Re A and others
[3.MB]KWA WAKUBWA TU ,KUANGALIA VIDEO YAO WAKIBANDUANA CHUMBANI BONYEZA HAPA CHINI 18++
KUTIZAMA PICHA ZAKE NA VIDEO ZAKE ALIZO PIGA AKIWA UCHI NI RAHISI BONYEZA HAPA CHINI
[2006]
EWCA Crim 04
CRIMINAL; Criminal Law, Criminal Procedure
COURT OF APPEAL, CRIMINAL DIVISION
SIR
IGOR JUDGE P, OPENSHAW J AND SIR PAUL KENNEDY
16
DECEMBER 2005, 13 JANUARY 2006
Criminal law – Trial – Open court – Right to a
fair trial – Order that part of proceedings be held in camera for reasons of
national security or for the protection of identity – Whether appeal against
order by person aggrieved to be determined without a hearing – Criminal Justice
Act 1988, s 159 – Human Rights Act 1998, Sch 1, Pt I, art 6 – Crim PR 67.2(6),
(7).
The defendant was charged with conspiracy to cause
explosions in the United Kingdom.
Through his solicitor he made allegations of torture against British,
American, and Pakistani intelligence authorities. During the course of pre-trial proceedings
the prosecution applied for an order that evidence relating to, or any
reference to, the events touching or concerning the defendant’s treatment
outside the jurisdiction, from the time of commencement of the investigation to
the time of his arrest, be given in camera.
At the end of a hearing in camera the judge ordered that, for reasons of
national security and the avoidance of harm to the due administration of
justice, the court would sit in camera for those parts of the trial and the
pre-trial process during which there was any evidence given or any reference
made to evidence, information or argument which related to the material
disclosed by the prosecution by a specified notice. He stated that the material shown to him had
revealed that ‘the general publication of the relevant parts of it could give
rise to a substantial risk to national security. Additionally, it could obstruct the
identification of, and cause the Crown to be deterred from prosecuting in this
and other cases, those who it is in the public interest should be tried’. Section 159a of the Criminal Justice Act 1988 provided that
a person aggrieved could appeal to the Court of Appeal, if that court gave leave,
against any order restricting the access of the public to the whole or any part
of a trial on indictment or to any proceedings ancillary to such a trial. CrimPR 67.2b applied to proceedings in which a prosecution
or a defendant had served a notice of his
________________________________________
a Section 159, so far as material, is set out at
[21], below
b Crim
PR 67.2, so far as material, is set out at [27], below
________________________________________
1
intention to apply for an order that all or part of a
trial be held in camera for reasons of national security or for the protection
of a witness or any other person. CrimPR
67.2(6) provided that an application for leave to appeal ‘shall be determined
by … the court … without a hearing’ and CrimPR 67.2(7) provided that where
leave was granted ‘the appeal shall be determined without a hearing’. The defendant applied for leave to appeal as
did two newspapers and the BBC. The
parties contended, inter alia, (i) that it was wrong in principle that the
appeal should be determined without a hearing and that there had to be a
discretion to permit an oral hearing in open court both under common law
principles and under the right to a fair hearing contained in art 6c of the European Convention for the Protection
of Human Rights and Fundamental Freedoms 1950 (as set out in Sch 1 to the Human
Rights Act 1998); (ii) in relation to the specifics of the in-camera order,
that there was no rational connection between disclosure and the danger
envisaged and that an irrational connection would not suffice; and (iii) that
there could not really be a risk to national security which could be guarded
against by prohibiting general disclosure to the public but permitting
disclosure to an alleged terrorist, his co-accused, the legal advisers and
jurors.
________________________________________
c Article 6, so far as material, provides: ‘(1)
In the determination of … any criminal charge against him, everyone is entitled
to a fair and public hearing … but the press and public may be excluded from
all or part of the trial in the interest of … national security in a democratic
society … or to the extent strictly necessary in the opinion of the court in
special circumstances where publicity would prejudice the interests of justice
…’
________________________________________
Held – (1) Leave to appeal would be given to
the media representatives and to the defendant who all fell within the
description of persons who were ‘aggrieved’ within s 159(1) of the 1988 Act
(see [22], [23], below).
(2) There was no requirement that in order to comply
with the entitlement under art 6(1) of the convention to a fair and public
hearing, the words ‘shall’ be determined without a hearing in CrimPR 67.2(6),
(7) had to be read as ‘may’ be determined without a hearing. The fundamental principle was that, unless
the circumstances were highly exceptional, justice had to be administered in
public. The instant appeal was concerned
with the process which should govern the exceptional cases which fell outside
the principle, and which, provided that they did fall outside, should not be
subject to it. The order made by the
judge had reflected his analysis of the needs of national security and the
potential prejudice to them and the interests of justice that would be caused
by an open court hearing. It did not
follow from the fact that the process in which the court was engaged was a
rehearing that the court must automatically be vested with a discretion to
order an oral hearing. The court was
considering by way of rehearing whether the in camera order had been
appropriate, but when deciding whether the process before it was fair the
starting point was the conclusion of the judge.
If his decision that part of the trial should take place in camera was
right then there was no reasoned justification to be discerned for concluding
that the language of Crim PR 67.2(7) required the court to interpret ‘shall’ as
providing it with a discretion to decide whether the instant appeal should or
could be held orally. If, and to the
extent that the judge’s decision was wrong, the in camera order would cease to
have effect. Accordingly, the absence of
a discretion was not incompatible with the convention and the court could not
ignore the express requirement that the determination of the appeal was to take
place without a
2
hearing It
did not follow that the order for an in camera hearing was flawed or irrational
simply because it was subject to the inevitable limitations created by the
entitlement of the defendant and his legal advisers to be present throughout
the trial and to provide the defence with material which might be of possible
assistance to him. On examining the
material in the instant case the substantial risk of prejudice to national
security and to the administration of justice without an order for an in camera
hearing to the extent ordered by the judge was unequivocally established. The order would enable the defendant to be
provided with material which could assist in the preparation of his defence whilst
simultaneously ensuring that the prosecution was not forced to
discontinue. Accordingly, the appeal
would be dismissed (see [32], [36], [37], [40]–[43], below).
R (on the application of Hammond) v
Secretary of State for the Home Dept [2006] 1 All ER 219 and Ekbatani v
Sweden (1991) 13 EHRR 504 considered.
Per curiam. In
urgent cases where in camera proceedings are tape-recorded and transcribed and
certainly as soon as it becomes known that an application for leave to appeal
will be made, the trial judge should be informed, and invited to check the
transcripts against his recollection and his notes before they are submitted to
the Court of Appeal (see [39], below).
Notes
For appeal from order restricting public access, see 11(2)
Halsbury’s Laws (4th edn reissue) para 1422.
For the Criminal Justice Act 1988, s 159, see 12(1) Halsbury’s
Statutes (4th edn) (2005 reissue) 1165.
For the Human Rights Act 1998, Sch 1, Pt I, art 6,
see 7 Halsbury’s Statutes (4th edn) (2004 reissue) 706.
Cases referred to in judgment
Ekbatani v Sweden
(1991) 13 EHRR 504, [1988] ECHR 10563/83, ECt HR.
Guardian Newspapers
Ltd, Ex p (1993) Times, 26 October, DC.
Guardian Newspapers
Ltd, Ex p [1999] 1 All ER 65, [1999] 1 WLR 2130, CA.
R v Beck, ex p Daily
Telegraph plc (1991) [1993] 2 All ER 177, CA.
R (on the
application of Hammond) v Secretary of State for the Home Dept
[2005] UKHL 69, [2006] 1 All ER 219, [2005] 3 WLR 1229.
Telegraph plc, Ex p [1993]
2 All ER 971, [1993] 1 WLR 980, CA.
Telegraph Group plc,
The, Ex p [2001] EWCA Crim 1075, [2001] 1 WLR 1983.
Applications for leave to appeal and appeal to
follow
A (the defendant) was charged on 12 February 2005 on an
indictment alleging that he was party to a conspiracy to cause explosions in
the United Kingdom. On the application
of the Crown under Crim PR 16.10(1) the trial judge, Sir Michael Astill,
sitting as a Deputy High Court judge at the Central Criminal Court, made an
order at the end of a hearing in camera that for reasons of national security
and the avoidance of harm to the due administration of justice the court would
sit in camera for those parts of the trial and the pre-trial process during
which there was any evidence given or any reference made to evidence,
information or argument which related to the material disclosed to the
prosecution by a specified notice. The
defendant and Times Newspapers Ltd, Guardian Newspapers Ltd and the British
Broadcasting Corporation (the media representatives) applied to the Court of
Appeal for leave to appeal under
3
s 159(1)(b) of the Criminal Justice Act 1988 against the
judge’s order with the application to proceed as an appeal if leave were
granted. The court heard argument on the
nature and proper method of conducting the application and any subsequent
appeal and decided that the application and any appeal should proceed without a
hearing. The facts are set out in the
judgment of Sir Igor Judge P.
Patrick O’Connor QC
(assigned by the Registrar of Criminal Appeals) and Hugh Mullan
of McCormacks for the defendant.
Keir Starmer QC and
Anthony Hudson (instructed by Times Newspapers Ltd Legal Department)
for the media representatives.
David Waters QC, Mark
Heywood and Duncan Atkinson (instructed by the Crown Prosecution
Service) for the Crown.
3 January 2006.
The parties were notified that the appeal would be dismissed for reasons
to be given later.
13 January 2006.
The following judgment of the court was delivered.
SIR IGOR JUDGE P.
[1] A is charged on an indictment alleging
that between 1 January 2003 and 30 March 2004, he and six others were parties
to a conspiracy to cause explosions in the United Kingdom. The other six defendants were arrested on 30
March 2004. A was arrested on 8 February
2005 on an inbound flight from Pakistan to London Heathrow. Prior to his arrest, he was detained in
Pakistan for about ten months. He was
charged on 12 February 2005, and sent for trial on 14 February.
[2] Thereafter the defendant’s solicitor read
out a statement on his behalf alleging that throughout his detention he was
‘tortured mentally and physically and subjected to interrogation by British,
American and Pakistani intelligence authorities’. A number of newspaper reports of his
appearance and some or all of the statement issued on his behalf were published
on 14 and 15 February in the Evening Standard, the Independent,
the Mirror, the Daily Express, The Times and the Sun.
[3] On 22 February it was reported in The
Times that A had appeared at the Central Criminal Court by video link and
that he was remanded in custody until 27 May 2005.
[4] On 30 June a defence case statement was
served, together with an outline skeleton argument. These raised a number of issues which will
form the basis of an application that the trial against A should be stayed as
an abuse of process. They include whether
United Kingdom officials were party to his unlawful detention or torture,
whether they forced or procured his return from Pakistan, and whether they were
guilty of ‘entrapment’. If the case
proceeds the further question will arise whether the interviews between A and
the police on his return to this country should be excluded under s 76 or s 78
of the Police and Criminal Evidence Act 1984.
[5] The trial is due to start on 9 January
2006. It will by then be not far short
of two years since the arrest of the six other defendants, and nearly a year
after A’s arrest. If humanly possible
the trial date must be maintained: hence the urgent hearing of this application
on Friday, 16 December 2005.
4
[6] This hearing concerns an order dated 28
November 2005 made by Sir Michael Astill, the nominated trial judge, sitting as
a deputy judge of the High Court at the Central Criminal Court. At the end of a hearing in camera he ordered:
‘for reasons of national
security and the avoidance of harm to the due administration of justice, this
court will sit in camera for those parts of the trial and the pre-trial process
during which there is any evidence given or any reference made to evidence,
information or argument which relates to the material disclosed by the prosecution
by a notice dated …’
[7] The reasons for the judge’s ruling are
stark. He was satisfied that the
material shown to him revealed that—
‘general publication of
the relevant parts of it could give rise to a substantial risk to national
security. Additionally it could obstruct
the identification of, and cause the Crown to be deterred from prosecuting in
this and other cases, those who it is in the public interest should be tried
… The importance of the principle of
open justice and the special function of the media are acknowledged, but the
grave risk to national security at the present time from potential acts of
terrorism and the likely obstruction both to the identification of perpetrators
and to the bringing to justice those who are identified are so real that an
exceptional course is justified.
Departure from the principle must be the minimum necessary to achieve
the objective.’
[8] The application by the Crown concerned—
‘evidence relating to,
or any reference to, the events touching or concerning his [the defendant’s]
treatment out of this jurisdiction, from the commencement of the investigation
to the time of his arrest on 8 February 2005, to be given in camera. It is not intended that any order should
prohibit publication of, or public access to, any part of the trial or
pre-trial process in which only his account of his treatment is given in
evidence.’
[9] The judge’s ruling is much narrower than
the written submissions before us might have suggested. It does not prohibit the defendant at trial
from giving or calling any admissible evidence he may wish about events in this
country, following his arrest. The
defendant will also be able to give any admissible evidence relating to his
treatment abroad. In short, his personal
evidence in its entirety, including any allegations he may choose to make about
his treatment here and abroad, will be given in open court. It can then be reported. There is this further consideration. The evidence covered by the in camera order
will indeed be given in camera. It will
not however be secret. It will not be
hidden from the defendant himself. He
will hear it: so will his legal advisers: so, indeed, will the co-defendants,
and so, too, will the jury. This
reflects the simple fact that he is indeed the defendant, and presumed in law
to be innocent, and it is the defendant, no one else, who will face the
consequences if he is convicted at the end of the trial. A complete record of all the evidence will be
made, and in due course will be available for consideration, if necessary, in
this court.
[10] It is also worth highlighting the
circumstances in which the material covered by the judge’s order came into
existence. Dealing with it very briefly,
following the assertions made by the appellant’s solicitor after the committal,
5
and in the light of the defence case statement, the
authorities in this country made efforts to discover, so far as they could,
whether there was, indeed, any material which might enable the appellant to
advance arguments against the admissibility of evidence obtained in this
country, or indeed to support any application that his future trial might
amount to an abuse of process. In short,
the order against which this appeal is now brought relates to material which
the prosecution wishes to disclose to the defendant.
[11] The judge recorded that if the
application by the prosecution failed, there was a serious possibility that the
Crown might ‘decide that having regard to the substantial risks to national
security which could arise if the evidence is given in open court’, it would
not pursue the allegations against A, and that others who might be involved in
terrorist activities would not be identified and prosecuted. It is salutary to remind ourselves of the
circumstances in which it became appropriate for the Crown to apply that a very
limited part of the case should be heard in camera, and that if it were not,
the consequence of the Crown’s efforts to investigate the allegations made on
the defendant’s behalf could realistically culminate in the discontinuance of
the prosecution case against him. That
is not consistent with the interests of justice.
[12] This is an application for leave to
appeal the judge’s order. If granted the
application would proceed as an appeal.
The hearing before us raised two distinct issues, the first a point of
general importance, involved an analysis of the nature and proper method of
conducting the application and any subsequent appeal, and the second directly
related to the particular facts of this case.
Mr Patrick O’Connor QC, counsel for the defendant at trial, and Mr Keir
Starmer QC, representing The Times and The Guardian newspapers
and the British Broadcasting Corporation, appeared in support of the
application.
[13] We heard argument on the point of general
importance in open court. Having heard
it, we decided that the application, and any appeal, should proceed without a
hearing. We have reduced our reasons to
writing, and our judgment may be reported.
THE PROCEEDINGS BEFORE SIR MICHAEL ASTILL
[14] The proceedings began with an application
by the Crown under Crim PR 16.10 that part of the forthcoming trial should be
held in camera. Rule 16.10(1) provides
that:
‘Where a prosecutor …
intends to apply for an order that all or part of a trial be held in camera for
reasons of national security or for the protection of the identity of a witness
or any other person, he shall … serve a notice in writing to that effect on the
Crown Court officer and the … defendant …’
[15] The notice in the present case reads:
‘TAKE NOTICE that the
Crown intends to apply in this case … for an order that part of the trial and
pre-trial process take place in camera, under the provisions of Rule
16.10 of the Criminal Procedure Rules.
The part of the trial process in respect of which application will be
made is all those parts of the trial and pre-trial process in which any
evidence is given relating to, or any reference is made to, any matter
disclosed or raised in response to A’s case relating to all matters concerning
events from the time of his surrender to overseas authorities until the time of
his arrest by the
6
Metropolitan Police
Anti-Terrorist Branch in February 2005.
This notice is given pursuant to Rule 16.10(1) of the Criminal Procedure
Rules.’
[16] Mr O’Connor submitted that the notice was
flawed. It failed expressly to identify
which of the considerations in Crim PR 16.10 was engaged. It therefore contravened the principles to be
derived from Ex p Guardian Newspapers Ltd [1999] 1 All ER 65, [1999] 1
WLR 2130, where, in criminal proceedings, the defendants purported to serve a
notice under r 24A(1) of the Crown Court Rules 1982, SI 1982/1109 (the
precursor of Crim PR 16.10) of an intention to apply for a hearing in camera of
their application that the trial be stopped as an abuse of process. We need not begin to attempt a comprehensive
description of the defects which characterised the application. Significantly, although nothing appeared in
the notices, the appellants were told that the single ground for the
application related to national security, but later discovered that the reasons
for the judge’s order had ranged much more widely, and they were not given any
opportunity to address him on the relevant principles. In the course of his judgment, Brooke LJ
observed that the words in the r 24A meant what they said. They meant (see [1999] 1 All ER 65 at 81,
[1999] 1 WLR 2130 at 2147):
‘[a] notice that the
relevant party intends to apply for an order that the relevant part of the
trial process … be held in camera for reasons of national security or for the
protection of identity of a witness.
This was not done. We appreciate
that there may be rare cases where it might invalidate the very purpose of the
application to specify which of the two grounds was being relied on, and in
such a case it would be proper for the party to use the language of the rule
without being more specific.’
[17] The possible relevance of this argument
to the present application is readily explained. Mr O’Connor suggested that the consequence of
what he identified as the defective notice is that the apparent prohibition
against an oral hearing in Crim PR 67.2 could not survive a flawed original
notice of application. He pointed out
that the present notice did not specify which of the relevant features,
national security or the protection of witnesses was to be argued before the
judge. Mr David Waters QC, on behalf of
the Crown, relied on the words of the notice itself. No one could have been in any doubt that Crim
PR 16.10(1) in its entirety was engaged.
