The partnership is a common and often very effective business structure for those in the farming community. This bite-size webinar is intended to help you firstly identify a partnership and then look at how a written partnership can help preserve the partnership and protect the partners.
Peter Snodgrass and Jennie Wheildon will be in conversation discussing:
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Webinar transcript
(Please note this is auto-generated and un-edited)
Good morning. I'm Peter Snodgrass, Head of Agriculture, here, Shakespeare Ma today.
0:07
Today, I'm delighted to be joined by my colleague Jenny Wheels, and Legal Director to talk about partnerships and implications of partnerships, which are very common in farming circles. On your screen, you'll see the chat icon. Please use this to ask your questions during the webinar, and we'll respond to you directly, or if we run out of time, we will respond after the session.
0:32
So, first things first, Jenny, what is the Partnership?
0:37
Partnership is defined by the Partnership Act, 1890, is the relationship between persons carrying out of business in common with a view of profit. So two people or more than two people come together with a business idea with the intention of making money. And we have a partnership. The parties agree to work with one another in the utmost faith and they share joint and several liability for the responsibilities and liabilities of that partnership.
1:09
So, the partnership at 890, it's really nice. Act. I think it's nice, succinct, easy to read, and uncover some significant points for partnerships in terms of how they will be be governed going forward. So we've got, and Section five, every partner of the partnership is an agent for the firm, that the partners have joint and several liability that they'll share in the profits of the partnership and the assets that are visible according to that profit on a destination.
1:43
And the note notice contaminate a partnership to the act covers quite a lot. But, Peter, shall we go into a bit more details, details, so the obvious can understand exactly the implications as to what that means for partnership? Perhaps we could start with importantly, the profit share.
2:04
Yes, OK. Well, that's, as you will see from the screen. It should be up there, is Section 24.
2:16
And if I have a look at the act, as Jenny says, it's a very succinct. They weren't quite so lengthy generally. In those days, but this says, the old apart, those, entitled to share equally in the capital and profits of the business must contribute equally towards the losses, whether capital or otherwise sustained by the firm. So, there's an equality, which is implied between all the partners, which is implied by the Partnership Act, if the partners haven't agreed something different.
2:47
So, yeah, the same in regard to assets that one partner might bring into the partnership. Well, that is a very good question, and in many situations, for example, the father might have introduced a significant asset or set of assets into a business.
3:11
He then joined in the, in the business by, his son, say, or daughter into up, and they become a partnership.
3:21
What will be their share, first of profit? Well, first profit, and then second, you know, what will be their share in the capital? And, also, what will be very significantly bought will be there, share their respective shares in any increase in value of a capital asset within the partnership.
3:44
This can lead, as we'll discuss a little bit later, to some quite unexpected consequences if you're simply relying on the partnership act. So, yeah, it's, it's, it can cause difficult situations, jeni.
4:00
OK, OK, I'm done talking about unexpected consequences and how does the impact of every partner being an agent of the coconut create? some unexpected consequences? Right? Well, as Jenny said, the relationship between partners is meant to be one of utmost good faith. And they are meant to act decently honorably to towards each other. Section five, you'll see is flagged up there on the screen for for Obvious. I says every partner isn't agent of the firm, and his other pop us for the purpose of the business of the partnership.
4:39
So, that is a big responsibility and also potentially, large liability.
4:46
And then we've also got on the screen, it does the joint and several liability consequence, which is a big legal phrase. But, if we boil it down, it's, it's, it's again well expressed in the partnership packed. And if I'll just reduce the slightly, but he just says an act relating to the business of the firm, done were executed in the firm name, or in a manner showing an intention to bind firm is binding on the firm and all the pop us.
5:19
So, that's, that's that the other partners are on the hook for whatever that one partner has done. Then, 12 says that if Section 12 says that, every partner is liable jointly with his co partners and also separately for everything, which the firm while he is a partner, there becomes a liable liable for and then refers back to a couple of other sections. And the key one is any quotes wrong, which is done by a partner, and that means really anything which is which causes loss to another person outside the partnership.
