Court decides one farming brother to buy out the other
© Tim Scrivener
The High Court recently had to consider what should happen to the equal partnership shares of brothers Matthew and Daniel Cobden. Matthew served a notice to dissolve their farming partnership on 25 August 2022.
This was what is known as partnership at will, as there was no written agreement.
Shortly after serving the dissolution notice, Matthew issued a claim in the High Court seeking a declaration that the partnership had been dissolved, or that the court should dissolve it.
Matthew also claimed Daniel was required to sell his interest in the partnership to Matthew, along with certain other interests, at a fair value.
See also: Farming partnership appeal case highlights dispute consequences
Matthew’s basis for this was two conversations which he said the brothers had in 2005/2006 and 2021 in which he alleged they reached an understanding that Matthew would buy Daniel out of the partnership.
In considering this, the court had to decide whether or not to issue a Syers order.
This is an alternative to a full winding-up of the partnership which would see its assets sold on the open market. If a Syers order was to be granted, the court also had to decide which partner should be allowed to buy out the other under its terms.
Partnership history
Matthew Cobden and his brother Daniel had been in an equal partnership since 2006 when a third brother, Willy, left the partnership.
Prior to this their parents had owned the farming assets and these were passed to the brothers in 1998. Between 1998 and 2006 the three sons carried on the business in Somerset as partners in equal shares without any written partnership agreement.
Much of the farming was done by Willy, as Matthew and Daniel were employed alongside their father in the family’s abattoir business. Matthew and Daniel returned to the farm in the early 2000s.
Matthew ran the dairy while Daniel managed the agronomy, forage and contracting side of the business. The dairy unit was modernised and expanded from 2013, moving from 300 cows to about 1,000 head.
It has a 72-point rotary parlour, milking three times a day on a high welfare, high input and high output system. Milk is sold to Saputo and the herd achieves well above national average yields.
The farm owns about 222ha and rents additional land.
Mathew referred to a conversation between the brothers in October 2021 involving Daniel agreeing to the suggestion that Matthew should buy him out of the partnership, so that Daniel could leave the farm, set up a new farming business with his son Charlie, and be his own boss.
Matthew also said that there was an understanding, reached between them in 2005, that one day Matthew would buy out Daniel from the partnership.
It was alleged that, since 2006, Matthew had, in effect, run the farm as a sole trader with Daniel’s tacit support; and that Matthew had been the driver in the partnership’s business, planning its substantial expansion from December 2013 onwards and liaising with all the professionals involved in that expansion.
£3m offer to buy share
In April 2022 Matthew made an offer to buy Daniel’s share in the partnership, in other farm property, and in a related company, for £3m.
Daniel rejected that offer in mid-July and on 15 August 2022 made a counter-offer of £3.852m to buy out Matthew. This was open for 14 days, the alternative being a formal dissolution of the partnership.
Matthew dissolved the partnership a week after Daniel’s counter-offer.
Daniel’s defence denied that there had been any agreement between the brothers, let alone any enforceable contract, to justify Matthew’s claim to be entitled to buy out Daniel, or that Matthew had an equity to support that claim.
It stated that unless the court was prepared to make an order that Daniel should buy out Matthew (at a price to be agreed or otherwise determined by the court) the partnership should be fully wound up.
The law of equity has developed to supplement common law. It focuses on fairness, justice and conscience and provides remedies and solutions that may not always be available through common law.
It can address circumstances where strict application of legal rules may lead to unjust outcomes.
February 2023 brought an amended claim by Matthew referring to the initial conversation, relied on by him as setting the basis on which the two brothers went forward, emphasising that the basis of it was Daniel’s indication that his involvement in the partnership was “time-limited”.
At the end of that time, Matthew would have to buy him out. Matthew alleged that the brothers had also spoken about that on three or four occasions since the significant expansion of the business from 2013.
Matthew also maintained that he was entitled to an order through proprietary estoppel, a legal term used referring to a promise having been made and where a person has relied on that promise to their detriment.
