Smith and Smith carried on business under the name of B. Smith & Son.They encountered financial difficulties and subsequently executed a deed of arrangement in favour of creditors.
The deed provided that the five creditors(including Cox and Wheatcroft) carry on the business of S. and S. as trustees for the creditors under name of “The Stanton Iron Company,” and to divide the net income of the business among the general creditors of S. and S.
Cox never acted as trustee, and Wheatcroft resigned before goods were supplied.Three remaining creditors continued the business, and goods were supplied by Hickman.
Hickman issued bills of exchange, accepted on behalf of the Stanton Iron Company by one of the three creditors.Hickman sued Cox and Wheatcroft, alleging their liability as partners in the Stanton Iron Company due to their involvement in the deed.
ISSUE
Whether the merchants who were essentially the creditors of the company are in partnership?
JUDGEMENT
Court advice to reverse the judgement of the Court of Common Pleas, and to adjudge that deed did not create any partnership so the Defendants are not liable, as acceptors of the bills of exchange, on which the action is brought.
LEGAL ANALYSIS
Creditors could derive no profits from the new business, beyond the payment of the debts due to them from the old firm.The business was to be carried on by the trustees till the debts of that firm were paid.
The mere concurrence of creditors in an arrangement under which they permit their debtor, or trustees for their debtor, to continue his trade, applying the profits in discharge of their demands, does not make them partners with their debtor, or the trustee.
By the deed the creditors will gain an advantage by the trustees carrying on the trade; for if it is profitable, they may get their debts paid, but this is not that sharing of profits which constitutes the relation of principal, agent and partner
The deed in this case is merely an arrangement by the Smiths to pay their debts, partly out of the existing funds and partly out of the expected profits of their trade.
it is impossible to say that the agreement to receive this debt, so secured, partly out of the existing assets, partly out of the trade, is such a participation of profits as to constitute the relation of principal and agent between the creditors and trustees.
Lord Cranworth argued that profit participation is not a crucial partner test. The real test is whether the partners are ‘mutual agencies.’
COMMENTARIES RATIO
The mere concurrence of creditors in an arrangement under which they permit their debtor, or trustees for their debtor, to continue his trade, applying the profits in discharge of their demands, does not make them partners with their debtor, or the trustees.