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Net Value Means Current Value Not Book Value, Rules Court

16th January, 2014

When a family partnership broke up, a lack of precision in the drafting of the partnership agreement led to an appearance in the Court of Appeal.

Two farmers took their 19-year-old son into partnership in 1997. In 2009, the son gave three months’ notice to terminate the partnership. The partnership agreement gave the remaining partners the right to buy out the retiring partner.

A dispute arose between them as to the price to be paid for the retiring partner’s share. Should it be based on the current market value of the assets, as the son claimed, or on the value of the assets shown in the partnership accounts, as his parents claimed?

The partnership agreement stated that in the event of a termination of the partnership, the ‘net value’ to be attributed to the assets would be ‘agreed between the Partners or their respective successors (as the case may be) or in default of such agreement shall be determined by the partnership accountants’. However, there was no definition of ‘net value’, which LJ Lewison described as a ‘most regrettable’ omission.

After an extensive discussion of the role of the accountants and their expertise, the Court of Appeal concluded that the partnership agreement required that on a termination, the actual values of the assets had to be taken into account rather than their ‘book values’ in the annual accounts.

It was persuasive that the alternative to the buy-out provision in the partnership deed was a winding up of the partnership, when the assets would have been disposed of at their open-market values.

The lesson for any partnership is that the partnership deed needs to be clear as to the definition of terms.

 

 

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