Corporate update: the latest corporate law developments May 2024

Was a resigning partner entitled to a payment for their partnership assets?

The Court of Appeal has held that a partner who resigned from a partnership was entitled to be paid their share of the value of the partnership assets despite the partnership agreement not containing any provision to that effect.

The facts

Proctor v Proctor [2024] EWCA Civ 324 involved a dispute between the partners in a family partnership that operated a 600-acre Yorkshire farm. The partnership was originally set up by the family’s grandparents but, by the time of the dispute, the four partners were two brothers, their sister and their father.

The partners had entered into a partnership agreement under which each of the four partners was entitled to an equal one-quarter share in the partnership profits. However, whilst the agreement set out various circumstances in which a partner would cease to be a partner, it was silent on a partner’s ability to unilaterally resign from the partnership. There is also no such right under the Partnership Act 1890.

The sister, who lived and worked in London, had no day-to-day involvement in the partnership. Perhaps mindful of the fact that, as a partner, she was liable for the debts and obligations of the partnership which had made a loss in 2008 and 2009, the sister wrote to the other partners in June 2010 “to confirm my resignation from the partnership with immediate effect”. The other partners, under the mistaken belief that she was entitled to resign, all accepted her resignation and continued in partnership together, taking over the assets and liabilities of the partnership. However, nothing was said, let alone agreed, between the partners about the financial terms on which the sister was to leave the partnership.

After the sister’s resignation, the partnership was found to have the benefit of a yearly tenancy of the farmland which was protected under the Agricultural Holdings Act 1986. This asset had a substantial value, despite not having previously been recorded in the partnership’s accounts (due to the partners being unaware of its existence).

The sister claimed she was entitled to a payment reflecting her interest in the partnership assets, essentially equal to one-quarter of the value of the agricultural tenancy at the time of her resignation. The judge at first instance agreed with the sister. But the continuing partners appealed his decision arguing that there was no express agreement that the sister was entitled to such a payment; no basis for implying an agreement to that effect; and no other statutory or legal basis for any such entitlement. They argued that, by retiring from the partnership, she had effectively given up her interest in its assets.

The decision

The Court of Appeal dismissed the continuing partners’ appeal.

The Court noted that, since the assets of a partnership are owned collectively by the partners, each partner has a proprietary interest in the partnership property. When determining what happens to that proprietary interest when a partner retires, the first port of call is what the partners have agreed in the partnership agreement. But, if that agreement is silent, what is the position?

The Court rejected the continuing partners’ submission that a partner who resigns without any agreement as to whether or not a payment should be made is to be taken as agreeing to surrender or assign their interest to the continuing partners without payment. As the Court noted, there being no agreement as to what, if anything, should be paid is very different from there being an agreement that nothing should be paid.

Since her resignation, the continuing partners had continued to use the sister’s interest in the partnership assets without accounting to her for it. They should now be required to do so, based on the actual value of the relevant assets at the relevant time rather than on their book values (which would be based on an historic cost or, in the case of the agricultural tenancy, nil since it was not known at the time and therefore was not included in the accounts).

Comment

This case is a reminder of the importance of partners agreeing all relevant terms in a written partnership agreement. In the absence of express agreement, disputes and litigation may result in the court stepping in to decide what the appropriate arrangements are.

Since all partnerships are different, a “one-size-fits-all” approach is not appropriate and the exact requirements will vary. For example, professional partnerships will generally provide that a retiring partner is not entitled to receive any payment for their share of the partnership assets which will simply transfer automatically to the continuing partners. In a family farming partnership as featured in this case, careful thought needs to be given to how, on a partner’s retirement or resignation, the interests of those partners who wish to continue farming can be reconciled with those who wish to realise their property.

Extension of UK payment practices regime

The UK’s reporting on payment practices regime has been extended and expanded by the Reporting on Payment Practices and Performance (Amendment) Regulations 2024 (the 2024 Regulations).

The 2024 Regulations, which came into force on 5 April 2024, extend the expiry date of the regime from 6 April 2024 to 6 April 2031 and introduce additional reporting requirements for in-scope entities.

Reporting on payment practices regime

The late payment of suppliers has long been recognised as a significant issue for UK businesses, particularly small businesses. Late payment adversely affects the liquidity of affected organisations, restricts their ability to invest and can, ultimately, force them to exit the market.

The Reporting on Payment Practices and Performance Regulations 2017 (the Principal Regulations) were introduced to increase information and transparency in the market regarding the payment practices and performance of large businesses. It was hoped that this transparency would help to drive a culture change toward more prompt payment.

The Principal Regulations impose a duty on large companies to report on their payment practices and policies approximately every six months, and to publish those reports on a Government-hosted website that is open to the public. (Equivalent regulations impose the same requirements on large limited liability partnerships.) Information that must be included in the reports includes:

• a description of the company’s standard payment terms in relation to qualifying contracts;
• the average number of days the business took to make relevant payments; and
• the percentage of payments made within specified periods.

The Principal Regulations were originally due to expire on 06 April 2024, but a 2023 consultation showed strong support for continuing with the reporting regime and for improving some of its requirements. This has been reflected in the 2024 Regulations.

Extension and expansion of the reporting regime

The 2024 Regulations amend the expiry and review dates under the Principal Regulations so that the expiry date of the regime is now 6 April 2031 (with a review to take place by 6 April 2029).

In addition to carrying forward the existing reporting requirements, the 2024 Regulations also expand the regime by introducing provisions that require the reporting of:

• the proportion of invoices that are disputed which subsequently result in payments being made outside of the agreed payment terms;
• the total value of payments made within specified time periods of 30-days; and
• the total value of payments not made within the payment period.

The 2024 Regulations also clarify how payments should be reported when a third party “supply chain” finance provider is involved.

The Government is due to publish updated guidance for in-scope businesses on how to comply with the revised regime.

First published in Accountancy Daily.