Cox v. Hickman (1860) 8 H.L.C. 268

Facts of the Case

The case is a landmark judgment that redefined the primary test for the existence of a partnership.

• Original Firm: B. Smith & Son encountered financial difficulties.

• Deed of Arrangement: The firm executed a deed of arrangement, transferring the business to five trustees (including Cox and Wheatcroft).

• Trustees' Role: The trustees were appointed to carry on the business under the name "The Stanton Iron Company" and divide the net income among the general creditors of B. Smith & Son. The objective was to use the profits to pay off the existing debts.

• Liability Sought: Hickman supplied goods to the new business. When the new business failed to pay, Hickman sued Cox and Wheatcroft (two of the original five appointed creditors/trustees) for the debt, alleging that all the creditors who executed the deed, or at least the trustees, were partners in the Stanton Iron Company.

• Defendants' Status: Cox never acted as a trustee, and Wheatcroft resigned before the debt was incurred.

Issue

Whether the creditors, who were beneficiaries of a deed of arrangement that provided for the profits of the debtor's continued trade to be applied in discharge of their demands, were in a partnership with the trustees carrying on the business, thereby incurring liability for the business's debts.

Judgment

The House of Lords advised reversing the judgment of the lower court, holding that the deed did not create any partnership between the creditors (including Cox and Wheatcroft) and the trustees. Consequently, the defendants were not liable as acceptors of the bills of exchange.

Legal Analysis

1. The Flaw in the "Sharing of Profits" Test

The Court analyzed the traditional common law view that profit participation was conclusive evidence of partnership. Lord Cranworth and the House of Lords rejected this rigidity:

• The creditors' arrangement was merely an agreement by the debtors (the Smiths) to pay their pre-existing debts, partly out of their existing assets and partly out of the expected profits of their trade.

• The creditors were simply benefiting from a profitable business in the form of debt repayment; they derived no profits from the new business beyond the payment of the debts due to them from the old firm.

• The mere concurrence of creditors in an arrangement that permits the debtor or trustees to continue trade and apply profits to discharge debts does not make them partners with the trustees.

2. The Establishment of the "Mutual Agency" Test

Lord Cranworth articulated the true legal test for partnership, which shifted the focus from merely receiving profits to the relationship of agency:

• The Real Test: The question is whether the business is carried on by persons acting for the person sought to be charged. Partnership is essentially the relation of principal and agent.

• Application to Facts: The creditors in this case were not principals, and the trustees were not their agents. The trustees were acting primarily for the benefit of the debtor (Smiths) in liquidating the debt, not as agents of the creditors.

• Absence of Agency: It was impossible to say that the agreement to receive debt repayment, secured partly out of the trade profits, constituted the relation of principal and agent between the creditors and the trustees.

Therefore, since the essential element of mutual agency was absent, no partnership existed.

Commentary: A Landmark Redefinition of Partnership

Cox v. Hickman is perhaps the most significant English common law case on partnership. Prior to this, the general rule derived from Waugh v. Carver (1793) was that a person who shares in the profits of a business is automatically liable as a partner.

This case successfully overthrew the rigid presumption that profit-sharing alone conclusively proves partnership. It established the principle, later codified in Section 4 of the Indian Partnership Act, 1932 (and equivalent legislation globally), that:

The true test of partnership is the existence of mutual agency, i.e., whether the person carrying on the business is doing so as an agent for the person sought to be held liable. The sharing of profits is merely prima facie evidence, but not conclusive proof, of the agency relationship.