New CA partnership law decision: Edward Peters KC
The nature of a retirement from a partnership, and its financial consequences
The question posed by the CA and their answer to it
The Court of Appeal, in its decision handed down on April 9, 2024 in Procter v Procter [2024] EWCA Civ 324 (in which the leading judgment was given by Nugee LJ, with whom Peter Jackson and Falk LJJ agreed), has decided an important question of partnership law, which the Court summarised as follows:
“[1] … 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? ”
The Court of Appeal’s answer to their question was in essence as follows:
“[85] 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. … 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.”
Nugee LJ stated (at [91]):
“I do not think it necessary to consider the correct jurisprudential basis for this conclusion …”,
but went on:
“[92] I prefer to say that the right of the outgoing partner to payment for her share of the net assets is simply a recognition of the fact that her interest is measured by her “right to a proportion of the surplus after the realisation of the assets and payment of the debts and liabilities of the partnership” …, and that if the other partners have taken over and used her property without payment, they should pay her for that interest.”
The consequence of the Court of Appeal’s decision is that the default financial result of a retirement from a partnership, in the absence of an agreement to the contrary between the partners (either in the partnership agreement, or ad hoc at the time of retirement), will be that the outgoing partner will be entitled to the value of the outgoing partner’s former share, assessed on the same basis as if there had been a general dissolution of the whole partnership. The Court of Appeal approved in that regard the interlocutory decision of Goff J. in Sobell v Boston [1975] 1 WLR 1587.
White, Drake and Ham distinguished
In so holding, the Court of Appeal distinguished the previous CA decisions in Re White decd [2001] Ch 393, Drake v Harvey [2011] EWCA Civ 838, [2012] 1 All ER (Comm) 617 and Ham v Ham [2013] EWCA Civ 1301. It held that those decisions were concerned with the position where a partnership agreement had made express provision for the outgoing partner to receive a payment in respect of their partnership share, or that the share was to vest in the continuing partners without payment; and that those three decisions had “made it clear that where there is such an express provision and it is open to more than one construction, the Court should not in construing it start from any particular presumption.” [69]
The Court held that the same principles would also apply to such an agreement reached ad hoc at the time of retirement [73].
However, the Court held that those principles did “not assist where there was no express agreement either in the partnership agreement or in an ad hoc agreement made at the time of retirement.” [74] Nugee LJ said as follows at [83]:
“I accept that the cases … of White, Drake and Ham show that where it is a question of interpreting an agreement, there is no presumption or starting point and the agreement should be interpreted in the normal way. But where ex hypothesi there has been no agreement, there is nothing to interpret, and I do not think these cases assist. The Court either has to find some principle by which the quantum of the outgoing partner’s share of the assets can be accounted for, or abandon the attempt and simply allow the continuing partners to keep the outgoing partner’s share of the assets without payment despite that never having been agreed. Faced with that choice, I have no real doubt that the principled answer is that the continuing partners who are using the outgoing partner’s property in their ongoing business have to account to the outgoing partner for her share of the assets, and that in the absence of agreement the Court has to determine how that share is to be quantified.
Nugee LJ acknowledged (at [91]) that
“… there are competing considerations as to how a retiring partner should be paid out which may vary from case to case. In the case of a farming partnership, which may be asset rich but cash poor, a payment at a valuation (using actual values at the date of retirement rather than book values) may lead to a substantial payment having to be made for unrealised capital profits which would place a strain on the continuing partners.”
but concluded that, in consequence:
“[93] … I think it is for those who set up family farming partnerships, often for tax reasons, to consider carefully how to reconcile the interests of those partners who wish to carry on farming, and of those who wish to realise their property, and make provision accordingly, either in the partnership agreement or in an ad hoc agreement when one of them wishes to withdraw.”
The nature of ‘retirement’ from a partnership
En route to their answer, the Court of Appeal also considered the nature of a “retirement’ from a Partnership as a matter of principle:
“[60] … It is, as Mr Peters submitted, an ordinary English word and I accept his formulation at the outset of his submissions that in the context of a partnership it connotes the voluntary departure of a partner in circumstances where the remaining partners continue the firm …
[62] … 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. So when a partner says that she wishes to resign from a firm, I would take that to be saying no more than that she wishes to cease to be a partner – that is, that she no longer wishes to carry on business in common with the other partners – albeit recognising that they will carry on the business themselves.”
As to the implicit consequences of a retirement, Nugee LJ then went on to say at [77]:
“It is … implicit in an agreement that a partner should withdraw from a partnership in return for a payment that the payment is for his share in the net assets, which implies both that he should transfer his interest in the assets to the continuing partners, and be indemnified against the liabilities by them. And the same would no doubt apply if there were an express agreement that a partner should retire without any payment for his share of the net assets; in many professional partnerships for example there are agreed provisions for retirement under which no payment is made to outgoing partners for their share of the net assets. But … I do not think one can draw from that the conclusion that a partner who retires without any agreement as to whether or not a payment should be made is to be taken as agreeing to surrender or assign her interest to the continuing partners without payment. There is all the difference in the world between an agreement that nothing should be paid, and there being no agreement as to what, if anything, should be paid.”
Is retirement a form of ‘dissolution’?
En route to their answer, the Court of Appeal also considered whether retirement could be said to be a form of ‘dissolution’.
The Court observed that the Partnership Act 1890 often uses the word ‘dissolution’ to refer to a dissolution “as regards all the partners” – what is sometimes referred to as a ‘general dissolution’, of the kind contemplated by s. 39 of the Act. The Court acknowledged that a ‘retirement’ is not a dissolution of that kind (although cf. a retirement from a partnership at will under s. 26, Partnership Act 1890).
However, the Court held that:
“[51] … Since partnership is a relationship between persons, it follows that it is the identity of the partners that defines a partnership. A relationship between A, B and C is self-evidently a different relationship to that between B and C, and hence in law a different partnership, even though they may carry on the same business under the same name.”
…
[55] … When one partner ceases to be a partner in a firm, the relationship of partnership between the outgoing partner and the other partners necessarily comes to an end, as does the firm of which they were a partner. Thus if A, B and C are in partnership and A ceases to be a partner, the partnership of A, B and C – and the firm consisting of A, B and C – also comes to an end. And logically this must be so whether or not B and C continue in partnership.”
Thus, the Court considered that a retirement was a ‘dissolution’ of a kind; namely, not a “dissolution as respects all the partners, but a dissolution only as respects … the outgoing partner” [58]. On that basis the Court also considered that it was not heretical to describe a retirement as a ‘technical dissolution’, in the sense of meaning that it was not a ‘general dissolution’.
The judgments are available here.
Edward Peters KC instructed by Peter Williams of Ebery Williams (editor of Scammell, Densham & Williams on The Law of Agricultural Holdings, 11th ed, 2023) appeared for the first and second defendants.
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