New consultation on proposals for reforms to Scottish limited partnerships

The Department for Business, Energy and Industrial Strategy (BEIS) has finally followed up its 2017 call for evidence of the misuse of Scottish partnerships for money laundering and other criminal activities by launching a consultation on what changes to the law are required: https://www.gov.uk/government/consultations/limited-partnerships-reform-of-limited-partnership-law

It has been described as a 'crackdown' in the media (eg by the BBC - see https://www.bbc.co.uk/news/uk-scotland-scotland-business-43935839) but it remains to be seen which reforms eventually make it into law and whether sufficient resources are made available to enforce them - concerns which have been immediately noted by the Scottish Herald which first broke the story and which has continued to investigate and campaign for reforms (http://www.heraldscotland.com/news/homenews/16192718.Staff_shortages__threaten__crackdown_on_shell_firms/?ref=erec).

Report on the Inaugural Conference of the Partnership, LLP and LLC Law Academic Forum

The Inaugural Conference of the Forum, which was generously supported by the Society of Legal Scholars (SLS) Small Projects and Events Fund, and by Nottingham Law School, attracted over thirty registered delegates including academics specialising in law and business from UK, Australian, US, Dutch and Italian universities, solicitors, barristers, tax advisers and students. It comprised four sessions where papers were presented followed by questions, and finished with a round table discussion on the future of the Forum.  

In the first session, Professor David Milman (Lancaster University) spoke on the problems of identifying when and whether a partnership exists. He considered the issues which trigger litigation on identification (including the desire of purported partners to claim a share of the partnership assets or profits). After discussing the limited guidance provided by the Partnership Act 1890 and a wide range of recent cases, he considered alternative non-partnership based claims, before concluding that reform is unlikely but the courts are experienced in dealing with characterisation issues across a range of other areas of law. Jonathan Hardman (University of Glasgow, and Dickson Minto) presented the results of an empirical study of the potential moral hazard of limited liability by reference to Scottish partnerships which had converted to LLP status, using evidence from publicly available records at Companies House. The research focussed on the potential risk indicators, including the granting of floating charges, delays in registering accounts, changes in drawings, and increases in liabilities. The results suggest that LLP status might lead to some increase in risk taking but that in many cases it improved the firm’s position by making membership more attractive.

In the second session, Professor Geoffrey Morse (University of Birmingham) considered whether a partner can also be an employee of the partnership with particular reference to the Supreme Court judgment in Clyde & Co. He first discussed the reasons for the incompatibility of the two statuses according to both partnership and employment law cases, and then examined whether a partner should be considered to have the capacity to be an employee. He argued that the dual capacity point was not the reason for the incompatibility but the impossibility of employment co-existing with the nature of the partnership relationship. Jason Ellis (Nottingham Trent University) then presented a paper on whether directors should be accorded employment rights, with particular reference to claims made by directors of insolvent companies against the National Insurance Fund. He examined the difficulty of reconciling separate legal personality with any attempt to consider the reality of the director’s status, particularly where the director is the sole director and sole shareholder.

In the third session, Professor Iris Wuisman (Leiden University) discussed current proposals in the Netherlands to reform partnership law. She noted that the traditional distinction between professional and non-professional partnerships would remain, but there would be consolidation of the relevant laws, and changes to (though not necessarily simplification of) the complicated distinctions drawn between equal liability for certain types of claim, and joint and several liability for others. The slides are available at http://www.partnershiplawforum.org/downloads/PresentationWuismanNottingham5April2018.pdf.  Professor Marco Speranzin (University of Padua) gave a detailed overview of the different types of partnership available under Italian law and their key features, noting differences when compared to the position in certain other European jurisdictions including the UK, in particular regarding partners’ liability and amendments to the partnership agreement. The updated slides are available at http://www.partnershiplawforum.org/downloads/ItalianPartnershipsSlides5April2018.ppt. 

In the fourth session, Brett Freudenberg (Griffith University) discussed the international trend towards new business forms (such as the UK LLP and US LLC) offering limited liability, separate personality and tax transparency. He highlighted the importance of structures enabling flexibility in both partner contributions and drawings, but noted the risk of this flexibility distorting the taxation outcomes. The slides are available at http://www.partnershiplawforum.org/downloads/FreudBordenDistFlexAndTaxFlowThrough.ppt.  Professor Brad Borden was unable to attend due to illness but provided Conference delegates with a draft of his paper on contribution-default remedies. 