In fact, he told us that notice was also given orally, three days before
the hearing. His skeleton argument,
distributed before the hearing, again fully explained the basis for the
application. At the hearing itself, Mr
O’Connor made observations about the terms of the notice without taking any
formal objection.
[18] Our conclusion can be expressed very
briefly. The purpose of the notice under
Crim PR 16.10(1) is to enable those affected to be given a proper opportunity
to consider how best to deal with it. In
our judgment this notice, set in the context of the other available material,
was sufficient for the purposes of Crim PR 16.10. No one can have been in any doubt that both
limbs of Crim PR 16.10(1) were engaged.
If further particulars were needed, or if there were any continuing
ambiguity, the issue could and should have been addressed at the hearing
below. The application before the judge
proceeded in accordance with the notice.
The application, and appeal with which we are
7
now concerned arises under Crim PR 67.2: otherwise
there is no application to be considered, and no appeal process has been
undertaken.
[19] During the proceedings before Sir Michael
Astill the defendant, and some of the representatives of the media, were given
the opportunity not only to be present, but to be heard and advance any
relevant evidence and argument against the in camera hearing. Full skeleton arguments and oral submissions
were deployed before the judge. They
were properly considered. He gave his
decision in open court, explaining the reasons for it.
[20] Mr Starmer suggested that it was a
pre-requisite to any fair hearing before the judge that the representatives of
the media should have been provided with all the material, or at the very least
a summary of the material shown to the judge, before he made his order. Equally, he complained that they should have
been provided with an unredacted copy of the document summarising the Crown’s submission
in support of the order for this appeal to be decided without a hearing. Although we understand the submission, in our
judgment it was a little unrealistic.
When an application for an in camera hearing is being made, it is
self-evident that if it is to be justified on the grounds of national security,
or the protection of the identity of witnesses, some at least of that material
is almost certainly bound to be highly sensitive, and cannot be made available
for dissemination. The judge must examine
the material and decide whether or not the application is justified. If counsel representing media interests are
put into possession of the same material as the judge before he makes his
decision, the purpose of an in camera hearing would be defeated. The effectiveness of the order would be
dissipated before it came into existence.
We take the same view about the disclosure to Mr Starmer in redacted
form of the Crown’s submissions before us.
The same practical considerations apply to the more familiar application
for public interest immunity. If the
desired confidentiality is broken in advance of the hearing, there is no
confidentiality to be preserved. In
deference to Mr Starmer’s submission we considered whether there was anything
in the material which was not disclosed prior to the hearing which ought to
have been disclosed. There was none.
THE APPLICATION
[21] The application is made under s 159 of
the Criminal Justice Act 1988. Sir
Michael Astill’s order restricted the access of the public to part of the trial
on indictment, and to proceedings ancillary to the trial. It did not restrict reporting of the public
elements of the trial. Section 159(1)(b)
of the 1988 Act provides that ‘[a] person aggrieved may appeal to the Court of
Appeal, if that court grants leave, against … [the] order’. The application for leave to appeal has been
referred directly to the full court by the Registrar. Under s 159(3)(b) we are empowered to give
such directions as appear appropriate and to ‘give directions as to persons who
are to be parties to the appeal or who may be parties to it if they wish’. Section 159(4) begins with important words,
‘Subject to Rules of Court made by virtue of subsection (6) below’, and then
continues, ‘any party to an appeal … may give evidence before the Court of
Appeal orally or in writing.’ Section
159(6) makes specific provision for the creation of rules of court in relation
to the ‘special provision as to the practice and procedure to be followed in
relation to hearings in camera and appeals from orders for such hearings’. The subsection further provides that the
rules may direct that
8
sub-s (4) should not have effect, and indeed in due
course, Crim PR 67.2(9) made such a direction.
[22] We have decided that leave to appeal
should be given not only to Mr Starmer’s clients, but also to the
defendant. The starting point is that
every infringement of the principle of open justice is significant. We emphasise that does not mean that it will always
be appropriate for leave to appeal to be given when a judge has decided that
the whole or part of a trial should take place in camera. If so, the requirement for leave to appeal
would be otiose. Moreover, as we have
explained, orders for in camera hearings are more likely to be of concern to
the media rather than the defendant. He
will be present during any in camera hearings, together with his legal
advisers. So, in the normal course, the
difficulties for the media, responsible for properly informing the public, will
be more striking than any potential problems for the defendant. That said, this is a case where the issues
raised are of particular sensitivity, involving as they do, the trial of
allegations of a major terrorist conspiracy, and, on the basis of the statement
issued on his behalf, that A was a victim of torture, currently itself a
general issue of public concern and importance.
Our conclusion in the particular circumstances was that we should
ourselves consider and examine whether the in camera order was justified.
[23] A himself asserts that he is ‘aggrieved’
by the order. So do Mr Starmer’s
clients. The media have a clear
interest. They represent and inform the
public who cannot be present in court personally. Mr Starmer’s clients fall within the
description ‘aggrieved’ within s 159(1) of the 1988 Act. Bearing in mind that the evidence encompassed
within the order includes reference to matters which may assist A, it seems a
little surprising for it to be asserted that he is ‘aggrieved’. We cannot avoid contemplating the reaction if
the consequence for an order that the entire trial should take place in open
court carried with it a prohibition against any attempt by him to deploy the
material covered by the in camera order.
That said, having reflected on the particular circumstances drawn to our
attention by Mr O’Connor, we concluded that A’s interest is sufficient. This therefore is now an appeal by the
defendant and Mr Starmer’s clients. They
are referred to hereafter as ‘the appellants’.
CRIM PR 67.2
[24] We are not at this stage considering the
appeal against the in camera ruling: we are simply considering the form which
the appeal should take. The broad issue
to be addressed is whether the appeal should be determined without a hearing. The appellants submit that this would be
wrong in principle. At the very least,
there is, or must be a discretion in the court to permit an oral hearing in
open court. Any provision which suggests
otherwise is flawed, and contravenes common law principles, and the rights encapsulated
in art 6 of the European Convention for the Protection of Human Rights and
Fundamental Freedoms 1950 (as set out in Sch 1 to the Human Rights Act 1998)
(the convention). In doing so, we are
fully aware of the nature and importance of the criminal trial which will begin
on 9 January. However if we lack
jurisdiction to order an open court hearing of this appeal, the seriousness of
the issues raised in the connected criminal trial will not create it. As this issue could have had no bearing on
the merits or otherwise of the appeal, and arose quite distinctly from it, we
agreed that the argument should be conducted in open court.
9
[25] As already noted, this appeal is not
concerned with an order restricting the reporting of proceedings, at any rate
in the sense that the judge imposed any restriction on the reporting of
material given in open court. What he
ordered was that parts of the trial and pre-trial process should take place in
camera. This was not an order made under
s 4 or s 11 of the Contempt of Court Act 1981, nor indeed made under s 58(7) or
(8) of the Criminal Procedure and Investigations Act 1996. Section 159 of the 1988 Act plainly
distinguishes between orders which restrict the reporting of proceedings, and
orders which restrict public access to those proceedings. Accordingly the order made by Sir Michael
Astill is subject to the appeal process provided by Crim PR 67.2, and is not
governed by Crim PR 67.1. Nor indeed is
it some kind of hybrid appeal under both rules.
The issues are different. It is,
of course, possible that orders may be made both restricting the reporting of
proceedings and restricting public access to them. If so, there would be distinct orders,
subject to distinct processes of appeal.
[26] Crim PR 67.2 and Crim PR 67.1 replace in
identical terms r 16B and r 16A of the Criminal Appeal Rules 1968, SI
1968/1262, as inserted by the Criminal Appeal (Amendment) Rules 1989, SI
1989/1102. These rules were held not to
be ultra vires in Ex p Guardian Newspapers Ltd (1993) Times, 26
October. The present provisions are in
identical terms. The relevant statutory
instrument was laid before Parliament after the 1998 Act came into force.
[27] Crim PR 67.2 lays down the appropriate
procedure. It provides:
‘Appeal against order
restricting public access to proceedings.—(1) This rule applies to
proceedings in which a prosecutor or a defendant has served a notice under rule
16.10(1) of his intention to apply for an order that all or part of a trial be
held in camera for reasons of national security or for the protection of a
witness or any other person …
(3) Subject to paragraph
(4) a notice shall be served on the Registrar under paragraph (2) within 7 days
of the display of the notice under rule 16.10(2) and where such an order is
made at the trial, the notice shall be treated as the application for leave to
appeal against the order.
(4) Where an order is
made at the trial, a person aggrieved who has not served a notice under
paragraph (2) may apply for leave to appeal against the order by serving notice
in the form set out in the Practice Direction on the Registrar within 24 hours
after the making of the order …
(6) An application for
leave to appeal shall be determined by a judge of the Court, or the Court as
the case may be, without a hearing.
(7) Where leave to appeal
is granted, the appeal shall be determined without a hearing …’
[28] Notwithstanding that the appeal ‘shall’
be determined without a hearing, in Ex p Guardian Newspapers Ltd (1993)
Times, 26 October, the Divisional Court held that written submissions from an
appellant or applicant would be permitted.
We have received written submissions both from Mr O’Connor, extending in
total to well over 40 pages of typescript, together with a chronology, and
further written submissions well over 20 pages in length from Mr Starmer. We also received detailed written submissions
from the Crown. We did not ‘hear’ oral
submissions by either side on the merits of the appeal.
10
[29] Crim PR 67.2 should be contrasted with
Crim PR 67.1. This provides that an
application for leave to appeal against an order restricting reporting of
proceedings ‘may be determined without a hearing’ (para (6)), and that an
application for an extension of time ‘shall be determined without a hearing,
unless the Court or a judge of the Court, as the case may be, directs
otherwise.’ (See para (5).) In short, in marked contrast to the language
of Crim PR 67.2, a discretionary jurisdiction is expressly conferred on the
court considering applications to which Crim PR 67.1 applies.
[30] The logic behind Crim PR 67.2 is
plain. The court is considering an
appeal against an order that public access to the whole or part of the trial
shall be restricted. An open court
hearing would normally involve disclosure to all parties of the material
deployed before the judge. We have
already examined and rejected Mr Starmer’s contention relating to disclosure of
material prior to the making of the order, on the basis that it would be
deprived of its usefulness. The same
considerations apply to pre-appeal disclosure of the same material. If, of course, the Court of Appeal were to
conclude that the judge’s order was wrongly made, then if the material were
deployed at trial, it would be heard in open court, and the restrictions
imposed by the judge’s order would not apply.
The material would be available for publication.
[31] The submissions begin with the
proposition that the word ‘shall’ in Crim PR 67.2(6) and (7) ought to be read
to mean ‘may’ rather than ‘must’. Even
discounting the terms of Crim PR 67.1, on any basis of ordinary construction
this would be an abuse of language.
‘Shall’ is not a synonym for ‘may’.
Nevertheless it is argued that this reading is required for Crim PR 67.2
to comply with the entitlement under art 6(1) of the convention to a fair and
public hearing, a principle which has been held to encompass the right to an
oral hearing (see R (on the application of Hammond) v
Secretary of State for the Home Dept [2005] UKHL 69, [2006] 1 All ER 219,
[2005] 3 WLR 1229).
[32] The principle of open justice, whether in
the Court of Appeal, or at the court of trial, is so fundamental that
supporting citation of authority is not required. The principle resonating throughout the
common law is that, unless the circumstances are highly exceptional, justice
must be administered in public. The
principle is echoed and repeated in art 6 of the convention. The judge was well aware of these principles,
and expressly reminded himself of them.
Nevertheless, even this fundamental principle is subject to a number of
recognised exceptions at common law.
Similarly, art 6(1) of the convention provides that the press and public
may be excluded from all or part of the trial in the interests of—
‘national security in a
democratic society … or to the extent strictly necessary in the opinion of the
court in special circumstances where publicity would prejudice the interests of
justice.’
These are the interests engaged in the decision currently
under examination. Again, art 10 of the
convention, which proclaims the right to ‘freedom of expression’, allows that
it may be ‘subject to such formalities, conditions, restrictions … as are
prescribed by law and are necessary in a democratic society, in the interests
of national security … or public safety …’
Again these are perfectly familiar exceptions.
[33] We must address the very recent decision
of the House of Lords in R (on the application of Hammond) v
Secretary of State for the Home Dept [2006] 1 All
11
ER 219. This
case involved a determination by a High Court judge of the punitive term of
imprisonment to be served following a conviction and the imposition of a
sentence of life imprisonment for murder.
More particularly, it addressed the transitional processes governing the
arrangements for prisoners whose punitive term had not been notified to them by
18 December 2003, an integral part of the trial. The relevant statutory provision, para 11(1)
of Sch 22 to the Criminal Justice Act 2003 reads: ‘An application … is to be
determined by a single judge of the High Court without an oral hearing.’
[34] Lord Bingham of Cornhill analysed the
convention jurisprudence and concluded (at [13]) that it ‘would appear to
support the … contention that an oral hearing should, where fairness requires
it, be held before a minimum term is set for an existing prisoner such as the
respondent …’ He continued (at [16])
that it was—
‘plain beyond argument
that the imposition of sentence at first instance is part of a criminal trial
and ought in any ordinary case to take place in public at a hearing at which
the defendant is present and represented and able to participate … In those cases where fairness does require an
oral hearing, however … it seems to me that para 11(1), in precluding the
possibility of an oral hearing at first instance, is incompatible with the
convention.’
He therefore agreed with the Divisional Court that, as it
stood, para 11(1) was incompatible with the convention. Effectively, that represented the decision in
the House of Lords. It was then accepted
or, as we assess it, conceded on behalf of the Secretary of State, that in
order to comply with the requirement of ‘fairness’, para 11(1) should be read
subject to an implied condition that the judge making the determination had a
discretion to order an oral hearing in cases where such an oral hearing was
required to enable the prisoner’s rights under art 6(1) to be fulfilled. We were urged to adopt a similar
construction. If not, Crim PR 67.2 was
to be treated as if it was incompatible with art 6, and as it was dependent on
delegated rather than primary legislation, an order striking it down would be
appropriate.
[35] Hammond’s case was concerned with
the sentencing process, that is, the process by which a citizen is deprived of
his liberty, and the process which decides the length of time for which he will
continue to be deprived of it. Ekbatani
v Sweden (1991) 13 EHRR 504 was also concerned with the process of criminal
justice. The defendant was convicted of
threatening a civil servant. His appeal
was dealt with without a hearing in the Court of Appeal. The court confirmed the decision at what can
conveniently be described as first instance.
Although the European Court of Human Rights confirmed that provided
there had been a public hearing at first instance, it had, on previous
occasions accepted that the absence of a public hearing before a second or
third instance tribunal might be justified, it went on to conclude that as the
Court of Appeal had to make what was described as a ‘full assessment of the
question of the applicant’s guilt or innocence’ its re-examination of the
conviction ought to have comprised a full rehearing.
[36] Mr Starmer suggested that the present
appeal amounted to a full hearing of the issues before the judge. Ekbatani’s case demonstrated that we
were similarly bound to provide, at the very least, for an oral hearing rather
than a determination on the papers. He
relied on R v Beck, ex p Daily Telegraph
12
plc (1991) [1993] 2 All ER 177, Ex p
Telegraph plc [1993] 2 All ER 971, [1993] 1WLR 980 and Ex p The
Telegraph Group plc [2001] EWCA Crim 1075, [2001] 1 WLR 1983, all cases
involving s 4(2) of the 1981 Act, to support his submission that under s 159 of
the 1988 Act the function of the Court of Appeal is not limited to a review of
the discretion exercised by the judge, with the well-known limitations on
interference with it, but requires this court to review all the material and
form an independent judgment of the merits, or otherwise, of the proposed
order. Leave to appeal having been given,
we agree, and that is what we have done.
However, it does not follow from the fact that the process in which we
are now engaged is a rehearing that we must automatically be vested, or vest
ourselves, with a discretion to order an oral hearing.
[37] Ekbatani’s case was directly
concerned with the principle of open justice as an element of fair process in
the context of a criminal conviction. Hammond’s
case required that the same principle of fairness should not be excluded from
the sentencing process. In truth, these
cases provide practical illustrations of the workings of what we have already
described as the fundamental principle of open justice. The present appeal, however, is concerned
with the process which should govern the exceptional cases which fall outside
the principle, and which, provided of course that they do, should not be
subject to it. The order made by the
judge reflected his analysis of the needs of national security, and the
potential prejudice to them and the interests of justice that would be caused
by an open court hearing. We have, of
course, considered by way of rehearing whether the in camera order was
appropriate, but when deciding whether the process before us is fair, the
starting point is the trial judge’s conclusion that part of the trial should
indeed take place in camera. If his
decision was right, then we cannot discern a reasoned justification for
concluding that the language of Crim PR 67.2(7) requires us to interpret the
word ‘shall’ as providing the court with a discretion to decide whether the
present appeal should or may be held ‘orally’.
If, and to the extent that it was wrong, the in camera order will cease
to have effect. Accordingly, the absence
of a discretion in this matter is not incompatible with the convention, and this court cannot ignore the
express requirement that the determination of the appeal shall take place
without a hearing.
THE APPEAL
[38] After we had adjourned to consider the
relevant material, it was drawn to our attention that the in camera hearings
before the judge, were, with his knowledge, recorded, not by a shorthand
writer, but by a mechanical tape recording.
This arrangement was made for obvious security reasons, including the
protection of any shorthand writer from inappropriate pressure, or, if the
material somehow became public, from any allegation of wrongdoing. At the conclusion of the hearings, the tapes
were removed from the recording machinery, and placed in marked envelopes and
retained within the precincts of the court.
When notice of the present appeal was given, transcripts based on the
tape recording were prepared by security-cleared employees of the relevant
intelligence agency. For Mr O’Connor, it
was a matter of understandable sensitivity that any material drawn to our
attention should be prepared or checked independently. As we appreciated during our pre-reading, the
transcripts were not absolutely complete.
