Scottish Court of Session Decisions

The estates of Laing Brothers & Company, jute spinners, Dundee, as a company, and of the individual partners, were sequestrated on March 9th 1895, and Mr John Mess, accountant, Dundee, was appointed trustee in the sequestration. Previous to the sequestration he had been acting under a voluntary trust-deed granted in his favour by the partners on 25th July 1894.

On 28th August 1891 Laing Brothers & Company and Mr John Low, nephew of the partners, entered into the following minute of agreement:—“Whereas the first parties have applied to the second party

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for an advance by way of a loan to enable them the better to carry on their business: And whereas the second party has agreed to advance the sum of £1000 to be used by the first parties in their business upon the conditions hereinafter mentioned:— First. The second party hereby agrees to advance to the first parties the sum of £1000 in loan as above mentioned, and that for the period of three years from the 31st day of October 1891, upon which loan interest shall be paid by the first parties to the second party at the rate of £5 per centum per annum from the said 31st day of October 1891 to the term of payment, and that half yearly, at two terms in the year, Whitsunday and Martinmas, by equal portions, beginning the first term's payment of said interest at the term of Whitsunday 1892, for the interest due preceding that date, and the next term's payment thereof at Martinmas following, and so forth half yearly during the continuance of the said loan. Second. The first parties agree that they shall retain in their business, and in order to secure the foresaid loan, the amount that may stand at their credit in the books of their firm as at 31st October 1891, at the expiry of a spinning account which will then come to an end, less the sum of £300 to be paid by them to Peter Matthew, merchant in Dundee. Third. The whole profits made in the business during the foresaid period of three years during which the foresaid loan is to continue, shall, under deduction of payments for management, wages, jute, and other ordinary and necessary outgoings requisite for carrying on the business, remain in the business, without any deduction other than that above specified until the expiry of this agreement, and on the expiry of the foresaid period the first parties shall repay in cash to the second party his said loan of £1000, and the whole of said profits shall be divided between the first parties and the second party equally. Fourth. In estimating the profits of the said business the said first parties shall be entitled to charge against the said business the sum of £2000 per annum in name of rent for Stobswell Works, and the sum of £50 per annum in name of office rent, and that by monthly instalments, and an allowance of £100 a-year for John Laing of Kellyfield, for assistance in the business, and all sums due to the said Peter Matthew for jute supplied by him or others to the said first parties, which outlay on jute at any one time shall not exceed £10,000: Declaring that the foresaid payments in name of rent shall be in full of all rents, taxes of every kind, and fire insurance, except fire insurance on the stock, which shall be charged separately and in addition against profits; and the first parties shall be bound to discharge all rents payable by them to their landlords, as well as all taxes and fire insurance, except as aforesaid. Fifth. The books of the said business shall be brought to a balance as on the 30th April and 31st October in each year, and should any of such balances show that the capital, including loan in this account, has been reduced to £500, this agreement shall come to an end as at the date of said balance, and the amount then remaining shall be paid by the first parties to the second party, but under no circumstances shall the second party be liable for any sum beyond the £1000 he is to advance on loan. Sixth. The second party hereby agrees to apply the share of the profits falling to him, as above mentioned, at the expiry of this agreement, in reduction or extinction of the debt secured by bonds and dispositions in security for £5700 and £8000, granted by the said John Laing and his sons, the said William Robert Laing and David Colville Carruthers Laing, in favour of the late Andrew Beharie Low, Esquire of Butterstone, the father of said second party, over the said Stobswell Works and machinery, and Dens Road factory and machinery, and the lands of Kellyfield and others, the half of the said debt to which he is entitled in the apportionment of the estate of his said father being reduced or extinguished, primo loco. Seventh. The said first parties shall have the sole power of buying and selling, and generally of conducting the said business, but they shall supply a monthly statement showing the quantity of jute in stock and to arrive, and the extent of orders for yarns to execute to the said second party, and the said second party shall also be entitled to see the said half-yearly balance-sheets; declaring, however, that the first parties shall not be entitled to purchase or to have at any time in their possession a larger stock of jute than one or two months' supply in excess of yarns sold.… Lastly. It is hereby declared, that notwithstanding the loan made in terms of this agreement by the second party, the said second party shall not be deemed or held to be in any respect a partner in the said firm of Laing Brothers & Company, and shall not be liable for the debts and obligations of that firm.”…

On 4th June 1895 Mr Mess raised an action against Mr Low, concluding for declarator that under the terms of the above agreement the defender had become a partner of the firm, and that the pursuer was entitled as trustee to recover from him such sums of money as might be necessary to pay the debts of the firm in full after exhausting the estate of the firm. The amount thus concluded for was £25,000.