(Ab)use of LLPs and limited partnerships, and the new PSC rules

The outcome of the UK government consultation on the misuse of Scottish limited partnerships and LLPs for criminal purpose is still awaited, a year after the consultation closed.

Meanwhile, the journalists whose initial investigations led to the government consultations continue their work:

http://www.heraldscotland.com/news/15919809.UK_vow_to_crack_down_on_abuse_of_Scottish_shell_firms_by_international_criminals/

See also the highly regarded BBC Radio 4 programme Analysis' episode on this:

http://www.bbc.co.uk/programmes/b09qd714

Book Review: Lindley & Banks on Partnership

Lindley & Banks on Partnership, Roderick I’Anson Banks (ed) (20^th edn, Sweet & Maxwell 2017), 1552pp., hardback, ISBN: 9780414060913

The latest edition of this classic text, edited by a leading barrister with extensive experience in partnership law, starts with the famous quote from the film Jaws, ‘We’re gonna need a bigger boat’. This refers to the expanding nature of the subject, which has necessitated a change for this edition to the use of the lightweight paper typically associated with dictionaries so as to accommodate an increase from 1300 pages in the previous edition to an even more substantial 1500 pages in this new edition. The book is not available as an e-book despite its increasing length (and the availability in e-book form of the latest edition of a key competitor, Blackett-Ord and Haren’s Partnership and LLP Law).

The basic structure of the book remains the same as in recent editions, with a detailed consideration of the law relating to all aspects of a partnership’s life from formation to dissolution and insolvency, including the relationship of partners inter se, their dealings with third parties, and taxation. The Appendices contain the key pieces of partnership legislation (the Partnership Act 1890, the Limited Partnerships Act 1907 and the Limited Partnerships (Forms) Rules 2009), and relevant extracts from the Civil Procedure Rules and HMRC materials. There is also a separate section on limited partnerships, but limited liability partnerships (LLPs) continue to be largely excluded, although there is a short (two page) section on LLP agreements and of course, much of the law governing LLPs in the UK is based on partnership law.

It is important to be aware of the need to cross refer between at least two different chapters of the book for many of the most important topics. This is because, as in previous editions, there is one very large chapter on Partnership Agreements, which includes a range of material on the internal relationship between partners, including decisionmaking, the powers and duties of partners, the financial entitlement of current and outgoing partners, the admission or expulsion of a partner, and dissolution, However, many of these topics are also discussed extensively in separate chapters and so, to get a full picture of the relevant law and the editor’s analysis, it is necessary to consult both. While this approach reflects the fact that some matters which can and should be dealt with by the partners in their agreement (and which are therefore logically considered in the Partnership Agreements chapter) are also matters where there is mandatory or default law and/or third parties are involved (and which therefore need to be considered separately to any partnership agreement), and some cross references are provided, it does risk a reader consulting only part of the relevant material without appreciating that it is subject to coverage elsewhere in the book.

The new edition has been fully updated. It contains a reworked and expanded section on discrimination (in the chapter on Illegal Partnerships) in the light of the Equality Act, which had not come into force at the time of the previous edition, and recent caselaw such as Fennell v Foot Anstey. It also discusses of the new Private Fund Limited Partnership (PFLP) vehicle introduced in 2017. This enables an investment partnership to register as a limited partnership under the Limited Partnerships Act 1907, but to benefit from reduced regulation because a number of provisions of that Act are disapplied, including a limited partner’s obligation to contribute capital and some limited partner duties, and from the insertion into the Act of a ‘safe harbour’ list of activities in which a PFLP limited partner may engage without losing his limited liability.

The new material in this edition also includes explanation and analysis of important recent cases such as Clyde & Co v Bates Van Winkelhof, Boghani v Nathoo, Hosking v Marathon Asset Management LLP and Inversiones Frieira v Colyzeo Investors.

In Clyde & Co v Bates Van Winkelhof the Supreme Court held that an LLP member could at the same time be a ‘worker’ for the purposes of the protection given to whistleblowing workers by the Employment Rights Act 1996. This ruling has provoked debate amongst commentators on partnership law about whether a partner can simultaneously be a worker. The Supreme Court also held that s4(4) of the Limited Liability Partnerships Act 2000, which provides that ‘A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership’ was to be interpreted as meaning that ‘whatever the position would be were the LLP members to be partners in a traditional partnership, then the position is the same in an LLP’ (per Lady Hale). It is settled law that a partner cannot also be an employee of the partnership, because a partnership is not a separate legal person to its partners (except in Scotland), and it is not possible in principle for an individual to employ himself. Although Lady Hale (who gave the leading judgment in Clyde) and Lord Clarke both suggested that the established approach was open to review, they left the matter undecided, while Lord Carnwath explicitly rejected any change and courts in subsequent cases have continued to follow the established approach.