They were, however, perfectly
13
intelligible and, on the face of it, the omissions
and infelicities in the text were explicable on the basis that difficulties can
arise, for perfectly understandable reasons, if transcripts are being urgently
prepared from a tape recording. What was
not made known to us, however, was that the transcripts prepared for the purposes
of the application for leave had not been independently verified or
checked. On subsequent investigation, we
ascertained that the judge had not been told how, in the event of an
application, it was proposed that the transcripts should be prepared. When the facts were discovered, immediate
arrangements were made for the transcripts to be submitted to the judge. In the course of a further short hearing
before us, Mr O’Connor was informed of these arrangements. Since then, Sir Michael Astill has examined
the transcripts. Allowing for the
omissions and infelicities already noted, they fairly represent what happened
at the hearings before him. Nothing of
importance is omitted, and nothing has been added. This was a sufficient check of the integrity
of the transcripts.
[39] For the future, there should be no
misunderstanding. We understand the
reasons why the in camera proceedings were tape-recorded, and indeed why
transcription could not, in the available time, be arranged by someone independent
of the intelligence agencies, who was himself or herself security cleared to
the appropriate level. In urgent cases,
and certainly as soon as it becomes known that an application for leave to
appeal will be made, the trial judge should be informed, and invited to check
the transcripts against his recollection and his notes before they are
submitted to this court. Thereafter, the
court should be fully informed of what has happened.
[40] We have reflected on the written
submissions on behalf of the appellants and the Crown. We need comment only on Mr O’Connor’s most
troublesome submission, that the argument for an in camera hearing was
irrational and patently absurd.
Paragraph 4 of the statements supplied in support of the application
attempted to explain how national security would be endangered if the
application were not to be granted and the trial were to proceed. He asserted that there is no rational
connection between disclosure and the danger envisaged, and that an irrational
connection would not suffice. He also
pointed out that the in camera issue emerged late, but the reasons have been
explained. In the end, what mattered to
the judge, and what matters to us, is whether the order was appropriate. The structure of the order was indeed
unusual, and Mr O’Connor submitted that it was so unusual that it called into
question the whole alleged risk to national security. In effect, he asked rhetorically, can there
really be a risk to national security which can be guarded against by
prohibiting general disclosure to the public, but permitting disclosure to an
alleged terrorist, his co-accused, the legal advisers and jurors? That must represent an irrational response.
[41] The argument is attractively presented,
but it is none the less logically flawed. It is an imperative of the administration of
criminal justice that, subject to exceptions which do not apply here, such as
deliberate non-attendance, or unruly behaviour, the defendant is entitled to be
present to hear the evidence presented to the jury, for and against him,
throughout the trial. The grounds for an
in camera hearing of part or the whole of the hearing on the basis of the
threat to national security and the interests of justice (which we use compendiously,
to cover the entire range of exceptions to the fundamental principle) are well
established. Nevertheless, they always
yield to the
14
imperative that the defendant is entitled to be
present throughout the trial. Carried to
its logical conclusion, Mr O’Connor’s submission would mean that in cases
falling within the recognised exceptions, the prosecution would be faced with
two choices. Either to prosecute, and
put all the material within the public domain, or offer no evidence against the
defendant. That cannot be right. Simply because the order made by the judge
was subject to the inevitable limitations created by the entitlement of the
defendant and his legal advisers to be present throughout the trial, and to
provide the defence with material which may be of possible assistance to him,
it does not follow that the order for an in camera hearing was flawed or
irrational.
[42] Having examined the material, in our
judgment, the substantial risk of prejudice to national security and to the
administration of justice without an order for an in camera hearing to the
extent ordered by the judge is unequivocally established. The in camera order will enable A to be
provided with material which may assist in the preparation of his defence,
while simultaneously ensuring that the prosecution is not forced to discontinue
the prosecution. In short, the trial
will proceed fairly to both sides, so far as practicable diminishing the risks
to national security. We agree with the
decision of the judge and the reasons he gave for it. We do not propose to repeat those reasons
using different language.
[43] This appeal is dismissed. So as to ensure that the trial could proceed
on 9 January, the parties were notified of the decision on 3 January 2006, and
that the reasons would be handed down at the beginning of the new term.
Leave to appeal granted. Appeal dismissed.
Vanessa
Higgins Barrister.
15
[2006] 2 All ER 16
Director of Public Prosecutions v Smith (Michael Ross)
[2006]
EWHC 94 (Admin)
CRIMINAL; Criminal Law
QUEEN’S BENCH DIVISION (DIVISIONAL COURT)
SIR
IGOR JUDGE P AND CRESSWELL J
17
JANUARY 2006
Criminal law – Assault – Assault occasioning
actual bodily harm – Actual bodily harm – No physical harm suffered – Defendant
cutting off victim’s hair without her consent – Whether cutting off hair can
amount to actual bodily harm – Offences against the Person Act 1861, s 47.
The victim, who was the ex-partner of the defendant,
went to visit him at his home. She went up to his bedroom where he was
asleep. He woke up, pushed her down on
the bed and cut off some of her hair, without her consent, with a pair of
kitchen scissors. The defendant was
charged with assaulting the victim thereby occasioning her actual bodily harm,
contrary to s 47a of the Offences
against the Person Act 1861. At the
close of the prosecution evidence, it was contended on behalf of the defendant
that there was no case to answer. The
justices found that it had not been established that the victim had been caused
actual bodily harm as there was no bruising, bleeding or cutting of her skin,
and that there was no expert evidence regarding psychological or psychiatric
harm. They were also of the opinion that
although the victim did suffer distress, taken on its own that could not amount
to actual bodily harm. The justices,
therefore, concluded that an essential element of the offence was missing and
that there was no case to answer. The
prosecution appealed by way of case stated.
On appeal, the defendant submitted that hair, according to medical and
scientific material, apart from the root, was not part of the body as it was
dead tissue.
________________________________________
a Section 47, so far as material, provides:
‘Whosoever shall be convicted upon an indictment of any assault occasioning
actual bodily harm shall be liable ... to imprisonment for a term not exceeding
7 years’
________________________________________
Held – Cutting off a substantial part of the
victim’s hair was capable of amounting to an assault which occasioned actual
bodily harm. In ordinary language, ‘harm’
was not limited to ‘injury’ and according to the dictionary definition extended
to ‘hurt’ or ‘damage’; ‘bodily’, whether used as an adjective or adverb, was
‘concerned with the body’. ‘Actual’ as
defined in the authorities, meant that the bodily harm should not be so trivial
or trifling as to be effectively without significance. Evidence of external bodily injury, or a
break in or bruise to the surface of the skin was not required and actual
bodily harm applied to all parts of the body including the victim’s organs,
nervous system and brain. It followed
that physical pain consequent on an assault was not a necessary ingredient of
the offence. Whether it was alive
beneath the surface of the skin or dead tissue above the surface of the skin,
the hair was an attribute and part of the human body. It was intrinsic to each individual and to
the identity of each individual. The justices had, therefore, been wrong in law
to find that there was no case to answer.
16
Accordingly, the appeal would be allowed and the case
remitted to the justices with a direction to continue the hearing (see
[16]–[19], below).
DPP v Smith [1960] 3 All ER 161, R v
Chan-Fook [1994] 2 All ER 552, R v Cooke [1995] 1 Cr App R 318 and
T v DPP [2003] All ER (D) 20 (Feb) considered.
Notes
For assault occasioning actual bodily harm, see 11(1) Halsbury’s
Laws (4th edn reissue) para 490.
For the Offences against the Person Act 1861, s 47,
see 12(1) Halsbury’s Statutes (4th edn) (2005 reissue) 142.
Cases referred to in judgments
DPP v Smith
[1960] 3 All ER 161, [1961] AC 290, [1960] 3 WLR 546, HL.
R v Brown [1993]
2 All ER 75, [1994] 1 AC 212, [1993] 2 WLR 556, HL.
R v Chan-Fook
[1994] 2 All ER 552, [1994] 1 WLR 689, CA.
R v Cooke [1995]
1 Cr App R 318, CA.
R v Donovan
[1934] 2 KB 498, [1934] All ER Rep 207, CCA.
R v Ireland, R v
Burstow [1997] 4 All ER 225, [1998] AC 147, [1997] 3 WLR 534, HL.
R v Morris (Clarence
Barrington) [1998] 1 Cr App R 386, CA.
T v DPP [2003]
EWHC 266 (Admin), [2003] All ER (D) 20 (Feb).
Appeal by way of case stated
The Crown Prosecution Service appealed by way of case
stated by the justices for Dudley acting in and for the Local Justice Area of
Dudley, in respect of an adjudication at the magistrates’ court on 6 June 2005,
dismissing an information preferred against the respondent, Michael Ross Smith,
that he assaulted Michelle Tether, thereby occasioning her actual bodily harm,
contrary to s 47 of the Offences against the Person Act 1861, having acceded to
a submission of no case to answer. The
question for the opinion of the High Court was ‘Were the Justices wrong in law
to decide that the cutting of the complainant’s hair did not constitute actual
bodily harm?’ The facts are set out in
the judgment of Sir Igor Judge P.
Timothy Green
(instructed by Crown Prosecution Service, Dudley) for the
appellant.
George Fairburn (instructed
by Timothy Gascoyne, Tipton) for the respondent.
SIR IGOR JUDGE P.
[1] This is an appeal by the Crown Prosecution
Service by way of a case stated by the justices for Dudley acting in and for
the Local Justice Area of Dudley, in respect of an adjudication at a
magistrates’ court on 6 June 2005.
[2] On 18 April 2005 an information was
preferred against Michael Ross Smith, the respondent, that on 11 April 2005 he
assaulted Michelle Tether, thereby occasioning her actual bodily harm, contrary
to s 47 of the Offences against the Person Act 1861. The information was heard on 6 June. The justices found the following facts.
[3] Michelle Tether was the ex-partner of
Michael Smith. They had started a
relationship about five years earlier.
During the course of the relationship it had broken up on two
occasions. Mr Smith lives in the next
street to Miss Tether. On 11 April she
went to his home. She went to his
bedroom where he was asleep and she woke him up. He pushed her down on the bed and produced
some kitchen scissors. He sat on top of
her and cut off the pony tail at the back of her head,
17
without her consent.
In addition, he cut some hair off the top of her head without her
consent.
[4] According to Michelle Tether, she
subsequently picked up some of her hair and the pony tail and took it with
her. She was noticed in a distressed
state by a passing friend in a car and was taken to another friend’s house. She did not go home until the following
morning, nor say anything to her mother at the time; rather, she covered her
head with a baseball cap. But it was not
long before her mother noticed that her pony tail was missing.
[5] At the close of the case for the
prosecution, it was contended on behalf of the respondent that there was no
case to answer. Cutting someone’s hair
without her consent did not necessarily amount to the offence of assault
occasioning actual bodily harm. It might
well be an ordinary common assault, but the respondent was not charged with
that offence. It was accepted that the
loss of the hair changed one’s appearance, but it still did not constitute
actual bodily harm and no evidence to that effect had been given. The victim had said that she was upset. This was a matter of emotion and ordinary
distress, and could not amount to actual bodily harm as there was nothing to
support any suggestion that she suffered psychiatric or psychological
harm. The complainant had been asked
specifically whether there were any cuts to her scalp or other breaks of the
skin caused while her hair was being cut.
She replied that there were none.
Accordingly, there was, so it was submitted, no actual bodily harm and
the critical ingredient of the offence had not been established.
[6] So far as the prosecution was concerned,
the contention before the justices was that cutting someone’s hair without her
consent was obviously an assault and naturally caused actual bodily harm. Bodily harm had its ordinary meaning. It included any hurt or injury calculated to
interfere with the health or comfort of the victim. Emphasis was made on the potential
interference with the comfort of Miss Tether.
[7] It was further suggested that it was
unnecessary for the purposes of the s 47 offence for the hurt to be
permanent. The cutting of hair will
eventually produce more hair—the hair will grow back. Cutting it nevertheless can be regarded as
more than merely transient or trifling; at any rate in the context of this kind
of case where the pony tail was removed rather than a single hair cut.
[8] The justices were referred to a number of
authorities. They are well known. They include: R v Donovan [1934] 2 KB
498, [1934] All ER Rep 207; R v Brown [1993] 2 All ER 75, [1994] 1 AC
212; R v Chan-Fook [1994] 2 All ER 552, [1994] 1 WLR 689; R v Morris (Clarence
Barrington) [1998] 1 Cr App R 386.
The justices received advice from their legal adviser that there was no
case law which indicated that the cutting off of a victim’s hair amounted to
actual bodily harm. The appellant and
the respondent were given an opportunity to add anything they wished, but they
were unable to produce any case law directly in point.
[9] When considering whether or not there was
a case to answer, the justices were of the opinion that if Mr Smith had cut
Miss Tether’s hair, as she alleged, that would constitute an assault, but that
it had not been established that she had been caused actual bodily harm because
there was no bruising, bleeding or cutting of the skin. Cutting of the hair merely changed her
appearance. There was no expert evidence
regarding psychological or psychiatric harm, therefore although Miss Tether did
suffer distress, taken on its own that too could not amount to actual bodily
harm. The justices concluded that an
essential element of the offence was missing and found that there was no case
to answer.
18
[10] The question for the opinion of this
court is: ‘Were the justices wrong in law to decide that the cutting of the
complainant’s hair did not constitute actual bodily harm?’ It is not in dispute that, on the facts, the
justices would have been entitled to find the respondent guilty of common
assault. The single issue raised by the
question in the case stated is whether his actions in cutting off the victim’s
hair against her wishes in the course of a common assault, without leaving any
mark or breaking her skin, is capable of amounting to assault occasioning
actual bodily harm. None of the previous
reported decisions is directly in point.
We have considered the authorities drawn to the attention of the
justices in the course of the hearing below.
[11] Mr Green, for the appellant, in effect
repeated the submissions made to the justices, emphasising before us that pain
is not a necessary ingredient of this offence, and that actual bodily harm may
be occasioned to someone even if the victim has no sensation of it at the time
because, for example, the part of the body which sustained the bruise or the
cut lacks sensation as a result of an earlier injury.
[12] Mr Fairburn, for the respondent, again
effectively adopted the submissions made before the justices. Before us, however, he particularly focused
on the fact that, according to the medical and scientific material which he was
able to discover, the shaft of the hair as opposed to the root is no more than
dead tissue. What the respondent had
done in this case was therefore to cut through dead tissue. Counsel drew attention to the decision of
this court in R v Cooke [1995] 1 Cr App R 318, where Glidewell LJ, giving
the judgment of the court, made these observations (at 325–326):
‘Each human hair has a
root—with hair on the head this root is under the scalp. Only the root, and a section of the hair
below the scalp leading from it, is alive and growing. The remainder of each hair, including all the
part above the scalp, consists of dead tissue.
The root is bedded or implanted in a sheath, consisting of a number of
layers of living tissue. The sheath nourishes and supports the hair through its
root. If a complete hair is pulled out
of the scalp, it emerges with the inner part of the sheath adhering to the
root. From the cells in this part of the
sheath, which [the consultant dermatologist] would describe as cells on the surface
of the hair, a DNA profile can be prepared.
If, however, a sample of hair is cut or combed from above the scalp, the
dead tissue forming that hair does not yield DNA for a profile.’
[13] Mr Fairburn also drew attention to the
latest entry in the Encyclopaedia Britannica for 2005 (www.britannica.com/eb/article-9038817),
which includes the following passage:
‘Except for a few
growing cells at the base of the root, the hair is dead tissue, composed of
keratin and related proteins. The hair follicle is a tubelike pocket of the
epidermis that encloses a small section of the dermis at its base. The human
hair is formed by divisions of cells at the base of the follicle. As the cells
are pushed upward from the follicle’s base, they become keratinized (hardened)
and undergo pigmentation.
Hair is continually shed
and renewed by the operation of alternating cycles of growth, rest, fallout and
renewed growth. The average life of
different varieties of hair varies from about 4 months for downy hairs to 3 to
5 years
19
for long scalp hairs.
Each human follicle follows this cycle independently of others …’
[14] On the basis of the entry in the
Encyclopaedia Britannica and the decision of this court in R v Cooke,
Mr Fairburn submitted that the shaft of the hair could not be harmed. That applied, as I understood his submission,
to each individual hair or to a bunch of hair.
As everyone knows, when hair is cut, it is not harmed. Everyone has his or her hair cut from time to
time, and the hair grows after it has been cut.
Accordingly, it followed that it could not be said that what happened
here could amount to actual bodily harm.
[15] As there are no decisions directly in
point, we must address the problem on first principles, noting that, according
to Viscount Kilmuir LC in DPP v Smith [1960] 3 All ER 161 at 171, [1961]
AC 290 at 334, ‘bodily harm’ needs no explanation, and that the phrase ‘actual
bodily harm’ consists of ‘three words of the English language which require no
elaboration and in the ordinary course should not receive any [R v Chan-Fook
[[1994] 2 All ER 552 at 557, [1994] 1 WLR 689 at 694]]’. So actual bodily harm means what it says.
[16] It is necessary to look at definitions
because there is nothing to assist us in the decided cases. In ordinary language, ‘harm’ is not limited
to ‘injury’, and according to the Concise Oxford English Dictionary
(11th edn, 2004) p 651 extends to ‘hurt’ or ‘damage’. According to the same dictionary, ‘bodily’,
whether used as an adjective or an adverb, is ‘concern[ed] [with] the body’, p
153. ‘Actual’, as defined in the
authorities, means that the bodily harm should not be so trivial or trifling as
to be effectively without significance.
[17] Recent authority shows that evidence of
external bodily injury, or a break in or bruise to the surface of the skin, is
not required. R v Chan-Fook
[1994] 2 All ER 552 at 558, [1994] 1 WLR 689 at 695 established that actual
bodily harm was not limited to ‘harm to the skin, flesh and bones of the
victim’. It applies to all parts of the
body, including the victim’s ‘organs, his nervous system and his brain’. The significant words in that sentence are
‘all’ and ‘includes’. By identifying
specific parts of the body, the observations in this judgment were not
excluding any others. An assault
occasioning actual bodily harm may be committed by words or gestures alone,
without the need for any physical contact between the assailant and the body of
the victim (see R v Ireland, R v Burstow [1997] 4 All ER 225, [1998] AC
147). It follows that physical pain
consequent on an assault is not a necessary ingredient of this offence (see
T v DPP [2003] EWHC 266 (Admin), [2003] All ER (D) 20 (Feb)).
