to the individual former partners, is because the ownership of the shares by the individual (former) partners beneficially is inconsistent with the ownership of the shares being subject to the partnership relationship. However, if the partnership relationship is necessary in order to influence, indeed to determine, the beneficial ownership of the shares, then, almost by definition, the partnership relationship must, at least to an extent, have continued despite the issue of the shares.

Secondly, there is Mr. Chahal’s complete lack of involvement in the decision to transfer the land and business from the partnership to HPL; indeed his knowledge of the nature and of the intended and actual effect of the arrangement, appears to have been almost nil. The effect of his evidence was somewhat unclear, to put it mildly. He seemed to have only the vaguest of notions as to what was involved or intended by the transfer of the business and the land from the partnership to HPL (not surprisingly, bearing in mind his command of English and his state of education, as described by the Judge).

In this connection, I consider that it is important to remember that one is here concerned with whether it is right to infer an agreement between all the partners that a partnership will be wound up as a result of actions or discussions. In my view, where, as here, one of the partners has not been involved in the relevant actions at all, and has only been peripherally involved in those discussions, it must at least be more difficult to spell out an agreement between all the partners, including him, that the partnership is to be dissolved. Of course, it is possible to conclude that the partner, who has not been involved in any discussions or actions, has been content to leave, or to delegate, any decision that might be made on his part to his fellow partners. However, on the exiguous and unclear evidence in this case, I am quite unconvinced that it would be appropriate to conclude that Mr. Mahal (or, indeed, Mrs Deol) had express, implied or ostensible authority to commit Mr. Chahal to an agreement to dissolve the partnership.

The evidence established that Mr. Chahal, and, indeed, Mrs Deol, were prepared to leave the running of the business to Mr. Mahal, and this appears to have extended to strategic decisions such as acquiring assets, including the adjoining property through the medium of the shares in HPL. The evidence also establishes that Mr. Chahal knew that there was some sort of re-arrangement of the business as the result of, or, at any rate, following, the acquisition of the shares in HPL. However, although Mr. Mahal had authority to carry on the business of the partnership on behalf of all the partners, including Mr. Chahal, I do not consider that that authority can properly be said to extend to agreeing to dissolve the partnership. Authority to carry on business on behalf of the partnership, even if it extends to acquiring new assets, does not appear to me to carry with it the right to agree to put an end to the partnership.

The fact that Mr. Chahal knew (probably by 1983) that shares had been acquired in HPL, that HPL had in some way taken over the running of the business, and that it in some way owned the land, cannot, without more, in my view, justify the conclusion that he thereby agreed not merely to the land and the business being transferred to HPL, but to the partnership being dissolved. All the more so given that no shares in HPL were ever allotted to him.

During the course of argument, reference was briefly made to the possibility that the partnership was one at will (as, despite the Judge’s contrary view, I am inclined to think it was). If it was, then it was a partnership which therefore could have been determined by any of the three partners by notice at any time. If any of the three partners could have dissolved the partnership by notice at any time, it is frankly impossible to see why it could be said to be necessary to imply an agency in Mr. Mahal to dissolve by agreement.

Further, it was not argued on behalf of the defendants, on this assumption, that, by arranging to transfer the whole of the business and all the assets of the partnership to HPL, in return for the issue of shares, Mr. Mahal had unilaterally dissolved, the partnership. It is right to say that, in my judgment, Mr. Pymont was correct not to raise such an argument. As I see it, if it is to be contended that a partnership at will has been dissolved by the decision of one of the partners, such an argument can only be sustained if it is shown that the partner concerned has, in pretty clear terms, communicated to the other partners the termination of the partnership. If, as I have concluded, it is legitimate to conclude that, on the unusual facts of this case, no agreement to dissolve can be inferred, it seems to me that, essentially for the same reasons, it must follow that no sufficient notification of a unilateral dissolution can have been given by Mr. Mahal.