In Hosking v Marathon Asset Management LLP an LLP member had breached his contractual and fiduciary duties to his fellow member by discussing with certain of its employees the possibility of starting a new business, and producing a business plan.

The court held that the profit share of a partner or LLP member could be subject to forfeiture on the basis of breach of fiduciary duty. The fact that the firm’s contractual documentation contained no provision for forfeiture did not mean that there was no scope for it to apply Although the forfeiture principle had generally been invoked in relation to agents, the underlying rationale applied more widely and had been applied to other fiduciaries. In any event, a partner or LLP member was an agent and the mere fact that they were also a partner or an LLP member should not preclude the application of the principle.  There was no reason to treat a profit share differently from other forms of remuneration, even though it usually reflected the interest of the partner or member in the firm rather than being a payment for specific services. Although neither the legislation nor the caselaw on partnerships and LLPs made provision for forfeiture, the legislation did not attempt to provide an exhaustive account of the law and remained subject to the general law, and the cases did not directly address the point at issue.

In Boghani v Nathoo the court provided guidance on the interpretation of s38 of the Partnership Act 1890. This provides that, after dissolution of a partnership, the authority of each partner to bind the partnership, and the other rights and obligations of the partners, continue only so far as necessary to wind up the partnership’s affairs and to complete ‘transactions begun but unfinished at the time of the dissolution’. It held that s38 does not entitle partners to enter into new contracts so as to bind a former partner and, even in relation to transactions begun but unfinished at the time of dissolution, it only applies to the extent that completion of such transactions is necessary to wind up the affairs of the partnership. Although the obligations of partners to third parties continue despite dissolution, the satisfaction of those obligations does not normally involve reliance on s38 and, if it is applicable, s38 only confers a power on partners and does not impose a duty.

Inversiones Frieira v Colyzeo Investors involved a dispute as to which partnership books and records had to be disclosed to limited partners. The court noted that s 28 of the Partnership Act 1890 provided that each partner had a right to disclosure by his co-partners of all matters relating to the partnership dealings and transactions, and s7 of the Limited Partnerships Act 1907 applied the general law of partnerships to limited partnerships.  Although s7 was stated to be subject to the other provisions of the 1907 Act, and s6 of the 1907 Act restricted the right of limited partners to take part in the management of the business and provided that limited partners did not have the power to bind the firm, it was not implicit in either of those provisions that a limited partner’s right to information was restricted.  Indeed, s6 expressly included the right to information as a proviso to the general restriction on management to make it clear that the exercise of this right it did not constitute taking part in management, and thus did not deprive them of their limited liability.  A limited partner’s capital was at risk in the same way as any other partner, and there was every reason why the general partner who was entrusted with the conduct of the business should be obliged to provide full information, not least because it was an aspect of the duty of good faith which he owed to his co-partners. The overriding obligation was to keep and make available information sufficient to enable a partner to examine into the state and prospects of the partnership business as provided s6 of the 1907 Act. What was required to fulfil the obligation would vary according to the nature of the business and the terms of its governing documents, but if a partnership had paid for the document, or if it would be necessary or advantageous to rely on the document in order to establish the partnership’s rights against a third party or to establish the partners’ rights inter se, then it related to the partnership and a partner was entitled to inspect it.

This new edition thus continues to provide a comprehensive and authoritative source of reference, as befits a book which is regularly cited in court judgments.  Issues which are frequently the subject of dispute between partners, such as when and whether a partnership exists, are examined in detail, but those issues which arise less commonly are also covered, including a partnership’s liability for the criminal acts of its partners, and recommended provisions for the agreement of a corporate partnership (in which all partners are corporate entities). This is what makes it such an excellent source of reference – it is difficult, if not impossible, to consult it on an aspect of partnership law, however abstruse, and not find helpful analysis including supporting case references. There are substantial footnotes directing the reader to relevant primary sources, and often explaining them in detail, although in some places it would be helpful for more of this material to be contained in the main text in order to avoid the risk of what are often important points contained in the footnotes being overlooked. It would also be helpful, particularly for an academic audience, for there to be more references to relevant secondary sources, although it must be acknowledged that this is a text primarily aimed at (and used extensively by) legal practitioners. The text is clearly written, and the increased use of subheadings in bold in this new edition, as well as the detailed contents list (which in this edition includes many more of the subheadings used in the text) and index, aids the location of particular material by the reader.

