Drake v Harvey & Ors

Partnership accounts used to calculate a deceased or retiring partner’s entitlement must reflect a fair value of the partnership assets unless the agreement, an established usage, or other compelling circumstances require a different basis. Historic book values used during a continuing partnership do not, without more, bind an outgoing partner. A fair revaluation surplus may be treated as a capital profit even though fixed partnership capital is not increased.

The claimant was the surviving partner of a family farming partnership. One child had died and both parents had subsequently retired following incapacity. The partnership deed required the outgoing partner’s entitlement to be calculated by reference to the last annual general account, including capital and undrawn profits.

The parties disputed whether the relevant accounts were confined to historic book values or had to reflect the current market value of the farm land. The court also considered the effect of unsigned accounts and how any revaluation surplus could be treated under the deed.

1. The reference to the last annual general account meant the account for the accounting year immediately preceding the relevant death or retirement, not the last account actually signed. If the relevant account had been signed by all partners, it would ordinarily have been binding under the deed.
2. The 2006 accounts were not binding because the deceased partner’s personal representatives had not signed them. Nor did they bind the partners who had signed, because the deed contemplated agreement by all partners. The court therefore had to determine what accounts ought to be drawn.
3. In the absence of an agreed contractual basis, the accounts had to reflect a fair value. That ordinarily required current market values, including the market value of the land. Historic values used during a continuing partnership did not establish a usage binding on a partner or estate leaving in materially different circumstances. A clear agreement was required to displace the fair-value approach.
4. The fixed “A” capital could not be increased without unanimous consent. A revaluation surplus could nevertheless be brought into the accounts as a capital profit under clause 11, including where unrealised.
5. The amount payable was the amount due on taking the account required by the deed, reflecting a fair value of the partnership assets, particularly the land.