The defender pleaded that not being and never having been a partner in the firm, and having never represented himself or suffered himself to be represented as a partner, he was entitled to absolvitor.

The Lord Ordinary ( Low) on 14th December assoilzied the defender.

Opinion.—“The pursuer is the trustee upon the sequestrated estate of Laing Brothers & Company, jute spinners, Dundee, and the object of the action is to have it declared that the defender was a partner, and is liable for the debts of the firm.

The individual partners of the firm are the defender's uncles. He is a young man of apparently considerable means, and when the partnership is alleged to have

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been entered into he was studying at Cambridge University with the view, he says, of taking orders in the Church of England.

The question at issue depends upon the construction of an agreement made between Laing Brothers & Company, and the individual partners thereof, on the one part, and the defender on the other part, in 1891.

The pursuer contends that the agreement was one by which a partnership was constituted; the defender, on the other hand, maintaining that it was an agreement fixing the terms upon which he agreed to lend £1000 to the firm for the purposes of their business.

The agreement proceeds upon the narrative that the first parties (that is, the firm and the individual partners thereof) have applied to the second party for a loan ‘to enable them the better to carry on their business,’ and that the second party (the defender) has agreed to advance to them the sum of £1000, to be used in their business upon the conditions thereinafter mentioned.

By the first article of the agreement the second party agreed to advance the sum of £1000 ‘in loan as above mentioned, and that for the period of three years from the 31st day of October 1891,’ and the first parties bind themselves to pay interest ‘upon the loan’ at the rate of five per cent. per annum.

By the second article the first parties agree to retain in their business, ‘to secure the foresaid loan,’ the amount that may stand at their credit in the books of the firm at a specified date, after deduction of a certain sum.

So far the agreement is one in regard to a loan and nothing else, and the third article contains the first of the stipulations upon which the pursuer founds as showing that a partnership was truly constituted, although under cover of an agreement bearing to be for a loan.

The third article is to the following effect:—‘The whole profits made in the business during the foresaid period of three years, during which the foresaid loan is to continue, shall under deductions of payments for management,’ and other payments of a like nature, ‘remain in the business without any deduction other than that above specified, until the expiry of this agreement, and on the expiry of the foresaid period the first party shall repay in cash to the second party his said loan of £1000, and the whole of said profits shall be divided between the first parties and the second party equally.’

The pursuer, of course, founded upon the provision as to the division of profits, and argued that the fact that the defender was to be entitled to one-half of the profits was inconsistent with any other idea than that he was to be a partner, because it could not be said that he was to receive a share of the profits as interest upon the loan, interest having already been stipulated for by the first article. Now, no doubt the receipt by a person of a share of profits is prima facie evidence that he is a partner, and if he was to receive a share of the profits in addition to interest at a full rate upon money lent by him to the firm, the presumption of partnership might be very difficult to rebut.

In this case, however, when the third article of the agreement is read along with the sixth article, it becomes clear that the defender was not to be entitled to a share of the profits in the ordinary sense of putting it into his pocket, but that the one-half of the profits which was apportioned to him by the third article, was under the sixth article, to be applied in a particular way.

It appears that the pursuer's father had lent a large sum of money to the firm, which was secured to the extent of £5700 over one property, and to the extent of £8000 over another property. The defender was under his father's settlement entitled to one-half of these debts.

In these circumstances the defender agreed, in the sixth article of the agreement, to apply the share of the profits falling to him under the third article in extinction of the debts to which I have referred, ‘the half of the said debt to which he is entitled in the apportionment of the estate of his said father being reduced or extinguished primo loco.’

Apparently the parties did not contemplate that one-half of the profits for three years could possibly exceed the debts, because there is no provision for the disposal of any balance of profits remaining after payment of the debts.

It seems to me that the arrangement set forth in article sixth entirely meets the argument which the pursuer founds upon article third. If in addition to interest at the rate of five per cent. upon the £1000, the defender had been entitled to put one-half of the profits into his pocket, the argument would have been very difficult to resist, because the inference would have been that the consideration which the defender was to give for the share of the profits was the obligation of a partner for the liabilities of the firm. It is different, however, when upon the face of the agreement the consideration is a prior debt of the firm. I see nothing inconsistent with an agreement for the loan of money, that the lender should stipulate that during the period for which the loan was given part of the profits should be used as a sinking fund for the payment of a prior debt. If the business had been successful, and there had been accumulated profits at the end of the three years, the defender would not have received payment of the amount, but would simply have written off an equivalent portion of the debt.

