Broume v. Davis.
1939Present. Soertsz A.C.J. and Nihill J.
BROWNE v. DAVIS.118—D. C. Nuwara Eliya, 2,099.
Partnership—.Action for dissolution—Right of partner to retire—Power of Courtto order dissolution—No reasonable prospect of profit a good ground fordissolution—Partnership Act, 1890, ss. 53 and 54 Victoria, Cap. 9, s. 32.
The power of a Court to order a dissolution of a partnership undersection 32 of the Partnership Act, 1890, is not fettered by the terms of apartnership agreement.
The fact that a partnership agreement gives a partner the remedy ofretirement does not deprive him of the right to ask for a dissolution ofthe partnership.
Where a partnership cannot be carried on with a reasonable prospectof profit, that would be a good ground for dissolution.
HIS was an action for dissolution of partnership entered into betweenthe plaintiff-respondent and the two defendants-appellants on
August 17, 1933. The nature of the business was that of a preparatoryschool known as Haddon Hill for the children of European parents. Thelearned District Judge ordered a decree of dissolution and the defendants-appellants appealed from that order.
J. E. M. Obeyesekere (with him O. L. de Kretser Jr.), for the defendants,appellants.—The dissolution is asked for on the grounds that—(1) thebusiness could only be carried out at a loss, and (2) there is a loss ofconfidence in the partners. English law of Partnership is applicable.The dissolution is asked for under section 35 of Partnership Act, 1890(53 and 54 Vic. c. 39 and Lindley on Partnership (8th ed.) p. 641). Underthat section a discretion is vested in the Court to dissolve the partnership
Browne v. Davis.
on the grounds stated therein, but this discretion cannot be exercisedwhere the terms of the deed of partnership had provided for the retirementof the partner.
To obtain a dissolution under the first ground, the plaintiff must provethat there is no hope of ever getting profits. Otherwise any partnercould come into Court and get the necessary publicity to spoil thebusiness.
The question whether the business can be carried out without loss isconsidered in Handy side v. Camel1; Jennings v. Baddeley *; and Bailey v.Ford
The partnership can be dissolved only in the manner laid down in thedeed and the Court will not exercise its discretion in favour of dissolutionas held in Moss v. Elphick4; and in Abbott v. Abbott *. The partnershipcould not be determined at the instance of one of the partners. TheCourt should not exercise its discretion in favour of a plaintiff who hasnot availed himself of that provision of the deed.
Loss of confidence to carry on the partnership is dealt with in Lindleyon Partnership, p. 656; Anonymous (1855) 2 K. & J. 441 at 451 ; andHarrison v. Tennant *.
H. V. Perera, K.C. (with him E. F. N. Gratiaen), for plaintiff-respond-ent.—The plaintiff is a man of substance and he will have to pay thedebts of the partnership. There are writs against the first defendant.The buildings are in a dilapidated state and there is another rivalinstitution.
The clauses in the deed cannot supersede the Partnership Act. Further,the powers of Court cannot be abrogated or superseded by an agreement.The business is insolvent and if a partner retires he retires burdened withthose liabilities. The debts of the business would be hanging over hishead for a number of years.
At the dissolution the other partners can buy the business. Theplaintiff does not want to put capital into the business because thebuildings are depreciating in value. If the deed provides for bringing inmore capital, then Court need not exercise its discretion in favour of theplaintiff.
In Anonymous (1855) 2 K. & J. 441, the man had recovered and theCourt refused to grant a dissolution. The depreciation must be takeninto account in valuating the profits. In re the Spanish ProspectingCompany, Ltd. (1911) 1 ch. 92, held that the true profits must be ascer-tained in finding whether the business is making profits. Robinson v.Ashton", decided that the rise and fall in the value of plant must be takeninto account. It was held in Jennings v. Baddeleya, that the partnerscould not be compelled to bring in more capital. It was found in Handy-side v. Camel", that the loss in profits was due to circumstances whichwould not exist always.
1 J7 T. L. K. 623.
7 (1856) 3K.dk J. 78.3 (1843) 13 Sim. 495.
* (1910) 1 K. B. 846.
(1936) 3 AU t. K. 823.
(1856) 21 Beav. 482 at 49 i.7 (1875) 20 Eq. 25.
‘ (1856) 3 K. rf- .7. 73.
• 17 T. I.. B. 623.
NIHILL J.—Browne v. Davis.
The Court will consider the circumstances at the date of the action—see Anonymous (1855) 2 K. & J. 441.
J. E. M. Obeyesekere, in reply.—A party cannot make use of conditionsbrought about by himself as held in Silva v. Nona Hamine1. A partywho ruins the business cannot ask for a dissolution—see Lindley on.Partnership, p. 658.
Cur. adv. vult.