[18] In my judgment, whether it is alive
beneath the surface of the skin or dead tissue above the surface of the skin,
the hair is an attribute and part of the human body. It is intrinsic to each individual and to the
identity of each individual. Although it
is not essential to my decision, I note that an individual’s hair is relevant
to his or her autonomy. Some regard it
as their crowning glory. Admirers may so
regard it in the object of their affections.
Even if, medically and scientifically speaking, the hair above the
surface of the scalp is no more than dead tissue, it remains part of the body
and is attached to it. While it is so attached,
in my judgment it falls within the meaning of ‘bodily’ in the phrase ‘actual
bodily harm’. It is concerned with the
body of the individual victim.
[19] In my judgment, the respondent’s actions
in cutting off a substantial part of the victim’s hair in the course of an
assault on her—like putting paint on it or some unpleasant substance which
marked or damaged it without causing injury
20
elsewhere—is capable of amounting to an assault which
occasions actual bodily harm. The
justices were wrong in law.
CRESSWELL J.
[20] I agree fully with the analysis and
reasoning of Sir Igor Judge P. The
question for the opinion of this court is: ‘Were the justices wrong in law to
decide on a submission of no case to answer that the cutting of the
complainant’s hair did not constitute actual bodily harm?’
[21] The body, for the purposes of the word
‘bodily’ in s 47 of the Offences against the Person Act 1861, includes all
parts of the body, including the hairs upon the scalp. On the evidence called by the prosecution,
there was a case to answer of actual bodily harm. As the President has said, to a woman her
hair is a vitally important part of her body.
Where a significant portion of a woman’s hair is cut off without her
consent, this is a serious matter amounting to actual (not trivial or
insignificant) bodily harm.
Appeal allowed.
Dilys
Tausz Barrister.
21
[2006] 2 All ER 22
Sandhu v Gill
[2005]
EWCA Civ 1297
COMPANY; Partnerships
COURT OF APPEAL, CIVIL DIVISION
MUMMERY,
NEUBERGER LJJ AND BLACK J
14 JULY,
2 NOVEMBER 2005
Partnership – Dissolution – Effect – Profits –
Profits earned by partnership business after dissolution – Outgoing partner
entitled to share of profits attributable to use of his share of partnership
assets – Meaning of ‘share of partnership assets’ – Partnership Act 1890, s 42(1).
The claimant and the defendant agreed, as partners at
will, to purchase a property, convert it, and carry on the business of an old
peoples’ residential home. They entered
into a partnership deed under which the claimant was to manage the business and
the net profits, after paying the claimant a salary, were to be divided equally
between the partners. The defendant had
in fact purchased the property himself.
It was agreed that each partner would pay equal capital contributions to
the partnership, and that the balance required to fund the development of the
property and set up the business would be raised by way of a bank loan. The claimant was to pay his contribution to
the defendant, given that the defendant had paid for the property. He could initially pay only a limited amount
and agreed to pay the balance of his contribution later. Under the deed the partnership assets were to
belong to the partners jointly. Several
years later, following differences between the parties, the partnership
determined. The defendant continued to
carry on the business on his own account.
The claimant brought proceedings to wind up the partnership whereupon an
issue arose concerning the share of the post-dissolution profits, if any, to
which the claimant was entitled. Section
42(1)a of the Partnership Act 1890 provided that
where any member of a firm had died or otherwise ceased to be a partner, and
the surviving or continuing partners carried on the business of the firm with
its capital or assets without any final settlement of accounts as between the
firm and the outgoing partner or his estate, then, in the absence of any
agreement to the contrary, the outgoing partner or his estate was entitled at
the option of himself or his representatives to such share of the profits made
since the dissolution as the court might find to be attributable to the use of
his share of the partnership assets, or to interest on the amount of his share
of the partnership assets. The master
decided that the claimant was entitled to half the post-dissolution annual
profits, after making a deduction for the defendant’s services. On appeal, the judge upheld that decision and
the defendant appealed. The claimant
submitted, inter alia, that s 42(1) of the 1890 Act required that his share of
the post-dissolution profits should be assessed by reference to his share of
the gross assets of the partnership as at dissolution. The defendant contended that the effect of s
42(1) was that the extent of the claimant’s entitlement to the post-dissolution
profits was equal to his share (if any) in the net assets of the partnership as
at the date of dissolution, and that, on the evidence, that interest would be
negative because any financial
________________________________________
a
Section 42, so far as material, is set out at [14], below
________________________________________
22
entitlement of the claimant would have been more than
cancelled out by his debt of unpaid capital to the defendant.
Held – The reference in s 42(1) of the 1890
Act to ‘the partnership assets’ was to the net partnership assets, that is,
what remained out of the gross assets, for distribution between the partners,
after all debts and other liabilities of the partnership had been met. It followed that the ‘share’ for the purposes
of s 42(1) was to be assessed by reference to the share which the partner in
question was entitled to receive at the conclusion of the winding-up process. The correct approach involved ascertaining,
in accordance with the partnership accounting rules what, on the dissolution
and winding up of the partnership, were the net assets of the partnership that
fell to be divided between the partners in equal shares. It was for the use of that ‘share’ of the
outgoing partner after dissolution of the partnership, not for the use of the
share of the pre-dissolution gross partnership assets of the partnership while
it had been carried on as a going concern, that the claimant was entitled to
claim a proportionate share of the post-dissolution revenue profits made by the
defendant. Accordingly, the appeal would
be allowed (see [32]–[34], [49], [50], [58], [61], [63], [71], [73], [96],
[99], [100], [102]–[104], below).
Manley v Sartori [1927] 1 Ch 157 considered.
Dictum of Nourse LJ in Popat v Shonchhatra
[1997] 3 All ER 800 at 806 not followed.
Decision of Lightman J [2005] 1 All ER 990 reversed.
Notes
For profits made after dissolution, see 35 Halsbury’s
Laws (4th edn reissue) para 118.
For the Partnership Act 1890, s 42, see 32 Halsbury’s
Statutes (4th edn) (2004 reissue) 1007.
Cases referred to in judgments
Ashworth v Munn
(1880) 15 Ch D 363, CA.
Barclays Bank Trust
Co Ltd v Bluff [1981] 3 All ER 232, [1982] Ch 172, [1982] 2 WLR 198.
Burdett-Coutts v IRC
[1960] 3 All ER 153, [1960] 1 WLR 1027.
Crawshay v Collins (1808)
15 Ves 218, 33 ER 736.
Crawshay v Collins
(1826) 2 Russ 325, 38 ER 358.
De Renzy v De Renzy
[1924] NZLR 1065, NZ SC.
Featherstonhaugh v
Fenwick (1810) 17 Ves 298, 34 ER 115, Rolls Ct.
Hadlee v IRC
[1993] STC 294, [1993] AC 524, [1993] 2 WLR 696, PC.
Joyce v Morrissey
[1999] EMLR 233, CA.
Manley v Sartori
[1927] 1 Ch 157, [1926] All ER Rep 661.
Popat v Shonchhatra
[1997] 3 All ER 800, [1997] 1 WLR 1367, CA; rvsg [1995] 4 All ER 646,
[1995] 1 WLR 908.
Ritson, Re, Ritson v
Ritson [1899] 1 Ch 128, CA.
Rodriguez v Speyer
Bros [1919] AC 59, [1918–19] All ER Rep 884, HL.
Simpson v Chapman
(1853) 4 De GM & G 154, 43 ER 466.
Willett v Blanford
(1842) 1 Hare 253, 66 ER 1027.
Yates v Finn
(1880) 13 Ch D 839.
23
Appeal
The defendant Hardip Singh Gill appealed from the decision
of Lightman J on 26 January 2005 ([2005] EWHC 43 (Ch), [2005] 1 All ER 990)
dismissing his appeal from the decision of Master Bowles on 24 September 2004
in partnership proceedings winding up a partnership between the claimant Kulbir
Singh Sandhu and the defendant that, subject to the entitlement of Mr Gill to a
payment in respect of the provision of his services of carrying on the business
previously carried on by the partnership between the date of the dissolution of
the partnership and the completion of the winding up, Mr Sandhu was entitled to
a half share of the revenue profits made by Mr Gill during that period. The facts are set out in the judgment of Neuberger
LJ.
Mark Blackett-Ord
(instructed by SKT Thobhani, Wembley) for Mr Gill.
Timothy Walker (instructed
by Lindops, Southend-on-Sea) for Mr Sandhu.
Cur adv
vult
2 November 2005.
The following judgments were delivered.
NEUBERGER LJ (giving the first judgment at the
invitation of Mummery LJ).
[1] The issue in this appeal centres on the
meaning of the words ‘his share of the partnership assets’ in s 42(1) of the
Partnership Act 1890 (the 1890 Act, and references in this judgment to sections
are to sections of that Act). In his
judgment, which is reported at [2005] EWHC 43 (Ch), [2005] 1 All ER 990, [2005]
1 WLR 1979, Lightman J, upholding Master Bowles, held that the reference to a
share in s 42(1) was to the partner’s share in the proprietary ownership of the
assets belonging to the partnership. He
also held that, in a case such as this, where there were two partners and there
was nothing to displace what might be called the presumption of equality, it
effectively meant half the gross assets of the partnership.
THE FACTS
[2] The relevant facts are as follows. The claimant, Mr Kulbir Singh Sandhu, and the
defendant, Mr Hardip Singh Gill, agreed, as partners at will, to purchase a
property (the property) at 59 Mountdale Gardens, Leigh-on-Sea, Essex with a view
to converting it into, and then running it as, an old people’s home. To that end, they executed a deed (the deed)
on 12 September 1995 setting out the terms of the partnership. Under the deed, it was agreed that Mr Sandhu
would manage the home, and that the net profits, after paying Mr Sandhu for his
services, would be divided equally between the partners.
[3] Mr Gill had purchased the property with
his own money on 21 July 1995 for £171,450.
It was agreed that each partner would pay about £85,000 by way of
capital contribution to the partnership, and that the balance required to fund
the development of the property and set up the business would be raised by way
of a bank loan. Mr Sandhu was, as I
understand it, to pay his contribution to Mr Gill, given Mr Gill had paid for
the property. Mr Sandhu could only pay a
limited amount until he had sold two flats that he owned. Accordingly, he agreed to pay the balance of
his contribution, £70,000, referred to as ‘the Contribution’ in the deed, to Mr
Gill, when he had sold the flats.
[4] Clause 10 of the deed dealt with
‘partnership property’. By cl 10.1, it
was agreed that ‘as soon as practicable … Mr Sandhu shall pay the Contribution
to
24
Mr Gill’, and that, in the meantime, Mr Gill was to
be entitled to receive the rent from the two flats. Clause 10.2 provided that, ‘after payment of
the Contribution’ the property ‘shall become partnership property’, and that Mr
Gill would declare a trust of the same on the basis that the partners would be
tenants in common. Clause 10.3 recorded
that all other partnership assets were to ‘belong to the partners jointly’.
[5] Apart from the fact that Mr Sandhu paid to
Mr Gill only £21,250 of the £70,000, or any part thereof, the project
proceeded, at least initially, as anticipated.
Appropriate works of alteration were carried out to the property, and it
was then run as a home by Mr Sandhu. For
that he was allowed a salary (later agreed at £22,000 a year) from the net
profits generated, and the net profits, if any, thereafter were shared equally
between the two partners.
[6] On 12 April 1999, following differences
between the parties, Mr Gill excluded Mr Sandhu from the property. It is common ground that the partnership
determined on that date. Thereafter, Mr
Gill carried on the business on his own account. As the judge explained in para [5] of his
judgment:
‘The business proved
profitable under the management of Mr Gill and indeed as well as producing
revenue profits the business over that period has increased in value from
£600,000 to £850,000, producing a capital profit of £250,000.’
[7] On 7 May 1999 Mr Sandhu began the instant
proceedings seeking an order that the partnership be wound up. There were a number of contentious
issues. They included Mr Gill’s contentions
that there had in fact been no partnership between him and Mr Sandhu and that
the property was not a partnership asset, and Mr Sandhu’s contention that the
deed should be rectified so that, in effect, the property was subject to cl
10(3), and not cl 10(2). Most of those
issues were resolved by a consent order made by Pumfrey J on 24 November
2000. The terms of that order (the
consent order) included an agreement that the property ‘constitute[s an] asset
… of the partnership’. The consent order
also directed the taking of post-dissolution accounts.
[8] The parties were unable to agree various
points relating to the post-dissolution accounts and those points were argued
before Master Bowles. The centrally
relevant dispute for present purposes was ‘what share of the post-dissolution
profits, if any … Mr Sandhu is entitled to …’.
In a full and careful written judgment, delivered on 24 September 2004,
the Master gave his opinion on the various points. His determination on the relevant dispute was
favourable to Mr Sandhu, namely that he was entitled to half of the
post-dissolution annual profits, after making a deduction of £22,000 for Mr
Gill’s services. (Mr Gill’s entitlement
to that annual sum is not in dispute, and I shall say no more about it). On appeal, Lightman J upheld that decision.
[9] As Lightman J recorded in para [6] of his
judgment:
‘It is common ground
that: (1) substantially more was due to Mr Gill than to Mr Sandhu in respect of
payment of capital and advances and that Mr Sandhu owed a substantial sum to Mr
Gill in respect of his loan of the larger part of his share of capital; and (2)
at the date of dissolution of the partnership the assets of the partnership
were sufficient to pay debts to non partners and advances from the partners,
but were insufficient to repay to the partners their capital in full.’
25
[10] It was also common ground that Mr Sandhu
was entitled to share the capital profit of £250,000 equally with Mr Gill. The centrally relevant issue, which the
parties could not agree, was the extent, if any, of Mr Sandhu’s entitlement to
a share of the revenue profits made by Mr Gill between 12 April 1999, when the
partnership was dissolved, and the date of the conclusion of the winding up.
THE RIVAL CONTENTIONS
[11] On behalf of Mr Sandhu, Mr Timothy Walker
(who appeared below) contends that Mr Sandhu is entitled to half the
post-dissolution profits earned from the running of the home pursuant to s
42(1), a contention which he says is reinforced by the provisions of cl 10(2)
of the deed and of the consent order. For
Mr Gill, Mr Mark Blackett-Ord (who also appeared below, although not before
Pumfrey J) agrees that s 42(1) is of central importance, but denies that the
consent order is of relevance, and he contends that Mr Sandhu is not entitled
to any share of the post-dissolution profits.
[12] Mr Blackett-Ord’s contention is that the
effect of s 42(1) is that the extent of Mr Sandhu’s entitlement to the
post-dissolution profits is equal to his share (if any) in the net assets of
the partnership as at the date of dissolution.
He says that one has to assess the existence and extent of Mr Sandhu’s
interest in the net assets of the partnership on a notional winding up as at
the date of dissolution, and that, on the evidence, that interest would be
negative because any financial entitlement of Mr Sandhu would have been more
than cancelled out by his debt of £70,000 unpaid capital to Mr Gill.
[13] Mr Walker has two answers to this
contention, which encapsulate the two issues on this appeal. First, he says that this contention involves
a misinterpretation of s 42(1), which, on his case, requires Mr Sandhu’s share
of the post-dissolution profits to be assessed by reference to his share of the
gross assets of the partnership as at dissolution, which, in the absence of any
evidence to the contrary, is a 50% share.
Second, he says that, in any event, the effect of the deed and the
consent order is to give rise to an agreement that Mr Sandhu has a 50% share in
the partnership, and therefore a right to half the post-dissolution profits.
THE MEANING OF SECTION 42(1): PRELIMINARY
[14] The resolution of the first issue turns
substantially on s 42(1), which provides as follows:
‘Where any member of a
firm has died or otherwise ceased to be a partner, and the surviving or
continuing partners carry on the business of the firm with its capital or
assets without any final settlement of accounts as between the firm and the
outgoing partner or his estate, then, in the absence of any agreement to the
contrary, the outgoing partner or his estate is entitled at the option of
himself or his representatives to such share of the profits made since the
dissolution as the Court may find to be attributable to the use of his share of
the partnership assets, or to interest at the rate of five per cent. per annum
on the amount of his share of the partnership assets.’
[15] Section 42 is in that part of the 1890
Act, consisting of ss 32–44 inclusive, which are under the heading ‘Dissolution
of Partnership, and its consequences’.
Sections 32–35 are concerned with methods of dissolution, and ss 36–38
deal with miscellaneous matters concerning outsiders to the partnership. Sections 39–44
26
deal with the rights of the partners following
dissolution. Section 39 is concerned
with the ‘Rights of partners as to application of partnership property’, and s
41 with ‘Rights where partnership dissolved for fraud or misrepresentation’, s
42 with ‘Right of outgoing partner in certain cases to share profits made after
dissolution’ and s 44 is the ‘Rule for distribution of assets on final
settlement of accounts’.
[16] It is worth referring to s 44 in a little
more detail. Section 44(a) deals with
the sharing of losses. Section 44(b)
provides that:
‘The assets … shall be
applied in the following manner and order: 1 In paying the debts and
liabilities of the firm to persons who are not partners therein: 2 In paying to
each partner rateably what is due … to him for advances … 3 In paying to each
partner rateably what is due … to him in respect of capital: 4 The ultimate residue,
if any, shall be divided among the partners in the proportion in which profits
are divisible.‘
[17] The only other provision of the 1890 Act
to which I should make reference is s 24, which, according to its title, sets
out certain ‘Rules as to interests and duties of partners subject to special
agreement’. As the title indicates, the
section sets out some rules which are to apply, save where something different
has been expressly or impliedly agreed.
Section 24(1) provides that ‘All the partners are entitled to share
equally in the capital and profits of the business …’.