5:54
The rest of the partners are responsible for if it is done in the course of the partnership, the normal partnership business. So, when the trade fairs I could again and the new partner goes with his partnership checkbook. There could be some unexpected consequences that can yeah, to state-of-the-art combine harvester is the responsibility of the whole punctured, not just the one who said, I like the look of that. And?
6:29
I'm assuming that on the assumption that the partners perhaps find themselves in a situation where they can't get on and can no longer continue with that provision to act in the utmost faith with one another. What are the consequences of bringing the partnership to an end?
6:55
Right. Jenny Festival, we just have a quick look at what, how, how things are divvied up between the partners? If the partnership package act is applied, because there's no barrier, there's no partnership agreement to say otherwise. And for that, we need to look at section 44.
7:13
Just turn that off, that says, after all the losses, are all the debts, basically payable outside the park should have been settled by the pole. This you then look at what the residue is. And you say, first of all, has any partner led me to learn to the partnership? in which case that land should be repaid to that poll now in priority.
7:41
Next line of allocation is the capital that is being contributed by a partner. So that will normally be what's shown in the accounts as credited as capital to partner, will be paid back to each partner. Because that's what they will put in.
8:00
This is assuming there's enough it net value to be divided, presume it is that is what happens. Then the ultimate residue is divided in the proportion, which profits on the visible. So if we go back to what we were looking at earlier, Partnership Act implies equality of profit share. So that means that in your respective really else where profit, irrespective of where acids came from once they're in the partnership, unless there's a presumption for some reason in another direction. It's equal shares.
8:43
Didn't intend seniority, equal intentions unless they're documented are going to be difficult to prove to the contrary, OK?
8:55
And in terms of the actual termination, that, and the consequences are obviously vast and significant, for all of the partners, already controls over how the partnership could be brought to an end.
9:11
That's, again, a very pertinent question, because what the Partnership Act says, it's extra 26 is, if no fixed term has been agreed upon for the length the partnership, any partner may determine the partnership at any time on giving notice. So in most situations where there isn't a written partnership agreement hasn't been agreed to be a period during which is going to go on, then that is kinda come to an end in farming contexts. It tends to be indefinitely until anyone wants to, to bring to an end, and then have a look at section 32 that says, if the if the partnerships have been entered into for an undefined time, any point I can give notice to the other will be others.
10:00
And in that case, the partnership is dissolved us from the date mentioned in the notice or if no data's mentioned, the date of the communications notice. So, it means that any partner can simply give notice to the other partners. He's immediately got the right to be paid out.
10:19
What is his do, share in the partnership.
10:25
That's quite significant, especially with farming partnerships where it's often a family arrangement, where we'll away, that can be family disputes, but those could have quite significant impact for the business, as well, known to scan, can simply be served in that way.
10:45
Absolutely, Caroline.
10:46
Yeah, So having looked at the consequences of having a partnership purely governed by the 1990 act, there are obviously agreements that can be placed in place, the rest of the partnership agreements that can tell some of those provisions. And so we have a look at what those agreements might include for, for those listening today, Jenny. And just as to make the whole thing a bit more lively. And we're going to put up on-screen a family scenario, which some of you may remember from a couple of seminars when we all like gathering together in person. Which we did in, I don't know, more than a year ago and then another one the year before that. Anyway, here is the scenario which I hope is up there on the screen. So we've got a family farming family and you can see Mom and Dad, at the top, there's Judith. She's aged 65, and she's recently diagnosed with Parkinson's. Dad is 67, and he's in good health. and then they got three children, got John? Who's in the partnership?
11:59
You've got Melissa, who's also in the partnership. She's recently become engaged to marry. Joseph, you can see them there in that nice little picture in the in the circle. And then the third child was Harry and he never wanted to farm. He's been a teacher since leaving university 10 years ago. So, that is our on our scenario. So, in the partnership, we've got Judith and Fred from that. Joan, and Melissa, for them. so, Jenny, just a quick starter, Is there a risk in bringing children into farming parks? You?
