On dissolution of a partnership the court may in exceptional circumstances permit one partner to buy the other out where it would be unfair and inequitable for the partnership assets to be liquidated through sale.
The High Court has considered this issue determining a dispute over the equal shares of two partners in a dissolved partnership in Cobden v Cobden [2024] EWHC 1581 (Ch).
The case concerned two brothers and a farming partnership which operated a dairy farm in Somerset. Matthew Cobden served notice of dissolution in August 2022 and sought an order requiring Daniel Cobden to sell his interest to Matthew at fair value based on an understanding reached in 2005/2006 which was confirmed in 2021.
Daniel denied any such agreement and if the court was not prepared to order Matthew to sell his share to Daniel it should order a full winding up. Each brother accused the other of breach of fiduciary duty.
A Syers order (Syers v Syers [1876] 1 App Cas 174) – permitting one partner to buy the other out – should only be made in exceptional circumstances where the normal practice of a winding up though a sale on the open market would not do justice to the parties Bahia v Sidhu [2024] EWCA Civ 605. The court decided that such circumstances arose in this case.
The partners had since 2005/2006 shared an understanding that Matthew would carry on the business when the partnership eventually came to an end and be permitted to buy out Daniel at a fair price. The 2021 conversation affirmed it.
Matthew was the driving force in the partnership. He had devoted himself to developing the firm’s business over almost 20 years and was largely responsible for creating the substantial business which now existed, in the expectation of buying Daniel out.
The understanding and reliance upon it gave rise to an equity in favour of Matthew which rendered it unfair and inequitable for Daniel to now insist, at partnership end, that both partners’ shares should be liquidated through sale.
The court was entitled to consider the partners’ individual efforts in developing the business and the adverse impact of a sale on third parties including employees and the customer base in deciding what was fair and just.
The court was entitled to act on the equity where expert valuation evidence supported the conclusion that the price payable under a Syers order was equivalent to what Daniel could reasonably expect to receive for his share factoring in the likely costs of sale and any potential adverse tax consequences.
Louise Clark is a property law consultant and mediator
