Partnerships are one of the oldest forms of carrying on business around the world (partnerships are still governed by the 1890 Act in England). In common law jurisdictions, they are often favoured for their simplicity and, in comparison to complex incorporated business concerns, reduction in paperwork.

Partnerships remain a very common form of trading today, notably in certain industries (such as the law), family businesses and those with a history and origin in the Commonwealth of Independent States.

While much focus is given to when people found or join a partnership, disputes most typically arise with respect to departing partners.

How, if at all, is the leaving partner to be compensated, or, if the partnership is financially unsuccessful, what ongoing responsibilities does the leaving partner have to their now-former partners?

The very recent Court of Appeal judgment of Procter v Procter and Others [2024] EWCA Civ 324 provides important guidance in this area.

A substantial family business; the point of departure

The Procters are substantial property holders in Yorkshire. Their businesses include farming and a golf course. The family business is one that goes back several generations. The heart of this dispute relates to the departure, in 2010, of the daughter of the current generation from the family partnership, which was constituted by a rather sparse partnership deed in 1980.

The daughter purported to leave the partnership by letter addressed to her father and two brothers (then the remaining partners). While not the principal focus of the judgment, this aspect of the case raises an interesting issue as to when partners can leave a partnership where the partnership deed does not provide for a voluntary right to do.

The Court of Appeal considered that the daughter had not had the right to unilaterally retire from the partnership, but that her proposed retirement having been accepted by the other partners (who do not seem to have appreciated that she did not have a unilateral right), it was nonetheless effective.

At the time of the daughter’s retirement, the partnership was in a process of refinancing as a result of poor performance. The daughter’s departing position in the partnership accounts was noted as being in debit by approximately £45,000, to be treated as a loan if not repaid within a specified period. The daughter made no payment to the partnership at that time.

A post-departure windfall – who benefits?

Importantly, following the daughter’s departure from the partnership and in the course of related litigation involving some of the same parties, a court determined that the partnership in fact had the benefit of a valuable tenancy under the Agricultural Holdings Act 1996. This changed the partnership’s financial position considerably and placed it in a cash positive position.

Given the change in the partnership’s economic position, this litigation focused on what, if anything, the daughter (being the departing partner) was entitled to be paid for having given up her share of the partnership on retirement. She made this claim in circumstances where the partnership deed was silent and no ad hoc agreement had been struck with respect to the value of her interest in or liability to the partnership at the time of her retirement.

The brothers, being the continuing partners with conduct of the litigation, sought to argue that the sister was entitled to nothing in return for her share of the partnership. Having left without agreeing a settling of the financial rights of herself and the continuing partnership, it was suggested that she had effectively given up the right to be paid for her interest.

The court disagreed.

While the daughter had left the business such that it was for the remaining partners to continue it using the assets they had as the remaining partners, it did not follow that she had done so for nothing.

Indeed, there was good evidence that a clean break of interests and liabilities could not have been what the remaining partners understood at the time, as otherwise they would not have recorded the daughter as still owing money to the partnership when they believed it was balance sheet negative. In the same way as the remaining partners had not wiped the slate clean of her share of debts when they believed the partnership to be in the red, the post-departure windfall was not something they could ignore and not compensate a departing partner for at a proper value.

The Court of Appeal therefore found that the daughter was entitled to a payment for her share of the partnership. The quantum was the value if, instead of there being a technical dissolution (whereby the partnership of four was dissolved in favour of one of three), there had been a general dissolution. In a general dissolution a general accounting of assets and liabilities would be made and the surplus distributed in line with the partnership interests. It was that value, in addition to the statutory 5% interest, to which the daughter was entitled.

Attractions of looking back

The decision is an important clarification of the rights of departing partners, particularly where partnership deeds (or other, including less formal, agreements) make no provision for financially settling the end of a partner’s role in the business.

It will be of urgent interest to former partners who are aware that potentially underperforming assets held at the time of their departure have since come good.

A process of accounting with former partners which may have appeared unpalatable on departure, for example if the partnership was financially challenged, may, looking back, be rather more attractive.