UK case on derivative actions in relation to LLPs

Homes for England v Nick Selman (Holdings) Limited and Bromham Road Development LLP [2020] EWHC 936 (Ch)

Homes for England, and Nick Selman (Holdings) Limited, were equal members in an LLP. Homes alleged that Holdings had breached the duties of honesty and good faith which it owed to Homes, by delaying in executing refinancing documentation in relation to a loan from a finance company to the LLP. The trial judge exercised his discretion to permit Homes to bring a derivative claim on behalf of the LLP, applying the criteria in s263 of the Companies Act 2006 (CA 2006) for the exercise of that discretion.

On appeal, the court held that s263 did not apply. Sections 260-264 CA 2006 on derivative actions had not been applied to LLPs by the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 which applied other provisions of CA 2006. Nor was s263 applied by the Civil Procedure Rules 1998 (CPR) Rule 19.9C. First, CPR 19.9C applied ss261, 262 and 264 but deliberately omitted s263, which was logical because the CPR dealt with procedure whereas s263 was substantive and s260, which was also substantive, had also been omitted. Furthermore, whereas the official form to be used for such proceedings in relation to a company stated that the court must take account of the s263 criteria, the form for an LLP did not. Second, the broad discretion given to the court by s261 did not enable the court to apply the s263 criteria, because s261 concerned the terms upon which a claim was to continue if it was given permission, and not the basis on which the court was to determine whether to give permission in the first place.

Since the statutory test for permission to bring a derivative claim did not apply, the court applied common law test. It held that it was not satisfied and therefore permission was not granted. In order to bring a derivative claim at common law, it was necessary to show that one of the four established exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461 applied. Only the fourth exception was relevant here, and it required Holdings’ actions to have caused financial loss to the members, and that either fraud in the sense of deliberate and dishonest breach of duty had been pleaded or it was alleged that Holdings had acquired a personal benefit at the expense of the LLP. The court accepted that the increased amount payable on the refinanced loan was a loss to the LLP which would also be suffered reflectively by the members. However, there was no allegation of dishonest breach of duty, and the allegation that the delay had put Homes under pressure in relation to an ongoing negotiation regarding a dissolution of the LLP was fell short of the type of benefit required.

A short article on this case by Gregor Hogan of Serle Court is available at https://www.serlecourt.co.uk/images/uploads/news-and-events/LLP__Derivative_Actions.pdf.

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