Case law: Court clarifies test for determining whether asset used by partnership belongs to it

Partners carrying on business in partnership should ensure there is a clear, written record of what they have agreed in relation to property used by the partnership, particularly when the partners change, following a recent ruling.

A husband and wife had built up a significant farming business as equal partners since 1986. In addition to the original farm, they also owned residential property, tenanted land and further freehold land. In 1997, one of their children was brought into the partnership. The farm, which had been an asset of the old partnership, was assumed to be an asset of the new partnership, and it was initially included in the new partnership's accounts from 1998 until 2003. However, it was later removed from the accounts by a new accountant.

In 2016, a dispute arose as to whether the farm was an asset of the new partnership or not. The court ruled that it was not, and said:

  • The fact that profits from an asset went into the accounts as new partnership profits did not mean the asset itself was necessarily partnership property, unless the asset was acquired using partnership profits
  • Nor did the fact that the value of improvements, and the acquisition of other land, went into the partnership accounts during the same period (1998 to 2003) that the farm appeared in them, mean there was an implied agreement that the farm was an asset of the new partnership
  • The wills of both husband and wife made clear that they considered they had retained personal ownership of the farm despite the new partnership, as they had each provided for part of it to be left to one of their daughters
  • The accounts themselves were merely evidence, not proof, of ownership of the assets recorded in them. If they did not reflect what the partners agreed – and the court ruled that they did not - they should be disregarded

An asset is also partnership property if it was originally brought into the 'partnership stock'. However, it was not clear in this case whether the farm had originally been brought into the partnership stock, so this test did not apply.

Operative date

  • Now

Recommendation

  • Partners carrying on business in partnership should ensure there is a clear, written record of what they have agreed in relation to property used by the partnership, particularly when there is a change in partners

Case ref: Ham v Bell [2016] EWHC 1791

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