When the time comes to wind your partnership down make sure that you take the necessary steps to conclude matters formally. Equally, if the nature of your business has changed, but you intend to keep your partnership in existence, make that clear in order to avoid unwanted disputes…
At the end of the life of a partnership, it needs to be wound up. Failing to do so leaves the partners (and if they are in a Limited Liability Partnership, the LLP itself) at continuing risk of liabilities being incurred in their name. Often partnerships have documented procedures for winding up their affairs – typically enshrined in the partnership or LLP agreement. If so, those procedures need to be followed. In any case, absolute clarity is needed regarding the fact that the partnership and its business has been concluded.
The 2019 case of Boyle v Burke & Anor [2019] EWHC 3364 (Ch) (10 December 2019) demonstrates that it is not a safe course simply to assume, from the conduct of some or all of the partners, that a partnership is at an end…
The facts
In this case the Claimant believed that the sale of the partnership brought about the partnership’s dissolution.
The terms of the partnership were set out in a partnership deed dated 27 January 1987. Clause 2.43 provided for the consequences of a dissolution of the partnership – including the entitlement of partners to a lump sum in respect of pension benefits on dissolution.
On 1 October 2012, the Defendants transferred the whole of their legal practice and other businesses to a company which they had set up to operate as an estate-agency and financial-planning business. The Claimant had retired in 1998 and had been in receipt of annual pension payments. He believed that he was now entitled to the lump sum payment as he had not been a part of discussions or the decision making process in the reallocation of business and assets. He claimed that the lump sum was due on 1 October 2012, upon the transfer of the partnership of the business to the company set up by the Defendants. He claimed that this was effectively a dissolution of the partnership.
Conversely, the Defendants argued that no dissolution had taken place pursuant to Clause 2.43, upon the transfer of the business to the company, because they did not intend or agree to any such dissolution and no such agreement could be inferred. It was also pointed out that the partnership retained the lease of the business premises, which it sublet to the Defendants’ company for a small profit.
The decision
The Court held that Clause 2.43 was predicated on there being a ‘final dissolution of the partnership’. The Claimant had to show that the partnership had been dissolved in law as of 1 October 2012. For that to have been the case, there must have been an agreement by the Defendants to dissolve the partnership. Such an agreement could be inferred as a matter of fact but not as a matter of law, following the case of Chahal v Mahal [2005] EWCA Civ 898. In Chahal, it was held that it would be very difficult to establish that an agreement to dissolve the partnership had occurred where one of the parties was not involved, or involved very little, in the decisions to transfer the business and its assets. In addition, delegated authority to continue business on behalf of the partnership, even as far as acquiring new assets, did not automatically equal a right to dissolve the partnership without an agreement between the partners.
This applied directly to Boyle v Burke as the Defendants were able to show that there was no agreement to dissolve, because they intended the partnership to continue – in fact, they most likely wished the partnership to continue to stop Clause 2.43 from coming into effect. The Claimant could not prove that the partnership was dissolved on the transfer of its business to the company.
The Court also made reference to National Westminster Bank Plc v Jones [2001] 1 B.C.L.C. 98. In that case the mere cessation of the partnership’s business was insufficient to establish that there had been a dissolution of the partnership. There can be many instances whereby a partnership ceases to have any business or assets, and yet the partners intend the partnership to continue e.g. starting a new venture or improving their positions with regard to tax liability. In Boyle v Burke, the dissolution could only have been effected with the agreement of the Defendants, and that was not present.
In the judgement handed down by Mr Michael Green QC, attention was drawn to Clause 2.43 and references made in the partnership deed to the partnership being dissolved. It was found that because the purpose of Clause 2.43 was “…to deal with the consequences of the partnership being dissolved the partnership must have been dissolved as a matter of law for those consequences to take effect.” The partnership’s business was not a defined term in the partnership deed and that meant that determining whether all of its activities had ceased or were intended to cease was not readily done.
Conclusion
If it’s your intention to wind up a partnership make sure that you do so properly, in accordance with any partnership agreement and, generally, with the consent of all the partners. Laying the ghost to rest is an essential part of any partnership’s natural cycle. But if you intend to change the nature or structure of the business of the partnership, but for the partnership to continue, make that clear too!
Andrew Cromby and Benjamin Turner
Bitter arguments and disagreement are features of many long term relationships. Familiarity breeds contempt and all too often in partnership disputes the relations between parties have disintegrated to the point that direct communication is all but impossible. That is often what sends the parties reaching for their solicitors.