Farming Partnerships – sell up or sell out?

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When a partnership is dissolved, commonly the most important question is how the partnership assets will be dealt with.  This can be a significant concern where the farm is a partnership asset and one partner wants to keep farming.

The question is usually whether the farm should be sold on the open market or whether a partner’s interest should be bought out at a valuation.  Invariably these sorts of issues are resolved at mediation, but there are occasions where cases come before the Court.

Malik v Hussain

Malik v Hussain [2021] concerned a restaurant business in Manchester.  It may not appear, on the face of it, to have much to do with farming partnerships, but it is a helpful reminder of the approach the Court will take when faced with these circumstances.

The restaurant was partnership property. There was no written partnership agreement.  After an unsuccessful mediation, Mr Malik did not want to be bought out by his previous partners. He wanted the property sold on the open market with the partners having liberty to bid.

Partnership Act 1890

Sections 39 and 44 of the Partnership Act 1890 confer a right on each partner, in the event of a dissolution, to have surplus assets shared between them in accordance with their rights as partners. To ensure this is so, the normal rule is that partnership property should be sold so the true value of the asset can be realised. However, this is just the starting point. The Court has a discretion and any other method of settlement may be adopted if it is fair and reasonable.

The Court will look at the facts of the case when it comes to the exercise of its discretion. The concern expressed in this case was that the late change of position by Mr Malik was an attempt by him to engineer a bidding war to increase the price, without having funds to be able to complete on a purchase himself.  However, on the other hand, questions were exposed in relation to the valuation process.

Fairness

The Judge found that where the Court is being asked to make a buy-out Order, whether alone or as a fall back to a sale order, a very significant consideration is the fairness of such an outcome.  If it transpires on the basis of the evidence and submissions at trial that making a buy-out Order would not achieve a fair outcome, the Court ought not to do so without ensuring, so far as it reasonably can, that any reasonable adjustments necessary to ensure a fair outcome are made.

Decision

In this case the judge ordered there be a sale on the open market, followed by a buyout from the other partners if no sale proceeded. However, he did not think it would be fair and just to allow a wholly unregulated bidding process.  Detailed directions were given on the reserve and the consequences if a successful bidder did not have the means to complete the purchase in a specified timetable.

Court’s approach

The Judge was not prepared to go so far as to accept a general principle, that there should always be a sale on the open market, if there was ever any risk of the selling partner not getting the best price.  However, where the Court has a discretion, judges are less likely to look for binding legal principles and will review all the facts of the case to decide how best to exercise their discretion.

Perhaps the morale of the costly case is to reach agreement at mediation wherever possible in order to avoid the uncertainties of litigation, the open market and valuation.