Facts:
There has been a long-running dispute between Suzanne Procter and her brothers. They were partners, initially, with both their parents and subsequently only with the Father, in a farming partnership that was formed to continue a farming business carried on by the Father on family-owned land. In 2010, Suzanne resigned from the partnership. However, there was no provision in the partnership deed for one partner unilaterally to resign, but the other partners accepted. Nothing was said about any financial terms at the time.
After the death of their parents in 2013 and 2014, respectively, Suzanne started a claim against her brothers for various relief in relation to the estates, trusts and partnership that owned or occupied the land. As mentioned in the 2019 judgement, “the land was owned and managed through a complex web of trust, partnership and company structures” to avoid the payment of tax.
One of the issues related to a ‘debt’ of £45,872 owed by Suzanne to the partnership which she contested. This issue was settled between the parties.
In a 2022 judgement, the Judge upheld Suzanne’s claim that she was entitled to the value of her share in the partnership assets at the date she resigned. The brothers appealed.
Decision:
This appeal was dismissed as Lord Justice Nugee agreed with HHJ Davis-White QC, the High Court Judge.
Lord Justice Nugee first looked at the question of whether Suzanne’s retirement amounted to a technical dissolution of the partnership. Based on Lord Lindley's sentence that “any change in the partners ‘destroys the identity’ of the firm”, he ruled that a change in the composition of a partnership effects a ‘technical dissolution’.” As a partnership is a contractual relationship with the identity of the partners defining the partnership, any change necessarily ends the partnership even if the remaining partners continue with the partnership.
He then turned his attention to the effect of the retirement. First, he noted that the word ‘resign’ is not used in the Partnership Act 1890 but the word ‘retire’ is several times. He noted that “the natural interpretation of what it is for a partner to resign or retire from a partnership is that they cease to be a partner while the remaining partners continue in partnership.” However, such resignation depends on the partnership agreement. If nothing is in the agreement, a partner can retire at will by giving a notice if they meet the requirement of Section 26(1) of the Act.
Regarding the effect of the retirement, Lord Justice Nugee noted that an agreement to resign is no more than an agreement that the person will no longer be a partner. The partnership agreement should deal with the question of entitlement as retirement or resignation alone, has nothing to say about the outgoing partner’s entitlement. If the partnership deed is silent, the
Court will look for any ad hoc agreement. If there is no such agreement, then the outgoing partner retains his or her interest in the net assets at the time of retirement based on Section 42.
Finally, as to valuation, due to the lack of agreement, the decided cases on the interpretation of such agreements are not applicable. The Court then needs to the nature of a partner’s “share” as defined by Lord Lindley as the “proportion of the partnership assets after they have been all realised and converted into money, and all the debts and liabilities have been paid and discharged.” A retirement does not involve a reduction of the share or a lesser figure than if there had been a general dissolution. If the other partners wish to continue the business with the outgoing partner’s “share”, they must account to her for the value of her share. Necessarily, that is based on actual value, not book value, because a winding up would have involved a sale of the assets in the open market.
Implications:
This ruling clarifies several issues of partnership law. It reiterates the importance of having a good partnership deed in place as it will be the first port of call. If the deed is silent, then courts will look for any ad hoc agreement at the time of retirement/resignation. In the absence of such an agreement, the outgoing partner retains his or her interest in the net assets at the time of retirement. The valuation needs to be done as though the company was winding up rather than based on the book value.