US case on derivative claims on behalf of LLCs

In the recent US case of Hopkins v Ackerman the court ruled that derivative claims* could not be brought on behalf of an LLC which had been cancelled.**

Commentary on the case by US law firm Patterson Belknap can be found at:

https://www.pbwt.com/ny-commercial-division-blog/commercial-division-closes-door-to-derivative-claims-on-behalf-of-cancelled-llc/

* A derivative claim is one brought by a member of a firm on its behalf when a wrong has been done to the firm but the firm itself has not taken action against the wrongdoer (often because the wrongdoer controls the firm). In the UK, a derivative claim may be brought in the name of an LLP pursuant to the exceptions to the rule in Foss v Harbottle, or in the name of a company pursuant to ss260 et seq of the Companies Act 2006 - provisions which have not been applied to LLPs, hence the continued application of the common law).

** Cancellation is the final stage in the termination of a US LLC after dissolution and winding up.

UK case on duration of a partnership, partnership property and unjust enrichment of one partner at the expense of another

Smith and Patrick v Crawshaw [2019] EWHC 2507 (Ch)

This case involved a property development partnership which was carried on between the  testatrix and the defendant. It was dissolved by the death of the testatrix, and the executors of her estate brought a number of claims against the defendant. The following elements of the judgment are of particular interest to partnership lawyers.

First, the court held that there was only one partnership. There was no evidence of any dissolution of the original partnership after the first development project had been completed, and a number of other projects were carried out subsequently under the provisions of the original agreement. The fact that a new agreement was reached subsequently was not inconsistent with a continued partnership.

Second, the property acquired in the defendant’s sole name was a partnership asset because the purchase money came from partnership funds and s21 of the Partnership Act provided that unless the contrary intention appeared, property bought with partnership money was deemed to be bought on its account.

Third, the court rejected the defendant’s claim for restitution for unjust enrichment for his work for the partnership, because s24(6) of the Partnership Act provided that in the absence of any contrary agreement no partner was entitled to remuneration for acting in the partnership business, and in any event the enrichment here was not unjust because the defendant’s services were specified in the agreement and had been remunerated by the profit share set out in that agreement.

New case on winding up of qausi-partnership companies

Tarloch Singh Badyal v Malkiat Singh Badyal and others [2019] EWCA Civ 1644

This case involved an appeal against the refusal of the High Court to order the winding up under s122(1)(g) of the Insolvency Act 1986 (IA 1986) of a ‘quasi-partnership’ company (i.e. a company that was in substance, though not in form, a partnership) owned by three brothers and their father.

The Court of Appeal noted Lord Lindley’s comments in his Treatise on the Law of Partnership cited in Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426, that the court must be satisfied that that it was impossible for the participants to place the confidence in each other which they had a right to expect, and that such impossibility had not been caused by the person seeking to take advantage of it. A breakdown in mutual trust and confidence was only one of three relevant factors referred to by Lord Wilberforce in Re Westbourne Galleries [1973] AC 360, and the appellant’s behaviour lacked the other two, probity and good faith, principally because of his involvement in a competitor company. Where a petitioner was solely responsible for a breakdown in confidence because of his own misconduct, he did not qualify for relief under s122.

Note also David Milman's recent article ‘Legal characterisation of commercial relationships in the UK: the quasi-partnership example' (2019) 40(10) Company Lawyer 312.

Summary of partnership structures in India

There is a useful article on Lexology discussing different types of partnership structure in India. It is another in the Lexology series summarising different types of partnerships in  particular countries.

The article is entitled 'Formation of partnerships in India' and is authored by a lawyer at the Indian law firm Clasis Law.

It is at

https://www.lexology.com/library/detail.aspx?g=a6974aea-ae47-457c-8dc4-0dea92b2050e&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2019-11-22&utm_term=

(if you need to subscribe to Lexology to access it, it is free do do so - see further https://www.lexology.com/account/rss)

Summary of partnership structures in Mexico

There is a useful article on Lexology discussing different types of partnership structure in Mexico. It is another in the Lexology series summarising different types of partnerships in  particular countries.

The article is entitled 'Formation of partnerships in Mexico' and is authored by a lawyer at the Mexican law firm Leal Isla & Horváth

It is at

https://www.lexology.com/library/detail.aspx?g=0132a9de-51bc-44ca-833d-9fe13d62879d&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2019-11-22&utm_term=

(if you need to subscribe to Lexology to access it, it is free do do so - see further https://www.lexology.com/account/rss)

Summary of partnership structures in Saudi Arabia

There is a useful article on Lexology summarising partnership structures in Saudi Arabia. It is another in the Lexology series summarising different types of partnerships in particular countries.

