Case Study: Cox v. Hickman

By Yousuf Khan 9 Minutes Read

“Participation in profits alone does not necessarily constitute a partnership; the intention of the parties is crucial.”

Citation: (1860) 8 HLC 268

Date of Judgment: 3^rd May, 1860

Court: House of Lords

Bench: Lord Cranworth LC, Lord Wensleydale, Lord Chelmsford

Facts

• James Smith and William Smith, who were owners of a business, faced financial difficulties. To resolve their debts, they executed a deed of arrangement, assigning the business’s assets to trustees, including Mr. Hickman, with the purpose of managing the business and repaying creditors using the profits generated.
• The trustees, including Hickman, were responsible for operating the business, with profits dedicated to repaying creditors. However, they did not assume ownership or partnership roles within the business; instead, they acted as fiduciaries with a duty to manage the assets for the benefit of the creditors.
• Despite this arrangement, a question arose whether the creditors, who were benefiting from the profits, were partners in the business due to their interest in the profits. Cox, a creditor, argued that Hickman and the other trustees should be held liable as partners for the business’s debts since they were receiving the profits.
• Cox filed a suit against Hickman, asserting that as trustees and participants in the profits, they were effectively partners and thus liable for the debts incurred by the business.

Decision of the Lower Court

The lower court ruled in favour of Cox, holding that the trustees were indeed partners by virtue of their receipt of profits from the business. The court’s decision was based on the legal principle that participation in profits was a strong indicator of a partnership, leading to the conclusion that the trustees were liable for the business’s debts.

Decision of the House of Lords

The mere receipt of profits from a business does not automatically create a partnership. The House of Lords emphasized that the existence of a partnership depends on the intention of the parties to share both the profits and the risks of the business as co-owners.

In this case, the trustees were managing the business purely in a fiduciary capacity for the benefit of creditors, without the intention to form a partnership, and therefore were not liable as partners for the business’s debts. The judgment remains a foundational case in partnership law, influencing how courts interpret agreements and relationships between parties who share profits. It underscores the importance of examining the intentions and agreements of the parties to determine the existence of a partnership.

Key legal issues discussed

1. Whether the trustees, by receiving profits from the business, should be considered partners and thus liable for the debts of the business?

No

The House of Lords reversed the trial court’s decision, establishing that participation in profits does not automatically create a partnership. The Court emphasized that the essential element of a partnership is the intention of the parties to share both the profits and the risks of the business as co-owners.

Lord Cranworth LC quoted that “It is often said that the test, or one of the tests, whether a person not ostensibly a partner is nevertheless in contemplation of law a partner, is whether he is entitled to participate in the profits. This, no doubt, is in general a sufficiently accurate test; for, a right to participate in profits affords cogent, often conclusive, evidence that the trade in which the profits have been made was carried on in part for or on behalf of the person setting up such a claim.”

The Court found that the trustees were not acting as partners but rather as managers or agents acting on behalf of the creditors. Their role was limited to overseeing the business to ensure the repayment of debts, without any intention of entering into a partnership with an ownership interest in the business. This distinction was critical in determining liability for business debts.

2. Whether the mere receipt of profits from the business creates a partnership, irrespective of the parties’ intention?

No

The Court further explained that the mere receipt of profits does not constitute a partnership unless there is a corresponding intention to share in the management and risks of the business. The Court clarified that partnership liability arises when parties share both the profits and the risks of the business, not merely when they receive profits as a form of payment or benefit.

The court stated that “A person who shares in the profits is liable as a partner only if the trade has been carried on for him and on his behalf.”

The real ground of the liability is that the trade has been carried on by persons acting on his behalf. When that is the case he is liable to the trade obligations, and entitled to its profits, or to a share of them. It will not be strictly correct to say that his right to share in the profits, makes him liable to the debts of the trade.

3. Whether the trustees’ management of the business assets under the deed of arrangement created a partnership with the creditors?

No

The Court found that the trustees’ management of the business under the deed of arrangement was not intended to create a partnership. The trustees were not managing the business as co-owners but were fulfilling their fiduciary duties to manage the business for the benefit of the creditors. The creditors had no control over the management of the business, and their role was limited to being beneficiaries of the profits used to pay off their claims.

The court held that “The trustees were acting purely in a fiduciary capacity, managing the assets for the benefit of the creditors without any intention to form a partnership.”

The Court clarified that the intention behind the receipt of profits must be examined to determine the existence of a partnership. This case laid down the principle that merely sharing profits does not constitute a partnership unless it is accompanied by an agreement to share the risks and management of the business.

Yousuf Khan