LLP member’s duties

Frances CoulsonSenior & Managing Partner, Head of Litigation & Insolvency, Moon Beever

Davidison v Finnan & Ors [2020] EWHC 1607 may not seem to be of great interest on an initial reading. The application before the deputy judge, Hugh Sims QC, was made by one of several respondents to a liquidator’s misfeasance claim. By his application he sought reverse summary judgment against the liquidator, asking for the misfeasance claim against him to be dismissed. 

The liquidator had brought proceedings against a number of parties to recover monies and/or compensation in relation to payments made by Finnan Developments (Raynes Park) LLP some years before the LLP went into liquidation but when its trading life was coming to an end. One of the issues, the central issue in the application before the judge, in his view, was what provision should have been made in relation to a contingent liability of the LLP at the time an agreement was made with an outgoing member and whether, with a suitable provision, the LLP had been insolvent or likely to become insolvent as a result of entering into that agreement with the retiring member (the third respondent in the liquidator’s proceedings and the applicant for reverse summary judgment). Under the terms of the agreement the LLP had paid the leaving member £1.35m, the sum the liquidator was seeking to recover. 

Briefly, the LLP had been incorporated in 2008 for the purpose of acquiring and developing a freehold site. In 2013 the third respondent wanted to retire. An agreement was reached that resulted in his receiving the £1.35m in contention. But the LLP had by then been involved for some time in arbitration with a contractor, G&S Construction Limited. The liquidator’s case was that the respondent as a designated member, and others, ought to have considered the contingent liability to G&S and placed a value on it before negotiating the terms of exit. Had it been taken into account, he claimed, the payment out of the £1.35m would have been likely to result in the LLP becoming insolvent, if not actually insolvent, as a result of which the members could or should not have caused or allowed the LLP to enter into the agreement. 

The law relating to ordinary partnerships does not automatically apply to an LLP unless special provision is made for it to do so; and, unlike ordinary partnerships, LLPs do have a separate legal personality. This has and continues to give rise to legal uncertainty. 

The deputy judge concluded in the application before him that the threshold test for summary judgment had not been satisfied: “In short, I am not satisfied that the entirety of the claims against [the applicant] are so fanciful, and lacking in merit, that they should be disposed of now, summarily. And there would be a real risk of this exercise becoming a mini-trial should I attempt to resolve all of the issues arising on the claims, on the evidence as it currently stands.” 

The interest in the judgment lies not in that result but in the view the judge expressed (obiter) about the application of company law principles to LLPs. He noted that under section 14 of the Limited Liability Partnerships Act 2000 the provisions of the relevant sections of the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 applied to limited liability partnerships and that the Limited Liability Partnership Regulations 2001 modified the provisions of the 1986 Act to make them operate effectively in relation to an insolvent limited liability partnership. The 2016 Rules applied directly to LLPs without specific modification but were, according to regulation 10 of the 2001 Regulations, to be read as having such modifications as were appropriate to the context. After referring to those points, he said:
 

“It is not immediately clear to me why a duty to creditors should not apply to an LLP, nor indeed to the LLP in this case which contains a stepping stone towards such a duty as set out in clause 14.1 of the LLP Agreement, since the reasons why the courts have recognised the principle in a limited liability company context, to protect the interests of creditors where solvency is in issue, as discussed at some length in BTI v Sequana would seem to apply equally to partnerships, which also have the benefit of limited liability and are registered as such at Companies house. There would seem to be something of a lacuna in the law, so far as protection of creditors of limited liability partnerships are concerned, if this principle should not be taken to apply to an LLP. And it appears to operate in a corporate context free from any limitations in the articles of association, and as a matter of law. I note that in Andrew McTear (Liquidator of CJ &RA Eade LLP (In Liquidation) v Christopher Eade, Richard Eade [2019] EWHC 1673 (Ch) ICC Judge Jones proceeded on the basis that such a duty applied (see at [140]). On the other hand it may be said the point was not argued fully in that case, and there are fundamental differences between limited liability companies and limited liability partnerships which supports a divergence, or supports it in this case having regard to the terms of the LLP Agreement.”

He described this issue as “a relatively short point of law, which [would be] capable of summary determination if it is genuinely contentious”. He did not go on to decide the point for a range of reasons set out in his judgment, but his positive view of the likely applicability of tried and tested company insolvency propositions as to directors’ duties to LLP members should be welcomed as a further step on the road to a clarity that is still awaited but must surely come soon.

 

Robert Paterson