Short article on the responsibilities of partnership and LLP boards

Daniel Sutherland and Ed Livingstone of UK law firm Fox Williams LLP have written a short article providing guidance on some of the responsibilities of partnership and LLP boards and managing partners. 'Partnerships - what keeps management up at night?' (4 February 2021) is available at:
https://www.foxwilliams.com/2021/02/04/partnerships-what-keeps-management-up-at-night/

Short article on partnership law in Poland

 

A short summary of the law relating to partnerships and other business organisations in Poland has been published by Łukasz Śliwiński and Daria Goliszewska of Polish law firm Wardyński & Partners. It is available at 

http://www.codozasady.pl/en/opening-business-in-poland-partnerships-vs-companies/

Ireland's Investment Limited Partnerships (Amendment) Act 2020 now in force

This Act came into force on 1 February and briefings on it have been published by law firms William Fry, and Arthur Cox, at:

https://www.williamfry.com/docs/default-source/Briefings/wf-guide-to-the-investment-limited-partnership-2021.pdf?sfvrsn=0

https://insights.arthurcox.com/post/102gpw8/investment-limited-partnerships-amendment-act-2020-takes-effect  and https://www.arthurcox.com/knowledge/investment-limited-partnerships-in-ireland/

Earlier briefings on the new legislation by law firms Dillon Eustace, and McCann Fitzgerald are available at:

https://www.dilloneustace.com/legal-updates/irelands-investment-partnership-bill-passes-through-the-irish-parliament

and

https://www.mccannfitzgerald.com/knowledge/asset-management-and-investment-funds/dawn-of-a-new-age-for-irish-investment-limited-partnerships

Recent UK cases on expulsion of an LLP member, liability of a partnership for a partner's wrongful acts, and the existence of a partnership

Joseph v Deloitte NSE LLP [2020] EWCA Civ 1457
Joseph, an equity member who was expelled from the defendant LLP, claimed that the expulsion procedure set out in the LLP Agreement had not been correctly followed, in particular as to the time limits applicable to the various stages of the procedure. His claim was rejected by the High Court, and the Court of Appeal.

The court refused to imply the time limits argued for by Joseph because such a term in the agreement would conflict with the express words of another clause of the agreement. For a term to be implied into a contract it must:
i) be reasonable and equitable,
ii) be necessary to give business efficacy to the contract or so obvious that it goes without saying,
iii) be capable of clear expression, and
iv) not contradict any express term of the contract.

The court also held that a promissory estoppel did not arise because the LLP Board had not stated or implied anything about time limit. For such an estoppel to arise, there must be:
i) a legal relationship giving rise to rights and duties between the parties,
ii) a clear and unequivocal promise or representation by one party that they would not enforce their strict legal rights arising out of that relationship against the other,
iii) an intention by the former that the latter would rely on the promise or representation, and
iv) alteration of the position of the latter in reliance on the promise or representation such that it would be inequitable to allow the former to act inconsistently with it.

The court concluded that Joseph was entitled to feel harshly treated, but that his appeal must be dismissed. As had been frequently stated by the courts, the role of the court was not to make a fairer or more reasonable contract for the parties but to ascertain what their contract was.

See also the short article on this case by Bahamas law firm ParrisWhittaker, ‘Sympathy – but no remedy for firm partner’ at http://parriswhittaker.com/sympathy-but-no-remedy-for-firm-partner/?utm_source=rss&utm_medium=rss&utm_campaign=sympathy-but-no-remedy-for-firm-partner


Baines v Dixon Coles and Gill (A Firm) [2020] EWHC 2809 (Ch)
Mrs Box, one of three equity partners in a solicitors’ firm, was expelled for dishonestly making unauthorised payments from client account money and was subsequently convicted of a number of offences of dishonesty. Claims for summary judgment were brought against the two innocent partners by parties who alleged that they had suffered loss as a result of Mrs Box’s dishonesty. The relevant ground for summary judgment was that the defendants had no real prospect of success on the claim.

Section 10 of the Partnership Act 1890 provides that a firm is liable to make good loss caused by the wrongful act of a partner acting in the ordinary course of business of the firm or with the authority of his co-partners. The defendant partners accepted liability in relation to misappropriations made by Mrs Box in the course of conveyancing transactions, since that was within the firms business. However, they denied liability for all other misappropriations on the ground that her conduct was neither in the ordinary course of the firm’s business nor authorised by them.

In Dubai Aluminium Co Limited v Salaam [2003] 2 AC 366 the court had noted that since wrongdoing was not normally authorised, the question whether an act or omission was done in the ordinary course of the firm’s business could not be decided merely by reference to whether the partner had been authorised to do it. In Hamlyn v John Houston and Co [1903] 1 KB 81 the court had held that if it was within a partner’s authority to obtain information by legitimate means, then it was within the scope of his authority for the purposes of s10 to do so by illegitimate means, but the court in Dubai Aluminium noted that a distinction should be drawn between unlawful acts done to further the business of the firm, and those done only to further the interests of the wrongdoing partner. In the latter case the firm would not be liable merely because the act was of the kind the partner was authorised to do, but it was still possible that the act was so closely connected with the ordinary course of business of the firm that the firm was liable for it.

