The “long-running and multi-faceted” family farming partnership dispute of Procter v Procter [2024] EWCA Civ 324, has given the Court of Appeal a recent opportunity to consider an interesting point of partnership law relating to the issue of what happens to a retiring partner’s interest in the partnership assets in the absence of express provision or agreement. The point of law is neatly summarised by Nugee LJ in paragraph 1 of his judgment in the Court of Appeal as follows:
A partner resigns from a partnership, the other partners continuing in partnership; they in effect agree to her leaving. Nothing however is said, let alone agreed, about the financial terms on which she does so. Is she in those circumstances entitled to be paid the value of her share of the partnership assets? Or is the position that, since nothing has been agreed beyond the fact that she is to cease to be a partner, she has no claim against the continuing partners?
Until her resignation in 2010, Suzanne Procter was a partner in the family farming and property business with her brothers and their parents. The partnership deed made no provision for unilateral retirement, but her decision to cease to be a partner was agreed by the other partners. At the time of her retirement, there was apparently no discussion or agreement about the financial consequences. She simply ceased to be a partner. Following the death of their parents, Suzanne commenced proceedings against her brothers (and others) making claims in relation to the family entities (trusts, estates and the partnership) which owned or occupied the land. In essence, she claimed to be entitled to the value of her share in the partnership assets as at the date of her resignation form the partnership. This later became refined to a claim to a 25% share in the value of a particular tenancy as at that date. In the High Court, the judge found in her favour, holding amongst other things that there was a technical dissolution of the partnership on her retirement.
The brothers appealed on the basis that it was wrong to hold that there was a technical dissolution of the partnership on retirement and that she should not have been entitled to a 25% share in the value of the tenancy at the date of retirement, because there was no express or implied agreement to that effect and no statutory or other legal basis for such an entitlement.
The Court of Appeal unanimously dismissed the appeal by the brothers.
In deciding that the judge at first instance was not wrong to describe Suzanne’s retirement from the family partnership as a “technical dissolution”, the Nugee LJ .The decision contains a useful analysis of the different ways in which the word “dissolution” is used within the Partnership Act 1890 (the Act”) The partnership between her and the other partners ceased upon her retirement, but there was no “general dissolution” of the partnership in the sense of requiring the assets to be sold and divided. Indeed, by retiring in that way, it was held that she was giving up her right to a general dissolution of the partnership.
In paragraph 85 of his judgment Nugee LJ (with whom Lady Justice Falk and Lord Justice Peter Jackson concurred), summarised his conclusions as follows:
“By retiring, and thereby accepting that the other partners will be at liberty to carry on the business, an outgoing partner necessarily gives up any right to have a general dissolution and to have the firm actually wound up. But I do not see why the outgoing partner, in the absence of agreement to the contrary (either in the partnership agreement or in an ad hoc agreement at the time of retirement), should be regarded as agreeing also that her share in the assets should be reduced, or quantified at any less a figure than it would have been had there been a general dissolution. As the discussion above on technical dissolution shows, there is some force in the point that as between the outgoing partner and the others there is a form of dissolution, albeit not a general one. I think it follows that if the other partners wish to continue the business with the outgoing partner’s share of the assets they should account to her for the value of her share – that is, what she would have received had the business been wound up. In practice that means that her share is to be assessed by a valuation of the assets and liabilities at the date of retirement.”
In reaching the decision, the Court of Appeal was conscious that the obligation on the continuing partners to pay out the retiring partner could be a very onerous one and could potentially cause difficulties for the survival of the partnership. However, it concluded that the answer was not to deny the retiring partner their right to be paid their share of the assets – see paragraph 93 of the Judgment.
The decision highlights once again the importance of getting good advice and making appropriate provision either in the underlying partnership deed or in an ad hoc agreement at the time of retirement. When establishing family farming partnerships, which may often be done for tax reasons, it is also vital to consider carefully and make express provision for what should happen when a partner wishes to retire. In particular, thought must be given as to how to reconcile the potentially conflicting interests of those partners who intend to carry on farming and the partner who wishes to realise the value of their interest in the partnership upon retirement.
The additional comments by Lord Justice Peter Jackson on the future of the litigation and the high desirability of considering mediation as a means of resolution are also worthy of note. He made a plea to the parties to consider the future and to reflect upon the impact of the litigation resulting from this family breakdown. He observed that after two substantial trials and two appeals, the parties have already spent a huge amount in legal costs and still need to engage in the valuation process provided for by the judge. He highlighted the fact that whatever the value of a quarter share in the tenancy to be valued, the cost of further litigation about it is likely to be disproportionate. He concluded his comments (paragraph 97 of the judgment as follows:
“These assets were built up by the grandparents and parents for the benefit of their children. The older generations may have had an aversion to paying tax, but the younger generation’s litigation habit is at least as great a threat to the family’s hopes. The remaining disputes cry out for mediation.”
Link to judgment here.
