Partnership Disputes: Retiring Partner Entitled To Recoup Her Share
An outgoing business partner was entitled to payment for her share of the net assets. If the continuing partners have taken over and used that partner’ property without payment - they should pay her for that interest.
This was the overall conclusion of an important High Court ruling on the question of what rights a partner if and when they resign - and the remaining partners agree to the resignation while continuing in business. Businesses operating under a partnership agreement should take note of the ruling.
The default position under the Partnership Act 1890 is that individual partners cannot retire from a partnership without dissolving the entire partnership. Further, s42 of the Act gives outgoing partners the right in certain circumstances to a share profits/assets.
What was the background?
Three siblings (a daughter and two sons) and their parents were in partnership together, running the family farming business in Yorkshire. The mother retired some time before the dispute arose.
The partnership deed (PD) made no provision for a resigning partner, but nonetheless the remaining three partners accepted the daughter’s (S) resignation in 2010 and that she was therefore no longer a partner.
However, when S resigned, nothing was said about any financial terms of her exiting. Following her parents’ deaths in 2013 and 2014, S brought proceedings for various forms of relief.
This ruling followed an appeal on the question of whether or not S had any claim against the continuing partners – and if so, to what extent. S argued that she was entitled to a payment proportionate to her quarter interest in the partnership assets and income by default, or by virtue of an implied term in the PD.
The remaining partners said that their agreement to retire S was their agreement to surrender her interest in the partnership assets to the continuing partners; and that in the absence of any agreement that she should be paid, she was not entitled to any payment.
But as the judge, Lord Justice Nugee, observed, S “never agreed she would hand over her share in the partnership assets to the other partners without payment, and never agreed the terms on which she might do so”.
It was his view that s42 clearly assumes the continuing partners were liable to account to the outgoing partner for her share of the partnership assets,
The outcome
Nugee LJ commented that as a matter of principle, by retiring and accepting that the remaining partners are free to carry on the business, an outgoing partner gives up the right to have a general dissolution and to have the firm actually wound up.
But he added: “I do not see why the outgoing partner, in the absence of agreement to the contrary… 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.”
On that basis, the continuing partners should account to S for the value of her share of the assets (ie what she would have received had the business been wound up). In practical terms, her share should be assessed by a valuation of the assets and liabilities at the date of her retirement.
What does this mean?
The judge aptly highlights the potential difficulties for existing partnerships, particularly for family farming businesses who often go into partnership for tax reasons. He commented on the need to “consider carefully” how to reconcile the interests of those partners who want to continue in the business and those who wish to realise their property.
It is vital for the partners in a business to check existing partnership agreements and ensure their individual interests are protected in order to minimise the risks of an expensive dispute arising. Appropriate provision should be made in the PD or by an agreement reached when a partner decides to exit.
1Proctor v Proctor & ors [2024] EWCA Civ 324
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