What happens to partnership assets following dissolution?

When a partnership is dissolved, and there is no written partnership agreement, then what will normally happen is that an account will be taken of the assets and liabilities, including any liabilities of the partners to and from the partnership. The value of the assets will then be realised, and the proceeds applied in the first instance to settle the partnership debts. If any of the assets is incapable of being sold, then its value will be brought into account by the partner who retains it. Any surplus will be distributed between the partners pro rata to their respective partnership interests.

If the parties cannot agree how the assets are to be valued and distributed then the Court has to do its best to achieve a fair outcome, which involves seeking to maximise the realised value of the partnership assets for the benefit of all the former partners.

The way in which this is normally achieved, if the assets are capable of being sold, is by directing a sale in the open market, usually at auction, but sometimes by private treaty.

So said Lady Justice Andrews LJ in giving the Judgment of the Court of Appeal inBahia v Sidhu and others CA-2024-000114in which the Appellants successfully appealed a decision of Mr Nicholas Thompsell, sitting as a Deputy High Court Judge.

This was a case in which, following the dissolution of a partnership at will, there was a trial of the main inquiries before Mrs Justice Joanna Smith who ordered the Appellants/Defendants to repay to the partnership a sum which, together with interest, amounted to over £3.5 million. That sum remained unpaid by the time of the hearing before the deputy Judge. The Claimant/Respondent therefore sought, and obtained, an order from the deputy Judge that sufficient of the partnership assets (which included a portfolio of valuable properties), rather than being sold, be transferred to the Claimant/Respondent as a distribution to him in specie in satisfaction of the Judgment debt.

The Court of Appeal were unanimous in overturning that decision. While accepting that there is no absolute rule that partnership assets be sold upon dissolution, it is nevertheless the normal means of ascertaining the value of the partnership assets if they are capable of being sold. Per Andrews LJ:

“The rationale which underlies the normal practice is that a sale on the open market will usually be the best means by which to achieve a full and fair value for the partnership assets. The partners can test the market with competing bidders in just the same way as they would if they were selling their own property. If one of the partners has a particular interest in acquiring any of the partnership property, an open market sale will ensure that he pays a fair price for it.”

Although the case ofSyers v Syers[1876] 1 AC 174identified a discretion to depart from the general principle in an exceptional case there is no reported authority in the 150 years since then, in which that discretion has been exercised or even recognised as arising and this was not such a case. Andrews LJ concluded:

“It is self-evident that in a case such as this, where the property can be readily sold at auction, the amount that an arms’ length purchaser is willing to bid for it will be a better measure of the value of the property in the open market than a virtually unchallengeable expert opinion as to what it might have fetched had it been put up for sale. Any concerns about it being sold at too low a price could easily be met by placing a reserve on the property at the valuation obtained from Alexander Lawson and by giving the Receiver a discretion to sell by private treaty, including to Mr Bahia, if it did not meet the reserve.”

She said that any unfairness arising from the Defendants’/Appellants’’ failure to pay the Judgment debt could be met by giving the Claimant/Respondent a credit equal to the Judgment debt which he could then use to bid for any of the partnership properties when they come to be sold at auction.

The Court allowed the appeal and directed that the properties should be sold at auction.