Application of the doctrine of liability from sharing profits.

limited liability turns solely on the validity of the special contract to shut out the operation of the common law, the special contract must fully cover the transaction or series of transactions it is intended to affect; and it must be stipulated that the funds of the company as contradistinguished from the separate estate of the individual partners, or better still, some specified fund, shall alone be answerable, otherwise the contract may be held to mean nothing more than an affirmance of the common law, which holds the members to be jointly and severally liable for the company obligations (a).

When limited liability is attained in this manner, a court of equity, while giving effect to the special contract, will require the shareholders to pay up so much of the guaranteed capital as has not yet been subscribed (b).

The question here under consideration does not appear, so far as the author is aware, to have come as yet under consideration of the Scotch courts; but if it did, there seems no reason to doubt that effect would be given to the principles of the English decisions, and this all the more readily that the foundation for its application seems already to be laid in the recognition of the company's separate

persona.

In an early part of the present treatise we endeavoured to explain the well-known doctrine, whereby a person, though entitled to none of the rights and privileges of a partner, has been held to have incurred all the responsibilities of that relation in a question with the public, by the mere fact of his having participated in the profits. Thus it has been held, that money could not be advanced to a trader on condition of receiving part of the profits as interest without the risk of rendering the lender liable as a partner; that servants or agents receiving salaries which in any way varied with the returns of the business were in a similar position; and that any one receiving an annuity out of the profits was in danger of incurring liability for all the obligations of the concern (c). The extent to M. and G. 180; Hassell, 4 Ex. 525; Athenæum Life Soc., 1 Johns. 80. See Lindley 304.

(a) See the following English cases: Hallett v. Dowdall, 18 Q. B. 2; Hancock v. Hodgson, 4 Bing. 269; Durham's case, 4 K. and J. 517; Halkett v. Mer. Trades Association, 13 Q. B. 960; Worcester Corn Ex. Co., 3 De G.

(b) Talbot's case, 5 De G. and Sm. 386. See Lindley 305.

(c) See p. 53 and p. 47.

which this doctrine was carried in some of the earlier cases produced very great hardship, if not absolute injustice; and as the liability thus incurred was unlimited, there can be no doubt that it operated most unfavourably as a check on commercial enterprise. These consequences of the doctrine, though not probably foreseen when it was first adopted by the courts, speedily made themselves apparent, and endeavours were made to obviate them by drawing a distinction between nett profits' and 'gross returns;' but it was soon found that this distinction, which Lord Eldon characterized as 'extremely thin,' laboured under the serious disadvantage of being unintelligible to the great mass of the mercantile community for whose benefit it was introduced. The truth is, the doctrine itself, as commonly received and expressed, was radically unsound, and could never be relied on as a safe principle for decision. The right to share profits is not the reason of a partner's liability for company obligations; but both the right and the liability are equally consequences, as they are indications, of the existence of partnership. By degrees, as the principles of commercial law were more fully elaborated, this came to be better understood; and as the existence of agency, express or implied, between the firm and an alleged partner came to be recognised as the most trustworthy test of the partnership relation, the old doctrine of liability from participating in profits was gradually circumscribed in its operation, and was expressed in a less questionable form. There is even reason to believe that it would have been ultimately banished from the law in its more objectionable sense, or that at any rate the inequitable principles to which it had given rise would have been abandoned, without the intervention of the Legislature. While, however, the present treatise was going through the press, and after the earlier chapters had already been printed off, an Act was passed, which, though very far from supplying a remedy commensurate with the imperfections of the existing law applicable to private partnership, has at least the merit of removing or palliating some of the more glaring evils which the doctrine in question had been the means of introducing.

The provisions of this Act (28 and 29 Vict. c. 86) (a) are Act of 1865. as follows: In the first place, it declares that the advance of Sharing of money by way of loan to a person engaged in any trade or under- lenders and (a) Passed 5th July 1865.

T

profits by

vendors of goodwill.

Provision in lieu of regis

tration.

Agents and

annuitants

participating in profits.

Definition of person.

Observations.

taking, on a written contract that the lender shall receive a rate of interest varying with the profits, or a share of the profits themselves, shall not of itself constitute him a partner, or render him responsible as such (sec. 1); and it further declares that the mere receiving by way of annuity or otherwise of a share of the profits of a business in consideration of the sale of its goodwill shall not render the receiver a partner with, or responsible for, the liabilities of the person carrying on such business (sec. 4).

