HLB Kidsons (Formerly Kidsons Impey) v Lloyd's Underwriters Subscribing Policy No. 621/PK1D00101 & Ors

This is satellite litigation, raising a short issue of partnership law and in particular the effect of Section 38 of The Partnership Act 1890, within a wider action. The Claimant has sued the Defendants who were its professional indemnity insurers for the policy year 1 May 2001 to 30 April 2002 and the solicitors and insurance brokers connected with that coverage and with notification of claims. A trial of preliminary issues has taken place before Mrs Justice Gloster largely favourable to underwriters but judgment from the Court of Appeal is awaited.

The Claimant HLB Kidsons (“Kidsons”) merged with Baker Tilly on 1 April 2002. The issue on this application is whether on 2 June 2005 the Baker Tilly partners who had formerly been partners in Kidsons (who I will for brevity also call “Kidsons”) had authority to start this action on behalf of former partners who had retired between 2002 and 2004. The Defendants are not involved in this application except as observers. I will call the retired partners, whom their counsel Mr Lazarus describes as “Kidsons Former Partners”, “KFP”.

Kidsons, like Baker Tilly with whom they merged, were a well known firm of accountants most recently in practice under the terms of the Kidsons Partnership Deed of 1 May 1999 (“The Kidsons Deed”). On 1 May 2001 Kidsons’ professional indemnity policy incepted for the year to 30 April 2002. Concerns were raised in Kidsons’ Edinburgh office in August 2001 resulting in what Kidsons claimed to be a notification to insurers sent on 31 August. On 19 December 2001 the Kidsons and Baker Tilly Partners entered into an agreement (“The Merger Agreement”) for a merger which took effect in a Merged Partnership Deed from 1 April 2002 (“The Merger Deed”). The KFP retired at different times between 2002 and 2004. On 11 October 2004 insurers declined cover for the matters for which purported notification had been given in August 2001 and this action was brought on 2 June 2005. The trial of preliminary issues began in January 2007. Judgment was given on 9 August and permission to appeal granted on 28 September. On 9 November Mrs Justice Gloster delivered a supplemental judgment requiring Kidsons to pay substantial costs and to make an interim payment of £1.2 million on account. The appeal was heard in June. Kidsons served Particulars of Claim in this application on 19 October and after a Part 18 Request KFP served a Defence on 23 November. The issue between the parties emerges from those pleadings.

Kidsons say that by Clause 7.11 of the Merger Agreement the former firm and its partners and KFP remain responsible for any claims made against the firm or any of its partners relating to Kidsons professional services provided prior to the merger on 1 February 2002. By Clause E4.2.3 of the Kidsons Deed the National Managing Partner of Kidsons (a Mr Greatorex) was empowered to “[direct] the conduct of all litigation in which the National Firm may be involved” and, by E4.2.4 “to act in the name of the National Firm and to enter into contracts on its behalf in the interests of the National Firm”. Kidsons say that Mr Greatorex authorised the bringing of this action and thereby bound KFP. That authorisation is said to arise because Mr Greatorex retained the powers he held as Kidsons National Managing Partner at the date of the merger for purposes of the continuing affairs of the “legacy” firm and thus validly authorised these proceedings. Kidsons say the effect of the merger was to dissolve the Kidsons Partnership and that as a result Mr Greatorex’s authority also sprang from Section 38 of the Partnership Act 1890 (“the Act”) which I will refer to in more detail shortly.

KFP deny the construction of the Deed contended for by Kidsons. KFP also deny that there was any dissolution within the meaning of Section 38 and accordingly contend that it was necessary for Kidsons to have express authority to sue on behalf of KFP.

These and other contentions give rise to a dispute between the parties about the construction of the relevant deeds and about the effect of Section 38 which they have agreed should be resolved by the court answering the following list of questions.

1. Was the effect of the merger of Kidsons and Baker Tilly on 1 April 2002 to “dissolve” the Kidsons partnership within the meaning of s.38 of the Partnership Act 1890?

Section 38 must be seen in the context of the Act as a whole and also in a group of sections beginning at Section 32 under the subheading “Dissolution of Partnership, and its consequences”. The Act does not define “dissolution” or indeed other terms. As the argument relies not only on Section 38 but Sections 32, 33, 37 and 39, I next set these out.

“Dissolution by expiration of notice

32.

Subject to any agreement between the partners, a partnership is dissolved –

(a)

If entered into for a fixed term, by the expiration of that term;

(b)

If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking;

(c)

If entered into for an undefined time, by the partner giving notice to the other or others of his intention to dissolve the partnership.

In the last-mentioned case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice.

