Farming Partnerships: buyout ordered on dissolution

In this article we consider the relatively recent decision in Cobden v Cobden [2024] EWHC 1581 (Ch). This is the first case concerning a family farming partnership where the court has made a Syers Order in a 50:50 partnership. Syers Orders are relatively rare in practice.

What is a Syers order?

In ordinary circumstances in which a partnership has dissolved, where there is no Syers order, the court would order the partnership be wound up and the assets sold on the open market.

A Syers order (deriving from the case Syers v Syers (1876)) is an order which allows one partner to buy out the interest of another.

Background

The case concerned a farming partnership between two brothers, Matthew and Daniel Cobden, who ran a large-scale dairy operation in Somerset. There was no written partnership agreement. The partnership existed as a partnership at will.

A partnership at will occurs when the duration of the partnership is for an undefined term. The partnership can be dissolved by any partner serving a notice of dissolution on the other partners and the provisions of the Partnership Act 1890 will apply in default of any express agreement to the contrary.

The relationship between the two brothers had irretrievably broken down. Matthew gave notice to dissolve the partnership and issued proceedings.

Matthew’s claim for a Syers order in his favour was also supported by an estoppel claim based upon what would happen to the partnership shares on a dissolution. Matthew’s position was there was an understanding that Daniel would at some point leave the business and Matthew would buy his share of the partnership from him, linking back to conversations they had in 2005/2006.

There was a valuation of the partnership assets which led to Matthew making an offer to purchase Daniel’s share for £3 million. This was rejected. Daniel made a counter-offer to purchase Matthew’s interest for £3.82 million.

The court was therefore asked to consider whether to grant a Syers order. Rather timely, before judgment was handed down, the Court of Appeal made a Syers order in Bahia v Sindhu [2024] EWCA Civ 605. That judgment is binding on the high court. It determined that a Syers order could only be made in exceptional circumstances.

What were the exceptional circumstances in Cobden?

They were summarised as follows:

• Where there is a partnership at will, equal partners share an understanding that when the partnership comes to an end, one partner could buy the other out at a fair price and that partner has devoted themselves to the partnership’s business in anticipation of that event. There was a shared understanding between the brothers over the years that when the partnership was eventually dissolved, Matthew would be entitled to purchase Daniel’s share, to enable him to continue running the business
• That understanding must be sufficiently clear from the dealings between them, the reliance sufficiently identifiable and substantial to support a conclusion that it would be unfair and inequitable that all assets be sold and liquidated.
• When considering “detriment” of the partner who has relied on the fact they could one day buy out the other, the court must make allowance for the fact that the partners have continued in business with a view to making profit and have shared in that profit and any capital injections have been reflected correctly in the accounts. The court looked at Matthew’s individual efforts in developing the business, which the judge held were responsible for the very substantial business that the partnership had.

Matthew had established an ‘equity’ which prevented the liquidation of the partnership assets. The court can make such conclusion where it considers “in all the circumstances, an order for sale would be unfair and unjust. Matthew had by far the stronger moral claim to carry on the business.

• The court could consider the effect a sale would have on third parties, such as employees or customers, the costs of a sale and any adverse tax consequences which may arise upon a sale.
• Where there is expert valuation evidence which supports the conclusion that the price payable under the Syers order is what the outgoing partner can expect to receive, then the court can act upon the equity. The court can factor in potential adverse tax consequences and sale costs into its comparison
• Even if the other partner offers to pay more than was offered in return, and a sale could result in a greater financial return than that suggested by expert evidence, the court is entitled to act upon equity.

Conclusion

Whilst there were a unique set of facts that also supported the Syers order in favour of Matthew (the tax bill that would have followed the sale to a third party; the fire sale of a large number of dairy cows under TB restrictions; the impact on farm workers), it does not get around the fact that not having a written partnership agreement in place can put the future of a farming business in jeopardy.

The Partnership Act 1890 is still the governing legislation where there is no written partnership agreement (or where gaps need to be filled in a partnership agreement). A Syers order is departure from the norm in terms of the dissolution of a partnership. Absent written agreement, partners can expect a winding up and sale of the assets.

It is therefore a worthwhile investment for partners to put in place a partnership agreement which makes provision for events that would otherwise trigger a dissolution; the ability to buy out another’s share and mechanism for that; together with a dispute resolution provision which will, hopefully, in the unfortunate event of a dispute save the partners significant amounts litigating any dispute. The costs of litigation far outweigh the costs of a well-documented partnership agreement and any other relevant ancillary documents, such as wills.

For all partnership questions and drafting of partnership agreements, please contact the partnership team at Michelmores.