12:39
If you're a mom, And dad, that, is it a good move, do you think, to bring Joan and Melissa? And it's a common misconception that we often hear that by bringing in the children into the partnership, mom and dad are risking the whole of the business. Because, as we've seen with the partnership that there's that concern that they will come in, and they'll give it a year or two. They won't think much of it, and then they've got this ability to terminate the whole partnership. But actually, a well drafted partnership agreement can actually protect against that, can protect the assets in the right ownership. And you can have the ability to state where you're going to allocate assets within the capsule accounts at the partnership piece or don't know if you want to explain a bit more about how you might use your capital accounts.
13:34
Yes, Jay.
13:36
Here we are inevitably trespassing into accountants. But I'm afraid it's not possible to avoid doing that because the way that the accounts on the partnership agreement interact with each other and relate to each other and are consistent with each other is absolutely key to these arrangements that you might want to do. So, something which has become quite popular in the last few years, is to set up a separate category of capital within the partnership. So, instead of lumping it didn't traditionally, you'd have had a capital account and maybe a current account, those two things. And the Farm Freehold, It presuming it's owned by the family or people in the family is lumped in as a general part of the capital.
14:28
That means that every part has a sort of chunk off, or an interest in, even if small, on, in the land on the farm freehold, as well as the other: capital, assets, machinery and other things.
14:48
And, even that is not always desired, especially by the older generation, if they've got other, the other children maybe that they want to cater for. Or they're just not comfortable at the moment with handing on significant ownership to the next generation.
15:06
So, what you can do is you can set up a separate land capital account. Sometimes it's called a property capital account.
15:14
And then you allocate the value of that freehold to the people that you intend to benefit. So, typically if, in this case, Fred and Judith or the coed say, off the off the farm. They could say, well, we don't really want to divide this or give an interest in it to Joan or Melissa. So, we will have a separate capital account into which we will put the farm freehold and that will be reflected by a value in the capital account for mom and dad to do different thread.
15:48
Um, so it'll be ring fenced within it. It gives Judith Fred, some protections that they haven't got that worry bringing Melissa and John into the partnership. For somebody for, that, may still sounds quite complicated, and they may maybe listen to this thinking about. do we actually just do? We need to bother bringing Melissa and Jordanian, and what's the benefit of bringing them into the partnership. Millimeter. Well, that's another good question Jenny. And I think it's, it's, it's more to do with people in a way than the law in that it's to do with bringing people on in a business and enabling them to take decisions and to contribute which will actually be of benefit to the business. So, in any business, it happens in what has happened in law firms, as well as farm partnerships.
16:47
You know, if people are not encouraged to grow and develop in their participation, it's discouraging.
16:57
And, you know, they might not want to continue on. Or they might just feel undervalued, or whatever.
17:04
Inviting all, bringing a child of the family, typically, into the partnership is a real affirmation. And I remember hearing about Myrick, Raymond the Vapor. And if you present a few terms ago saying that he and his brother in Pembrokeshire, where I think the father died when they were very young age 18. Or So, they were immediately put by the, then, Martha, as partners at the farm, they had access to the Champ book. It was it was a tough going. They have learned a great deal but he immediately develop them, put them on And so, that that's on, say, a major reason for bringing a child into partnership.
17:56
And there's also the potential problem that if you've got the children working on the farm and ...
18:09
illusion, or belief that they've made this promise that they will one day have a share of the partnership.
18:19
There's been recent case law around a proprietary stoffel, which, hopefully you, all to unpack that a bit, because the legal mouthful, but it's where someone acts upon a promise. All asked to their detriment. So often with the farming scenarios, we will see a daughter or son, or the act that's worked on her farm for less than minimum wage. Because they've always thought that the farm or proportion of it would be best and they missed out. perhaps, at opportunities to go to university or to have better paid employment. And.