Dissolution by bankruptcy, death or charge

33.

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

(2)

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

Right of partners to notify dissolution

37.

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

Continuing authority of partners for purposes of “winding up”

38.

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

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

Rights of partners as to application of partnership property

39.

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

SUBMISSIONS

The parties agree that on the merger with Baker Tilly there was dissolution of Kidsons but KFP say the dissolution was a “technical” not a “general” dissolution, a distinction which Mr Lazarus adopts from Lindley & Banks. That work describes the distinction in the following terms:-

“… as a matter of law, a change in the composition of a partnership results in a dissolution of the existing firm and the creation of a new firm; in such a case, the new firm will usually take on the assets and liabilities of the old, without any break in the continuity of the business. This is often referred to as a “technical” dissolution and is usually, but not always, the result of agreement.

In contrast, the expression “general” dissolution is used to denote a dissolution involving a full scale winding up which may well have been brought about at the instance of one partner against the wishes of the others.”

Kidsons say that there is no such distinction certainly as regards Section 38. A firm is not a legal entity and on any change in composition the firm ceases to exist. Agreement between partners in the “old” and the “new” firms for continuation avoids discontinuity in the business but does not affect this legal fact. Kidsons accept that the Merger Deed which took the form of amendments to the Kidsons deed ensured continuity in the businesses of the two firms but in law Kidsons was dissolved and this is illustrated by the feature that claims against the partners of the previous firms remained the responsibility of those partners.

KFP say that this was a technical dissolution. The Merger Agreement requires the pre-merger Kidsons partners to alter that firm’s deed to the form of the agreed Merger Deed and then for the pre-merger Baker Tilly partners to be admitted. The Kidsons Deed provided by Clause F25.2 that subject to provisions for retirement, compulsory retirement, expulsion and dissolution contained in the deed, the partnership would continue during the joint lives of the partners of the firm or any successor firm. Mr Lazarus submits that this means the firm could not be dissolved, except in the technical sense, except as provided by the Deed.

Mr Lazarus also submits that it is clear from the context of the Act that Section 38 is concerned with a general dissolution. He points to the heading of Sections 32-44. He says that Section 32 envisages general dissolution, Section 33 refers to general not technical dissolution by providing that dissolution upon death or bankruptcy can be avoided by contrary agreement. Section 37 expressly refers to a distinction between dissolution and the retirement of the partner. (The response of Mr Davidson QC to that is that the distinction is either surplusage or a reflection of a bygone approach to drafting). Section 38, Mr Lazarus submits, refers to general dissolution because it provides for winding up and he says that Section 39 does so also since there is no question of dealing with assets and liabilities of a firm upon a mere retirement. Mr Lazarus also points out that if Section 38 applies to a technical dissolution then Kidsons could invoke it equally upon the retirement of any single partner and would not need to focus upon the merger.

Mr Davidson relies on three cases which he says supports his position. The first is Dickson -v- National Bank of Scotland 1917 S.C. (HL) 50 a decision of the House of Lords affirming the Second Division of the Court of Session. That case concerned a firm of lawyers which became dissolved. Some years later one of the former partners endorsed a receipt which enabled money repayable on the signature of the firm to be embezzled. The House of Lords affirmed that the repayment of the money was necessary either “to wind up the affairs of the partnership” or “to complete transactions begun but unfinished at the time of the dissolution” of the firm within the meaning of Section 38. The case contains guidance about the origins of Section 38 and points to the problems that would arise but for the existence of a provision permitting matters incidental to the winding up of affairs to be dealt with notwithstanding dissolution. Mr Davidson points, for example, to the Opinion of Lord Shaw at 54 where it is assumed that a dissolution accompanied by Section 38 would prevent “an immediate arrest of business” necessarily resulting “from a change of the personnel of a firm”. The Lord Chancellor points out at 52 that Section 38 enacts the old law that for certain purposes a partnership continued notwithstanding dissolution. It followed that the partners were liable to complete matters begun before dissolution but left unfinished. There are similar observations in the other speeches but I do not obtain from a case concerned primarily with the consequences of an admitted dissolution and with whether the particular embezzlement fell within Section 38 much help with the question of whether Section 38 applies at all when, as here, the partners have agreed otherwise and that there will be no “arrest of business”. The focus of Dickson is on a different issue and I do not read their Lordships’ remarks about more peripheral points such as the last sentence of the paragraph in Lord Shaw’s Opinion, to which I have referred, as determinative.