Returning now to the intervening articles of the agreement, I do not think that the fourth is of any importance, as it only provides that in estimating the profits certain sums shall be deducted in name of rent for the business premises, and a salary of £100 a-year for an assistant. The fifth article, however, is the one upon which the pursuer's case chiefly depends. It provides that the books of the business

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shall be brought to a balance twice in each year, ‘and should any such balances show that the capital including loan in this account has been reduced to £500 this agreement shall come to an end as at the date of said balance, and the amount then remaining shall be paid by the first parties to the second party, but under no circumstances shall the second party be liable for any sum beyond the £1000 he is to advance on loan.’

The pursuer contended that that article showed that the parties recognised that the defender would be liable to creditors, and that the concluding words were an attempt to limit his liability to creditors by an agreement between the partners. Further, just as the first article provided for the case of the business being successful, so the fifth article provided for the case of the business being unsuccessful. In the former case the defender was to be paid the £1000 in cash; in the latter case he was only to be paid the balance of capital of £500 or under, which might remain. That stipulation, the pursuer contended, was entirely inconsistent with the idea that the defender was merely a lender to the firm, because no mere lender would agree, in the event of the firm to which he had lent money proving unsuccessful, to give up his debt and content himself with any balance of capital to the amount of one-half of the loan, or less, which might remain.

I am unable to assent to the pursuer's construction of the fifth article. I think that it is designed as a protection to the pursuer as a lender to the firm. By the previous part of the agreement the £1000 which he lent was to become part of the capital of the firm and be used in the business, and there was to be no obligation to repay it until the lapse of three years. During that period the firm were entitled to trade with and risk the £1000, but if at any time it should appear that the firm had lost all their own capital, and one-half of the £1000 in addition, the defender was to be entitled at once to put an end to the agreement and demand that the balance of capital still remaining should be handed over to him. There is no stipulation that the defender is to accept the balance of capital as in full payment of his debt, and I do not think that the obligation undertaken by the firm and the individual partners in the third article to repay the loan in cash would in the event contemplated in the fifth article be discharged or extinguished.

The stipulation or declaration that the defender should in no circumstances be liable beyond the £1000 which he was to advance, was, I think, unnecessary, and was, I imagine, inserted with the view of making it perfectly clear as between the parties of the contract, that although the defender took the risk of losing the £1000, or part of it, that was the limit of his risk and of his obligation. It is true that the article does not treat the defender simply as an ordinary creditor of the firm, because he is only to be entitled to claim the amount of capital brought out upon a balance of the books, that is to say, after the trade creditors are provided for. But that is just the legal position of a lender to a firm who receives a share of the profits under the third section of the Partnership Act of 1890. I am therefore of opinion that if the agreement, apart from the declaration, does not make the defender a partner the declaration does not do so.

The seventh article of the agreement was also founded on by the pursuer as pointing to partnership rather than to the loan. It provides that the first parties shall have the sole power of buying and selling, and generally of conducting the business; that they shall supply a monthly statement to the defender of the amount of jute in stock, and the extent of the orders for yarn, and that the defender shall be entitled to see the half-yearly balance sheets. It is then declared that the first parties shall not be entitled to have in stock a larger amount of jute than one or two months' supply in excess of yarns sold.

No doubt these provisions might have been suitable enough for the case of a partner who was contributing capital, but who was taking no active part in the conduct of the business. They seem to me, however, to be equally suitable to the case of a lender who has advanced money necessary to enable the partners to carry on the business, and who as a condition of the loan has stipulated that the profits shall be accumulated for a certain period, and then applied in paying off a prior debt.

The eighth and ninth articles do not touch the point at issue at all, but the last article declares that ‘notwithstanding the loan made in terms of this agreement by the second party, the said second party shall not be deemed or held to be in any respect a partner in the said firm of Laing Brothers & Company, and shall not be liable for the debts and obligations of that firm.’

I agree with the pursuer's counsel that that declaration would not prevent a partnership being constituted if the effect of a fair construction of the agreement otherwise was to show that there was a partnership. But the declaration shows what the intention of the parties was—that they did not intend to make a partnership—and of course in the question of the construction of the agreement the intention of the parties to it is a matter of importance.