June 19, 1939. Nihill J.—
In this case the defendants-appellants appealed from a decree of theDistrict Court at Nuwara Eliya dissolving a partnership which existedbetween them and the plaintiff-respondent. The nature of this businesswas that of a preparatory school known as Haddon Hill which is a schoolat Nuwara Eliya for the children of European parents. It is unnecessaryfor me to detail the history of this school as this is fully set out in thejudgment of the learned District Judge. It will suffice to mention thatit was founded by the first defendant-appellant, Mr. Davis, in 1918,Mr. Davis returned to England in 1926, and thereafter took no part in theactual management of the business. For some years the businessprospered under the asgis of a popular Headmaster, Mr. Hawkins, whodied under tragic circumstances on January 1,1933. The second
defendant-appellant, Mr. Hogg, who had been a partner since 1930,carried on the school single-handed for a few months when he was joinedby the plaintiff-respondent, Mr. Browne, in July, 1933. Mr. Browne paidin cash for his share a sum of Rs. 56,000 odd and became entitled to anl8/45th share in the business. Mr. Davis retained a 20/45th share andMr. Hogg’s interest stood at 7/45ths. Under a deed of partnershipwhich was executed in July, 1933, the partnership was to be for lifesubject to a retirement clause. By the same deed Mr. Browne wasdeclared to be the Headmaster of the school with sole control on theeducational side and Mr. Hogg was declared to be solely in control of thebusiness administration. Both Mr. Browne and Mr. Hogg were to receivea salary of £450 per annum apart from profits and £300 of Mr. Hogg’ssalary was guaranteed to him as a prior charge after payment of thetrading liabilities.
Since the inception of this partnership until the institution of this actionit is undisputed that the business had decreased steadily. If numbers bea true index of a school’s prosperity, as they must be in an establishmentwhich is run for profit, there are now about half as many pupils as therewere in 1933. Further, the profits on whatever basis they be computedhave dwindled to a negligible figure or less. It is the contention of theplaintiff respondent that under no circumstances can this business in futureunder the present partnership be carried on except as a loss, and this washis main ground in asking for a dissolution.
The action went to trial on a number of issues but before consideringthese and the learned District Judge’s answers thereto, it will be convenient
' (1906) 10 N. L. R. 44.
N1H1L.L. J.—Browne v. Davis.
first to deal with the point taken by learned Counsel for the appellantsthat the Court cannot or should not exercise the discretion of dissolutionin favour of a partner who has the remedy of retirement by the terms ofthe partnership agreement. Counsel has urged that the fact that section32 of the Partnership Act, 1890 (53 and 54 Vic. Cap. 39) which applies toCeylon is made subject to any agreement between the parties, shows thatthe Act sets store on that which has been agreed upon by partners andthat it was not intended that the relief obtainable under the Act shouldprovide a means by which a dissatisfied partner can run away from hispartnership obligations. Undoubtedly under section 35 of the Act theCourt must look at all the circumstances before coming to a decisionbased on equity and justice and it might well be that the Court would lookwith disfavour upon a partner who was anxious to leave his co-partnersin the lurch prematurely merely because a business voyage was provinghazardous, whereas by a little courage and resolution he might bringhimself as well as his partners safely into port. The contention cannothowever be stressed so far as to rule out the Court’s powers to consider anapplication for dissolution where a right of retirement exists. In thefirst place there is nothing in the wording of section 35 similar to thewording used in section 32, neither do the two sections relate to the samething. Section 32 enumerates circumstances under which partnerships,unless there is something to the contrary in the agreements, are dissolvedipso facto, whereas section 35 sets out the circumstances under which apartner bound by a partnership not otherwise dissoluble may apply tothe Court for dissolution. If then the Court’s powers under section 35of the Act are unfettered the only question in which we are concerned inthis appeal is to determine whether the Court below has exercised itsdiscretion judicially. Now it is clear from the judgment of the learnedDistrict Judge that his main ground for ordering a dissolution was becausehe was satisfied on the evidence that a continuation of the partnershipmust involve certain loss and that therefore it was just and equitable toall that the partneiship should be dissolved.
The case went to trial on nine issues some of which seemed to have beenframed with the intention of attempting to fix responsibility -for thepresent unhappy state of the business on either Mr. Hogg or Mr. Browne.The substance of the learned Judge’s answers I think amounts to this :that whilst quite definitely Mr. Browne has not ruined the business noneof the partners are free from their share of responsibility for a situationwhich brought about as it may have been to a large extent by externalcircumstances beyond their control has been accentuated in its gravityby serious errors in business management ; that I think on the evidenceled before the learned Judge was a correct conclusion. On one issue,namely, as to whether Mr. Browne had lost confidence in Mr. Hogg thelearned Judge did make an error but it was a highly technical error whichby itself cannot vitiate the decree for dissolution if otherwise the grantingof the decree be founded on just principles. We are thus brought againto the crucial issue in this case as to whether this school can continueunder its present partnership with any reasonable prospect of profit. Ifthe answer be rightly in the negative, then from the language of the statute
NIHILL. J.—Browne v. Davis.
that is by itseli clearly a ground for dissolution and the Courts have soacted. (Jennings v. Baddeley1; Bailey v. Ford’; and Wilson v.Church").