Secondly there is in Re Frank Hill [1921] 2 KB 831. In that case a four partner firm obtained judgment but one of the four retired before the issue of a bankruptcy notice. The debtor appealed on the grounds that leave should have been obtained from the court to enable a bankruptcy notice to be issued by the three remaining partners there having been a change of parties within the relevant Order. The court held that by virtue of Section 38 there was no change in the firm. Mr Lazarus suggests, in my view correctly, that there is nothing to suggest that the firm was anything other than a partnership at will and that in the absence of the existence of a written agreement it is unsurprising that Section 38 should apply.

Thirdly Mr Davidson relies upon Queensland Southern Barramundi -v- Ough Properties Pty Ltd [2000] 2 Qd.R.172. a decision of the Supreme Court of Brisbane. A partnership claimed money from a company associated with one of the partners. The other partner sued alone and was met with the challenge that the relevant procedural rules required action to be commenced by “two or more partners” requiring the participation of both. The judge upheld the single partner’s right to sue on the basis of that provision operating “to continue the authority of each partner to bind the former firm so far as may be necessary to wind up its affairs. I accept that includes the authority to start a claim as necessary in the firm name”. Mr Lazarus responds that the case is coloured by the local procedure rules.

Mr Lazarus relies upon Duncan -v- MFV Marigold [2006] Scot CS0H 128 an opinion of Lord Reed in the Outer House, Court of Session. In that case one of four partners in a firm which operated a fishing boat died and accounts were drawn up without the agreement of the other three. The surviving partners continued to operate the boat for several years with the result that the deceased’s share of the surplus of assets was much less than that shown in the cessation accounts. The Opinion contains a very interesting discussion and account of the origin of the 1890 Act and how it came to apply in Scotland. Having recorded that the dissolution of a partnership has the consequence unless otherwise agreed that its affairs must be wound up and its assets distributed in accordance with Section 44 the judge comes to discuss Section 38 and observes that “winding up” can take different forms “in some cases the business may be disposed of as a going concern; and in some cases the acquirers may be a new partnership, comprising the surviving partners of the dissolved partnership. In other cases the business may have to be broken up and assets sold”. Mr Lazarus cites this case to support his contention that Section 38 will only apply to a general dissolution not one that is technical or limited by the terms of an agreement. Mr Davidson seeks to draw from this case support for the idea that the continuation of a business by surviving partners is a form of winding up.

As I see it these cases are of limited help because the questions they were seeking to answer and the surrounding circumstances differ markedly from those in this case. More help is to be gained from applying the statute to the partnership structure both sides agreed to enter into. It was the intention of all these partners expressed in the Kidsons Deed that the partnership would continue subject only to express provisions for retirement, compulsory retirement, expulsion and dissolution as specified in the deed. Section 38 does not as I read it extend to what is a “technical” dissolution in this case. Indeed there are a series of technical dissolutions arising not only from the merger but from the departure of partners from time to time. Sections 32-44 are concerned with a more “general” dissolution as one sees from the wording of the particular sections. When seen in that context it seems to me that the distinction between dissolution and the retirement of a partner drawn in Section 37 is a sound indication that the regime was not intended to apply to partnerships that were in practice continuing without interruption other than changes of membership from time to time. It would be odd if Section 38 were, despite the agreement otherwise expressly contained in most modern partnership deeds, to come into play every time a partner leaves which nowadays can be several and indeed many times a year.

So the answer to the first question is “no”.

Kidsons say that the answer is “yes” because third party claims which are plainly arguable, as the history of the litigation has shown, had to be pursued. KFP say “no” because the bringing of these claims is not “winding up” within Section 38 a process which would bring the trading activities of the dissolved firm to an end. Furthermore the action could have been commenced by Kidsons with KFP being joined as Defendants under CPR 19.3.

The answer as I see it is “no”. Kidsons were free to proceed as they did without the consent of KFP and to bring KFP in as Defendants under CPR 19.3. This provides that where a Claimant claims a remedy to which some other person is jointly entitled that person must be a party. If any person does not agree to be a Claimant he must generally be made a Defendant. While some may agree with Kidsons that it is unattractive for KFP to take the position that they will be content to benefit from the fruits of the action but decline to take the financial risks that is, as Mr Lazarus points out, an aspect of the broader law of joint claims.

It was I believe common ground at the hearing that if the requirements of the first two issues were met (and I have concluded that they were not) the answer to this question is yes except that KFP contend that it would be no as regards the three partners who retired before the merger. I am not going to decide that minor point as it was not fully argued. It arises only if I am wrong on both the first two issues and can if necessary be resolved by an appellate court without the need for findings of fact from me.

the terms of the merged partnership deed;

that the Kidsons former partners retired before the commencement of the coverage action?

