Bahia v Sidhu and another

Partnership – Dissolution – Distribution of assets – Dispute arising concerning dissolution of partnership and distribution of its assets – Judge ordering transfer of properties to respondent instead of sale on open market – Appellants appealing – Whether judge erring in law in failing to order sale of properties in open market to maximise value for benefit of all former partners – Appeal allowed In 1972, the respondent and T formed a partnership which, over the years, acquired a sizeable investment property portfolio comprising both residential and retail premises, situated mostly in and around Greater London. The partnership was a partnership at will, and it was dissolved in 2016. The respondent and T were equal partners, and thus each was entitled to 50% of the net proceeds of the winding up. A dispute arose concerning the dissolution of the partnership and the distribution of its assets. T died in 2018 and was represented by the appellants. When a business partnership was dissolved, each partner was entitled to receive their proportionate share of the realised value of the partnership assets after the partnership liabilities had been discharged. In the absence of agreement, the court had to do its best to achieve a fair outcome, which involved seeking to maximise the realised value of the partnership assets for the benefit of all former partners. That was normally achieved, if the assets could be sold, by directing a sale in the open market, usually at auction. In this case, the judge departed from that practice and directed the outright transfer to the respondent of four of the properties owned by the partnership (the schedule A properties), treating him as having received the higher of the values ascribed to each property by surveyors and an expert valuer: [2023] EWHC 3028 (Ch). The appellants appealed. Held: The appeal was allowed. (1) On the dissolution of a partnership every partner was entitled, as against the other partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what might be due to the partners respectively after deduction of what might be due from them as partners to the firm; for that purpose any partner or his representatives might on the termination of the partnership apply to the court to wind up the business and affairs of the firm: see section 39 of the Partnership Act 1890. Each partner was, in general, entitled to have dissolution accounts taken as between him and his co-partners and to have the partnership property applied in liquidation of the partnership debts, and to have any surplus assets divided. Save in special circumstances, no partner could insist on taking the share of any other partner at a valuation or insist on a division of the partnership assets in specie. (2) Each partner was also entitled to force a sale of all partnership assets which could be sold and to have the value of any unsaleable asset brought into account by the partner who retained it. There was no absolute rule that partnership assets be sold upon dissolution, but it was the normal means of ascertaining the value of the partnership assets if they were capable of being sold: see Lindley & Banks on Partnership (21st edition). The rationale underlying the normal practice was that a sale on the open market would usually be the best means to achieve a full and fair value for the partnership assets. The partners could test the market with competing bidders in the same way as if they were selling their own property. If one of the partners had a particular interest in acquiring any of the partnership property, an open market sale would ensure that he paid a fair price for it. However, there might be cases in which an open market sale would not be the best means of achieving full value, or would be unfair: Syers v Syers [1876] 1 AC 174, Hammond v Brearley (unreported) [1992] 12 WLUK 185 and Mullins v Laughton [2003] Ch 250 considered. (3) If the judge had correctly applied those principles, he would have refused the respondent’s application for the transfer of any of the properties to him in specie, as there were no circumstances which would justify taking that exceptional course. A sale at auction would achieve a just outcome and the judge was wrong to make the order he did. The properties should have been put into auction and the respondent should have been allowed to bid on credit up to the amount of the judgment debt owed by the estate to the partnership. It would have been prudent for the judge to direct that a reserve be put on the properties at the valuations ascribed to them by the valuer, and to give the receiver a discretion to sell them by private treaty if they did not make the reserve. There was no good reason to justify allowing a direction of the lower court to stand which should never have been made in the first place. Any consequential practical difficulties could be overcome, if necessary, with the assistance of further directions from the court. It was not necessary to unwind the transfers. (4) The schedule A properties should be put into auction as soon as practicable. It was only fair that the respondent should purchase the properties at the price he truly attached to them; if that was less than the value ascribed to them by virtue of the judge’s order, he would be better off, and could not complain. If it was higher, the whole partnership would benefit. If he succeeded in bidding for the properties, the value he had received could be adjusted upwards or downwards as necessary, but he would retain title to them and matters could be arranged in such a way that he would not be fiscally disadvantaged. If he lost to a third-party bidder, then he could transfer the property to the successful purchaser either directly or, if necessary, via the receiver. The property portfolio was an unexceptionable portfolio of investment properties and, if the respondent lost in the bidding, he could easily replace them with comparable properties. In any event, an emotional attachment by one of the partners to a particular property was not a good reason for departing from the usual practice; if that partner really wanted the property he could bid for it and keep it that way. Peter Knox KC and John Carl Townsend (instructed by Anthony Gold Solicitors) appeared for the appellants; Robert-Jan Temmink KC and Gabriel Buttimore (instructed by Hill Dickinson LLP) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Bahia v Sidhu and another