19:04
Some of those cases we've seen have been brought within the life time of the old generation, and it's caused them to lose the farm, or to have huge payout to the next generation, which potentially, this sort of forward looking and planning with the partnership agreement might have prevented. Right, absolutely.
19:28
And there, you flagged up one thing, is thinking about these things, anticipating them, so that everybody knows where, where, where they stand. And so, one example of what you can do and a genuine we were discussing is beforehand.
19:49
You said, well, what about if Harry that child had started off, say as being in the partnership, and then he'd allowed some feels to be used by the partnership, and whether or not they were partnership assets upon partially Patrick, certain rights to use it, if he then decided, I want to come out. But I do want to have my capital out, as well, which could have been, could be quite expensive for the partnership immediately to find, than. the partnership agreement could have provided for a payout over. You know, sometimes it's two years, sometimes it's four years, whatever. It just keeps the partnership the opportunity to pay out in a structured way to get a loan if they need to, to be able to buy out. Harry's feels that way they can keep fields within the farming partnership and give Harry the money in a structured way so he can buy a house near his school. It is now teaching at saint.
20:55
Yeah, exactly. Exactly. It gives every one of the future that they want, but still keeping the farming business going, and talking about sort of the future. We've seen within our family tree, another common concern that gets raised with us with farming families, is the introduction of a new partner into the family. This time scenario, we've got walesa, she's just gonna engage to Joseph. And whilst everyone really likes Joseph, there's still niggling doubt as to well what happens if things didn't go well, and the path to divorce way?
21:37
The opportunity to have a share Melissa shared within the partnership. So we're sort of seeing more and more common that partnership agreements include a requirement for any unmarried partners to enter into a pre-nuptial agreement. Whether they, should they be about to get married, right, Jenny.
22:01
That, that is something which, Yeah, as you say, comes up quite regularly with, with clients. Again, you know, that's a development, I would say over the last few years. It's once a common beforehand. Just one thing is that, of course part, there is some, just just to clarify, Partner is either, obviously he has got two meetings here. one is a partner in the Farm Partnership, and the other is a partner to Melissa. So here we're talking about John Melissa's. Josie Joseph? Yes. Joseph is going to be married to Melissa. And so he's a partner in that sense. That obviously won't make him a partner in the palm Nepal. Yeah.
22:50
It just kinda say Melissa is so because if she's in the partnership, she has never forgave assets through the partnership that could be exposed ****, Joseph and Melissa divorce, a pre-nuptial agreement that they entered into before marriage. And you can have post an actual agreements as well afterwards.
23:14
As well as adding, but what allows Joseph and Melissa to essentially set out who's bringing what to the marriage partnership. Say that ****, that dissolve.
23:27
They know that, well, well, assets, they're taking away some analysis.
23:31
So, partnership, the share that she's got at the point of marriage should hopefully be protected. It also, I think he's got that added advantage, that it takes some of the personal feelings away, quest, for pre nuptial agreement, If it's a case of Saint Joseph. Well, we have to have it, because my business contract requires me to, It's a bit last person, or the mom. and Dad asked me to Bible one. Yes.
24:07
Yes, I quite agree, Jenny. Because, Yeah, I mean, the idea of ..., I mean, obviously, you know the second marriages and so on. There are different things. Which apply? But, you know, generally you don't go into marriage thinking, Well, you know, what's my exit strategy? But, actually, this is not what this is mainly mainly about, and I think that, that hopefully will be understood by the new partner and the daughter.
24:36
Looking then at the family tree, Judith. And John, I've got a sad situation that, oh, sorry, dude, from Fred situation that dude sadly been diagnosed with Parkinson's disease and is there anything that we could do within the partnership agreement that might be helpful in helping families to navigate this? Yes, it's very common to put in a partnership agreement that if Panther loses capacity, they can be retired, that's just a word, is usually expelled from the partnership, but that seems rather a harsh word to use. But basically, they can be excluded from the partnership if they lost my physical mental capacity. But, another possibility is to have power of attorney.
