Farming Partnerships: Dissolution Equals Sale?

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Case: Cobden v Cobden 

Over a very long career I have acted in many just causes. It is always a pleasure when such just cause, is then reflected in the justice of the decision of the Court. That is what happened in Cobden v Cobden [2024] EWHC 1581 (Ch).

Matthew Cobden farmed in partnership with his Brother, Daniel, each having a 50% share. State of the art dairy was built up over a number of years, driven by Matthew’s idea to do it and his enthusiasm to implement it. A dispute emerged and Matthew served notice to dissolve the partnership at will. There was no partnership agreement.

Generally, after the dissolution of a farming (or other) partnership the presumption is that (in the absence of retirement provisions or agreement between the parties), the assets will be sold. The principle was reiterated by a very recent Court of Appeal decision in Bahia v Sidhu [2024] EWCA Civ 605. The Court of Appeal decided that a Syers Order, namely an Order where the Court decides that one partner can buy out the interest of another, will only arise in exceptional circumstances. Such exceptional circumstances were held to exist by HHJ Russen KC (sitting as a High Court Judge) in the Cobden case.

Those exceptional circumstances were summarised by the Judge as follows:

“The equal partners in a partnership at will have, since its inception, shared an understanding that one partner would himself carry on the business when the partnership eventually comes to an end, by being permitted to buy out the other partner at a fair price to be determined at that end point, and that partner has devoted himself accordingly to the firm’s business and its development in anticipation of that event.

The understanding is sufficiently clear from the dealings between the partners and the subsequent reliance upon it (throughout the life of their partnership) sufficiently identifiable and substantial to support the conclusion that it would be unfair and inequitable for the other, at the partnership’s end, then to insist that both partners’ shares in the partnership assets should be liquidated through their sale. 

Any consideration of the “detrimental” nature of the first partner’s reliance (“the partner has devoted himself accordingly”) must make allowance for the fact that the relationship between the partners arises out of their shared endeavour in making profits and that he has benefited equally from any profit during the life of the partnership; and also that any unequal injections of capital will be reflected in the partners’ respective capital accounts. Nevertheless, the court is entitled consider his individual efforts in developing the partnership business and to do so with particular focus upon a comparison with the business as it was at the partnership’s inception and the relative efforts of the other partner in that regard. 

The understanding and reliance upon it give rise to an ‘equity’ in the first partner which may operate to prevent the liquidation of the partnership’s assets if the court concludes that, in all the circumstances, an order for sale would be unfair and unjust. 

Other factors, such as the likely adverse impact a sale may have on third parties (including employees of the business and others whose financial interests may be damaged by a sale) or upon the business’s customer base, may feed into the court’s assessment of the equity in deciding what is fair and just. 

The court is entitled to act upon the equity where expert valuation evidence supports the conclusion that the price payable under the Syers order is equivalent to what the other can reasonably have expected to receive for his own share.  The likely costs of a sale and any potential adverse tax consequences resulting from a sale may be factored into the court’s comparison of the two.

 The court is entitled to act upon the equity despite any suggestion by the second partner that he would be willing to pay more for the first partner’s share than is offered in return, as the price of himself carrying on the business, and notwithstanding the prospect that such a sale might have produced a greater financial return for him than that indicated by the valuation evidence accepted by the court.”

As general partnerships (still, remarkably, governed by the Partnership Act 1890) continue to be the prevalent form of business relationship within farming families, Cobden is a very important decision, and one for practitioners’ note when dealing with farming partnership dissolutions. It does not follow that dissolution equals sale.

In the Cobden case I briefed Stephen Jourdan KC and Ciara Fairley who (as always) were outstanding, and the case would not have been capable of being prepared without the huge contribution of our paralegal, Gemma Staddon.

© P R Williams

4 July 2024

P R Williams, Ebery Williams – Author of Scammell, Densham & Williams Law of Agricultural Holdings

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