In Commissioner of State Revenue v Rojoda Pty Ltd, the High Court of Australia engaged with the vexed issue of the nature of a partner’s interest in partnership property. Historically courts have adopted a bewildering range of characterisations of this interest, and Rojoda represents the most developed judicial discussion of the question, one which fully engages with partnership’s place in the pantheon of equitable interests and property rights. The decision required a direct comparison between the rights of a beneficiary under a standard fixed trust and the rights of a partner. The majority judgment is extremely clear and lucidly reasoned, but raises three thorny issues of principle.
The High Court ultimately ruled that duty was payable. In a joint judgment, Bell J, Kean J, Nettle J, and Edelman J ruled that partnership property was held on trust for the partners. However, because each partner had the right to force the others to sell partnership property on dissolution to satisfy partnership debts, each partner only had a right to due administration of the whole partnership fund, and no partner had a ‘vested’ interest in any given partnership asset. They would only acquire such interests once the debts of the partnership had been paid. For that reason, the equitable interests of partners were said to be categorically distinct from those of beneficiaries of fixed trusts. At the time of the 2013 declaration of trust, the debts of the partnership were outstanding. The 2013 declaration of fixed trust therefore did involve the creation of new rights: each partner acquired for the first time a ‘vested’ interest in the freehold properties. As a result, duty was payable.
The second issue relates to the distinction drawn by the majority between the rights of partners and of beneficiaries of fixed trusts. It was held that while beneficiaries of fixed trusts have interests in each trust asset, partners can only claim the residue of the partnership assets after the creditors have been paid upon dissolution. Until that time, no partner has a right in any particular asset of the partnership. With respect, the distinction is hard to sustain, because beneficiaries of fixed trusts are as much residual claimants as partners. Imagine that A holds property on fixed trust for B and C, and the terms of the trust allow A to contract debts on the trust’s behalf. A has access to the trust assets, by way of a right of indemnity and lien, to meet such authorised debts, in exactly the same way that partners have rights of indemnity and lien over partnership assets. The key point is that B and C could not collapse the trust under Saunders v Vautier, without first indemnifying A and making good any loss A had incurred with authority under the trust’s terms, (see CPT Custodian Ltd v Commissioner of State Revenue  and ). Although beneficiaries of a fixed trust, B and C are residual claimants exactly like partners: neither partners nor beneficiaries can claim the assets until the debts of the partnership or fixed trust have been met or are otherwise provided for. Likewise, because B and C are co-owners in equity of the trust assets, neither could claim any particular asset held by the trust as theirs alone. Partners are in the same position, but this has nothing to do with the availability of partnership assets to partnership creditors—it is simply the consequence of co-ownership.
The third issue relates to the Partnership Act 1895 (WA), s 53 equivalent to the Partnership Act 1890 (UK), s 43. That section provides that the share of a retired or deceased partner of a business is a debt accruing at the date of dissolution, and represents the statutory codification of the majority judgment in Knox v Gye (1871-72) LR 5 HL 656. The status of the section is perhaps thrown into question by Rojoda, which instead states that Lord Hatherley LC’s minority judgment in Knox v Gye that a former partner retains an interest under a trust in the assets of the firm—rather than a simple debt—has “prevailed” (Rojoda at  to ). It is unfortunate that the High Court did not address the conflict.
It is suggested that the best solution here is to treat the Western Australian Partnership Act 1895, s 53, and its equivalents, as simply relating to limitation periods. Knox v Gye itself concerned whether the estate of a deceased partner could claim his share of the assets of the firm more than six years after his death. The litigation only arose because the partners had failed to include the normal clause in the partnership agreement providing that upon retirement or death a former partner’s share would become a liquidated debt. The majority in Knox, in an era before general incorporation had become widespread, was clearly wary of allowing claims of retired and deceased partners indefinitely to haunt businesses which had failed to include such a clause in the partnership deed, but had continued trading after dissolution. The passage of Sir Frederick Pollock’s A Digest of the Law of Partnership which served as the template for English Partnership Act 1890 (UK), s 43 and its equivalents, treats Knox v Gye simply as relating to limitation periods ((1884) 3rd edn, Stevens and Sons, pp. 103-104). If a former partner’s claim was simply a debt, it would be hard to justify his statutory entitlement to a share of any profits the business makes using his former share of the assets after his retirement (Partnership Act 1890 (UK), s 42; Partnership Act 1895 (WA), s 55). Construing the ‘debt’ provision as simply relating to limitation periods thereby reconciles the statute with the reasoning in Rojoda in a way sympathetic to the history of the provision.
How to cite this blog post (Harvard style)
Televantos, A. (2020). The Nature of Partnership Property and Fixed Trusts. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2020/12/nature-partnership-property-and-fixed-trusts (Accessed [date]).