25:33
Nowadays called blasting Powers of Attorney, under which, another person, probably he will be Fred Probably, but it might be Fred and John ..., you can decide who you pointers. There are times would be given power to deal on, due to its behalf, which is very valuable because, for example, for tax reasons or for other reasons, it might be important for duties to remain a partner. But, also, things like signing checks. All authorizing documents and that kind of thing. If you haven't got a lasting power of attorney can be very difficult. And a business can be stymied held back whilst these things are put in place.
26:20
Which can be very difficult to put in place, actually. Once a person has lost capacity, it's pretty much the whole idea of lasting positive attorneys. But you have to have capacity, of course, when you do them, and the hope is that you never have to look.
26:36
You look at them again, but once a person has lost capacity, then does become quite problematic, can do to get the power given to somebody.
26:46
Sorry.
26:50
And the space for everyone and in particular, Fed gentlemen lesson that having it within the written partnership agreement should something awful happen to their parents. Everybody knows where they stand, rarely.
27:07
It sets out what's, what's to happen with the partnership, the family business to help that carry on forward.
27:15
There's no fakes turns that there might cause argument or uncertainty.
27:24
So they will say the opportunity for Frightened Jaded Plan.
27:27
So they've got the option that perhaps to look at transferring some assets within their lifetime to take advantage of the inheritance tax position that we currently have, some generous reliefs available at the moment that may or may not be around forever. And so, those deliberate actions may be reflected, perhaps through the partnership accounts to I don't know if you want to explain a little bit how, Some of them, if they were interested, might be able to use that.
28:02
Mmm hmm.
28:05
I think the main thing is it is, as you said, is that any transfers, which are done of partnership assets, are defined and consciously thought about, rather than being lay left to the vague implications of accounts. And that raises accountants, again, which is coming back, because this is, so they, they have such an important role to play in all the face. But it really is essential that your accountant knows about, and implements in the accounts, whatever, you put in a partnership agreement, because we have seen mismatches between accounts and partnership agreement, or accounts, and the intentions of the partners, many times and often it doesn't end well account. two understands the importance of these aspects. And will work with, your sister is really valuable.
29:08
Yes.
29:08
we will say that waltzed, the partners may feel that they've had discussions T times everybody is clear. So it doesn't need to be in writing because I won't be an argument, isn't always the partners that look at this. These transfers and gifts a, it can be HMRC as well even though they may choose to investigate and.
29:37
and without the proper documentation there to support what's, what's taken place that may make those conversations more difficult? Absolutely.
29:48
So due to the time today we've talked, we have talked about pre-nuptial agreement, we've talked about inheritance tax planning, which leads onto wells. We've talked about powers of attorney, but unfortunately, we haven't got time to go into those in detail. But obviously, at any point that you're putting a new partnership agreement in place, it's worth reminding our listeners. These documents should also be looked at and consider to make sure that they dovetail with the new partnership agreement.
30:23
Absolutely, right, Jenny. Just before rounding off, I wouldn't be. Right?
30:29
Not to mention the fact that, as all of you will be aware, there's an agricultural transition plan in, in process at the moment, with important implications for partnerships, for all farmers. And you need to keep a very close eye on what is happening there before you implement any changes, including partnership changes, to make sure that you're not kind of fall foul of what is the offering from the UK or the English government after Brexit.
31:06
OK, um, that brings us to the end of this webinar and I hope you found it useful and relevant. If there's something you would like further information on, we'll have a specific query and other than any other matter, please do let us know and we'll be happy to help. A recording of this webinar will be posted on our on demand page on our website, along with a downloadable podcast version finally. A short survey would appear on your screen, we would be pleased if you could give us your feedback, as this helps prepare and improve our events in the future. So thank you Jenny: for co presenting with me. Thank you.
31:46
Those of you who have been joining with us today to look out for forthcoming webinars on robotics natural capital and a closer look at pre-nuptial agreements in the farming context. Thank you. Thank you.
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