Recent UK case on the existence of a partnership, partnership assets, partners' duties, and just and equitable winding up.

Malik v Hussain and others [2020] EWHC 2334 (Ch)

This case involved a business operated though an alleged combination of partnerships and companies. In 2002 the claimant and the first defendant took preparatory steps to enter into a restaurant business together. They later incorporated a company and acquired a property from which the restaurant was to operate, and in 2003 the restaurant began trading. They only entered into a formal partnership deed in 2006. In 2013 the first defendant opened a restaurant trading under the same name but in a different location.

The court held that there was a partnership in relation to the property and the business, that the two partners held their shares in the company as partnership property, and that the partnership should be dissolved and wound up. It stated that the normal rules applicable to the construction of written commercial contracts applied equally to partnership agreements, and the relevant principles were clear. The parties were therefore bound by the written terms of the deed and could not seek to imply inconsistent terms.

The court held that there was sufficient evidence that an informal partnership came into existence in 2002. The claimant and the first defendant had agreed to go into business together, with a view to owning property and using it to run a restaurant business, they had opened a joint bank account which they were using for the development of the business, and they had decided to take out a joint loan. The company which they had set up had never been intended to take over the whole of the business, and there was no evidence that the opening and operation of the company current account, and the treatment of the restaurant business in the accounts, the property rental statements and the personal tax returns, were carefully considered decisions, the effect of which had been explained by the accountants. In the absence of such evidence, they were insufficient to infer that the claimant and the first defendant had agreed to hive the restaurant part of the partnership business completely out of the partnership and into the company. The court concluded that the parties had intended to own the whole business as partners but for the company to operate the restaurant business on behalf of the partnership.

In the absence of an exhaustive definition of the partnership assets in the partnership deed, the court held that particular attention should be paid to the statements that the parties wished to carry on the business of an Indian restaurant in partnership, that all the equipment and fittings in the property and used for the purposes of the business should be partnership assets, and that the capital was £6 million, which was only explicable if the value of the business was included. These demonstrated that the business was a partnership asset and that this was the basis on which the shares in the company were held by the partners as partnership assets.

The court also held that the obligations in s29 of the Partnership Act 1890 to account for benefits derived from the partnership, and in s30 to account for the profits of a competing business, did not arise. Any benefit derived by the second restaurant from the use of the name of the first and its reputation was modest and short lived, and there had been no meaningful competition given that the second restaurant was over 200 miles from the first. In any event, the parties had given prior consent to either of them operating a competing business. Although the deed was silent on this point, a separate prior oral agreement had been reached and recorded in a file note, and this amounted to a valid consent under s30.

The court concluded that the relationship between the two partners had wholly broken down, and therefore that it was it was just and equitable to make an order for the dissolution of the partnership under s35(f) of the Partnership Act and for the partnership to be wound up and a final account taken.

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Second Annual Conference of the Partnership, LLP and LLC Law Forum 10 January 2019

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