The article is entitled 'Formation of partnerships in Saudi Arabia' and is authored by lawyers at King & Spalding LLP. 

It is at

https://www.lexology.com/library/detail.aspx?g=c04fbcfb-851d-4053-a26f-da369b913a1b&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2019-11-22&utm_term=

(if you need to subscribe to Lexology to access it, it is free do do so - see further https://www.lexology.com/account/rss)

Summary of partnership structures in Switzerland

There is a useful article on Lexology discussing partnership structures in Switzerland. It is another in the Lexology series summarising different types of partnerships in particular countries.

The article is entitled 'Formation of partnerships in Switzerland' and is authored by lawyers at Swiss law firm FRORIEP. 

It is at 

https://www.lexology.com/library/detail.aspx?g=f2eade43-2a59-488d-99fb-f638ad067e1e&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2019-11-22&utm_term=

(if you need to subscribe to Lexology to access it, it is free do do so - see further https://www.lexology.com/account/rss)

UK case on partner/employee distinction

Jospeh Puttnam v Commissioners for HMRC [2019] UKFTT 389 (TC)

The appellant treated the income from his engagement by a diving company as trading income of a partnership with his spouse, and so declared 50% of that income as his share of the partnership profits for tax.

The tribunal agreed with HMRC that he was an employee and that the income from his contract was not income of a partnership but his own income. It ruled that s15 ITTOIA 2005, which stated that the “performance of the duties of employment [of a relevant diver] is … treated for income tax purposes as the carrying on of a trade in the United Kingdom” applied for income tax only and could not be interpreted as meaning that the employment should be treated as a trade which was separate to the diver and capable of being owned and carried on by another person, or by persons in common under partnership law. The only person who could be regarded as “carrying on a trade” within the meaning of s15 was the individual “performing the duties of the employment”, and so his employment income could not be regarded for tax purposes as trading income of a partnership in which he was a member. Although expenses could be deducted if they met the criteria to be deducted as expenses of the deemed trade, this did not mean that an actual trade capable of being carried on in partnership existed.

The tribunal cited the approach set out in Ready Mixed Concrete (SE) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, 515, to determine whether an employment existed:

“A contract of service exists if these three conditions are fulfilled.

  • The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.
  • He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.
  • The other provisions of the contract are consistent with its being a contract of service.”

It considered that there was mutuality of obligation during each assignment, no right of substitution, and control by the diving company over the work undertaken by the appellant. Other relevant factors included the appellant’s entitlement to paid leave and sick pay, and the statement that the contract was one of employment, although that was not definitive. The tribunal therefore concluded that the relationship was one of employment and not a trade capable of being carried on in partnership.

Finally, the tribunal held that whether there was a partnership was largely irrelevant because the appellant’s activities did not amount to a trade which could be carried on by that partnership, and his employment could not be regarded as income which could be attributable to the partnership for tax purposes.  However, it explicitly rejected the appellant’s argument that that Protectacoat Firthglow Ltd v Szilagyi [2009] EWCA Civ 98 implied that it was possible to have a valid partnership in which the partners entered into employment contracts with a client. The decision in Protectacoat referred to the possibility of the partners each being engaged as employees: it did not, even in obiter dicta, find that the partnership itself could be engaged as an employee. It was well established that employment required personal service and so could not be undertaken in partnership. The tribunal also rejected the appellant’s argument that if the engagement with the diving company was not with the partnership, then he was required by s30 of the Partnership Act 1890 to account to the partnership for the profits made. Section 30 only obliged a partner to account for profits earned without consent in carrying on a business of the same nature, whereas the appellant was employed rather than carrying on a business.

Summary of US partnership and quasi partnership vehicles

There is a useful article on Lexology discussing different types of partnership and quasi-partnership structures - such as LLCs - in the USA. It is another in the Lexology series summarising different types of partnerships in a particular countries 

The article is entitled 'Partnerships in USA' and is authored by lawyers at US law firm ES&A. 

It is at https://www.lexology.com/library/detail.aspx?g=a5a32b2e-b25e-4a36-917f-84676f8d48e6&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2019-11-01&utm_term=

(if you need to subscribe to Lexology to access it, it is free do do so - see further https://www.lexology.com/account/rss)

New short article on partnership property and accounts

A short article commenting on the judgment in the Kingsley case (noted in an earlier post ‘New case on partnership property and accounts’) has been published:
Katie Alsop, ‘Deeds not words’ (2019) 211(Nov) Trusts and Estates Law & Tax Journal 16

Resources

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Second Annual Conference of the Partnership, LLP and LLC Law Forum 10 January 2019

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