Reynolds Report October 2019

Farmers Fall Out

A recent case in the Court of Appeal (Liddle v Liddle [2019] EWCA) establishes the principle that, under a cross option agreement (an agreement allowing outgoing business owners/partners to require the continuing owners/partners to purchase their share of the business) the continuing owners/partners could not be required to pay the buyout price until the price had been determined.

David Liddle, his wife (Edith Liddle) and their son (Stuart Liddle) were in partnership with Mary Liddle and her children Robert Liddle, Martin Liddle and Andrew Liddle.  The partnership ran and held the assets of an agricultural business (“the Business”).
On 23 January 2001 the partners entered into a partnership agreement (“the Agreement”).  The terms of the Agreement included provision that:
1. A partner (an “Outgoing Partner”) could leave the partnership by giving 6 months’ notice or through death or by expulsion; and

2. The partnership would not determine due to the above but, rather, cross options would arise allowing the remaining/surviving partners (“the Continuing Partners”) to purchase (call option) and the Outgoing Partner to require them to purchase (put option) the Outgoing Partner’s share of the Business.

Setting out the relevant provision (clause 13):

Outgoing Partners

 (a)  This clause shall apply if during the continuance of the partnership any partner shall die…. or shall retire or otherwise cease to be a partner (”the Determination Date”) (hereinafter referred to as the Outgoing Partner which expression shall where the context so admits include the Outgoing Partner’s legal personal representatives, assigns and successors in title) subject to the provisions of clause 12 hereof the Continuing Partners shall have the option of purchasing the share in the Partnership of an Outgoing Partner on the terms contained in Clauses 13.2 and 13.3 PROVIDED ALWAYS that such call option shall be exercised only by a notice in writing given to such Outgoing Partner on or at any time within 2 calendar months following the Determination Date save where the Determination Date is the death of a partner when the notice period shall be 6 months (in each case hereinafter called “the Notice Period”).

 (b)  The Outgoing Partner shall have the option of requiring the Continuing Partners to purchase his share in the Partnership on the terms contained in Clauses 13.2 and 13.3 PROVIDED ALWAYS that such put option shall be exercised only by a notice in writing given to each of the Continuing Partners on or at any time within the 2 month period immediately following such date as is 2 calendar months after the Determination Date.

The Agreement also contained detailed provision for the valuation of the Outgoing Partner’s share:

13.2.  UPON the exercise of either the call option contained in Clause 13.1 (a) or the put option contained in Clause 13.1 (b) the following provisions shall apply:-

 (a)  As soon as is reasonably practicable the accountants of the Partnership for the time being shall prepare a balance sheet and profit and loss account as at the Determination Date in accordance with the accounting principles and practices adopted in the last signed balance sheet and profit and loss account prepared pursuant to the provisions of Clause 9 of this Agreement but for the purposes thereof the assets of the Partnership (other than goodwill which shall be valued at £1) shall be shown at their market value as at the Determination Date such value to be agreed between the Outgoing Partner and the Continuing Partners and in default of any such agreement within 2 calendar months following the exercise of the said option to be determined by a valuer (acting as an expert and not as an arbitrator) to be nominated by the Outgoing Partner and the Continuing Partners jointly and in default of any such nomination within 1 month thereafter to be appointed by the President for the time being of the Institute of Chartered Accountants of England and Wales whose decision shall be final;

The Agreement also contained detailed provision as to the timing of payment of the purchase price and the accrual of interest:

[13.2] (d) The purchase price shall be the net value of the Outgoing Partner’s share in the Partnership as shown by and in the said account and balance sheet (but excluding any share of profits payable in accordance with sub- clause (c) hereof) and shall be paid by the Continuing Partners as follows:-

 (i)  On the Outgoing Partner surrendering his occupation of any dwellinghouse owned by the business (or in the event of death on the outgoing partner’s widow surrendering her occupation of any dwellinghouse) the Continuing Partners shall pay to the Outgoing Partner a sum equivalent to 20% of the Purchase Price;

 (ii)  The balance of the Purchase Price shall be paid by the Continuing Partners by 40 equal quarterly payments the first of which shall be paid at the expiration of two months from the date of expiry of the Notice Period;

 (iii)  Provided that the first eight such quarterly payments are made in full and on the due dates they shall be free of interest;

 (iv)  The remaining 32 such quarterly payments shall be paid together with interest on the amount or balance of the Purchase Price for the time being outstanding as from the Determination [Date] at the rate of 1% per annum above the base rate of the Bank referred to in clause 10 from time to time and for the time being in force;

 (v)  If any quarterly payment is not paid on the due date interest shall become payable on that outstanding payment as from the due date at the rate of 3% per annum above the base rate of the Bank as aforesaid;

Finally, there was provision (“the Accelerated Payment Provision”) saying what was to happen in the event that any of the payments due above were delayed:

[13.2(d)] (vi)  If any instalment of the said purchase price shall be in arrears for more than 21 days after the same shall have become due and payable then the whole amount or balance of the said purchase price then outstanding shall forthwith become due and payable together with such interest as aforesaid……”

On 30 October 2011 Stuart Liddle gave notice of retirement.  The notice period being six months, his partnership came to an end on 30 April 2012 and the two-month notice period for the options (see above) ran from that date.