These provisions appear to remove the worst consequences of the old state of the law; but it is obvious that if they stood alone, they would enable unprincipled persons to collude with a firm or an individual trader, so as, under the pretext of participating in profits, to appropriate the only fund available for payment of bona fide creditors. The true safeguard against such abuses would seem to lie in the extension of the principle of registration to ordinary firms. This method, however, has not been adopted; but the Act endeavours to meet the difficulty by declaring that in the event of the trader becoming bankrupt, taking the benefit of any act for the relief of insolvent debtors, entering into an arrangement to pay his creditors less than twenty shillings in the pound, or dying insolvent, lenders under its provisions shall not be entitled to recover any portion of their principal, or of the profits, or interest payable thereon; and vendors of the goodwill of a business, under sec. 4, shall not be entitled to recover any share of profits, until the claims of the other creditors have been satisfied (sec. 5).

By sec. 2 it is declared that no contract for the remuneration of a servant or agent by a share of the profits shall of itself render him responsible as a partner, or give him the rights as a partner with his employer; and sec. 3 provides that no widow or child of the deceased partner of a trader receiving by way of annuity a portion of the profits made by such trader in his business, shall by reason only of such receipt be deemed a partner of or subject to the liabilities of such trader.

Lastly, by sec. 6 the word 'person' as used in the Act is declared to include a partnership firm and joint-stock company, and a corporation.

In perusing this Act the following observations suggest themselves—It is noticeable, in the first place, that it contains no

thing to detract from the power which previously existed under the old law, to make advances to a firm or company in such a way that the lender should stand to it as an ordinary creditor, without either incurring the liabilities of quasi partnership, or having the debt postponed in a question with other creditors. If, therefore, a man chooses to make a loan to a firm, in consideration of receiving a fixed rate of interest instead of a return varying with the profits, he will now, as formerly, be entitled to all the privileges of an ordinary creditor. What the Act does is merely to enable a lender to receive a rate of interest varying with the profits, without thereby incurring the responsibilities of quasi partnership; but it couples this with the condition that, in such a case, his claims to repayment, either of principal or interest, shall be postponed to those of other creditors who are not entitled to share profits. It is very questionable, however, how far this provision will be taken advantage of in practice. For it is to be observed, 1. That as the lender is expressly declared not to be a partner, he has no right to take an active share in the concern, so as to ensure its being properly carried on, and he may even find it difficult to ascertain with accuracy what amount of profits are de facto realized; and, 2. That if, from reckless or even fraudulent management, the concern should become bankrupt, his chance of payment may be entirely illusory. Persons lending money on such conditions are in fact most unfavourably situated; they are very much at the mercy of the borrower, having neither the full privileges of partners nor the full rights of creditors. The provision as to the remuneration of agents and servants, and that as to annuities to the widow and children of a deceased trader, are eminently beneficial; but the former, it may be observed, is little more than an affirmance of what was perhaps always law in Scotland. The declaration, that the word 'person' shall include firms, companies, and corporations, gives the Act a very wide application; but, on the other hand, it may be questioned whether the use of the words 'trader' and 'trade' throughout the Act, will not have the effect of restricting, in some respect, the benefit of its provisions within what would have been the case if it had been declared to apply to all undertakings for the purpose of gain, as is the case with the Act of 1862.

CHAPTER XVI.

Partners liable

for debts contracted since formation only.

COMMENCEMENT OF THE LIABILITY OF PARTNERS FOR
COMPANY DEBTS AND OBLIGATIONS.

As the liability of partners for company debts and obligations depends upon their being its sureties for such debts and obligations. as it has contracted as a quasi person through the instrumentality of one or more of them as its agents, it follows that such liability only commences from the date of its formation. Prior to that event there was no quasi person to contract, no agency by which it could be bound, and no sureties on whose guarantee the public could rely. Hence results the legal principle, that a partner is not liable for any obligations of his copartners, or for any acts they may have done, or any representations they may have made, before the company was formed.

In private partnerships it often happens that, before the partnership is formed, those who afterwards become partners agree among themselves that one shall contribute goods and another money when the concern is set agoing. If, in such circumstances, the goods are furnished or the money is lent by third parties, they have no claim against the partnership when it is formed, but are limited to their recourse against the individual partners with whom they had transacted (a).

It makes no difference that the goods furnished or the money borrowed were applied to company purposes. The public creditor really contracted, not with the company, but with an individual;

(a) Smith v. Craven, 1 Cr. and J. 500; Greenslade v. Dower, 7 B. and C. 635; Dickinson v. Valpy, 10 B. and C. 141, 3 Ross L. C. 571; Fisher v. Tayler, 2 Hare 218; Saville v. Robertson, 4 T.

B. 720; Wilson v. Whitehead, 10 M. and W. 503; Barton v. Hanson, 2 Taunt. 49. See White v. M'Intyre, 1841, 3 D. 334, for opinions of judges adopting the English authorities quoted above.