Rights on rescission for fraud/misrep PA 1890 s.41
On rescission for fraud/misrepresentation, the innocent partner gets a lien on surplus assets, subrogation to creditors, and indemnity.
Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled— to a lien on, or right of retention of, the surplus of the partnership assets, after satisfying the partnership liabilities, for any sum of money paid by him for the purchase of a share in the partnership and for any capital contributed by him, and is to stand in the place of the creditors of the firm for any payments made by him in respect of the partnership liabilities, and to be indemnified by the person guilty of the fraud or making the representation against all the debts and liabilities of the firm.
Text in force at .
Source: legislation.gov.uk — The National Archives (legislation.gov.uk), reproduced under licence Open Government Licence v3.0.
What it actually says
This section applies when a partnership contract is cancelled (rescinded) because one partner deceived the other by fraud or a false statement. The deceived partner gets extra rights beyond any other legal rights they may have.
They have a lien (a legal claim) on the surplus of the partnership's assets after all partnership debts are paid. This lien secures any money they paid to buy their share in the partnership and any capital they contributed. They also step into the shoes of the firm's creditors for any payments they personally made to cover partnership liabilities. Finally, the partner who committed the fraud or made the false statement must indemnify (compensate) them for all the firm's debts and liabilities.
When it applies
- A partner discovers that the other partner lied about the business's revenue to induce them to invest, and wants to recover their investment from the remaining assets after dissolving the partnership.
- After rescinding the partnership due to misrepresentation, a partner pays off a firm debt with personal money and then seeks to be repaid from the partnership's remaining assets as if they were a creditor.
- A partner contributed capital based on false statements about the partnership's inventory, and after rescission, they claim a lien on the surplus to get that capital back.
- The defrauded partner uses this provision to demand that the dishonest partner personally cover all outstanding partnership debts, protecting them from being pursued by creditors.
What this section does not say
- It does not cover dissolution by mutual agreement or expiry of the partnership term (that is under s.32).
- It does not apply to a partner who voluntarily retires or dies (see s.33 and s.43).
- It does not govern the general distribution of assets after dissolution when no fraud or misrepresentation is involved (s.44 applies).
- It does not address apportionment of a premium paid when a partnership ends early for reasons other than fraud (s.40 covers that).
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This page reproduces the text of PA 1890 s. 41 in force at the date shown and explains it in general terms. It is not legal advice and takes no account of the circumstances of your case, which can change the answer completely. For a live dispute, for limitation periods, and before taking any step in court, consult a qualified lawyer in England and Wales.