On the facts of the present case, the court considered that there was a real prospect of establishing that Mrs Box’s conduct in relation to two ledgers which she kept and which were not client ledgers was not conduct in the course of the firm’s business. However, the other ledger was a client ledger, and it could not be argued that setting up and transacting through such a ledger was outside the ordinary course of business of a solicitor. Indeed, such steps were integral to the running of a solicitors’ firm. Nor was setting up and transacting through a client account ledger outside the apparent authority of a partner. Summary judgment was therefore given in relation to this ledger.


Patel and another v Barlows Solicitors and others [2020] EWHC 2753 (Ch)
The first claimant alleged that there had been a partnership between him and two of the defendants. His capital contribution had been used to pay for two investment properties but the solicitors had negligently paid the money to the vendor’s solicitors without ensuring that good title to the properties would be acquired. The claim brought by one of the other partners against the solicitors was settled, and the first claimant sought repayment of his capital out of the settlement amount, on the basis that the amount was received on behalf of the partnership.

Section 1(1) of the Partnership Act 1890 defines a partnership as “the relation which subsists between persons carrying on business in common with a view of profit”. The court held that this definition was satisfied on the facts, and that the three alleged partners had indeed been in partnership. First, the purchase of a property with a view to its subsequent sale could constitute a business, and here the intended purchase and resale of three properties could realistically only have taken place in the course of carrying on a business. The court noted that the question whether an enterprise amounted to a business was a mixed question of law – i.e. the legal principles governing the meaning of the word “business” - and fact – i.e. the facts of the case. Second, there were clearly two or more persons involved, and they had carried out the purpose of the business for their common benefit and had agreed to share profits equally. Third, there was no suggestion that the business was not carried on with a view of profit, and indeed the written agreement between the three alleged partners expressly stated that it was.

The court made a declaration that the enterprise was carried out in partnership and that the partnership had been dissolved on the date that the first purchase of the first and second properties had to be aborted. It ordered that the affairs of the partnership be wound up and an account taken.

Article on the nature of a partnership interest

Joel Nitikman, ‘Do we understand yet the nature of a partnership interest? The High Court of Australia weighs in on the debate’ (2020) 26(7) Trusts & Trustees 672

Although this article focuses on a recent Australian judgment, it is of direct relevance to the same issue in UK law (and potentially in other common law jurisdictions) and discusses both the UK's Partnership Act and several UK cases.

It is available at:
https://academic.oup.com/tandt/article/26/7/672/5894692?login=true

UK government consultation on use of i) LPs/LLP as directors of companies, and ii) corporate general partners of LPs/corporate LLP members

In December 2020 the UK government issued a number of further consultations on Corporate Transparency and Register Reform, including 'Consultation on implementing the ban on corporate directors'. This proposes that, in addition to the existing requirement that companies must have at least one director who is a natural (rather than a corporate) person, all corporate directors may themselves only have directors who are natural persons.

Despite the title of the consultation, it is of relevance to limited partnerships (LPs) and LLPs, because it consults on whether:

i) LPs and LLPs should also be allowed to be corporate directors and, if so, whether the proposed new restriction on corporate directors which are companies should apply also to them ie that the partners/members of an LP/LLP which is a director must all be natural persons; and 

ii) whether the restrictions on corporate directors of companies should also apply to corporate partners of LPs/corporate LLP members. 

The consultation is available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/942194/Corporate_Directors_Consultation.pdf  and the deadline for responses is 3 February 2021. 

Short article on dealing with partner misconduct

UK law firm CM Murray has published a short article on 'The Four Key Questions Every Firm Needs to be Prepared for When Dealing with Allegations of Partner Misconduct' (20 October 2020). It is available at:

https://www.cm-murray.com/knowledge/the-four-key-questions-every-firm-needs-to-be-prepared-for-when-dealing-with-allegations-of-partner-misconduct/

Recent UK case on the existence of a partnership, partnership assets, partners' duties, and just and equitable winding up.

Malik v Hussain and others [2020] EWHC 2334 (Ch)

This case involved a business operated though an alleged combination of partnerships and companies. In 2002 the claimant and the first defendant took preparatory steps to enter into a restaurant business together. They later incorporated a company and acquired a property from which the restaurant was to operate, and in 2003 the restaurant began trading. They only entered into a formal partnership deed in 2006. In 2013 the first defendant opened a restaurant trading under the same name but in a different location.

