Partnership “validly kept alive” to avoid pension liability

Pension: Annual payment fell massively after incorporation

A law firm that incorporated its business but kept the partnership alive solely to frustrate a retired partner’s pension entitlement has defeated that partner’s claim in the High Court.

Michael Green QC, sitting as a deputy High Court judge, ruled that the partnership deed required there to have been a dissolution of the partnership to trigger that entitlement, but the transfer of the partnership’s business to the limited company did not do that.

John Boyle practised at Bells Solicitors in Farnham, Surrey from 1959 until his retirement in 1988. Under a partnership deed entered into by nine partners in 1987, he was entitled to a pension; in the event the partnership dissolved, he would receive a lump sum to cover his future pension benefits.

He claimed that when defendant partners Dermot Burke and Jeremy Cave incorporated the firm in October 2012, this dissolved the partnership. They pair argued that it did not and was still in existence.

In 1988, the firm merged to create Bells Potter & Kempson (BPK) and it was constituted by the 1987 deed. Subsequent changes in the partnership and new deeds recognised the continuing obligation to Mr Boyle.

In 1996, Mr Burke – who joined in 1992 – renegotiated Mr Boyle’s £25,000 a year pension, which was more than he was drawing and others employed by the firm were earning, to £20,000.

They also agreed that it would only increase by the retail prices index (RPI) – the 1987 deed entitled the claimant to the higher of 5% or RPI.

The judge recorded that, around the time of the global financial crisis in 2008, the defendants “became particularly concerned about the viability of the firm and they were keen to transfer towards limited liability trading for obvious reasons”.

Mr Burke contacted Mr Boyle to negotiate an end to the pensions liability. But talks soon collapsed “because the claimant would not confirm that he would not sue the defendants’ wives in respect of his pension entitlement and was only prepared to consider a transfer of his pension to an LLP if the defendants provided personal guarantees to him.

“In Mr Burke’s mind, this would have defeated the purpose of the transfer to limited liability.”

Eventually, in 2012, the firm incorporated as Bells Solicitors Ltd (BSL). The one liability that was specifically excluded from the transfer and which remained a liability of the partnership was Mr Boyle’s pension.

Mr Burke openly admitted that they were desperate not to trigger the pension entitlement under the deed and had to keep the partnership going to make sure there was no dissolution.

To do this, the defendants retained the partnership’s lease of its offices in Farnham in their own names and sub-let them to BSL. The lease was an asset of the partnership. They took a 5% margin on the rent from BSL, “thus making a small turn through the subletting”.

The defendants changed the partnership’s name to BPK Management Services and said its business would become the provision of services to BSL “and such other business as may in the opinion of the partners be advantageously carried on” – but specifically not regulated legal or financial services.

Soon after, the defendants added corporate partners so as to avoid the risk of an accidental dissolution in the event of either of their deaths.

Mr Boyle’s annual pension entitlement fell to just £1,200 a year because the partnership’s profits were drastically reduced after the transfer of its business. He has refused to accept the £100 a month since 2012 because of the dispute.

Judge Green ruled that the overarching purpose of the key clause in the deed was to deal with the consequences of the partnership being dissolved.

This meant that it must actually have been dissolved as a matter of law – the clause referred to the “final dissolution” of the partnership.

“For there to have been such a dissolution in this case, there must have been an agreement by the defendants to dissolve,” he said. “Such an agreement can be inferred as a matter of fact from the defendants’ conduct; but it cannot be imputed to the defendants as a matter of law.”

So mere cessation of the partnership’s business was insufficient to establish dissolution, the judge said – “in this case, that can only have been effected by the agreement of the defendants”.

He continued: “As there was clearly no agreement between the defendants to dissolve the partnership on 1 October 2012, my conclusions on the law mean that the claimant cannot succeed in showing that the Partnership was dissolved upon the transfer of its business to BSL.

“Accordingly clause 2.43 did not come into effect on that date and the claimant is not entitled to a lump sum from the defendants in respect of his pension entitlement.”

In any case, Judge Green ruled that the partnership post-2012 satisfied the requirement in the Partnership Act 1890 that the partners were “carrying on a business in common with a view of profit”.

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