John Patrick McGowan v Michael Chadwick (2002)
In sanctioning the commencement of proceedings for breach of equitable and/or fiduciary duty against a court-appointed receiver of a partnership business, the court would only permit the proposed claimant to pursue those losses suffered by him in his capacity as a partner, and not as a disappointed purchaser, of the partnership business.
Appeal by the interested party ('R'), a court-appointed receiver, and cross-appeal by the defendant ('D') from a decision of Burton J by which he gave the court's sanction to the commencement by D of an action against R for breach of equitable and/or fiduciary duty. The claimant in the action ('M') and D were formerly partners in a restaurant business that operated from leasehold premises in London. Following the emergence of disputes between them, R was appointed as receiver and manager of the business. In April 1999 D offered to purchase the business from R, but R refused to sell to him until a year later during which time the business traded under R's management at a substantial loss. By his proposed action D sought to recover under the following heads in respect of losses allegedly sustained as the result of R's breach of equitable and/or fiduciary duty in his management of the partnership business: (i) loss of business assets worth £29,000 taken over by R at the commencement of the receivership; (ii) depreciation of the lease and the fixed assets; (iii) damage to the goodwill of the business; (iv) legal costs; and (v) loss of the opportunity of discharging the pre-receivership liabilities out of the proceeds of sale or trading receipts. Burton J held that there was a proper basis upon which at least heads (i) to (iv) and just (v) could be argued, and that the sums involved arguably would exceed six figures. He therefore gave the court's sanction to D's proposed claim for the recovery of those losses. By this appeal R contended that Burton J should have held that: (a) R's duties to D were owed to him only in his capacity as a partner and not as a disappointed purchaser; and (b) D's case under (v), as well as his general allegation of mismanagement, was inadequately pleaded. By his cross-appeal D sought to add a claim to recover the losses in question "both as a loss to the partnership and on his own behalf as an outgoing partner".
(1) Having bought out M, D was entitled to claim recovery of the entirety of any loss suffered by the partnership as a result of R's breaches of duty. (2) However that was the limit of his claim because the maximum loss that he could claim was the loss that he had suffered as a partner. In particular any diminution in the value of the business attributable to alleged mismanagement by R was not a loss suffered by D as a partner except to the extent that the purchase price for the business was lower than it otherwise would have been. (3) The pleading of specific heads of loss was misplaced in any event because the measure of D's claim was the loss to the business as a whole. (4) Subject to the question of D's legal costs at (iv), supra, the only head of loss that he had arguably suffered as a partner was in respect of the pre-receivership liabilities at (v). (5) As to D's legal costs, he could only pursue his non-litigation costs. All issues in relation to his litigation costs had been conclusively determined in the proceedings between M and D.
Appeal allowed in part. Cross-appeal dismissed.
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