This legal and practical guide provides a user-friendly, practical, and accessible resource to help practitioners, students, partners and those running firms to navigate this specialist field.
Authors: Jeremy Callman (Ten Old Square), Corinne Staves (CM Murray), Elspeth Berry (Nottingham Law School) and Naomi Winston (Ten Old Square).
Those of you who have previously attended the annual Forum Conference will have met Elspeth, and may have met Jeremy or Corinne or heard them speak at the Conference.
LexisNexis are pleased to offer Forum Members a 30% discount (applicable to hard copy books; for online books please contact Lexis directly) on this publication until the end of April 2024. If you would like to take up the discount offer, please order using the following link: https://www.lexisnexis.co.uk/llp30off
This legal and practical guide provides a user-friendly, practical, and accessible resource to help practitioners, students, partners and those running firms to navigate this specialist field.
Authors: Jeremy Callman (Ten Old Square), Corinne Staves (CM Murray), Elspeth Berry (Nottingham Law School) and Naomi Winston (Ten Old Square).
Those of you who have previously attended the annual Forum Conference will have met Elspeth, and may have met Jeremy or Corinne or heard them speak at the Conference.
LexisNexis are pleased to offer Forum Members a 30% discount (applicable to hard copy books; for online books please contact Lexis directly) on this publication. If you would like to take up the discount offer, please order using the following link: https://www.lexisnexis.co.uk/llp30off
A formal Call for Papers will be posted soon, but please put the date in your diary!
Many of you will have met Joel Woolf, of Joel Woolf Rural Consultancy, at the 6th Annual Conference. He has kindly supplied a copy of the following short article on the recent judgment in Morton v Morton:
Morton v Morton – Clarity on s42 of the Partnership Act 1890
The Morton family are now no strangers to the inside of a court room. This farming family from Cheshire are an exceptional example of what can go wrong in farming families and why leaving it to chance is no sensible strategy.
The recent Court of Appeal judgement ([2023] EWCA Civ 700) however is of significant assistance to understand how and where interest on a partnership share becomes payable on the retirement or other departure of a partner (i.e. through death) from a partnership, and the judgement amounts to considerable guidance on the drafting of provisions in such options.
The appeal related to the interpretation of section 42 of the Partnership Act 1890. It is worth quoting that section in full:
42 Right of out-going partner in certain cases to share profits made after dissolution.
(1)Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent. per annum on the amount of his share of the partnership assets.
(2)Provided that where by the partnership contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.
At first glance the sections appear straight forward. In s42(1) Parliament considered it reasonable and just that where the business of a partnership was carried on after the retirement or death of a partner then the retirement or deceased partner should be entitled to either a share of the profits or interest at 5% per annum. Given the nature of many partnerships, interest is probably by far the easiest to calculate and, until very recently probably also more attractive given savings rates. The election to either a share of the profits or interest is available unless the partnership agreement states something to the contrary. This is consistent with the rest of the act in that the Partnership Act effectively provides a baseline agreement between partners unless they have expressly agreed something else in writing.
Although the Court of Appeal gave commentary on s42(1), it is s42(2) which is the meat of the decision. The various parts of s42(2) were considered in turn. For s42(2) to be engaged there must first be an option for the continuing partners to purchase the interest of the outgoing or deceased partner. That option must have been duly exercised and where it is, there is no right to interest or a share of profits. This makes sense because the terms of the option should include the payment terms and should be set out in full within the partnership agreement.
However, interest can become payable where there is a material breach of the option. What is material will be a matter of fact and circumstance in each individual case, but it can be seen that s42(2) effectively provides a form of default interest although if the partnership agreement contained provisions for interest to be paid in default, then the author would posit that it is likely that the contractual provision will prevail over the statutory provisions.
So, what does the judgement of the Court of Appeal tell us in this case. The author considers that there are two lessons for those who advise on and draft partnerships.
The first is that it must be understood the difference between an option to purchase within a partnership agreement, and the position where on the retirement or death of a partner, where the retiring partner or their estate are simply paid out the value of the relevant share of the partnership belonging to the departed partner. This was a distinction drawn by Lord Justice Lewison at para 65. It is key to understand when considering the nature of a partnership and its assets which of an option or an implied contract for sale is the better solution. For many farming families an option is not the way to go. For a business which heavily relies on the expertise of a single partner then it might be that an option to purchase is sensible on the retirement or death of that partner, as the remaining partners may want to consider carefully whether they wish to continue the business or wind it up.
The second lesson is the drafting of the partnership agreement itself to make sure that there is no ambiguity or missing clauses. Regardless of whether the partnership agreement contains an option or not there will in essence be a requirement for the remaining partners to introduce capital to the partnership in order for the partnership to pay out the capital value of the departed partner.
This starts with being able to identify what the partnership assets actually are, how to value them and then how to calculate the relative shares of the partners and thus how much must be paid to the retired partner or their estate. How that eventual sum of money is raised is a matter for the remaining partners. How the money is paid, the payment terms, should be clearly set out within the partnership agreement together with any period over which payment is made and whether or not interest is payable and at what rate. There must also be consideration given in the drafting to what is to happen if things go wrong.