[18] With that, I now turn to the meaning of s
42(1). The concept of ‘a partner’s share
of the partnership assets’, at any time before the end of the winding-up
process in accordance with s 44, is conceptually somewhat opaque. In a case to which I will have to return, Popat
v Shonchhatra [1997] 3 All ER 800 at 804, [1997] 1 WLR 1367 at 1372, in an
uncontroversial passage, Nourse LJ said this:
‘Although it is both
customary and convenient to speak of a partner’s “share” of the partnership
assets, that is not a truly accurate description of his interest in them, at
all events so long as the partnership is a going concern. While each partner has a proprietary interest
in each and every asset, he has no entitlement to any specific asset and, in
consequence, no right, without the consent of the other partners or partner, to
require the whole or even a share of any particular asset to be vested in him. On dissolution the position is in substance
not much different, the partnership property falling to be applied, subject to
ss 40 to 43 (if and so far as applicable), in accordance with ss 39 and 44 … As
part of that process, each partner in a solvent partnership is presumptively
entitled to payment of what is due from the firm to him in respect of capital
before division of the ultimate residue in the shares in which profits are
divisible; see s 44 … It is only at that stage that a partner can accurately be
said to be entitled to a share of anything, which, in the absence of agreement
to the contrary, will be a share of cash.’
THE MEANING OF SECTION 42(1): THE ARGUMENTS FOR THE
APPELLANT’S CASE
[19] In the current edition of Lindley
& Banks on Partnership (18th edn, 2002), the topic of ‘partnership
shares’ is dealt with in Ch 19. Lord
Lindley’s ‘classic definition’ is quoted in para 19-05 (pp 518–519). He said that ‘the share of a partner
is his proportion of the partnership assets after they have been all realised
and converted into money, and all the debts and liabilities have been paid and
27
discharged’.
In the following paragraph, the editors effectively indorse this
definition, albeit stating that ‘it would be more accurate to speak of a
partner’s entitlement to a proportion of the net proceeds of sale of the
assets’. The editors go on to explore a
little further the nature of a partner’s share in three circumstances, namely
while the partnership is continuing, after ‘General dissolution’ and after
‘Death, retirement or expulsion of a partner’ (see p 521 (paras 19-10 and
19-11)).
[20] As to the position while the partnership
is continuing, Lindley & Banks suggests (pp 520–521 (para 19-09))
that:
‘In the absence of any
agreement to the contrary, the share of a partner will represent (and should
always be stated in terms of) his proportionate share in the net proceeds of
sale of the partnership assets, after all the firm’s debts and liabilities have
been paid or provided for.’
The editors go on to suggest that this is supported ‘in
substance’ by the approach of the Court of Appeal in the passage I have quoted
from Popat’s case.
[21] In para 19-10, the editors turn to the
position on the general dissolution, and ‘submit’ that ‘each partner’s share
will have the same proprietary character as it had prior to the
dissolution’. They immediately go on to
state that ‘in terms of value, the share must still be expressed as a net
entitlement since, in the absence of some specific agreement between the
partners, it cannot properly be viewed in any other light’. That is also stated to be supported by the
passage I have quoted from Popat’s case.
[22] One can find support for this conclusion
in at least some of the authorities referred to in the footnotes to the
passages that I have cited in Lindley & Banks. Thus, in Re Ritson, Ritson v Ritson [1899]
1 Ch 128, Chitty LJ said (at 131) of a deceased partner that his ‘interest in
the joint assets [of the partnership] was only his share of the surplus after
payment of the joint debts’, echoing a similar observation of Lindley MR
himself (at 130–131). In Rodriguez v
Speyer Bros [1919] AC 59 at 68, Lord Finlay LC said this:
‘When a debt due to the
firm is got in no partner has any definite share or interest in that debt; his
right is merely to have the money so received applied, together with the other
assets, in discharging the liabilities of the firm, and to receive his share of
any surplus there may be when the liquidation has been completed.’
[23] The concept of an interest in such a
‘surplus’ is also to be found in a judgment of Buckley J, Burdett-Coutts v
IRC [1960] 3 All ER 153 at 159, [1960] 1 WLR 1027 at 1035 where he said
this, when he observed that the analysis of Romer J in Manley v Sartori
[1927] 1 Ch 157—
‘is authority for the
view that, when a dissolved partnership is to be, or is in the course of being,
wound up, each partner or his estate retains an interest in every single asset
of the former partnership which remains unrealised or unappropriated, and that
that interest is proportionate to his share in the totality of the surplus
assets of the partnership.’
[24] So far, I have referred to authorities
after the 1890 Act, but it is worth observing that it seems to have been the
same before that Act came into force.
Thus, in Ashworth v Munn (1880) 15 Ch D 363, James LJ said this
(at 369–370):
28
‘[The partners’]
interest is exactly in proportion to what the ultimate amount coming due to
them upon the final taking and adjustment of the accounts may be … the share of
each of the other partners no doubt is not a share in any specific asset or any
specific part of the assets real or personal, but his share of what will
ultimately come to him when the accounts are ascertained, and when the partners
who are to contribute have contributed, and when the assets are got in, the
debts paid, and the amounts realised.’
[25] Although this observation was, as
mentioned, made before the 1890 Act came into force, it should be noted that,
as stated in Lindley & Banks (p 4 (para 1-06)), the 1890 Act ‘introduced
no great change in the law’.
[26] The situation catered for by s 42(1),
namely the entitlement of what I shall call an excluded partner to compensation
in light of post-dissolution profits made by his former partner or partners
from continuing the partnership business, was the subject of a number of
decisions prior to the 1890 Act. In one
of those decisions, Featherstonhaugh v Fenwick (1810) 17 Ves 298, 34 ER
115, Grant MR made the point that, once the partnership is dissolved, all the
partners had the same right, namely ‘to have the whole concern wound up by a
sale, and a division of the produce’ and that, if one partner carried on the
business to the exclusion of the other and without the consent of the other,
which was something which he was not in principle entitled to do, and he would
therefore ‘come under a liability for whatever profits might be produced’ (see
(1810) 17 Ves 298 at 310, 34 ER 115 at 120).
[27] Those observations, and also observations
to which we were referred of Lord Eldon LC in Crawshay v Collins (1826)
2 Russ 325 at 344–345, 38 ER 358 at 365, do not seem to me to impinge on the
essential issue which we have to determine.
They serve to emphasise the justice of the excluded partner (or his
estate) being entitled to benefit from the carrying on of the partnership
business after dissolution, given that the immediate right of all the partners
is to have the partnership wound up, and that any profits earned after
dissolution will, at least normally, be in part attributable to the earning
capacity of assets in which the excluded partner or his estate has an interest,
albeit an interest which will not crystallise until the winding up is
completed. However, what those cases do
not do, in my view, is to indicate how the excluded partner’s share of the post
dissolution profits was to be assessed.
[28] Based on the decision of Wigram V-C in
Willett v Blanford (1842) 1 Hare 253, 66 ER 1027, Lightman J said ([2005] 1
All ER 990 at [16], [2005] 1 WLR 1979) that, before the 1890 Act, the approach
of the courts to the question of the entitlement of the excluded partner to
share in the post-dissolution profits was based on the particular circumstances
of the case, and was relatively flexible.
I think there is some force in that, with one exception, I shall say no
more about those cases, save to say that I agree with Black J’s analysis in
[83]–[87], below. Yates v Finn
(1880) 13 Ch D 839 was a decision which suggests that, prior to the 1890 Act
the courts did adopt an underlying principle, albeit that it was one which
could be modified, or even departed from, where the facts justified it.
[29] In that case, the excluded partner had
provided about 75% of the capital, and under the partnership agreement it was
agreed that profits would be shared equally between the partners. After dissolution, and both before and after
the excluded partner’s death, the business was carried on profitably by the
other partner, who had provided about 25% of the capital. After deducting in favour of
29
the surviving partner a sum to compensate him for
running the business after the dissolution, the chief clerk apportioned the
post-dissolution profits equally between the two partners. That decision was successfully appealed to
Hall V-C, and it is interesting to note that (at 841) he ‘remarked that it
might be necessary to continue a business for the purpose of winding it up’.
[30] Even more to the point, Hall V-C said
this (at 843):
‘In such a case as this
I think that … the correct principle to be applied (in the absence of other
special circumstances affecting the rights of the deceased partner on the one
hand and the surviving partner on the other) is this: that the representatives
of the deceased partner are entitled to say to the surviving partner, “You have
been using our testator’s money in trade, and making profits by the use of it,
and we are therefore entitled to an account of the profits you have made by
continuing that money in the concern and trading with it.” Of course I do not mean to say that there may
not be special circumstances which may vary the case.’
[31] It is fair to say that, in that case, the
partnership agreement was for a fixed term, which had expired well before the
excluded partner died, but I cannot think that makes any difference. Indeed, if anything, it could be said to be a
stronger case than the present, where, for virtually the whole of the
post-dissolution period of trading, the winding up of the partnership could be
said to have been under way (bearing in mind that Mr Sandhu applied for the
partnership to be wound up within a month of the dissolution).
[32] At least on the basis of the authorities
we were referred to, Yates’s case is the clearest and most recent
reported decision on this issue prior to the passing of the 1890 Act. Bearing in mind the fact that, as already
mentioned, the purpose of that Act was more to codify (albeit partially) and
clarify the law on the topic, rather than to change it, I consider that the
decision is one which can justifiably be invoked to support the case advanced
by Mr Blackett-Ord.
[33] So far, it appears to me that the
judicial and textbook analyses of the concept of a partner’s ‘share of the
partnership assets’ accords more with that advanced on behalf of the appellant
Mr Gill, than that favoured by the judge and advanced on behalf of the
respondent, Mr Sandhu.
[34] In my judgment, that view is reinforced
if one examines the effect of the closing words of s 42(1). Confining oneself to a case of only two
partners, the section applies in a case where, after dissolution has occurred,
but before the winding up has been concluded, one of the partners carries on
the partnership business, to the exclusion of the other. In such a case, the excluded partner can elect
between receiving a proportion of the profits or receiving interest at 5%
pa. The proportion of the profits is
assessed by reference to ‘the use of his share of the partnership assets’
and the interest is assessed on ‘the amount of his share of the partnership
assets’. It is very difficult to
avoid the conclusion that the expression I have emphasised in those two
quotations has the same meaning in each case.
In the present instance, Mr Sandhu appears to have elected for the first
alternative, but I am currently concentrating on the second alternative.
[35] In that connection, in agreement with Mr
Blackett-Ord, it would seem to me quite remarkable if the partner who carries
on the business could be obliged to pay the excluded partner interest based on
a sum equal to the value of the latter’s interest in the gross assets of the
partnership, ie his interest in the assets of the partnership, without taking
into account the liabilities of the partnership. Yet
30
that is what Mr Walker accepts his submission, and
therefore the judge’s conclusion, mean.
Consider a case, which would be common, and indeed the present is an
example, where the main asset of the partnership consists of real
property. Very often, that asset will be
charged to the bank, possibly for a sum which is equal to or conceivably even
more than its value. If the judge’s
conclusion in the present case is right, it would mean that the excluded
partner would be entitled to interest based on the unencumbered value of the
property, which would seem surprising and unfair.
[36] Mr Blackett-Ord conjured up an even more
extreme example. It involved a
partnership running a hotel business where one partner had contributed the
building as a partnership asset, albeit that it was wholly owned by him and
would be returned to him on winding up (unless needed to repay the partnership
liabilities) and where the partners agreed an equal share of profits (because
the other, subsequently excluded, partner was to run the business). In such a case, it would be surprising if the
hotel-owning partner, who carried on the business after dissolution, had to
account to the excluded partner for interest at 5% pa on half the value of the
hotel. It would be even more surprising
if he had so to account if the hotel was 100% charged to secure a loan to the
partnership (or to the hotel-owning partner).
Yet that would be the effect of the judge’s conclusion (unless ‘share of
the partnership assets’ at the end of s 42(1) is given a different meaning from
that which it has earlier in the same subsection, which is unlikely and was not
suggested by Mr Walker).
[37] It is no answer, in my view, to this
analysis to say that a partner who carries on the partnership business with
partnership assets, to the exclusion, and without the authority, of the
excluded partner, after the partnership has been dissolved, does so at his own
risk, and therefore cannot complain if he is effectively penalised in this
way. In the first place, the first
alternative for which the excluded partner can opt, namely an appropriate share
of the profits has no such penal element; it would be very surprising if the
two options were based on different principles.
[38] Quite apart from this, s 42(1) is not, in
my opinion, concerned with penalising a partner who continues the partnership
business in such circumstances. It is
specifically stated to apply, inter alia, where the excluded partner has in
fact died; in other words, it applies where the partner who carries on the
business really has no alternative but to do so, and indeed where the estate of
the deceased partner would often expect to benefit from the fact that the
business is being continued, so that, for instance, it could be sold as a going
concern. Indeed, where the partnership
takes a long time to wind up, as in the present case, it is similarly desirable
that one partner should be able to continue the business essentially for the
same reason.
[39] In any event, if the excluded partner is
entitled to be accorded some sort of extra right for the ‘insult’ of the
partnership business being continued against his will, it seems to me that the
right he is given to elect between interest and a share of the profits, is
quite sufficient. Any further right,
such as that contended for by Mr Walker, could frequently turn out to be wholly
disproportionate to any perceived injustice to him, and could also work
arbitrarily.
[40] It also seems to me that this conclusion
receives a little indirect support from s 42(2), to which I have not so far
referred. It provides that, where the
continuing partners exercise an option to buy out an outgoing partner, the
outgoing partner cannot rely on s 42(1), unless the continuing partners fail to
31
comply with the terms of the option. Given that the amount payable under any such
option would be likely to be based on the outgoing partner’s share of the net,
rather than the gross, value of the partnership assets, it seems likely that
the share of the profits, and the 5% pa interest, in s 42(1) would be assessed
on a similar basis.
[41] In para [18] of his judgment, Lightman J
observed that the conclusion that the reference to a partner’s ‘share of
partnership assets’ was a reference to the gross assets and not to the net
assets was supported by s 41(a) which applies where a partnership contract is
rescinded on grounds of fraud or misrepresentation. In such a case, the rescinding party is
entitled inter alia to:
‘a lien on, or right of
retention of, the surplus of the partnership assets, after satisfying the
partnership liabilities, for any sum of money paid by him for the purchase
of a share in the partnership and for any capital contributed by him …’ (My emphasis.)
[42] That is a point with some force. On the construction of s 42(1) advanced by Mr
Blackett-Ord, the reference to ‘the surplus of the partnership assets, after
satisfying the partnership liabilities’ in s 41(a) has the same meaning as ‘the
partnership assets’ in s 42(1), whereas on the judge’s construction, supported
by Mr Walker, the expression ‘the partnership assets’ has the same meaning in
the two sections.
[43] However, I do not consider the point to
be particularly powerful. First, s 41(a)
is concerned with the actual net assets of the partnership after the payment of
all liabilities, ie just before distribution of those net assets among the partners. On the other hand, s 42(1) is dealing with a
period which may, and normally does, extend to a period before the winding-up
process has even begun, so the net assets are, as it were, prospective in
nature. Further, the ‘share of the
partnership assets’ in s 42(1) is, in a sense, a composite expression which, as
the passages I have quoted from Lindley & Banks demonstrate, had an
established meaning when the 1890 Act was passed.
[44] In any event, when one turns to another
provision of the 1890 Act which has a reference to a partner’s ‘share of the
partnership assets’, namely s 31, it appears to me that the expression is used
in a way which is consistent with the case advanced by Mr Blackett-Ord rather
than that adopted by the judge. Section
31(2) provides that an assignee of a partner’s share is entitled to receive
‘the share of the partnership assets to which the assigning partner is entitled
as between himself and the other partners’.
In my view, that must be a reference to the share of the net assets, or
the ‘surplus assets’ referred to, for instance, by Buckley J in
Burdett-Coutts v IRC [1960] 3 All ER 153, [1960] 1 WLR 1027. Support for that interpretation may be found
in Hadlee v IRC [1993] STC 294 at 298, [1993] AC 524 at 533, where the
Privy Council appears to have taken the view that the identically worded New
Zealand statutory provision was a reference to ‘the right on dissolution to a
share in assets’, which seems to me to refer back to the description of a
partner’s right ‘to share in the surplus assets of the partnership on a
dissolution’ on the previous page of the judgment ([1993] STC 294 at 298,
[1993] AC 524 at 532).
[45] It may be added that this interpretation
appears to coincide with the view expressed in the current, eighth, edition of
Higgins and Fletcher The Law of Partnership in Australia and New Zealand
(2001). At p 250, when discussing the
antipodean equivalent of s 42(1), they suggest that ‘the relevant share’ there
32
referred to is ‘the amount owing to the outgoing
partner from the remaining partners’. It
is also worth mentioning that Lightman J referred ([2005] 1 All ER 990 at [21],
[2005] 1 WLR 1979) to the New Zealand decision, De Renzy v De Renzy
[1924] NZLR 1065, and said that he had ‘some difficulty’ with the approach of
Stringer J to the apportionment of post-dissolution profits between the
surviving partner, who continued to carry on the partnership business, and the
estate of the deceased partner. It
appears to me that, if Mr Blackett-Ord’s analysis in the present case is
correct, no such difficulty arises.
[46] In para [17] of his judgment, Lightman J
referred to Manley v Sartori [1927] 1 Ch 157, and cited rather more
extensively the observations of Romer J which were quoted by Buckley J in
Burdett-Coutts v IRC. Rather
contrary to the view of Buckley J, it appears that Lightman J took the view
that those observations rather assisted Mr Walker’s submissions in the present
case. I am rather dubious whether the
observations in Manley’s case, despite their authoritative source, are
of much assistance, because Romer J was not really concerned with the issue
which we have to decide.
[47] However, as I have probably already
implied, it seems to me that, if anything, the analysis of the law in Manley’s
case assists Mr Blackett-Ord rather than Mr Walker. The passage I have in mind is where Romer J
said this (at 162):
‘There appears to have
been an idea at one time that [where the partnership business was carried on
after the death of a partner] the partners were interested in the profits so
made in shares in which they would have been entitled to the profits if they
had been earned while the partnership was a going concern. For instance, it was suggested that,
supposing a partner brought no capital into the partnership but in consequence
of his skill or for some other reason was entitled under the partnership
articles to receive a particular share, say a one-third share, of the profits,
then if, after his death, the surviving partner who brought all the capital
into the concern carried on the business and made a profit, the executors of
the deceased partner were entitled to one-third of that profit. That that is not so was explained by Wigram
V-C in [Willett v Blanford (1842) 1 Hare 253, 66 ER 1027]. He pointed out, in effect, that where the
profits had been earned by reason of using the assets of the partnership, those
profits were divisible between people who, in the events which had happened,
were interested in the partnership assets: they were not divisible between the
parties in accordance with their rights and interests in profits earned while
the partnership was a going concern.’