I first record that Section 9 of the Act provides that:-

“Every partner in a firm is liable jointly with the other partners and in Scotland similarly also, for all debts and obligations of the firm incurred while he is a partner”.

Kidsons contend that Mr Greatorex had authority to sue by Clauses E4.2.3 and E4.2.4 of the Kidsons Deed and by that deed “as a whole”. Clause E4 of the deed deals with the appointment and authority of various “National Officers”. E4.2.3 gives to the National Managing Partner a wide range of functions including “directing the conduct of all litigation in which the National Firm may be involved”. Clause E4.2.4 headed “National Managing Partners’ Authority” provides as follows:-

“The National Managing Partner (if and to the extent authorised by the National Executive Committee) shall have power to act in the name of the National Firm and to enter into contracts on its behalf in the interests of the National Firm and shall have power to delegate such powers to such persons and on such terms as he shall in his absolute discretion think fit”.

Kidsons say that the merger did not have the effect of terminating this authority of Mr Greatorex, particularly in relation to claims concerning professional services for which by Clause 7.11 of the merger agreement of December 2001 the Kidsons partners alone were responsible. They contend that this authority remained with the National Managing Partner notwithstanding the retirement of any partner before the coverage action commenced. They contend that there is nothing in the Deed to terminate Mr Greatorex’s authority to act for a partner after he retires and that there is no basis for implying such a term. Kidsons contend that given the practical need for central management in a large partnership one would expect the authority to continue because otherwise separate authorities would be needed from each retiring partner to enable Mr Greatorex to act on his or her behalf. KFP contend that when the claim form was issued there was no relationship of partnership between them and Kidsons. There was nothing from which Kidsons could derive authority to act on behalf of KFP. The powers under the Kidsons Partnership Deed for Mr Greatorex to act on behalf of “the National Firm” cannot apply to those who were not members of it, such as retired partners. Moreover the partners within KFP who retired after the merger were subject after 1 April 2002 to the Merger Deed but not to the Kidsons Deed.

If the National Managing Partner was to have power to bring proceedings in the name of those who were no longer members of the National Firm these should have been provided for and agreed in the deed. The bringing of legal proceedings is a significant matter. If partners had agreed to bestow upon the National Managing Partner the power to sue in their name even after they had left the firm the Deed which after all runs to 140 pages would have said so. I reject the suggestion that such a power can exist because the deed did not provide the opposite. There is nothing in the point that the practical requirements of a large firm require construction of the deed in the manner urged by Kidsons. In practice Kidsons could have invited members of KFP to participate. Those who refused could have been brought in as Defendants under CPR 19.3. Further given that Kidsons emphasised the comparative rarity of proceedings of this kind I see nothing cumbersome in the National Managing Partner having power to sue on behalf of retired partners only if and when he or she invites and then receives written agreement from the potential Claimants. It is common for retiring partners in large firms to leave on the basis of the Deed but with detailed provisions specifically agreed in more detail in an exchange of letters when they depart.

So the answer is no.

the Kidsons former partners other than Messrs Buckle, Falconer and Lister notwithstanding that they had retired from the partnership before the commencement of the coverage action;

Messrs Buckle, Falconer and Lister notwithstanding that they had retired from the partnership before the merger?

Kidsons plead that Clauses E3.1.1 and E3.1.2 entitle the National Management Team to delegate to Mr Greatorex power to “discharge all aspects of the management and conduct of the Firm”. In argument Mr Davidson relied more upon the absence of express terms in the Merger Deed to terminate Mr Greatorex’s authority to act on partners when they retired. As I see it the position is much the same as with issue 4. If Mr Greatorex was to have the powers which he claimed these could only derive from agreement between the partners. No such agreement is to be found in the Deed or elsewhere.

For obvious reasons this issue does not apply to the three partners within KFP who retired before the merger and were not subject to this deed.

It follows that, in substance, KFP succeed. Kidsons claim that it is morally wrong that KFP should be able to stand on the side lines reaping any benefit of the insurance litigation while avoiding the risks and burden of costs. KFP say that their position is no different from that of any other joint Claimant who, as a matter of established law, can decline to take part in proceedings but still benefit from the outcome. I reach my decision without regard to either moral consideration. It may be said that KFP’s position is unattractive. Against that the retired partners have played no part in the decisions to bring this case and it is quite common for continuing partners to take steps which may benefit retired partners without seeking to place the risk and costs on those who may be less able to meet them from income. I recognise however that in this case a number of the retired partners left to work in other fields.

I shall be grateful if Counsel will, at least 48 hours before this judgment is handed down, supply any corrections of the usual kind, a draft order and a note of any other matters they wish to raise.