On 8 December 2011 David Liddle (Stuart’s father) died, ending his partnership as at that date and triggering a six-month notice period for the options (running to 8 June 2012).

On 5 April 2013 Edith Liddle (mother of Stuart and wife of David) also gave notice – ending her partnership as of 5 October 2013.  (She subsequently also died.)

(From here on, I will refer to Stuart, David and Edith together as “the Outgoing Partners.”)

This left Mary Liddle and her children (Robert, Martin and Andrew) (from here on “the Continuing Partners”) to continue the Business.

Issues arose as to how much the Continuing Partners were to pay for the shares in the Business of the Outgoing Partners and the timing of that payment.  (Significant sums of money were at stake because the value of land and buildings held by the Business, whilst relatively modest when the Business was set up, had become substantial.)

On a quick glance back at the valuation provisions above, it will be clear that this scenario – with interleaving Determination Dates and, on a strict reading, successive Outgoing Partners being entitled to have the effect on the value of their share in the Business of the departure of prior Outgoing Partners taken into account – created significant complications.  This led to delay.

In addition, issues were raised as to whether or not the Outgoing Partners had served effective notice triggering the put options – i.e. whether or not the Continuing Partners were required to buy them out at all.

In November 2014, in light of the above issues, the Outgoing Partners issued proceedings seeking, a declaration that the partnership be dissolved and an order that it be wound up or, in the alternative, an order for the payment of the purchase price provided for in clause 13 of the Agreement.

The claim was defended, and proceedings became embroiled in detailed arguments as to what had and had not been agreed by way of modifications of the seemingly unworkable clause 13 procedure to, supposedly, simplify the valuation process.   There was periodic judicial input into this debate – at both District Judge and High Court level.

By December 2015 the partnership accountants had produced figures to both sets of partners (Outgoing Partners and Continuing Partners).  Issues however continued to be raised regarding these figures and proceedings continued.

On 29 October 2016, in what would appear to have been an act of frustration, Statutory Demands were served on the Continuing Partners (two on each of them) demanding payment of:

1.  A sum claimed with respect to Stuart’s share of the Business; and

2. A sum claimed with respect to David’s share of the Business.

Applications to set aside the Statutory Demands were duly issued (on 4 November 2016) and, unsurprisingly, the resultant proceedings were swiftly consolidated with the High Court proceedings.

In the meantime, accountancy work continued and it is accepted that, by the end of July 2017, a purchase price for the interests of the Outgoing Partners had been ascertained.

On 13 September 2017 HHJ Davis-White QC produced his judgment in the High Court proceedings (Liddle v Liddle [2017] EWHC (Ch) 2017).

In summary, his judgment provided that, notwithstanding the fact that over much of the relevant period the sums in question had not yet been ascertained, the timing of payment provisions in the Agreement (see above) were not delayed or suspended hence the Accelerated Payment Provision applied (see above) and payment of the now ascertained price was due in accordance with that clause together with a substantial sum for interest accrued over the relevant period.  (Unsurprisingly, the Statutory Demands were set aside.)

The judgment was appealed.

On the crucial second element of the appeal Lords Justice McCombe, Richards and Newey, sitting in the Court of Appeal (see citation above), found that HHJ Davis-White had erred in law in deciding that the Continuing Partners were obliged to make payments under clause 13 before purchase prices were ascertained in July 2017.  Consequently, any time period leading to triggering of The Acceleration Provision ran from July 2017 only, with consequent revision of the amount due for immediate payment and of the amount of interest due.

This was, no doubt, of much relief to the Continuing Partners.

Further reading

I’m selling my business, why do I need a solicitor? – The Reynolds Report

Fake News – The Reynolds Report

What are alphabet shares and why you may want to have them – The Reynolds Report

Commercial Leases – A point in the right direction for prospective Tenants

Understanding the Key Clauses in a Commercial Lease

Barrett & Co Commercial Property and Conveyancing Department

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