In summary, this is an essential reference text for academics, postgraduate students and practitioners in this area of law.

Transparency International report on use of Scottish partnerships in money laundering and corruption

Earlier this year, the UK government department responsible for Business, Enterprise and Industrial Strategy (BEIS) called for evidence on the use of Scottish partnerships (which, unlike English partnerships, have separate legal personality)  in criminal activities.  BEIS has not yet published its response but Transparency International has published its own report - at http://www.transparency.org.uk/publications/offshore-in-the-uk/#.WfnsaBO0NXE - and the government has already responded by requiring Scottish partnerships to disclose information about persons who may exert significant influence over the firm (Scottish Partnerships (Register of People with Significant Control) Regulations 2017 (SI 2017/694)).  Partnerships are already obliged to disclose the names of their partners.

It will be interesting to see what responses have been made to BEIS, and what view the government forms as to the need for further action.  Possibilities include requiring more information to be registered by limited partnerships, or by corporate partners, including greater disclosure of accounts (which are currently only disclosed where all partners are entities with limited liability).

The relationship between US LLCs and UK partnerships

LLC law is in many, many respects partnership law wearing different clothing.  The first LLC statutes were an amalgam of the then current uniform general partnership act and the uniform limited partnership act.  Indeed, many LLC statutes still include a statutory apparent authority provision derived from Section 9 of the Uniform Partnership Act of 1914, which as you may know was based heavily on the English Partnership Act of 1890.  In re Hall's Estate, 1919 WL 2957, at *3 (Pa. Orph. 1919), aff'd, 266 Pa. 312, 109 A. 697 (1920) (“[In] the article in the Central Law Journal, vol. 80, page 435, written by Walter George Smith, Esq., who was Chairman of the Committee on Commercial Law of the Commissioners on Uniform State Laws, under whose direction the act was drafted, … he says: ‘The draftsman, William Draper Lewis, Esq., formerly Dean of the Law School of the University of Pennsylvania, and now one of its professors, based his work upon the English Partnership Act,’ etc.”)

Dan Kleinberger

Recent UK partnership/LLP cases

Dinesh Kotak v Jagdish Kotak and others [2017] EWHC 1821 (Ch)

The bank and two partners in a commercial property partnership disputed the scope of a bank mandate signed by both partners. The court held that the mandate authorised future borrowing by just one partner, but that even if this was not correct, s5 of the Partnership Act 1890 applied to give the sole partner who had signed the loan agreements ostensible authority to do so. In determining whether an act of a partner constituted the carrying on of a particular business in the usual way, as required by s5, the court had to examine whether the conduct in question was usual to the type of business carried on by the partnership, both when viewed at a high level of generality and when examined in detail (JJ Coughlan Ltd v Ruparelia [2014] PNLR 4). The question was not whether the conduct was carried out in the usual way of a business of a relevant kind, but whether a rational, competent, reasonable counterparty to the transaction at issue would so regard it. Since it was an everyday action of a commercial property business to operate on borrowed money, the acts of borrowing at issue here were clearly usual for the kind of business carried on by the partnership.

Halborg v EMW Law LLP [2017] EWCA Civ 793

Halborg, a sole practitioner solicitor, was the solicitor on the record in relation to legal proceedings against his client. He appointed the respondent LLP to act as his agent in those proceedings, and was subsequently ordered to pay LLP’s costs. He appealed on the ground that the LLP should have been treated as a litigant in person and its recoverable costs limited accordingly. The Court of Appeal dismissed the appeal, holding that the LLP was not a litigant in person within the meaning of the Civil Procedure Rules 1998 (CPR) rule 46.5(6). This rule states that a litigant in person includes (a) a company or corporation which is acting without a legal representative; and (b) (inter alia) a solicitor, except where he is represented by a firm in which he is a partner. The LLP was not a litigant in person under CPR 48.5(6)(a) because, although it was a corporation, it had acted with a legal representative. The fact that this was an in-house legal representative made no difference. The court also held that the LLP could not be a litigant in person under CPR 48.5(6)(b) because that only applied to individuals, but that if it was wrong on this point, CPR 48.5(6)(b) was capable of applying where an LLP member or the LLP itself was represented by the LLP. The word ‘firm’ included a sole practitioner, and ‘partner’ included a case where there was only one principal in the firm. An LLP and its members should be treated in the same way as a partnership, since the fact that an LLP had separate legal personality and its members had limited liability was not relevant to the rationale for the principle that a solicitor who acted for himself in litigation could recover his expenses and his profit costs.