When Partnerships Go Wrong: Duties Regarding Asset Realisation on Dissolution

On occasion, a partnership will dissolve in less than friendly circumstances, with resentment or ill will on one or both sides.  In such circumstances, the responsibilities of the partners in ensuring that the winding up of the partnership proceeds smoothly become extremely important.  In particular, the partners are obliged to ensure, as far as is possible, that partnership assets are realised for the maximum possible amount.

Following the dissolution of a partnership, s 41 of the Partnership Act 1908 provides:

41. Continuing authority of partners for purposes of winding up—
           
After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue (notwithstanding the dissolution) so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:
…

The Court of Appeal, in Sew Hoy & Ors v Sew Hoy & Anor (CA 48/00, 6 November 2000), discussed the obligations provided for in s 41 and quoted with approval from Lindley & Banks on Partnership (17th ed (1995) at para 25-54(5)) as follows:

…for the purposes of winding up, the partnership is deemed to continue; the good faith and honourable conduct due from every partner to his co-partners during the continuance of the partnership being equally due so long as its affairs remain unsettled; and that which was partnership property before, continuing to be so for the purpose of dissolution, as the rights of the partners require.

This passage indicates that, even following dissolution of the partnership, partners are obliged to act in the best interests of the partnership, which interests are clearly served by the maximisation of partnership assets.  Acting against these interests, particularly with motivations that are less than honourable, would be a breach of the duty of good faith and honourable conduct owed by each of the partners to the partnership as a whole. 

However, it should be noted that the Court in Sew Hoy, after discussion of the Australian case Chan v Zacharia (1984) 154 CLR 178, went on to say at para [39]:

It does not appear correct that a former partner is to be obliged to undertake fresh liabilities in order to preserve an asset for the partnership.

Therefore, while obligations do exist in respect of the maximisation of partnership assets, it is clear from the above passage that those obligations are limited to some extent.

For example, the Australian High Court in Chan v Zacharia was faced with a situation where a medical practice was carried on in partnership by the parties.  There was a valuable lease of the premises from which the practice was carried on, which contained an option to renew.  A few months before the renewal date, Dr Chan gave notice of dissolution of the partnership but refused to join with Dr Zacharia in renewing the lease.  Dr Chan then obtained in his sole name a new lease of the premises.

The Court held that Dr Chan could not use his refusal to enter the lease to obtain a benefit for himself.  Although one judge did go further and said that he thought Dr Chan could have been forced to renew the lease in the name of the partnership, it was not necessary to decide on this point and two of the other judges presiding disagreed, in quite strong terms, with the finding.  The New Zealand Court of Appeal in Sew Hoy also disagreed with this finding.

Clearly, having regard to the above, partnership duties extend beyond the dissolution of the partnership.  However, it is equally clear that these duties are limited.  It is not equitable, for example, to force the partners of a dissolved partnership to enter into new liabilities, which effectively extend the relationship between them where they plainly no longer wish to conduct business together.  This is particularly so where the dissolution has been less than friendly and the parties can be expected to be somewhat antagonistic towards each other.  There is a duty to maximise partnership assets but this duty should not operate so as to extend the relationship of the parties any longer than is absolutely necessary.