Although the Court of Appeal distinguished the case on its facts, it nonetheless contains a clear lesson that the less ambiguous the partnership agreement, the less likely a dispute will arise which requires determination in the courts.
Joel Woolf Rural Consultancy – 28 June 2023
Contact: 07896757957
Email: joel@woolfrural.co.uk
Website: www.woolfrural.co.uk
THE DEADLINE FOR REGISTRATION IS APPROACHING - PLEASE REGISTER AS SOON AS POSSIBLE (OR CONTACT ME IF ANY DIFFICULTIES).
PLEASE ALSO NOTE CHANGE TO PROGRAMME (UPDATED VERSION TO LINK BELOW). NEW SPEAKER, SIMON BOWERS FROM OPEN DEMOCRACY.
The 6th Annual Conference of the Partnership, LLP and LLC Law Forum will be held at Nottingham Law School on Thursday 14 September.
This conference provides a unique opportunity for those practising in, researching, teaching or otherwise with an interest in partnership or LLP law, practice or policy, to hear papers from leading practitioners, academics and policymakers.
Further details of the programme (including of speakers who are APP members) and registration are at https://www.ntu.ac.uk/about-us/events/events/2023/9/6th-annual-conference-of-the-partnership,-llp-and-llc-law-forum. Advance registration is required and early registration is recommended as the venue has limited capacity.
We look forward to welcoming you on the day.
Elspeth Berry
Associate Professor of Law
elspeth.berry@ntu.ac.uk
UK law firm BDBF has published a useful short article, 'Thinking about leaving an LLP? Read on'. It is available at https://www.bdbf.co.uk/thinking-about-leaving-an-llp-read-on/
In Gary Lineker and Danielle Bux T/A Gary Lineker Media v HMRC [2021] UKFTT 101 (TC), the First Tier Tribunal held that IR35 could apply to partnerships - see further casenote at https://www.devereuxchambers.co.uk/resources/news/view/ftt-releases-decision-in-gary-lineker-ir35-appeal
In HFFX LLP and Ors v HMRC [2023] UKUT73 the Upper Tax Tribunal held that profit shares distributed to individual LLP members after first being distributed to the corporate member were liable to income tax under the mixed membership rules - see further casenote at https://www.rossmartin.co.uk/sme-tax-news/6879-ut-partnership-planning-subject-to-income-tax.
David Milman and Terence Flanagan, Modern Partnership Law (first published 1983, Routledge 2021), 210pp., hardback ISBN: 0709910150, eBook ISBN: 9781003324874
This is a republication of a classic text, in the Routledge Revivals series. It is co-authored by Professor David Milman, a leading partnership law academic who will be familiar to Forum members as a speaker at several Forum Conferences, and to readers worldwide from his many publications on partnership law, company law and insolvency law.
The writing style is highly engaging and the book is thus a pleasure to read – something which cannot be said of all legal texts!
As readers will know, many elements of partnership law have stood the test of time and the UK’s Partnership Act 1890 continues to govern partnerships in the 21st century, so this text retains much more relevance than most 40-year old legal texts.
Particularly useful discussions include Chapter 2 on Financing Partnerships, Chapter 5 on Relations between Partners inter se (including duties, partnership property and remuneration, Chapter 6 on Partners and Outsiders (including authority, liability and holding out), and the winding up section of Chapter 9 on Winding up and Insolvency.
There are also some interesting chapters which are less commonly found in partnership texts today. These include Chapter 3 on Partnership Employees (covering both the distinction between partners and employees, and the treatment of partnership employees) and Chapter 8 on Legal Regulation of and Intervention in Partnerships (covering the courts’ approach to partnership agreements, including restrictive covenants, arbitration clauses, expulsion, receiverships and dissolution).
Also of interest is Chapter 10 on Partnerships: Review and Reform. Although this predates the introduction of LLPs (and was written before the increase in use of LPs), it does discuss the 1981 Green Paper: A New Form of Incorporation for Small Firms which included the idea of an incorporated limited firm based on the internal constitution of a partnership. Other reforms discussed in the book have failed to materialise, including enabling partnerships to grant floating charges, and granting them separate legal personality, the latter having been proposed by the Law Commissions in 2003 but rejected by the government.
A wide range of cases are thoughtfully discussed, although the use of endnotes rather than footnotes annoyed this reviewer (though no doubt readers less dinosaur-like will obviate the problem by using the eBook rather than the hard copy!). The indexing is helpful, although a number of entries are indexed only within the entry for ‘partners’.
Of course some of the law is now outdated, including references to the litigation rules in the RSC rather than the CPR and to the 20-partner limit (now repealed); much of Chapter 4 on Partnerships and Spouses (another chapter unlikely to be found in partnership texts today), the very short insolvency section of Chapter 9 on Winding Up and Insolvency which predates the Insolvency Act 1986 and the Insolvent Partnerships Order 1994, and Chapter 7 on Partnerships and Taxation. However, while employment legislation has moved on, the partnership-specific principles outlined in Chapter 3 on Partnership Employees remain relevant.
In conclusion, this is an enjoyable and useful source of specialist legal commentary on a number of areas of partnership law, and Routledge is to be commending for republishing it.