Dissolving or Continuing Partnerships: Chahal v Mahal [2005] 2 B.C.L.C. 655

Posted On: 06 November 2006

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This article is reproduced with the permission of W Green & Son Ltd (law publishers).

Introduction
Many small or medium size companies start off as partnerships prior to their incorporation and, in the right hands, the transfer of business and assets usually goes smoothly.  Consideration is given to the most advantageous way to structure that transfer which may or may not involve the partnership continuing beyond the point at which the assets are transferred and the newly incorporated company starts trading.  In Chahal v Mahal the Court of Appeal (Neuberger, Carnwath and Arden LJJ) had to decided whether a partnership had been formed and then continued for a period of 18 years after the partnership business and assets had been transferred to a limited company which took over the operation of the business.  As this case shows, the Court was prepared to take into account the equity of the situation in determining the legal issues.

The Legal Framework
Section 1(1) of the Partnership Act 1890, which codified the equitable law of partnership as it had been developed by the English Chancery Court, 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 dissolved are set out in ss.32–35 of the 1890 Act, and, in Hurst v Bryk [2002] 1 A.C. 185 at 195 B-C, Lord Millett said "It is true that a partnership may also be dissolved by mutual agreement, and it may be objected that this is not mentioned [in the 1890 Act] either; but in fact it is catered for by Section 19 taken in conjunction with Section 32(2)(a)".  Section 19 provides that the "mutual rights and duties of partners… may be varied by the consent of all the partners" and adds that "such consent may be either expressed or inferred from a course of dealing". Section 32 provides: "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 any partner giving notice to the other or others of his intention to dissolve the Partnership."  The Partnership Act, notwithstanding its English Chancery origins, clearly applies in Scots law.
As a matter of law there are circumstances where a partnership ceases to have any assets or business and yet the partners intend the partnership relationship to continue, for example, in order to start up a new business, to revive the previous business, to improve or maintain their tax liability position or to crystallise certain rights or obligations.  This was confirmed in National Westminster Bank plc v Jones [2001] 1 B.C.L.C. 98.  The court rejected the argument that the farming partnership between the defenders must have been dissolved when they transferred possession of the property on which the business was carried out to the company (via the tenancy), and when they transferred all the assets of the farming business to the company (via the sale agreement), since the effect of granting the tenancy and the sale of the assets to the company was that the defenders had ceased to carry on the only business which they had been carrying on until then, namely the farming business on the basis that those facts did not necessarily mean that the partnership must have dissolved since the mere fact that partners cease trading does not put an end to the partnership.  In other words, there is no presumption that dissolution follows cessation of trade.

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