untitled

Partnership 343

Business property

When a firm is wound up, the partnership property will be used to pay the debts and
liabilities of the firm. Partnership property does not belong to individual partners; it
belongs to all of the partners, who hold it on trust for each other. Property is partnership
property if:

(i) it was brought into the firm as partnership property; or

(ii) if it was bought with the firm’s money as partnership property; or

(iii) it was acquired for the purposes of the firm and in the usual course of the firm’s
business.

Partnership property must be distinguished from property belonging to the individual
partners for three main reasons. First, if the property increases in value, this increase will
belong to the firm rather than to any individual partner. Second, partnership property
should be used exclusively for the purposes of the partnership, as defined by the partner-
ship agreement. Third, on dissolution of the firm creditors are first paid out of partnership
property.

The goodwill

The goodwill of the firm might be one of the firm’s most valuable assets. Accountants might
define the goodwill as the excess of the market value of a business over the value of its
individual assets. Various legal definitions have been put forward.
In Trego vHunt (1896)Lord McNaughton defined goodwill as:
the whole advantage, whatever it may be, of the reputation and connection of the firm, which may
have been built up by years of honest work or gained by lavish expenditure of money.

In Hill vFearis (1905)Warrington J said that the goodwill was:

the advantage, whatever it may be, which a person gets by continuing to carry on, and being

entitled to represent to the outside world that he is carrying on, a business which has been carried

on for some time previously.

Once the goodwill has been sold for the benefit of all of the partners, those partners will not
be able to use the firm’s name or solicit its customers. There is no reason why they should
not otherwise carry on a rival business, unless a valid restraint of trade clause forbids this.
(Restraint of trade clauses were considered in Chapter 4 at p. 133.) Lord McNaughton, in
Trego vHuntexplained the position in this way:

A person who has sold the goodwill of his business is under no obligation to retire altogether from

the field. Trade he undoubtedly may, and in the very same line of business. If he has not bound

himself by special stipulation...he is free to set up business wherever he chooses. But, then, how

far may he go? He may do everything that a stranger to the business, in ordinary course, would be

in a position to do. He may set up where he will. He may push his wares as much as he pleases.

He may thus interfere with the custom of his neighbour as a stranger and outsider might do; but

he must not, I think, avail himself of his special knowledge of the old customers to regain, without

consideration, that which he has parted with for value. He must not make his approaches from the

vantage ground of his former position. He may not sell the custom and steal away the customers.

Winding up of partnerships

A partnership may be dissolved either by the partners themselves or by the court. A dis-
solution by the partners themselves might be allowed for by the partnership deed. For