Retiring partner was entitled to be bought out in the absence of express agreement

17 April 2024

The Court of Appeal has clarified the entitlement of an individual who retired from a partnership without agreeing the financial terms of her departure.

What happened?

Procter v Procter [2024] EWCA Civ 324 concerned a partnership between individual family members that was formed to run a farming business. One of those partners wished to retire from the partnership.

The Partnership Act 1890 does not give individual partners the right to retire from a partnership without dissolving the entire partnership. If the partners are to have this right, it must be set out in the partnership deed governing the partnership.

In this case, the partnership deed set out various circumstances in which one of the individual family members would cease to be a partner. But it did not give any of them a right simply to retire (in other words, resign) by notice to the other partners.

Despite this, one of the partners gave notice to retire from the partnership, and the other partners accepted her resignation. They did not, however, agree the terms on which she would be bought out, and the partnership deed did not contain any provisions to that effect.

The retiring partner claimed that she was entitled to her proportionate share (in this case, one quarter) of the partnership’s assets and income, either by default or because there was an implied term to that effect in the agreement as to her retirement.

The remaining partners, however, argued that, in the absence of any specific agreement to the contrary, a retiring partner is not entitled to any payment when they leave a partnership. They said that, by unilaterally leaving the partnership, the retiring partner had given up her share in its assets.

What did the court say?

The court held that the retiring partner was entitled to payment for her share in the partnership.

There was no implied term that the retiring partner would be bought out. There were numerous ways to calculate a retiring partner’s share and so it was not possible to identify a single term to achieve this.

But it was wrong to assume that a retiring partner intends to surrender their interest in a partnership for nothing where the partners do not reach an agreement for a buy-out. In the court’s words, there was “all the difference in the world between an agreement that nothing should be paid, and … no agreement as to what, if anything, should be paid”.

To understand what should happen, the court looked to section 42 of the Partnership Act 1890 for inspiration. This states that, where a person ceases to be a partner in a partnership but the other partners carry on the partnership’s business, the outgoing partner is entitled to a share in the partnership’s profits attributable to their use of the partnership’s assets.

The court said that this clearly assumes that the continuing partners are liable to account to the outgoing partner for their share of the partnership’s assets. However, it does not indicate how that share is to be valued and so, unless the parties specifically agree this, the court must decide it.

In the court’s view, the retiring partner was entitled to the share of the partnership’s assets she would have received if the partnership had been wound up at the point of her retirement.

Moreover, those assets were to be ascribed their market value, and not the value given for them in the partnership’s books of account.

What does this mean for me?

The circumstances of this case are important. When she retired, the retiring partner and her fellow partners were unaware of a valuable asset held by the partnership. This was a factor in the court’s decision that the retiring partner was entitled to assert her interest in the partnership at a later date.

The court also noted that it is difficult – and, the judgment suggests, inappropriate – to adopt a “one-size-fits-all” approach to a buy-out in these circumstances. Partnerships take many different forms, and the nature of a buy-out for one kind of partnership may not work for another kind.

This case, for example, involved a farming partnership, a kind of partnership the court acknowledged is likely to be “asset-rich but cash-poor”, meaning an immediate valuation could lead to substantial cash payments for unrealised capital profits.

This highlights a key point for partners in a partnership. Neglecting to set out arrangements for a retiring partner can create significant uncertainty and, ultimately, litigation, with the partners potentially not knowing the precise buy-out arrangements until a judge issues a decision.

Key points to consider include the following.

  • Should partners be able to retire by notice? This will vary from partnership to partnership. But it will often be appropriate to provide for this specifically in the partnership deed, given that a partner has no other right in law to simply retire by notice.
  • Should there be a buy-out? The partnership deed should ideally state whether a partner who retires is entitled to be bought out. This may help to avoid disputes down the line. This may not be a simple “yes or no”. Whether a partner is entitled to be bought out (and, if they are, the amount payable) may depend on the circumstances in which the partner is retiring. For example, it may be appropriate to pay less or nothing at all to a partner whose conduct has been unbefitting.
  • Be wary of a consensual retirement. Even if the partnership deed does not allow partners to retire unilaterally, the partners can still agree among themselves that an individual partner is to retire. If doing so, however, the partners should make clear at the time the arrangements for the retiring partner’s exit, including what payment (if any) the retiring partner is to receive and whether the retiring partner is to remain on the hook for, or (conversely) be indemnified against, any historic liabilities.

Access the court’s decision on a retiring partner’s buy-out entitlement in Procter v Procter [2024] EWCA Civ 324