This relied both on the conversations Matthew claimed the brothers had had, and on Matthew having invested all his time and resources in building up the partnership business in the reasonable belief, encouraged by Daniel, that Daniel would leave the business at some point and Matthew would buy him out.
Moral claim
Granting Matthew the Syers order, Judge HHJ Russen said: “The evidence given at trial leads me to have no doubt that, as between the two brothers, it is Matthew who has, by far, the stronger moral claim to carry on the business of the farm.”
The evidence pointed all one way, said the judgement – Matthew deserved to be the successor to the farm and to carry on the very substantial business which was mainly attributable to his efforts over the past couple of decades.
Expert evidence from a consultant familiar with and retained by the farm business supported this.
Market valuations
Regarding valuations, the judge said it was important to consider what the market might pay for the farm and not with a potential bidding war between the brothers in mind.
Several factors were considered alongside the brothers’ claims, including the tax consequences if the assets were sold on the open market.
This would likely lead to substantial income tax bills for both brothers on the sale proceeds of the partnership’s livestock, deadstock, plant and machinery.
The farm was under TB restrictions so was unable to sell or move animals unless for slaughter, so any open market sale of cattle would likely return a lower value than would otherwise be obtainable. In addition, there could be staff retention issues if the farm was put on the market.
Selling the farm on the open market would also incur costs of about £120,000 plus VAT, or more, and there would be other costs to conduct the sale of the live and deadstock.
The judgement granting the Syers order came just three days after the final hearing date, with the judge concerned to act as quickly as possible because the value of farming assets can change quickly.
What happens now
The value of the partnership’s property (before any burden, interest, right, or claim on its use or value) was put at £11,040,000.
Syers dissolution accounts must be prepared, covering the profits or losses of the partnership, the value of its assets and liabilities, the amount due to Daniel for his capital and share of the profits or losses, assets and liabilities.
A payment date is set for 10 weeks after the date on which the dissolution accounts are provided.
Matthew must pay Daniel the amount specified in the order and provide bank documents releasing Daniel from liability for amounts owed by the partnership to the bank.
Daniel must transfer legal title to the partnership assets to Matthew, who will indemnify Daniel for any liabilities incurred in relation to the partnership assets after completion.
If Matthew does not pay Daniel the amount specified by the payment date and time, and deliver the required documents, then all of the partnership assets are to be sold on the open market with both brothers having permission to bid.
Partnership Act 1890
If there is no written partnership agreement, or if an agreement is silent on the matter of dissolution, then the Partnership Act 1890 governs what happens.
This provides for the partners to have the assets divided between them in line with their respective shares.
This generally means that the partnership assets must be sold on the open market to determine their value.
However, the court can decide on any other method of fair and reasonable settlement. One option is a Syers order, named after the case of Syers v Syers (1876).
Lawyer comment
“This case considered whether the circumstances relating to the dissolution of the farming partnership were exceptional enough to grant a Syers order (that is, an order as to whether one partner should be entitled to buy the other’s share at a price based on valuation evidence),” says Michael Anderson, a solicitor with Lee Bolton Monier Williams.
“This would be a departure from the usual course of a full winding up of the partnership which would require the sale of the assets on the open market.”
A very particular set of circumstances must exist for the court to impose a Syers order, he says.
The court found there was an understanding that Matthew would carry on the business when the partnership eventually ended, by being permitted to buy out Daniel at a fair price to be determined at that end point, and that Matthew devoted himself to the farm’s business and its development in anticipation of that event.
“The understanding was sufficiently clear on the facts, and Matthew’s subsequent reliance upon it supported the conclusion that it would be unfair and inequitable for Daniel, at the partnership’s end, then to insist that both partners’ shares in the partnership assets should be liquidated through their sale on the open market.”
Cobden v Cobden is a warning to any existing farming partnerships with no written partnership agreement or one that is silent on partners’ exit arrangements and dispute resolution, says Michael.