The learned District Judge has no difficulty in coming to a conclusionadverse to the defendants-appellants on this issue and neither have I.Mr. Obeyesekere has insisted that a business which can and has met itstrading liabilities cannot be said to be insolvent and that it is unsound toinclude as loss depreciation in fixed assets which are due to what may bea temporary adverse market. On the latter point learned Counsel for theplaintiff-respondent cited to us the case of The Spanish Prospecting Co.,Ltd.which although not directly in point contains in the judgment ofFletcher Moulton L.J. such a lucid exposition of the meaning of the term“ profits” that it will I think bear quoting : —
“The word ‘profits’ has in my opinion a well-defined legal meaning,and this meaning coincides with the fundamental conception of profitsin general parlance, although in mercantile phraseology the word mayat times bear meanings indicated by the special context which deviatein some respects from this fundamental signification. ‘ Profits ’ impliesa comparison between the state of a business at two specific datesusually separated by an interval of a year. The fundamental meaningis the amount of gain made by the business during the year. This canonly be ascertained by a comparison of the assets of the business atthe two dates. For practical purposes these assets in calculatingprofits must be valued and not merely enumerated. An enumerationmight be of little value. Even if the assets were identical at the twodates it would by no means follow that there had been neither gain norloss, because the market value—the value in exchange—of these assetsmight have altered greatly in the meanwhile. A stock of fashionablegoods is worth much more than the same stock when the fashion haschanged. And to a less degree but no less certainly the same con-siderations must apply to buildings, plant, and other fixed assets usedin the business, because one form of business risk against which businessgains must protect the trader is the varying value of the fixed assetsused in the business. A depreciation in value, whether from physicalor commercial causes, which effects their realizable value is in truth abusiness loss …. ”
Now if one looks at the affairs of this partnership with this definition of“ profits ” in mind, the parlous condition of this business is at onceapparent. It is burdened with heavy debt charges, its goodwill hasdwindled to nothing, its fixed assets owing to the general fall in landvalues in the district have depreciated heavily and are now valued byMr. Vandersmaght at a figure which represents about a fourth of the valuegiven them in 1933. At their present value the land and buildingstogether stand according to Mr. Vandersmaght at a figure some twelvethousand rupees short of the mortgages on them. Furthermore, accordingto the evidence of Mr. Hall, a consulting engineer, they are in such a state
1 3 Kay and Johnstone 78.- 13 Simon’9 Rep. p. 406.
13 Chan. Div. p. 1.
(1911) L. R. 1. Chan. Dh />. !)2.
NIHIL.L. J.—Browne v. Davis.
of disrepair that it would cost about Rs. 30,000 to bring them into asatisfactory condition. That buildings should be in a good state ofrepair is necessarily of great importance in the case of a school.
Along with these adverse factors there has been the serious drop inpupils already referred to. That all the parties have recognized theseriousness of the position is clear from the correspondence and Mr. Hogghimself as the business manager proferred what has been called areconstruction scheme in November, 1938. The scheme is based on thesomewhat speculative hypothesis that a reduction in the school fees willbring about an increase in the number of pupils. On this assumption andwith economies in staff and salaries the scheme is able to show a paperprofit but it is a scheme which makes no allowance for depreciation of thefixed assets, nor does it provide for the creation of a fund from which topay off the mortgage debts. In a word it repeats the same financialerrors which has contributed to bring the business to its present state.
A good deal of time was taken up at the trial by attempting to assessthe factors responsible for the school’s decline in prosperity. It is notnecessary to examine these in detail. If some of the attributed causesappear petty it must not be forgotten that parents are sometimes asdifficult to catch as the trout in the streams of Nuwara Eliya, and theassignment of reasons for their disinclination to bite may be just asdifficult.
One cause however is clearly important, namely, the competition of theConvent which did not exist in the prosperous times before Mr. Hawkins’death but which is now continuing. For obvious reasons this competitionpresents a real difficulty to the school. It is the old story of the concernwith high overheads being unable to compete with the products turnedout by a rival establishment whose overheads are low or with importsfrom a country where labour is cheap.
It is clear from the judgment of the learned trial Judge that he had allthese facts in mind and that on the evidence he was justified in findingthat the business of the partnership could only be carried on in the futureat a loss. That being so, the learned Judge had a discretion to order adecree of dissolution and it cannot be said that in exercising this discretionhe has acted unjudicially or clearly contrary to justice and equity. Theplaintiff-respondent may stand to lose most by a continuance of thepartnership because he alone has paid up his partnership interest in fulland being a man of some means he would be likely to find himself calledupon to meet the increasing liabilities. Furthermore, the somewhatostrich-like attitude of the other partners can in the long run bring themno benefit. As a day of reckoning must come, it is in the ultimateinterest of everyone that it should come early rather than late.
I would accordingly dismiss the appeal with costs.
Soertsz A.C.J.—I agree.
BROWNE v. DAVIS