It makes no difference, in my opinion, if, as the Judge thought, the partnership was one for the duration of “a single adventure or undertaking” to quote from section 32(b) of the 1890 Act. One would still have to decide whether the ownership of the land and business through the indirect medium of HPL, in the circumstances in which that happened in 1981/2, should be regarded on the facts of this case as a continuation of that adventure or undertaking. On the unusual facts of this case, for the reasons set out above, I consider that it should. If the Judge was right about the intended duration of the partnership, then it would be equally as difficult as if it was a partnership at will, to justify the notion that Mr. Mahal had implied authority to dissolve it by agreement. It would involve implying an authority to do something contrary to what had been agreed.

The conclusion that there was no dissolution of the partnership in 1982 is reinforced by a further point made by Mr. Corbett, namely that, as the Order agreed by the parties following the judgment of Ms Williamson records, the business of the partnership was, at any rate just before the transfer of the business and land to HPL, the running of the business, the ownership of the land and the ownership of the shares in HPL.

I think, however, that Mr. Corbett puts the point much too high when he contends that, so long as the shares in HPL were retained, the defendants were estopped, as a result of the terms of the Order, from contending that the partnership was dissolved. Nonetheless, I believe that there is force in the point that the question, whether or not the partnership was dissolved on the transfer of its business and assets to HPL, has to be judged by reference, inter alia, to the fact that the shares in that company were, at the time of the alleged dissolution, owned by the partnership. It is not merely that it is quite common for a partnership to own shares in a company in connection with the partnership’s business – e.g. to manage, or even to own, the property from which it practices. Over and above that, where, as here, a partnership already owns the shares in the company to which its business and assets are subsequently transferred, it is perhaps a little more difficult to infer an intention to dissolve the partnership than where the company is acquired for the purpose of the transfer.

For these reasons, I am of the view that the Judge was right to conclude that, on the rather unusual facts of this case, the transfer to HPL of the business, previously owned and run by the partnership, and of the land, being the asset of the partnership, did not operate to dissolve the partnership. Just as in National Westminster Bank v Jones, where the facts were also quite unusual, albeit very different from the present case, there are reasons for concluding that the complete transfer of the business and all its assets from the partnership to a company did not carry with it the inference of an agreement that the partnership should be dissolved.

On the assumption that the partnership was not dissolved in 1982, it was not suggested before the Judge, as I understand it, that any date earlier than 2001, when the shares in HPL were sold, should be adopted as the date on which the partnership determined. While, as already mentioned, it seems to me that Mr. Pymont has a real argument for suggestion that the partnership continued beyond that time, it has not been argued before us that the Judge’s decision on the point should be reconsidered if we were of the view that her conclusion, that the partnership was not dissolved in 1982, should be upheld.

However, having referred to the point, it is right to say that, even though (unsurprisingly) there has been little discussion on the issue, there is a formidable case for concluding that the Judge was right on this issue. First, although I consider that the partnership was probably one at will, it could have been (as the Judge thought) a partnership for a particular venture. If so, unless determined earlier, it would have determined when the venture ended - see Section 32 (b) of the 1890 Act. If that is right, then, for the reasons I have given, even though the venture can be said to have been transferred to HPL, the partnership still continued so long as the venture was under the ownership and control (albeit only indirectly, through the medium of HPL) of the partners. On that basis, the partnership would have ended in 2001 when the shares in HPL, which carried with them the business and the assets, were sold.

If the partnership was one at will, then, for the reasons I have given, it seems to me that it is not the case that all three partners would have envisaged that it would determine without notification if there was an arrangement, such as that which occurred in 1981/2. However, I think that they would have envisaged that it would determine if there was simply no caravan site or other business to own or run (even indirectly through a company such as HPL).

Accordingly, the common assumption, reflected in the Order below, that, if the partnership was not dissolved in 1982, it continued until, but not after, 2001, was, in my opinion, probably correct.

For these reasons, which are very similar to, if somewhat more extensively expressed than, those of the Judge, I would dismiss this appeal.

I agree.

I also agree.