Right to profits after dissolution PA 1890 s. 42
Outgoing partner may choose either share of profits from use of his share, or 5% interest on that share, after dissolution without settlement. PA 1890 s. 42.
Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent. per annum on the amount of his share of the partnership assets. Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.
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 partner leaves (by death or otherwise) and the remaining partners continue the business using the partnership's capital or assets without a final settlement of accounts. The outgoing partner (or his estate) has a choice: either claim a share of the profits made since the dissolution that the court finds is attributable to the use of his share of the partnership assets, or claim interest at 5% per year on the amount of his share of those assets.
If the partnership agreement gives the continuing partners an option to buy the outgoing partner's interest and they exercise that option properly, the outgoing partner gets no further share of profits. But if the person assuming to act under the option does not comply with its terms in all material respects, he must account for profits under the first part of this section.
When it applies
- A partner dies and the surviving partners keep using the firm's assets without paying out the deceased partner's share.
- A partner retires and the continuing partners continue the business without settling accounts.
- The continuing partners exercise an option to purchase the retiring partner's interest but fail to comply with the terms of the option.
- The court is asked to determine what share of profits is attributable to the use of the outgoing partner's assets.
- The outgoing partner's estate elects to take interest at 5% instead of a profit share.
What this section does not say
- This section does not cover the rights of partners to dissolve the partnership itself (see ss. 32–35).
- It does not determine the final distribution of assets on settlement (see s. 44).
- It does not apply where there is an agreement to the contrary (the section says 'in the absence of any agreement to the contrary').
- It does not give a right to profits if the continuing partners do not carry on the business with the firm's capital or assets.
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This page reproduces the text of PA 1890 s. 42 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.