The court held that there was a partnership in relation to the property and the business, that the two partners held their shares in the company as partnership property, and that the partnership should be dissolved and wound up. It stated that the normal rules applicable to the construction of written commercial contracts applied equally to partnership agreements, and the relevant principles were clear. The parties were therefore bound by the written terms of the deed and could not seek to imply inconsistent terms.

The court held that there was sufficient evidence that an informal partnership came into existence in 2002. The claimant and the first defendant had agreed to go into business together, with a view to owning property and using it to run a restaurant business, they had opened a joint bank account which they were using for the development of the business, and they had decided to take out a joint loan. The company which they had set up had never been intended to take over the whole of the business, and there was no evidence that the opening and operation of the company current account, and the treatment of the restaurant business in the accounts, the property rental statements and the personal tax returns, were carefully considered decisions, the effect of which had been explained by the accountants. In the absence of such evidence, they were insufficient to infer that the claimant and the first defendant had agreed to hive the restaurant part of the partnership business completely out of the partnership and into the company. The court concluded that the parties had intended to own the whole business as partners but for the company to operate the restaurant business on behalf of the partnership.

In the absence of an exhaustive definition of the partnership assets in the partnership deed, the court held that particular attention should be paid to the statements that the parties wished to carry on the business of an Indian restaurant in partnership, that all the equipment and fittings in the property and used for the purposes of the business should be partnership assets, and that the capital was £6 million, which was only explicable if the value of the business was included. These demonstrated that the business was a partnership asset and that this was the basis on which the shares in the company were held by the partners as partnership assets.

The court also held that the obligations in s29 of the Partnership Act 1890 to account for benefits derived from the partnership, and in s30 to account for the profits of a competing business, did not arise. Any benefit derived by the second restaurant from the use of the name of the first and its reputation was modest and short lived, and there had been no meaningful competition given that the second restaurant was over 200 miles from the first. In any event, the parties had given prior consent to either of them operating a competing business. Although the deed was silent on this point, a separate prior oral agreement had been reached and recorded in a file note, and this amounted to a valid consent under s30.

The court concluded that the relationship between the two partners had wholly broken down, and therefore that it was it was just and equitable to make an order for the dissolution of the partnership under s35(f) of the Partnership Act and for the partnership to be wound up and a final account taken.

Recent UK case on partnership winding up

Loveridge and others v Loveridge [2020] EWCA Civ 1104

A caravan park business was operated through several companies and three oral partnerships at will. The partnership proceedings related to the winding up of the three partnerships.

The first instance court had appointed the respondent partner to manage the partnerships pending their winding up, and ordered that the three other partners be restrained from interfering with the business. It discounted the possibility of appointing a third party receiver or manager because it would involve unjustified expense, and there also insufficient time for it to be done.

The Court of Appeal allowed the appeals. It noted that when appointing a partner rather than a third party receiver or manager, it was necessary to take account of the fact that the majority partners, by definition, had the most to lose from any mismanagement. Further, where several partnerships were involved, it was not necessary for the court to order ‘unitary control’ by one partner of all the partnerships. There was no reason to disrupt the status quo of the management of the partnerships by removing all control from the appellants. The respondent was not the only person capable of running any individual partnership, and as it was unclear whether he was a partner at all in one of the partnerships - in which case he would have no say in its future - and at most he had a 25% interest, and as he had made no complaints about the its continued management by the partner who might in fact be its sole owner, the court ruled that she should remain in sole day to day control of this partnership pending trial of the respondent’s claim. The court awarded sole control of one of the other partnerships to the two appellants, since they lived on its principal site, and awarded the respondent sole control of the other partnership.

Recent UK case on the duties of designated LLP members

Re A&C Restoration LLP: Manolete Partners plc v Riches [2020] EWHC 1404 (Ch)

(Judgment in this case was given in May 2020 but the transcript has only recently become available)

Riches was a designated member of A&C Restoration LLP until he retired under the terms of a retirement deed. At that time a new member was appointed. The deed included a waiver of any claim by the LLP for sums owed by Riches as a result of drawings by him which exceeded profits.

The court noted that the LLP was insolvent at the time the deed was entered into. It held that designated members of an LLP, such as Riches, owed the same duties as company directors owed to limited companies (McTear v Eade [2019] EWHC 1673 (Ch)), and that these duties included a duty to take into account the interests of creditors at a time when the firm was insolvent. It concluded that it was a breach of duty, objectively viewed, to cause the LLP to agree to a waiver which released a debt, since this could not be in the interests of the creditors. Riches was therefore estopped from relying on the clause, and remained liable for the debt. He was not able to ask the court to grant relief for any breach of duty pursuant to s1157 of the Companies Act 2006 (applied to LLPs by the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009), because that section was dependent on him having acted honestly and reasonably, and the court considered that it could not be a reasonable decision to waive one’s own liabilities in the context of insolvency.

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