For the reasons which I have stated, I am of opinion that the agreement, upon a fair construction, is not one whereby a partnership was constituted, but one for fixing the conditions upon which the defender should lend £1000 to the firm. And that is sufficient for the decision of the case, because it is not said that the defender held himself out as a partner, or that anyone gave the firm credit upon the faith of his being a partner.

I shall therefore pronounce decree of absolvitor.”

The pursuers reclaimed.

In the course of the debate in the Inner House the defender was allowed to amend

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his record, and to add the plea “No title to sue.”

Argued for reclaimers—1. On the construction of the agreement, the parties intended to make a contract establishing all the rights inter se of partners, but attempted to relieve the defender of his obligations to third parties and make it a loan. That, however, it was not possible for them to do—Lindley on Partnership (6th ed.), pp. 45–47. The definition of partnership in the 1890 Act was fully satis-fied by the conditions here. The sharing of profits stipulated for in article 3 was prima facie evidence of partnership, especially when taken along with the fact that by article 1 five per cent. interest was already allowed on the sum advanced. This was still further strengthened by the restrictions upon the method of conducting business, and by the provisions for periodic balancing and accounting. But the stipulation in article 6 as to what was to happen when the capital of the firm fell to £500 was absolutely inconsistent with any relation but that of partnership. If the defender were merely a creditor of the firm, he surely would not wait to demand repayment till the capital fell to £500, but would call for it when there was £1000 left. But the stipulation was quite reasonable if he were a partner. He would have no further rights after getting this £500, as he wrongly maintained that he would under sec. 3 of the Act, and accordingly would lose half, so this was nothing more or less than a gamble in the capacity of a partner. The fact that the profits were to be primarily applied in payment of the debts due by the former firm was merely an arrangement between the parties to apply profits in the first place in this way, but there was no limitation if there were more profits than would meet these debts, and the surplus would go to the defender. Accordingly there was here a contract of partnership, and the declaration in the 10th article did not prevent it being so. 2. The pursuer had a title to sue. No change had taken place in the creditors between the date of the trust-deed and of the sequestration. There was no authority for the view that a trustee was not entitled to sue a partner for debts of the firm— Hay v. Mair and Others, January 27, 1809, F.C; Speirs v. Dunlop, May 9, 1777, 2 Paton 437. The defenders misapplied the doctrine in Mann v. Sinclair, June 20, 1879, 6 R. 1078, at 1082, for the trustee's title to sue was only rejected on the ground that the party sued was not in fact a partner. And there was no countenance for applying that doctrine where the party sued was—as might here be assumed—to be a partner. The only alternative view would be for all the creditors to go against him individually, which would be, of course, out of the question.

Argued for respondent—The question was whether the parties were partners inter se, there being no suggestion that the defender had held himself out as a partner so as to deceive third persons— Eaylesham & Company v. Grant, July 15, 1875, 2 R. 960, at 964. The question was the same as if it had been raised by the parties inter se in the course of conducting the business. The two real partners could not have claimed in the face of the agreement that the defender was a partner as regards themselves, and accordingly the pursuer was not entitled to do so now. The Lord Ordinary's treatment of the various articles of the minute of agreement completely refuted the arguments of the pursuer based upon them. There were two analogous cases in which it was held that partnership was not constituted— Mollwo, March, & Company v. Court of Wards, July 1872, L.R., 4 P.C. App. 419, and Badely v. Consolidated Bank, 1888, 38 Chan. Div. 238. In the former case two of the elements relied upon by the pursuers existed, viz., sharing in the profits, and complete control of the business by the lender. Assuming the defender to be a partner, he could not be sued till the company's estate was exhausted. Accordingly the liability of the partners of the company to pay a debt after the estate was exhausted was not an asset of the company, and the trustee on the sequestrated estate, who under sec. 102 of the Bankruptcy Act 1856 (19 and 20 Vict. cap. 79) was vested in “the whole property” of the debtor, did not acquire a claim such as this. There was no case where the trustee on a sequestrated estate had been allowed to sue an alleged partner. The defender was not sequestrated, and accordingly he could not be discharged by the majority of the creditors, and would continue liable after being sued by the trustee. It was held in Dunbar v. Remington, Wilson, & Company, March 10, 1810, F.C., that an individual creditor might sue an alleged partner even though there was sequestration of the partnership estate, so if the trustee were right there would be two sets of creditors with rights to sue. The only legal way for the trustee to sue was by receiving an assignation of their rights from the creditors— Speirs v. Dunlop, supra.

At advising—