New guidance on insolvent partnerships – Shiraz Boghani v Bashir Nathoo

13 September 2011

PARTNERSHIP GROUP

Shiraz Boghani v Bashir Nathoo
[2011] EWHC 2101 (Ch)

Section 38 Partnership Act 1890

Mr Boghani and Mr Nathoo carried on the business of hotel development under the name Splendid Hotels Group as partners at will from 1993. On 1 April 2011 Mr Boghani served notice of dissolution on Mr Nathoo dissolving the partnership with effect from 8th April 2011. Mr Nathoo accepted that the partnership was dissolved from that date. Subsequently Mr Boghani brought proceedings against Mr Nathoo seeking a declaration that the partnership was dissolved from 9 April 2011 but also alleging breaches of duty on the part of the Mr Nathoo causing loss to the partnership and, thus, Mr Boghani. Accounts, enquiries and indemnities were sought.

The partnership was undoubtedly solvent and had several assets. The assets of the dissolved partnership included two substantial but uncompleted hotel development referred to as the Hilton Development and the ICH Development. Mr Boghani wanted the two developments to be sold in their incomplete state and clearly wanted to buy them himself so as to take the development profit for himself. Mr Nathoo wanted them to be completed before sale so that the development profit would pass to the partnership and, thus, be divided between the parties.

Mr Boghani issued an application seeking a declaration that they should be sold in their current condition and Mr Nathoo issued an application seeking a declaration that pursuant to section 38 of the Partnership Act 1890 the duties and obligations of the partners continued notwithstanding the dissolution of the partnership for the purposes of completing transactions commenced but not completed before dissolution so as to require the parties to complete the developments.

The applications came before the Chancellor of the High Court, Morritt LJ, who found that partners duties and obligations continued for the purposes of completing transactions commenced but not finished before dissolution in so far as it was necessary to complete them for the purposes of winding up the partnership. He found that it was not so necessary in this case as it was legally possible to assign or novate the contracts entered into before dissolution in relation to the two developments so as to rid the partnership of the obligations under them. He also found that there was no obligation to enter into new contracts in order to complete existing incomplete transactions unless the new contract fell within the category of being an inevitable consequence of the pre dissolution agreements. In this case it was necessary for the parties to enter into new funding agreements and the learned Judge found these not to be consequences of the pre-dissolution contracts but necessary conditions. As a result the parties were under no obligation to enter into them. He ordered that the developments be sold in their present condition save that the parties were to continue to construct the ICH development during the three month marketing period.

This is an important case on the construction of section 38 and permission to appeal has been sought from the Court of Appeal as the benefit to the partnership if the development is completed is far greater, even taking into account additional costs including finance costs, than if they are sold in their present condition. Mr Nathoo argues that the Judge was wrong to find that the continuing duties and obligation to complete pre existing contracts is subject to a proviso that the completion must be necessary for the winding up of the partnership; that even if such a proviso does apply the mere fact that it might be possible to novate the contracts does not mean that the duties and obligations do not continue as contended by Mr Nathoo if the completion would result in a more beneficial winding up of the partnership.

There is precious little authority on the meaning and operation of section 38. The decision leaves open as many questions as it answers. It states in terms that if the partnership has entered into contracts before dissolution which have not been completed at the date of dissolution, the affairs of the partnership cannot be finally wound up unless and until the contractual obligations have been satisfied by performance, release or novation or the payment of damages and so the obligations and duties continue to that extent. Notwithstanding that, on the basis of this case, it will be very rare for performance to be required if it is legally possible to assign or novate or there is a chance of release as it is not necessary for the contracts to be performed. It would also seem, by application of the principle, that if the partnership is solvent and able to pay damages for breach of contract, the partners will not be obliged to perform. This appears to contradict Inland Revenue v Graham’s Trustees [1971] SLT 46.

Counsel: Alan Steinfeld QC, Philip Jones QC and Helen Galley

Helen Galley
XXIV Old Buildings
September 2011

Published by LexisNexis Butterworths