[48] The reason I consider that passage to be
important in the present context is this.
For the respondent, Mr Sandhu, Mr Walker contends that all the partners
have an interest in the assets of the partnership until it is completely wound
up, and, indeed, that all their interests are equal, unless there is an
agreement to the contrary; this is no doubt because their right to have the assets
dealt with in accordance with the rules of the partnership and the provisions
of the 1890 Act can be said to be equal.
On this basis, at least in the absence of an agreement to the contrary,
post-dissolution profits are to be shared equally. If that were correct, then it seems to me
that the example given by Romer J cannot be right. Even though the deceased partner in the
example had not contributed any capital, he would still, on Mr Walker’s case,
have an interest in the assets of the partnership, in the sense of having been
a partner and having an interest, which was prima facie ‘equal’ of that of the
other partner, in having the assets
33
distributed in accordance with the provisions of the
1890 Act (or as varied, if at all, by the provisions of the relevant
partnership agreement). Yet, under Romer
J’s analysis he would not be entitled to any share of the post-dissolution
profits which appears to me to be entirely consistent with the analysis put
forward by Mr Blackett-Ord, on behalf of the appellant, Mr Gill.
[49] In these circumstances, I am disposed to
reach a different conclusion from that reached by Lightman J in that it appears
to me that the reference in s 42(1) to ‘the partnership assets’ is to the net
partnership assets, and not the gross partnership assets. However, that would not necessarily be
determinative of the first of the two issues on this appeal, because the basis
for assessing the ‘share’ in that section must also be determined. Having said that, many of the reasons for
arriving at the conclusion that the reference to ‘assets’ is to net assets
appear to me to carry with them the notion that the ‘share’ referred to is the
actual share of those assets attributable to the partner concerned in the net
assets in the winding-up process in accordance with s 44. Further, logic and commercial common sense
(which often, but not invariably, march together) suggest that if the value of
‘the partnership assets’ in s 42(1) is to be assessed by reference to the
present value of the prospective surplus, then the partner’s ‘share’ under that
section must be based on the actual proportion of those assets to which he
would be entitled.
[50] In other words, if the reference to ‘the
partnership assets’ in s 42(1) is to what Buckley J called the surplus, ie what
remains out of the gross assets, for distribution between the partners, after
all debts and other liabilities of the partnership have been met, it seems to
follow that the ‘share’ for the purposes of s 42(1) is to be assessed by
reference to the share which the partner in question is entitled to receive at
the conclusion of the winding-up process.
Indeed, it seems to me that the way in which the observations in the
cases and textbook to which I have referred are expressed make that conclusion
virtually inescapable.
[51] Further, if the excluded partner’s share
of net assets under s 42(1) is not to be assessed in this way, and the judge is
right, there would appear to be only two alternatives for assessing that share
(subject to the possibility of agreement, which is specifically mentioned in
the section). The first is that it is to
be assessed in accordance with s 24(1).
The alternative is that the excluded partner would be intended to have a
share which was equal to that of each of the other partners. Either conclusion would be hard to reconcile
with justice or authority, as discussed above.
Also, if either had been the legislature’s intention, one would have
expected s 42(1) to have been differently drafted. Either s 24(1) (together with the opening
words of s 24 if the first alternative was intended) would have been referred
to in s 42(1), or the latter section would have used the same language as the
former. As it is, s 42(1) uses a
different basis for the distribution of profits from that used in s 24(1), the
basis involving an expression, which, when used elsewhere in s 42(1) itself (ie
at the end) and in s 31, suggests a meaning consistent with the appellant’s
case.
THE MEANING OF SECTION 42(1): THE DIFFICULTIES IN THE
WAY OF THE APPELLANT’S CASE
[52] However, there are three points that give
me considerable pause for thought before I go firm on the conclusion that s
42(1) has the meaning contended for by Mr Blackett-Ord on behalf of the
appellant. The first is the practical
consequences of this conclusion. The
second is what is said in Lindley
34
& Banks (pp 524–528 (paras 19-18–19-26))
under the heading ‘The size of each partner’s share’. The third is part of the reasoning of the
Court of Appeal, to which I have not so far referred, in Popat v Shonchhatra
[1997] 3 All ER 800, [1997] 1 WLR 1367.
[53] The practical consequences of accepting
the appellant’s case can be said to be somewhat unsatisfactory, in that, in the
absence of agreement, the court would have to carry out, or at least to
commission, a fairly detailed account both of the assets and liabilities of the
partnership and of the value of each partner’s share of the net assets, as at
the date of dissolution, in order to determine the amount to which the excluded
partner is entitled pursuant to the provisions of s 42(1). In other words, there would virtually have to
be a hypothetical winding-up exercise as at the date of dissolution. If the judge’s conclusion is right, such an
exercise would be required more rarely, and it would be easier to carry
out. It would be required more rarely
because in the normal run of cases, each partner’s share would be equal, and it
would therefore be unnecessary to determine the precise value of the partnership
assets, unless the excluded partner opted for 5% pa interest rather than a
share of the profits. However, given
that the 5% pa interest would be based on proportion of the gross assets of the
partnership, it would frequently be the preferred option, and therefore a
valuation exercise would have to be carried out. However, because that accounting exercise
would involve valuing only the assets, and not the liabilities, of the
partnership, it would be a cheaper and simpler exercise than that of valuing
the net assets.
[54] While such considerations cannot be
ignored when determining the meaning of s 42(1), it seems to me that the
practical consequences of the appellant’s construction is not so startling as
to call the construction which he contends into question if it is otherwise
correct.
[55] The editors of Lindley & Banks
quote Lord Lindley (pp 524–525 (para 19-19) as saying that, in the absence of
agreement to the contrary, ‘the shares of all the partners will be adjudged
equal’, and that this is now supported by s 24(1), which provides that, in the
absence of agreement to the contrary, all partners ‘are entitled to share
equally in the capital and profits of the business’. They go on to explain (p 525 (para 19-20))
that this rule applies even where the capital has been contributed, and is
owned, unequally. They also point out (p
526 (para 19-21)), that this analysis is based on convenience, and that it was
approved by this court in Joyce v Morrissey [1999] EMLR 233 at 243.
[56] I was initially impressed by the
submission that, while they might be difficult to reconcile with the thrust of
the authorities I have so far discussed (including earlier passages in the same
Chapter), these observations in Lindley & Banks were of considerable
assistance to the respondent’s case here.
However, on further reflection, it appears to me that this is not
so. In para 19-20, Lord Lindley is
quoted as saying:
‘When it is said that
the shares of partners are prima facie equal, although their capitals are
unequal … it is not meant that, on a final settlement of accounts, capitals
contributed unequally are to be treated as one aggregate fund which ought to be
divided between the parties in equal shares.’
[57] In other words, as one would expect, the
position as laid down by the 1890 Act, and, in this connection, in particular
by s 44, reflects the position as developed by the judges. After the assets of the dissolved partnership
have
35
been converted into money and have been used to pay
off the debts and other liabilities of the partnership, any balance that
remains is for the benefit of the partners individually, and is to be
apportioned between them as laid down by s 44(b). The presumption of equality only comes into
play in that connection at stage 4 of that subsection; it has no part to play
at stage 3, or indeed stage 2. In these
circumstances, it seems to me that the partners will only be presumed to have
equal shares in any sum that remains after they have been paid what is due to
each of them in respect of advances and of capital.
[58] Accordingly, I do not consider that the
contents of paras 19-18ff of Lindley & Banks undermine the
conclusion I have reached. Where the
business of the partnership is carried on after dissolution by one partner to
the exclusion of the other, the excluded partner’s entitlement to a payment
under s 42(1) is to be calculated by reference to his share of the partnership
assets, and that share is to be assessed in accordance with s 44, which does
involve a rebuttable presumption of equality but only at stage 4.
[59] So far as Popat v Shonchhatra
[1997] 3 All ER 800, [1997] 1 WLR 1367 is concerned Mr Walker for the
respondent understandably relies on what Nourse LJ said ([1997] 3 All ER 800 at
804–805, [1997] 1 WLR 1367 at 1372) about the ‘size’ of ‘a partner’s share of
the assets’. He said that, in light of
the absence of any express guidance on the topic from the 1890 Act, it was
‘necessary to have resort to the rule, established well before the 1890 Act and
no doubt recognised by s 24, that, subject to any agreement, all the partners
are entitled to share equally in the partnership property’. Nourse LJ then expressed the view ([1997] 3
All ER 800 at 806, [1997] 1 WLR 1367 at 1373–1374) that, in light of the terms
of s 42(1) and of Manley’s case, the post-dissolution profits made by a
partner who carried on the business on his own should, in his view, have been
divided ‘between the partners in equal shares’, and not by reference to the
interest of the partners in the net assets of the partnership, valued as at the
date of dissolution. It is plain that
those observations were obiter, because, as Nourse LJ immediately went on to
say ‘the plaintiff has not appealed against that part of the judge’s order’.
[60] While it therefore follows that the
analysis in Popat’s case was and is strictly obiter so far as this case
is concerned, I accept that this court should be reluctant not to follow a
clear (and unanimous) observation in the Court of Appeal on this very
point. Indeed, it is clear that Lightman
J justifiably relied on it in assisting the conclusion that he reached. It is particularly difficult not to follow,
given that it can fairly be said that the whole thrust of the conclusion in
Popat’s case, which was concerned with the apportionment of increase in the
value of the capital assets of the partnership after its dissolution, can be
said to be consistent with the Lightman J’s decision here. It is only right to add that the difficulty
is reinforced in my case, not only because it was my judgment at first instance
which was successfully appealed in Popat’s case, but also because in
that judgment I decided ([1995] 4 All ER 646 at 651–652, [1995] 1 WLR 908 at
913–914) the present point at issue (although, as mentioned above, that part of
my decision was not appealed).
[61] Notwithstanding this difficulty (and,
indeed, the real diffidence I feel in these somewhat invidious circumstances),
I have come to the conclusion that the reasoning and observations in Popat’s
case should not deflect me from the conclusion which I would otherwise have
reached in relation to this appeal.
Firstly, as already mentioned, this court’s observations in relation to
the effect
36
of s 42(1) in Popat’s case were plainly
obiter. Secondly, as explained above,
the editors of Lindley & Banks appear to take the view that Nourse
LJ had the same opinion as to the meaning of the expression ‘share of the
partnership assets’ in s 42(1) as I have formed. Thirdly, neither Yates v Finn (1880)
13 Ch D 839 nor Burdett-Coutts v IRC [1960] 3 All ER 153, [1960] 1 WLR
1027 (nor a number of other cases to which I have referred on post-dissolution
income) were cited to the court in Popat’s case.
[62] Fourthly, I do not think that s 24 is of
any assistance in a case where, as is common ground, s 42(1) applies; further, the
passage in what was then the current, and is now the previous, edition of
Lindley & Banks, cited in the judgment of Nourse LJ ([1997] 3 All ER
800 at 805, [1997] 1 WLR 1367 at 1372–1373), and relied on by him, is plainly
concerned purely with capital, which was what was an issue in that case, and
not with income, which is what this case is concerned with. Fifthly, I contributed to any difficulty
faced by the Court of Appeal in Popat’s case by confusing in my judgment
at first instance, the capital of the partnership with the assets of the
partnership, as Nourse LJ observed ([1997] 3 All ER 800 at 804, [1997] 1 WLR
1367 at 1372), although it appears to me that I was guilty of using the wrong
terminology rather than the wrong figures (see [1995] 4 All ER 646 at 652,
[1995] 1 WLR 908 at 914). Sixthly, the
commercial unjustness of giving s 42(1) the meaning adopted below was simply
not considered in Popat’s case.
THE EFFECT OF THE DEED AND THE CONSENT ORDER
[63] Accordingly, I have come to the
conclusion that the appellant’s case, as advanced by Mr Blackett-Ord, on this
issue is correct. It is therefore
appropriate to turn to the second issue, namely, what, in the light of this
conclusion, is the effect of the terms of the deed and of the consent order so
far as the entitlement of Mr Sandhu, the respondent, to any part of the
post-dissolution profits.
[64] In that connection, it is right to
emphasise that, at any rate at this stage, it has not been suggested by either
party that we should carry out a detailed assessment of the respondent’s share
of the partnership assets. In other
words, we are concerned with questions of principle, not with detailed
assessments. I mention this because, in
their respective skeleton arguments, Mr Blackett-Ord and Mr Walker have each
put forward calculations, on the assumption that s 42(1) has the meaning for
which the appellant contends, with a view to establishing that the respondent,
Mr Sandhu has no, or as the case may be, a substantial, such share. We did not hear any argument on these
calculations, any more than we heard any argument on the disputed facts
relating to what contribution (other than financial) each party had made to the
success of the home, although these issues were also debated in the skeleton
arguments.
[65] In the absence of any subsequent
variation by agreement or otherwise, or an order for rectification, it seems to
me that the effect of cll 10.1 and 10.2 of the deed would be that the
beneficial ownership of the property was vested solely in the appellant, Mr
Gill. That was the position, at least on
the face of it, when the deed was executed, as Mr Gill had bought the property
with his own money and had registered as the sole proprietor at HM Land
Registry. Clause 10.2 appears to
envisage that that should remain the position until Mr Sandhu pays ‘the
Contribution’, which to this day he has not done.
37
[66] However, it is contended by Mr Walker
that this arrangement has been changed by the agreement embodied in the consent
order. He says that, as a result of the
parties agreeing that the property was an ‘asset … of the partnership’, it
should now be treated as owned beneficially in equal shares by Mr Gill and Mr
Sandhu. Mr Blackett-Ord suggests that
that would be a surprising concession for Mr Gill to have made, given that it
was after the parties had fallen out, and that it is misconceived, because the
terms of the consent order nowhere deal with the beneficial ownership of the
property, let alone the shares in which that beneficial interest is held.
[67] Although Mr Walker’s argument can
arguably be said to mean that Mr Gill did make a significant concession in the
consent order as to the way in which the beneficial interest in the property is
owned, I do not consider that the concession can be characterised as
particularly surprising. Firstly, the
consent order settled a number of different disputes between the parties, and
would almost inevitably have involved a degree of give and take on each side. Secondly, the proceedings included a claim by
Mr Sandhu for rectification of the deed so that the property would have been
held in accordance with cl 10.3, ie in equal shares beneficially. Thirdly, Mr Gill’s concession would not alter
the fact that he had not received the full contribution from Mr Sandhu, and, at
least as I currently see it, Mr Gill would be entitled to require that debt
from Mr Sandhu to be taken into account when settling the final account in
accordance with cl 20 of the deed, which reflects the provisions of s 44. After all, Mr Sandhu’s liability to pay the
contribution, as expressed in cl 10.1, has still not been fully satisfied, and
would therefore appear to be enforceable.
[68] In my judgment, Mr Walker is correct on
this second issue. The natural meaning
and effect of the parties having agreed in writing, well after the partnership
had determined, that the property was a partnership asset, when read in the
context of cl 10.2, and Mr Sandhu’s claim for rectification, is that the
parties intended that the beneficial interest in the property should be treated
as owned equally. Firstly, it appears very difficult to discern
any other purpose in the parties having made such an agreement. Secondly, if Mr Sandhu is still liable for
the contribution (as cl 10.1 suggests he is), and this is to be recognised in
the final accounts in the winding up, it would seem unfair if he was not
entitled to benefit from the intended consequences of such payment as expressed
in cl 10.2. Thirdly, although the expression
‘asset … of the partnership’, used in the consent order, is different from
‘partnership property’, used in cl 10.2 of the deed, the words have the same
effect. Once the property is
‘partnership property’, the parties have agreed in cl 10.2 that it becomes
effectively equally owned beneficially.
[69] Indeed, given that Mr Gill appears to
have contributed his share of the capital through the provision of the property
(which cost almost exactly twice each party’s agreed capital contribution), it
seems particularly sensible for the parties to have made the agreement
contended for by Mr Walker, provided always that Mr Sandhu is still treated as
liable to Mr Gill for the contribution.
(Mr Blackett-Ord makes the point that there is no reference to shares,
let alone to equal shares in cl 10.2, but, on normal principles and in the
light of the commercial realities, as just discussed, I think that there is
nothing in that point.) Finally, the
consent order involved Mr Sandhu effectively abandoning his claim for
rectification, which forms part of the factual matrix against which the consent
order must be construed, and which renders it more likely (or at
38
least more explicable) why Mr Gill would have made
such a concession (if, indeed, it is fair to characterise it as such).
[70] I do not believe that it would be
appropriate to go any further, at any rate at this stage, in identifying how
the final accounts are to be drawn up, or how Mr Sandhu’s ‘share of the
partnership assets’ is to be assessed. I
would hope that, despite the differences which still appear to exist between
them, the parties, with the assistance of their respective legal advisers, will
be able now to agree those matters. If
that is not possible, then it may be necessary for the case to be remitted to
the capable hands of Master Bowles.
CONCLUSION
[71] In these circumstances, for the reasons I
have given, and indeed for the reasons given by Mummery LJ and Black J, I would
allow this appeal to this extent.
BLACK J.
[72] The present appeal concerns the
interpretation of s 42(1) of the Partnership Act 1890.
[73] I agree with the judgments of my Lords,
Mummery LJ and Neuberger LJ which deal far more fully with the issues in this
case than I could attempt to do.
However, in the light of the difficulty of the points at issue, it may
be appropriate for me to add some remarks of my own to explain why I share
their view.
[74] Section 42(1) defines the right of an
outgoing partner to share in the profits made by the firm after his
departure. Provided there is no
agreement to the contrary, it applies where there has been no final settlement
of accounts as between the firm and the outgoing partner and where the business
has been continued other than purely to wind up the affairs of the partnership
and to complete transactions begun but unfinished at the time of the
dissolution.
[75] The final settlement of accounts to which
s 42 refers is to be carried out according to the rules set out in s 44,
subject to any contrary agreement.
Section 43 provides that the amount due from the surviving partners to
the outgoing partner in respect of the outgoing partner’s share is a debt
accruing at the date of the dissolution of the partnership. In the event that accounting does not occur
as expeditiously as might be, any partner may apply to the court to wind up the
business and affairs of the firm in accordance with s 39 and, of course, the
outgoing partner can bring a civil action as a creditor of the firm in respect
of the debt owed to him.
