Business Clinic: Can executors ignore partnership agreement?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help.

Here, Robert James of solicitor Thrings offers advice on a tricky farming family situation following the death of a partner.

Q. In a three-partner family business, one partner has passed away and intended to leave his shareholding to his wife, although the partnership agreement implies the shares should be divided between the two remaining partners.

The executors are refusing to acknowledge the partnership and have submitted the probate, stating they have passed on the deceased’s shareholding to his widow.

The widow has been drawing down a salary from the partnership account for the past six months without any agreement, as she has access to the accounts. Where do the other two partners stand please?

A. The situation set out above is a classic illustration of common problems encountered and issues often misunderstood when a partner leaves a farming partnership. 

In terms of the destination of the deceased’s shares, it is not uncommon to see provisions written into partnership agreements, whereby an outgoing partner’s share (on death or by retirement) accrues to the others, or the remaining partners have pre-emption rights to acquire the outgoing partner’s share for a price to be determined in line with the mechanism set out in the partnership agreement.

See also: Care home fees row raises partnership questions 

The rationale for this is often to keep the integrity of the business together, rather than face a forced sale situation every time a partner leaves the business.

The legal position will be dependent on the exact terms of the partnership agreement – and each partnership agreement can be different.

Where a partnership agreement is silent or deficient in one aspect, the fallback position is by reference to the Partnership Act 1890.

The answer may therefore lie in considering both the partnership agreement and the Act in any given situation. It sounds as if the position here is very uncertain, as the question phrases it as an implication rather than a clear-cut express term.

The position is further complicated because the terms of a partnership agreement are often varied by previous conduct or consents, especially when it is decades old and has not been updated to reflect current practices and agreements between the partners.

In terms of the conduct of the executors, they will have standalone duties to ensure that what they submit to probate is true and accurate. Serious questions could be raised if they are on clear notice that the partnership agreement says something very different.

Whatever the rights and wrongs of what the executors submitted, nothing they do or say affects the actual legal position from the viewpoint of the remaining partners if the outgoing partner’s share is subject to any accruing or pre-emption rights.

The executors may well be subject to an obligation written into the partnership agreement to do all that is necessary and desirable to vest any assets held in the deceased’s name and the corresponding share to the remaining partners.

For example, if land held in the name of the deceased needs to be transferred, a declaration from the court could be obtained to force the executors to comply.

In terms of the salary being drawn for the past six months, it appears, certainly in the absence of any contractual right to do so, that it has been improperly withdrawn and the widow must account for this sum back to the partnership in full.

In the first instance, the remaining partners should simply issue a demand and if the widow does not comply, they may have recourse to the court for an order compelling her to do so.