David James Digwood & Ors v Andrew John Digwood

Following dissolution, Partnership Act 1890, section 42 applies by default where continuing partners use partnership assets, unless there is an agreement to the contrary. The outgoing partner’s profit share is calculated by reference to the net partnership assets at dissolution, after deducting indebtedness to the partnership. Revenue profits exclude capital gains and capital losses. Depreciation is therefore excluded when calculating the outgoing partner’s share of post-dissolution revenue profits. A continuing partner may receive a proper allowance for unmatched labour, but only to the extent that the work is not otherwise recompensed. Accounting adjustments should reflect fair accrual principles and the date on which losses crystallise.

The proceedings concerned the winding up of a dissolved family farming partnership. The claimants had been permitted to continue operating the business and later purchased the defendant’s partnership interest. The remaining disputes concerned the calculation of post-dissolution profits, including depreciation, credit for the work of a continuing partner, the defendant’s percentage share, rent, crops held in store and an oat-crop penalty.

The court determined the application of section 42 of the Partnership Act 1890 and the proper accounting treatment of those items.

1. Section 42. Section 42 of the Partnership Act 1890 applied by default. There was no agreement to the contrary. The defendant had consistently sought an immediate open-market sale, while the court had imposed an arrangement allowing the claimants to continue the business and later buy out his interest. The statutory regime therefore governed the post-dissolution profits.
2. Nature of profits and depreciation. The relevant profits were revenue profits attributable to the use of the partnership assets. Capital profits, and by corollary capital losses, fell outside section 42. Depreciation of £286,272 was consequently excluded from the calculation of the defendant’s share.
3. Allowance for labour. A continuing partner was entitled to a proper allowance for unmatched labour. The allowance was limited to work not otherwise recompensed from the revenue profits. Because the defendant worked until October 2022, the claimant’s allowance was limited to approximately 12 months from November 2022 to December 2023. A broad-brush allowance of £60,000 was appropriate.
4. Share of profits. The defendant’s entitlement was based on his share of the net partnership assets at dissolution, after deduction of his indebtedness to the partnership. His post-dissolution profit share was therefore 29.2%, rather than 40% of the gross assets.
5. Other accounting issues. Rent accrued daily, producing a further deduction of £7,063. The accountant’s 25% discount for harvested but unsold crops was upheld. No deduction was allowed for the oat shortfall penalty because the loss crystallised after 20 December 2023.

The court’s conclusions were recorded in the overall orders at paragraph 50. Costs were reserved for a later hearing.