[76] In this case, Master Bowles and Lightman
J ([2005] EWHC 43 (Ch), [2005] 1 All ER 990, [2005] 1 WLR 1979) held that Mr
Sandhu, the outgoing partner, was entitled under s 42 to one-half of the
post-dissolution revenue profits of the business, after deduction of a sum to
recompense Mr Gill, the continuing partner, for his management of the business.
[77] Master Bowles’s basis for this was that
(i) ’the assets of the partnership comprehend everything belonging to the
partnership having a money value as at the date of dissolution’ (see Master
Bowles’s judgment at para 93), (ii) unless there is a contrary agreement, all
partners are entitled to share equally in the assets of the partnership (see
para 95), (iii) there being no contrary agreement here, Mr Sandhu’s share of
the assets at the date of dissolution was an equal share with Mr Gill (see para
96), (iv) therefore, subject to Mr Gill’s
39
management allowance, Mr Sandhu is entitled to
one-half of such of the post-dissolution profits as were attributable to the
assets of the partnership (see para 96).
[78] Mr Gill argued in front of the Master, as
he does on appeal, that ‘assets’ in s 42 means ‘net assets’ so that if, at the
date of dissolution, the outgoing partner would not have been entitled to any
payment in respect of his partnership share after all liabilities had been
paid, then he has no entitlement to a share in the post-dissolution
profits. The Master did not accept
that. He considered that it confused the
partner’s share in the partnership (ie what he would get once liabilities were
paid) and his share in the assets of the partnership (ie his share in all the
property belonging to the partnership).
He also considered that it failed to reflect the fact that s 42 was
concerned with a situation in which there was no winding up and therefore no
sale of the assets and payment of the liabilities. His view was that s 42 was concerned with the
actual assets of the business in specie and not with the notional debt that the
partnership would owe to the outgoing partner.
His thinking is perhaps best summarised in para 104 of his judgment
where he says:
‘The fact that a partner
has no cash entitlement at the dissolution date should not mean that if assets,
in which he has, as a partner, joint and equal rights, are used by the
remaining partners to make a profit, he should for that reason be deprived of a
share of that profit.’
[79] Lightman J agreed with this approach,
considering that ‘share of the partnership assets’ in s 42 means the outgoing
partner’s share in the proprietary ownership of assets belonging to the partnership. He considered the question of the outgoing
partner’s share in the partnership and the sum which may be payable to him by
the continuing partner to be irrelevant.
He considered himself supported in this conclusion by, amongst other
things, the decision of Romer J in Manley v Sartori [1927] 1 Ch 157, the
decision of the Court of Appeal in Popat v Shonchhatra [1997] 3 All ER
800, [1997] 1 WLR 1367 and the contrasting terminology of s 41(a) of the 1890
Act.
[80] The issue on appeal has therefore been
whether the interpretation adopted by the Master and Lightman J is correct or
whether the 1890 Act intends that the outgoing partner’s right to share profits
under s 42 is a right to share the profits attributable to what might be
described, loosely, as his continuing (albeit involuntary) actual investment in
the partnership business ie the figure that would be payable to him if the
accounting exercise contemplated by s 44 were to be undertaken.
[81] In providing that—
‘the outgoing partner …
is entitled at the option of himself or his representatives to such share of
the profits made since the dissolution as the Court may find to be attributable
to the use of his share of the partnership assets, or to interest at the rate
of five per cent. per annum on the amount of his share in the partnership
assets …’
—s 42 has the appearance of a fixed rule by which
entitlement is determined although there will be scope for debate as to its
application in an individual case, notably as to whether and to what extent
profits are ‘attributable to the use of [the partner’s] share of the
partnership assets’ or to some other factor such as the industry or flair of
the continuing partners.
40
[82] The law which preceded s 42 had a more
overtly discretionary flavour. The
courts had resisted declaring any rule of general application. Willett v
Blanford (1842) 1 Hare 253, 66 ER 1027 was determined in 1842 by the Vice
Chancellor of the day (Wigram V-C). He
was satisfied that previous authorities did not establish a general rule
applicable to all cases and that the facts of each case had to be considered by
the court before it could make a determination as to the proper accounting for
profits made since the ending of a partnership.
He considered himself—
‘bound by authority and
reason to hold that the nature of the trade, the manner of carrying it on, the
capital employed, the state of the account between the partnership and the
deceased partner at the time of his death, and the conduct of parties after his
death, may materially affect the rights of the parties …’ (See (1842) 1 Hare 253 at 272, 66 ER 1027 at
1034.)
[83] Some of the examples that Wigram V-C
cites of the possible circumstances and their likely outcomes are instructive,
foreshadowing as they do, the positions of the parties in this appeal. In some cases he would have considered the
court virtually compelled to order that the profits would be allocated
according to the shares of the several partners in the business when it was a
going concern, as had been the outcome in an earlier case, Crawshay v
Collins (1808) 15 Ves 218, 33 ER 736.
But he gives examples of situations in which that approach would be
dislodged. He says ((1842) 1 Hare 253 at
271–272, 66 ER 1027 at 1034):
‘there may be the case
of two persons being partners together, in equal shares; one finding capital
alone and the other finding skill alone; and suppose the latter, before his
skill had established a connexion or goodwill for the concern, should die, and
the survivor, by the assistance of other agents, should carry on the concern
upon the partnership premises, it could scarcely be contended after a lapse of
years that the estate of the deceased partner was entitled as of course to a
moiety of the profits made during that lapse of time after his death; and if
his estate would not be so entitled where the deceased partner had left no
capital, it would be difficult to establish a right to a moiety only, because
he had some small share of the capital and stock-in-trade engaged in the
business at his death, without reference to its amount and the other
circumstances of the case …
If capital were to be
taken as the basis upon which, in every case, the proportion of profits was to
be calculated much injustice would often ensue.
In partnership cases the agreed capital of a concern is considered in
general as remaining the same, notwithstanding one partner may make advances to
and the other abstract money from the concern.
If, at the death of an acting partner, he had abstracted or borrowed
money from the partnership exceeding the amount of his property in the concern
it would be anything but justice to hold as a rule of course that his right to
participate in the profits after his death should continue to the same extent
as if his accounts with the partnership were adjusted, and he had given his
time and attention to the business.’
[84] The Court of Appeal in Simpson v
Chapman (1853) 4 De GM & G 154, 43 ER 466 in 1853 indorsed the
reasoning in Willett v Blanford and there is no reason to suppose that
it was not current at the time the 1890 Act came into
41
being. Yates
v Finn (1880) 13 Ch D 839 was determined by Hall V-C in 1880. A and B had carried on business in
partnership for a term of years with articles that provided for an equal
division of profits after payment of interest upon their respective capitals
which were unequal. A died. By then his capital was very significantly
more than B’s. B carried on the business
without the consent of A’s representatives, using A’s capital. Proper allowance was to be made from the
profits earned since A’s death for B’s management of the business and then the
profits were to be divided according to the proportion in which the partners
were entitled to the capital employed in the business. The decision of Hall V-C was made on a
summons seeking to vary the determination of the chief clerk who had made a
finding as to ‘the surplus assets’ and the net profits since A’s death and
provided for an allowance for B for management and then equal division of the
profits. Willett v Blanford
receives further indorsement and Hall V-C comments ((1880) 13 Ch D 839 at 843):
‘where there have been
profits made by the joint capital of the two partners, and the capital of one
of the partners vastly exceeds the capital of the other, I should say it is
ordinarily just and right that the profits made by the business should be
apportioned according to the capital employed in it.’
Having allowed for the possibility of a management
allowance, he continues:
‘I cannot, however,—
because in the ordinary case of partners living and acting together and trading
with unequal capitals, the profits would, in the absence of agreement to the
contrary, be divided equally—apply that rule to a case like this, where the
business has been carried on after the death of one of the partners, the
partnership having, as I conceive, ceased entirely at the time of the
death. The partnership having so ceased,
I do not consider there is anything in this partnership contract to which I can
have regard upon the question what rights there may be as to sharing the
profits after the death. I cannot have
regard to that. If I could have regard
to it in an ordinary case, I could not do so here, where, as it seems to me,
the surviving partner has asserted rights in respect of this partnership to
which he was not entitled, the effect of which was to defer for a considerable
period of time the ascertainment and distribution of the funds between the
parties entitled to them. Therefore, it
seems to me that the certificate was wrong in dividing the profits equally.’
[85] In so far as a philosophy can be
extracted from these nineteenth-century cases, it appears to be that recompense
for the continuing use of assets in business after the ending of a partnership
should be tailored to the degree to which the outgoing partner continues to
have an investment in the business and to which that investment is the source
of the later profits rather than being determined by, for example, an
artificial extension of the principles that applied as between the partners
when the partnership was extant. This is
not, of course, in any way determinative of the proper interpretation of s 42
but it may be of assistance in considering the question.
[86] It is of note also that Sir Frederick Pollock
(the draftsman of the 1890 Act), in his annotation to s 42 in the 1920 edition
of A Digest of the Law of Partnership, said: ‘the right, where it
exists, is an alternative right to interest on the capital improperly
retained in the business or to an account of the profits made
42
by its use…’
To my mind, the most obvious reading of this passage suggests that the
author considered the remedy under s 42 to be related to the amount of the
actual continuing investment of the outgoing partner in the business.
[87] As the statement of the law in Higgins
and Fletcher The Law of Partnership in Australia and New Zealand (8th
edn, 2001) shows, the Australian and New Zealand courts have developed this
philosophy in their interpretation of s 45 of their Partnership Act 1908 which
can be taken, for present purposes, to correspond to the English s 42.
[88] A New Zealand case particularly cited to
us and referred to by Lightman J is De Renzy v De Renzy [1924] NZLR
1065, a decision of Stringer J in the Supreme Court. This was a partnership between brothers, one
of whom contributed the technical knowledge, managed the business and owned
about nine-tenths of the capital. The
other brother died. The survivor made a
payment to his estate thinking, erroneously, he was acting in furtherance of an
agreement to purchase his brother’s interest.
He then continued the business.
The deceased brother’s beneficiaries sought an account relating to the profits. Section 45 applied. Stringer J dismissed the contention of the
beneficiaries that no regard should be paid to the sum paid to the estate in
supposed purchase of the deceased’s interest.
He said (at 1072):
‘What has to be
ascertained is the amount of profits attributable to the share of the deceased
in the partnership assets. When payment
of £658 was made, the share of the deceased in the partnership assets was
thereby reduced, and the profits attributable to such share must therefore
necessarily, it seems to me, be proportionately reduced.’
In support of this conclusion, he cites an example of a
defendant who thinks he has an option to purchase the share of a deceased
partner and pays the estate more for it than the deceased’s actual share in the
partnership assets. Should the beneficiaries
have the purchase set aside, they would not get anything from the profits made
by the business in the period after the dissolution of the partnership because
there could be no share of the profits made after the dissolution which could
be attributed to the use of the share of the deceased because no such use would
have been made.
[89] De Renzy v De Renzy troubled
Lightman J who could not see why the beneficiaries’ share of the profits was
reduced by the erroneous payment; the learned judge thought that it should
rather have been treated merely as payment on account of the sum found due to
the estate. However, it seems to me that
Stringer J’s approach to the issue of the erroneous payment is entirely
understandable when viewed in the context of what I have inferred is the
philosophy of the nineteenth-century cases, adopted in New Zealand. The payment had reduced the continuing
investment of the estate in the business and their share of the profits made
thereafter had to be reduced accordingly.
[90] I turn to the English authorities which
post-date the 1890 Act, of which there are few.
In reaching his conclusion that the share of partnership assets to which
s 42 refers is the outgoing partner’s share in the proprietary ownership of
assets belonging to the partnership, Lightman J placed considerable reliance on
Manley v Sartori [1927] 1 Ch 157, a decision of Romer J in the Chancery
Division. From Romer J’s judgment, the
following propositions can be extracted, Romer J’s stated source for his view
being included in square brackets after each proposition:
43
(a) ’Where … the surviving partners, instead of
realizing the assets and distributing the proceeds amongst the parties in
accordance with their rights and interests, choose to carry on the business and
make profits by virtue of the employment of any of the partnership assets,
then, subject no doubt to making a proper allowance to the surviving partners
for their trouble in so carrying on the business, such profits belong to all
the persons interested in the partnership assets by means of which the profits
have been earned in accordance with their rights and interests in those assets;
that is to say proportionately to their interests in those assets’ [laid down
in ‘numerous cases’ and affirmed by s 42] (see 162);
(b) the partners are not interested in the profits in
the shares in which they would have been entitled whilst the partnership was a
going concern [as explained in Willett v Blanford and expressed in s
42];
(c) ‘the rights of the deceased partner or his legal
personal representatives are rights over all the assets of the
partnership. He has an unascertained
interest in every single asset of the partnership, and it is not right to
regard him as being merely entitled to a particular sum of cash ascertained
from the balance-sheet of the partnership as drawn up at the date of his
death. So that if, after the death … any
profits were in fact earned by using any single partnership asset, the profits
so far as attributable to the use of that partnership asset are profits in
which the executors … have a share to the extent of their share in that
particular asset; that is to say, in proportion to their share in the total
assets of the partnership.’ (See
163–164.)
[91] Neither the wording of the judgment nor
of the order reveals whether the judge, when he used expressions such as the
‘total assets of the partnership’ and contemplated the effect of his order in
fact had in mind the net or the gross assets.
He was not determining the issue that falls for determination in this
case. His comment that it was not right
to regard the deceased partner as merely entitled to a particular sum of cash
at the foot of the balance sheet of the partnership at the date of his death
might look at first sight to support the interpretation of s 42 adopted by the
Master and the judge below. It is
important to understand, however, that it was provoked by the submission that
had been made to Romer J that the deceased partner was not entitled to any
share in the revenue profits because there was, at all times, sufficient liquid
cash to pay him out implying, one supposes, that he was not therefore
interested in any part of the assets that had generated the profit. It would be wrong to interpret what he said
in that particular context as suggesting that he was inclined to the
interpretation advanced by Mr Walker.
Indeed, it seems to me that if anything, his remarks taken as a whole
suggest that he would have been of the opposite view. The passage (at 162) which Neuberger LJ
quotes in [47], above, of his judgment in which Romer J refers, with apparent
approval, to Willett v Blanford gives this impression. It is probably a mistake to focus too sharply
upon individual phrases in a judgment of this type, especially as Romer J seems
in this passage to be concentrating upon the question whether post-dissolution
profits were divisible between the parties in accordance with their rights and
interests in profits earned while the partnership was a going concern, which is
not necessarily the same question as whether they may be divisible between the
parties in the proportions that they may have been interested in the
partnership assets during the partnership given that there may,
44
for example, have been an express agreement as to the
sharing of revenue profits which did not tally with the interests of the
partners in the assets. However, with
that caveat, I note particularly that Romer J appears to be indorsing this
proposition:
‘where the profits had
been earned by reason of using the assets of the partnership, those profits
were divisible between people who, in the events which had happened,
were interested in the partnership assets: they were not divisible between the
parties in accordance with their rights and interests in profits earned while
the partnership was a going concern.’
(My emphasis.)
The reference in this passage to ‘in the events which
happened’ must, I think, be a reference to the ending of the partnership and
strongly suggests to me that Romer J contemplated that in making provision for
post-dissolution revenue profits, the courts would look to see who was actually
interested in the assets in the light of the dissolution and not who would have
been interested in them had the partnership still been continuing.
[92] The remaining English authority is
Popat v Shonchhatra [1997] 3 All ER 800, [1997] 1 WLR 1367, in which Nourse
LJ gave a judgment with which the other two members of the Court of Appeal
agreed. My Lord, Neuberger LJ, sitting
at first instance ([1995] 4 All ER 646, [1995] 1 WLR 908), had decided that
subject to a management allowance, the revenue profits made in the
post-dissolution period should be divided between the partners in accordance
with their shares in the partnership which were unequal, rather than equally in
accordance with their entitlement to the partnership assets. It is not surprising that Nourse LJ’s comment
upon this decision is brief in the extreme, given that it had not been appealed
(or presumably argued) and whatever he had to say was very much obiter. He simply said ([1997] 3 All ER 800 at 806,
[1997] 1 WLR 1367 at 1373–1374):
‘Since s 42(1) refers to
“such share of the profits made since the dissolution as the Court may find to
be attributable to the use of his share of the partnership assets”, the judge
ought, for the reasons already stated, to have directed a division between the
partners in equal shares.’
[93] That Nourse LJ was of this opinion, even
if it is not binding, must make one pause long and hard before adopting another
interpretation of s 42. Furthermore, to determine
otherwise would mean that post-dissolution capital profits and post-dissolution
revenue would be dealt with differently.
The point at issue on appeal in Popat v Shonchhatra was how the
capital profit realised on a sale after dissolution of the assets of a
partnership should be divided between the partners. Was the division to be equal pursuant to s 24
of the 1890 Act or, as the court below had held, in shares corresponding to
their respective shares of the capital of the partnership as at the date of
dissolution, one partner having contributed significantly more capital than the
other? In the course of his judgment,
Nourse LJ emphasised: (a) The distinction between the capital of a partnership
(which is a fixed sum, being the aggregate of the contributions made by the
partners) and its assets (which may vary from day to day and
45
include everything belonging to the firm that has any
money value). (b) The fact that, whilst
the partnership is a going concern, a partner has a proprietary interest in
each and every asset of the partnership but no entitlement to any specific
asset. It is only once the accounting
process has been carried out upon the dissolution of a partnership that a
partner can accurately be said to be entitled to a share in anything. These two fundamental points constitute the
‘reasons already stated’ which Nourse LJ considered dictated that a correct
interpretation of s 42 on these facts would have provided for a division of
income profit between the partners in equal shares.
[94] The balance of the reasoning for the
decision in relation to the capital profits is not directly applicable to the
interpretation of s 42 although it is of note.
There having been no agreement to the contrary, the partners were
entitled during the partnership to share equally in its assets in
accordance with the rule established before the 1890 Act and, in Nourse LJ’s
view, probably recognised by s 24 of that Act.
