Dissolution - Effect - Partnership property - Partnership Act 1890

Boghani v Nathoo: ChD (Sir Andrew Morritt): 2 August 2011

The parties carried on the business of hotel development as partners at will. The partnership (the firm) was dissolved pursuant to a notice given by the claimant to the defendant. At the date of dissolution, the assets of the firm included two very substantial but uncompleted hotel developments (the first development and second development).

The parties had been unable to agree how those developments should be disposed of in the winding up of the affairs of the firm.

The claimant contended that they should be sold, following a three-month marketing campaign, to the highest bidder on certain terms which included the ability of each partner to bid. The defendant disagreed. He maintained that the developments should be completed then sold on similar terms.

Each of them sought an order giving effect to that suggestion. Fundamental to that disagreement was the proper construction and application of section 38 of the Partnership Act 1890 (the 1890 act). The defendant contended that that section obliged the firm to continue the developments unless and until the court in its discretion determined otherwise under section 39 of the 1890 act.

The claimant disagreed. He submitted that before dissolution the firm was under no unconditional obligation to complete the developments. In addition, he suggested that it was not necessary that the firm should do so for the purposes of winding up its affairs. In any event, he submitted that the court should in the exercise of its discretion order a sale on the terms he proposed.

Issues arose as to: (i) whether the firm was obligated before dissolution supervened to complete each development and/or whether such developments were transactions begun but unfinished at the time of dissolution; and if so (ii) whether in order to wind up the affairs of the firm it was necessary to perform those obligations or complete such transactions.

The court held: The terms of section 38 of the 1890 act demonstrated the following propositions: (i) the obligations of partners to third parties continued notwithstanding the dissolution of the partnership; (ii) in England, if not in Scotland, the satisfaction of those obligations by performance, release or novation or the payment of damages would not usually involve reliance on the terms of section 38; (iii) section 38 did not entitle the surviving partners to engage in new bargains or contracts so as to bind a deceased former partner; (iv) even in relation to transactions, not being new bargains or contracts, begun but unfinished at the time of dissolution, section 38 applied only if and to the extent that the completion of such transactions was necessary to wind up the affairs of the partnership; and (v) section 38, if applicable, conferred a power; it did not impose any additional duty (see [27] of the judgment).

The firm was contractually bound to third parties by various agreements. To that extent, the obligations of the firm continued notwithstanding its dissolution. The affairs of the firm could not be finally would up unless and until those obligations were satisfied by performance, release or novation or the payment of damages.

It was unnecessary to resort to section 38 for that conclusion. However, if and to the extent that it was, then it was equally clear that the existing contractual commitments of the firm to third parties were ‘transactions begun but unfinished at the time of dissolution’. The ability of surviving partners to bind former partners did not extend to new contracts, except to the extent to which they were an inevitable part of the pre-existing contractual obligations of the firm under a ‘transaction begun but unfinished at the time of the dissolution’.

The issue in all such cases was likely to depend on whether it was necessary to do so. The necessity had to arise from the need to wind up the affairs of the partnership. It was not necessary for that purpose that the obligations arising from outstanding transactions had to be satisfied by performance of the unfinished transaction.

In the instant case, if completion required full performance of the pre-dissolution obligation it had not been demonstrated that any such completion was necessary in order to wind up the affairs of the partnership. On the evidence, there was a distinct possibility that suitable outside third parties might well be interested in taking over the role of the firm in the two developments.

It followed that it was not necessary in order to wind up the affairs of the firm that the dissolved firm should complete those developments, even in the unlikely circumstances that it could do so without the need to make new contracts for new banking facilities to enable it to do so (see [28]-[33] of the judgment).

Catherine Newman QC and David Mumford (instructed by Underwoods Solicitors) for the claimant; Philip Jones QC and Helen Galley (instructed by CKFT) for the defendant.