They were not entitled to equal shares in the capital of the
partnership but shares in proportion to their contributions to the cost of
acquiring the leasehold premises, fixtures and fittings and goodwill. However, the issue was not about the
‘capital’ of the partnership within s 24 but about the ‘profits’, a term which
includes both capital and revenue profits.
Nourse LJ’s reasoning was that s 24 applied not only to profits up to
the date of the dissolution of the partnership but also thereafter. He considered that s 42(1) was an exception
to this in certain circumstances and authority established that it covered
revenue profits only, not post-dissolution capital profits. In relation to the capital profits of the
business under consideration, he therefore held that the governing provision
was s 24(1) which, there being no agreement to the contrary, imposed equal
shares.
[95] The fact that Nourse LJ viewed s 42 as an
exception to s 24, imposing a discrete regime in relation to revenue profits in
certain circumstances, reduces my anxiety about the differential treatment of
post-dissolution capital and revenue profits.
I remain, however, extremely diffident in contemplating a different
interpretation of s 42 from his.
Nevertheless, the tenor of the pre-1890 Act authorities forces me to
consider this possibility seriously. It
seems to me that whereas they concentrate upon the reality of the
post-dissolution period, the Popat v Shonchhatra solution operates
artificially to extend into that period the position as it was during the
partnership.
[96] There are other features which also
incline me, reluctantly, against the Popat v Shonchhatra
interpretation. It seems to me necessary
that the phrase ‘his share of the partnership assets’ should, if at all
possible, be given the same meaning on both occasions on which it appears in s
42(1). The outgoing partner has two
choices under the section as to how to take recompense on what has been
retained and used in the partnership business.
The phrase is used in defining each of these choices (the share of the
profits that the court may find to be attributable to ‘the use of his share of
the partnership assets’ or interest at the rate of five per cent pa ‘on the
amount of his share of the partnership assets’). It is almost inconceivable that the draftsman
would have intended it to have two different meanings. It is perhaps easier to contemplate the
practical outcome of the two proposed interpretations of the phrase in relation
to the simple concept of five per cent interest than in relation to the more
sophisticated concept of a share of profits.
It seems to me that such an exercise
46
enables one to identify the potentially
unsatisfactory results that would flow if the ‘share of the partnership assets’
were taken to be a share of the gross assets rather than of the surplus assets
after proper accounting. I am grateful
to Mr Blackett-Ord for the examples he gives.
I will not labour the point in this judgment because I am in agreement
with Neuberger LJ’s analysis of them.
Two will be sufficient to underline the apparent injustices that could
be produced. Firstly, take the
partnership where the partners have equal entitlements to the partnership
assets and which has only one asset, the business premises which are subject to
a 100% loan. Can the outgoing partner
really be intended to have the option to demand of the continuing partner, who
may, in fact, be serving the interests of both of them by continuing the
business for a period rather than embarking immediately upon winding it up, 5%
interest on the unencumbered value of the property? This would have to be discharged from the
actual profits of the business which, in reality, may be seriously diminished
by servicing the loan in relation to the property. Secondly, take the partnership where the
partners again have equal entitlements to the partnership assets but where the
outgoing partner made his contribution by hard work during the currency of the
partnership and the continuing partner put up all the capital. Assuming for the moment that no valuable
goodwill has been generated to complicate the issue, can it be intended that
the outgoing partner can claim 5% interest on 50% of the value of the assets
which have all come from the other partner?
It must be remembered that whereas the option for a share of the profits
is subject to the filter that those profits must be attributable to the
use of the partner’s share of the assets, there is no such filter on the
interest option. The mere fact that he
is entitled to a share of the partnership assets is sufficient and the
continuing partner can only seek to redress the balance through the medium of a
management allowance.
[97] There are, however, also valid points to
be made in support of the interpretation adopted by the Master and Lightman J,
quite apart from the fact that it accords with the approach of the Court of
Appeal in Popat v Shonchhatra.
[98] Lightman J pointed out that in s 41(a) of
the 1890 Act, where reference to the net assets of the partnership is intended,
explicit language is used (‘the surplus of the partnership assets, after
satisfying the partnership liabilities’).
Section 39 is similarly explicit.
Section 31, however, which deals with the assignment of a share in a
partnership, and in particular s 31(2) which deals with the assignee’s
entitlement in the case of a dissolution of the partnership, speaks of the
assignee’s entitlement to receive ‘the share of the partnership assets to which
the assigning partner is entitled as between himself and the other partners,
and for the purpose of ascertaining that share, to an account as from the date
of the dissolution’. This provision, it
seems to me, contemplates the assignee receiving a share which reflects the
accounting process in s 44 and therefore utilises the phrase ‘share of the
partnership assets’ in a sense which is in line with the proposed net asset
interpretation of s 42. Furthermore, I
am not convinced that the use of language is sufficiently homogenised in the
Act to draw any particular inference from s 41.
It seems to me more important to look at the sections that immediately surround
s 42 to examine how it fits into that context.
My impression of the part of the Act commencing at s 32 and dealing with
dissolution of partnership and its consequences is that it can be subdivided
47
into groups of sections dealing with particular
features of the topic. So, ss 32–35 deal
with methods of dissolution, ss 36–38 concern the dealings of the partnership
with the outside world in the aftermath of the dissolution, ss 39–44 deal with
the rights as between the partners.
Within the last group of sections, it makes a great deal of sense to
read ss 42–44 together. Section 43
utilises the word ‘share’ when providing that the amount due from the
continuing partners to the outgoing partner in respect of the outgoing or
deceased partner’s share is a debt to him.
This use of ‘share’ is a reference to the share as calculated in s
44. It is also arguable, in my view,
that its use here is a shorthand version of ‘share of the partnership assets’
in s 42(1) which strengthens the case for the net asset interpretation of s 42.
[99] So it is that, albeit with considerable
difficulty, I have reached the conclusion that the correct interpretation of s
42(1) is that which reflects the reality of the outgoing partner’s position
vis-Ã -vis the partnership and not the interpretation adopted in the courts
below. I am quite satisfied that the
phrase ‘share of the partnership assets’ has the same meaning on both occasions
when it is used in the section. In my
judgment, the section contemplates that a figure will be ascertained, as at the
date of dissolution, for the assets after payment of third party liabilities in
accordance with s 44(b)1 and thereafter a calculation carried out as to what is
due to the outgoing partner by way of advances, capital and share in any
surplus. For the five per cent interest
option in s 42, no further calculation is necessary (except possibly in
relation to a management allowance); the outgoing partner can claim 5% pa on
the figure calculated to be due to him.
For the profit option, it will be necessary to work out the proportion
that that figure bears to the total of the assets after discharge of third
party liabilities; subject to arguments as to other factors that have
contributed to the making of profit, the outgoing partner can claim the
proportion of profit that his figure bears to the total assets. I have referred in this judgment to the
accounting exercise as set out in s 44.
As that section makes clear, however, contrary agreement will displace
its provisions. Here, para 20 of the
partnership deed is relevant, although in fact to similar effect, in
determining what is due to the out going partner.
MUMMERY LJ.
[100] I agree with Neuberger LJ and Black J
that the appeal should be allowed.
[101] We are differing from detailed reasoned
judgments of Master Bowles and Lightman J on a point of principle arising on s
42(1) of the Partnership Act 1890. As it
is not an easy point of construction, permission for a second appeal was
granted. The authorities on the
attributability of profits, when an outgoing partner claims a share of the
post-dissolution profits made by a partner who continues the business using
partnership assets, cover a variety of circumstances. Although my Lords have dealt with all the
legal and factual points in depth, I think that this is a case in which my
opinion should be expressed in my own words.
[102] In my judgment the legal position of Mr
Gill and Mr Sandhu is as follows.
(1) It is common ground that s 42 of the 1890 Act
applies to Mr Sandhu’s claim to a share of the post-dissolution ‘revenue
profits’ made by Mr Gill. (It is
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also common ground that the section does not apply to
the ‘capital profits’ realised by the continuing partner post-dissolution: Barclays
Bank Trust Co Ltd v Bluff [1981] 3 All ER 232, [1982] Ch 172.)
(2) Mr Sandhu ceased to be a partner on 12 April
1999, when the partnership was dissolved.
He was the ‘outgoing partner’ within s 42(1). Mr Gill carried on the business of an old
people’s home at 59 Mountdale Gardens with the capital and assets of the
partnership. He did so without any final
settlement of accounts as between the firm and Mr Sandhu. Mr Gill was accordingly in the position of a
‘continuing partner’ within s 42(1). On
Mr Sandhu’s exercise of his statutory option under s 42(1) he is entitled to
claim a share of the profits made by Mr Gill in the period between the date of
dissolution and the conclusion of the winding up of the partnership.
(3) Mr Sandhu’s entitlement is to ‘such share of the
profits made since the dissolution as the court may find attributable to the
use of his share of the partnership assets’.
Mr Sandhu’s claim for one-half of the revenue profits is advanced on the
basis that, under the 1995 partnership agreement and the consent order by
Pumfrey J in this litigation, he is entitled to an equal half-share in all the
gross assets of the partnership. His
claim was upheld by the Master and by Lightman J, subject only to deduction of
a sum (£22,000) to reflect the contribution by Mr Gill’s work in running the
old people’s home to the making of the post-dissolution profits. That part of the profits was found by the
court to be attributable to Mr Gill’s exertions in carrying on the business,
not to his use of Mr Sandhu’s share of the partnership assets. No financial adjustment was made by the
Master to reflect the fact that Mr Sandhu’s contribution to the capital of the
partnership was less than the contribution to the capital made by Mr Gill.
(4) In answer to Mr Sandhu’s claim for an equal share
of the revenue profits Mr Gill points to the inequality of the respective
amounts of their investment of capital in the partnership. Mr Gill made by far the larger
investment. Mr Blackett-Ord appearing
for Mr Gill contended that Mr Sandhu was accordingly not entitled to an equal
half-share of the net revenue profits post-dissolution: he was only entitled to
a share of the net post-dissolution profits proportionate to his share of the
net assets of the partnership. In ascertaining
Mr Sandhu’s share of the partnership assets within s 42(1) it was necessary to
make an adjustment to reflect the inequality of capital contributions. If that approach is applied to the figures Mr
Sandhu had a nil share in the net assets of the partnership. Accordingly he had no claim in respect of the
post-dissolution trading profits made by Mr Gill.
(5) In deciding which of the rival contentions is
correct, four points on the construction of the statutory option exercised by
Mr Sandhu are worth noting.
(6) First, the context in which Mr Sandhu’s claim is
made is critical. Section 42 is in the
group of sections in the 1890 Act (ss 32–44) governing dissolution of
partnership and its consequences. The
sections should be read together. They
are the part of the partnership code relevant to dissolution. They include rules for the distribution of
assets on final settlement of accounts (see s 44). The partnership between Mr Sandhu and Mr Gill
was dissolved with effect from 12 April 1999.
After that date the business ceased to be carried on by the partnership
as a going concern. The business was
carried on by Mr Gill thereafter using the partnership capital and assets. But the partnership had to
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be wound up.
Accounts between the partners had to be settled. Before any division of ultimate residue could
be made between the partners in the proportions in which profits are divisible
certain payments had to be made out of the assets of the firm: debts and
liabilities of the firm, advances by partners and sums due from the partners in
respect of capital (see s 44).
(7) Second, the reference in s 42(1) to a share of
‘partnership assets’ is strongly relied on by Mr Gill. ‘Partnership assets’ are, as he correctly
submits, to be distinguished from the ‘capital’ of the partnership (see
Popat v Shonchhatra [1997] 3 All ER 800, [1997] 1 WLR 1367). The shares of Mr Sandhu and Mr Gill in the
assets and profits of the partnership were equal, but the respective
contributions by them to the capital of the partnership were not equal. On a dissolution of the partnership the
capital would fall to be shared in proportions corresponding to their
respective contributions of capital, but the partnership assets would be shared
equally between them.
(8) Thirdly, the claim of Mr Sandhu, as the outgoing
partner, arises from Mr Gill’s ‘use’ of something to which Mr Sandhu was
entitled when he ceased to be a partner.
That something was not ‘the partnership assets’ themselves, with which
Mr Gill has carried on the business formerly carried on by the
partnership. The relevant use by Mr Gill
for the purposes of s 42(1) is of Mr Sandhu’s ‘share’ of the partnership
assets. The critical question is what
was Mr Sandhu’s ‘share’ of those assets when the partnership was dissolved? Mr Sandhu does not claim to be entitled to
all the profits made by Mr Gill with the partnership assets. He only claims that he is entitled to receive
those profits, which the court finds to be attributable to ‘the use of his
share’ of the partnership assets.
(9) Fourthly, notwithstanding the distinction between
partnership assets and the capital of the partnership, it is important to note
that Mr Sandhu’s ‘share’ of the partnership assets on the dissolution of the
partnership is governed by the rules laid down, subject, of course, to any
contrary agreement, for the distribution of assets on a final settlement of
accounts between the partners. The rules
cover the treatment of capital contributions in the settlement of accounts. The rules provide that Mr Sandhu’s ‘share’ of
the partnership assets is ascertained after taking into account, inter alia,
the respective capital contributions of Mr Sandhu and Mr Gill to the
partnership. Mr Sandhu’s ‘share’ of the
partnership assets is determined on the equal division of the ultimate residue
between the partners after all relevant payments have been made out of the
assets of the firm, including payments of what is due to each partner in
respect of capital.
(10) As explained by Neuberger LJ this approach to s
42(1) is consistent with the authorities.
I refer to the observations on s 42 in Manley v Sartori [1927] 1
Ch 157 at 162, 163 and 165 (Romer J) and Popat v Shonchhatra [1997] 3
All ER 800 at 804–805 and 806, [1997] 1 WLR 1367 at 1371–1372 and 1373–1374 per
Nourse LJ. The passages, which are cited
in the judgment of Neuberger LJ, make clear that entitlement to a share of the
profits of the partnership business is changed on the dissolution of the
partnership. It is not the same as the
division of profits between the partners while the partnership is running the
business as a going concern. The
outgoing partner on a dissolution is ‘only entitled to his proper proportion of
the profits earned by the partnership assets’ on the basis that the outgoing
partner has an unascertained interest or share in
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every single asset of the partnership. As Nourse LJ said in Popat v Shonchhatra
[1997] 3 All ER 800 at 804, [1997] 1 WLR 1367 at 1372 ‘each partner has
a proprietary interest in each and every asset’, though no entitlement to any
specific asset. The profits claimed
must, however, be attributable to the use of the outgoing partner’s ‘share’,
which they are not if, for example, they are earned by and attributable to the
skill and labour of the continuing partner.
(11) The importance of observing the distinction
between (a) entitlement of the partners to repayment of capital invested by
them in fixed amounts of cash or kind in the partnership and (b) entitlement of
the partners to shares in the assets of the partnership which vary from time to
time was emphasised by Nourse LJ in Popat v Shonchhatra [1997] 3 All ER
800 at 804, 805 and 806, [1997] 1 WLR 1367 at 1371,1372 and 1374. His comments were made in the context of
determining shares in post dissolution profits, in that case both capital
profits and revenue profits. The
distinction is relied on by Mr Walker appearing for Mr Sandhu. He submitted that his client was entitled to
a continuing interest or share in all the assets of the partnership, not just
to a particular sum of cash surplus ascertained at the date of
dissolution. He submitted that Mr Gill
had continued the business utilising all of the partnership assets. He had made the profits from his use of them. Hence Mr Sandhu’s claim to a half-share of
the profits based on a half-share of the gross assets of the partnership, save
only to the extent that the profits are attributable to the skill and exertion
of Mr Gill rather than the use of the one-half share.
(12) I appreciate the attraction of the arguments
advanced on behalf of Mr Sandhu and accepted in the courts below, but, in my
judgment, the submissions of Mr Blackett-Ord for Mr Gill fit better into the
scheme of the provisions in the 1890 Act governing the distribution of assets
on the dissolution of a partnership, including post-dissolution profits made by
a continuing partner. They also lead to
a more sensible result. Two important
points were made in Popat’s case: first, that the partners’ capital
contributions do not include partnership assets and are not ‘determinative of
the size of the partners’ respective shares of the assets’ (see [1997] 3 All ER
800 at 804, [1997] 1 WLR 1367 at 1372).
Mr Gill does not argue that they are.
Second, however, on the dissolution of a partnership, the position is
that a partner has a ‘share’ in the assets of the partnership at the stage when
division is made between the partners of the ultimate residue: that is after
payment of what is due from the firm to the partners in respect of
capital. The second point, in particular,
supports the position taken by Mr Gill rather than the position of Mr Sandhu.
[103] I agree with Lightman J that the issue
on post-dissolution profits focuses on the meaning of the words ‘share of the
partnership assets’ in s 42(1). I also
agree with him that each partner has a proprietary interest or share in all the
assets of the partnership and that the size of the interest is determined by
the agreement between the parties, in default of which the partners are
entitled to equal shares. As indicated
in the preceding paragraph, however, I am unable to agree with his approach, in
the context of a dissolution, to the determination of the assets of the
partnership, in which the outgoing partner has a share for the purposes of
establishing his claim for a share in the post-dissolution profits made by the
continuing partner with the partnership assets.
The approach proposed by Mr Blackett-Ord does not involve, as Lightman J
said (see [2005] EWHC 43 (Ch) at [20], [2005] 1 All ER 990 at [20], [2005] 1
WLR 1979) either
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‘valuing’ the outgoing partner’s share of the
partnership assets or taking account of sums which may be payable by the
outgoing partner to the continuing partner.
What it does involve is ascertaining, in accordance with the partnership
accounting rules in s 44, what, on the dissolution and winding up of the
partnership, are the net assets of the partnership that fall to be divided
between the partners in equal shares. It
is for the use of that ‘share’ of the outgoing partner after dissolution of the
partnership, not for the use of the share of the pre-dissolution gross assets
of the partnership while it was being carried on as a going concern, that Mr
Sandhu is entitled to claim a proportionate share of the post-dissolution
revenue profits made by Mr Gill.
[104] I would allow the appeal. The parties should attempt to agree a draft
order in accordance with the judgments handed down on this appeal.
Appeal allowed.
KUJUA STYLE TAMU ZA KUMKUNA MSICHANA AKAKUPENDA DAIMA ASIKUSALITI BONYEZA HAPA CHINI
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