Short article offering advice on investigations into partner wrongdoing

Law firm CM Murray have published a short article on 'Investigations into Partner Wrongdoing - Common Concerns and Best Practice'. It is available at:

https://www.cm-murray.com/knowledge/investigations-in-to-partner-wrongdoing-common-concerns-and-best-practice/

Book Review: The Law of Limited Liability Partnerships, 5th edn

The Law of Limited Liability Partnerships, John Whittaker and John Machell QC (5th edn, Bloomsbury Professional 2021), 792pp., hardback, ISBN: 9781526516695. Also available as ePDF, ISBN: 9781526516688; and EPub, ISBN: 9781526516701.

This is one of two leading texts on UK LLPs, the other being Palmer’s Limited Liability Partnership Law (reviewed elsewhere on this website).

This book continues to be multi-authored and although there have been some changes to the team, it continues to benefit from the extensive practical experience and expertise of its authors. John Machell QC, the General Editor, is a senior barrister focussing on commercial law including partnerships and LLPs, John Whittaker, the Consultant Editor, is a retired barrister, and many other members of Serle Court chambers are also credited in this edition. Specialist contributions included the chapters on discrimination and whistleblower protection (Susanne Foster, updated for this edition by Clare Murray, Sarah Chilton and Beth Hale), taxation (Colin Ives with assistance from Sean Richardson), and Financial Services Regulation (John Goodhall, updated by Nick Williams.

This 5th edition retains the basic chapter structure of the 3rd and 4th edition, (see further the review of the 4th edn on this website) with a detailed consideration of the law relating to all aspects of an LLP’s life from formation to winding up. In addition to what might be described as standard chapters (such as incorporation, the rights and duties of members, and decisionmaking), it includes chapters on the LLP as a corporate entity, charges and debentures, conversion from a partnership, accounts and audit, the appointment and role of auditors, and investigations and striking off. It also includes many chapters on the separate issues arising on winding up and insolvency. The Appendices include the full text of the Limited Liability Partnerships Act 2000 and the Limited Liability Partnerships Regulations 2001, though not – no doubt due to their length – the Limited Liability Partnerships Regulations 2009.

New sections for this edition include separate sections on the duty to notify changes to the Registrar, forfeiture (including the judgement in Hosking v Marathon), sexual harassment and bullying, permanent health and disability insurance, detriment (in the context of whistleblowing claims), Brexit (in the context of financial services regulation), the term of office of auditors, rectification of the register (including the judgment in Grupo Mexico de CV v Registrar of Companies), and compensation orders in disqualification proceedings. The chapter on accounts and audit now has several new sections including filing derogations for small LLPs and, in relation to non-IAS individual accounts, abridged accounts, reports, micro-entity LLPs and dormant subsidiary LLPs. The chapter on voluntary arrangements has been re-organised to include the new free-standing moratorium. Other new developments covered in this edition include the judgment in McTear v Eade on the clawback provisions of 214A of the Insolvency Act 1986, and a number of judgments on derivative claims. The sections dealing with fetters on decision-making powers has been expanded as the effects of the decision in Braganza continue to be explored by the courts and commentators.

The text continues to highly readable. Although some closely related material is contained in separate chapters, this is inevitable in a book of this length and there are plenty of cross references. The use of numbered paragraphs and chapter subheadings, as well as the detailed contents list and index, assists in ensuring that all relevant material can be located by the reader. There are substantial footnotes directing the reader to relevant primary sources, and often providing considerable further information, although some of the references to cases which do not appear in the main text are easily missed.

This edition therefore continues to be a comprehensive and authoritative source of reference on all aspects of LLP law for practitioners, and also for academics and postgraduate students. The close relationship of LLP law to that of general and limited partnerships, and to limited companies, means that this book will also be of interest to practitioners and researchers in those areas.

Recent UK cases on i) partnership property, ii) restoration of an LLP to the register, iii) whether a sale or a buyout should be ordered on partnership dissolution, iv) partnership goodwill, and v) the application of the disqualification regime

i) Badyal v Badyal and another [2021] EWHC 1508 (Ch)
Two brothers set up and operated a partnership in which they were equal partners. They had also set up a company, which carried on the same kind of business, in which they and their father were equal shareholders. The question arose whether the brothers’ shares in the company were partnership property. The court relied on the presumption in s21 of the Partnership Act 1890 that, unless the contrary intention appeared, property bought with money belonging to the firm was deemed to have been bought on account of the firm. It held that the company had been established using money from the partnership, and that no contrary intention appeared.

ii) Re Harrington & Charles Trading Co. Ltd and others Standard Chartered Bank and another v Registrar of Companies [2021] EWHC 1566 (Ch)
This case concerned applications to restore an LLP and three companies to the Register of Companies under s1029 of the Companies Act 2006 (CA 2006), and to appoint new liquidators under s108 of the Insolvency Act 1986 (IA 1986). Those sections were applied, with modifications, to LLPs by the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 and the Limited Liability Partnership Regulations 2001. The applicants alleged that all four entities had been used to launder the proceeds of an international fraud before being placed into liquidation and dissolved. The applicants were victims of the fraud.

Section 1029(2)(f) CA 2006 permitted restoration by the court if it was satisfied that the applicant had a creditable potential legal claim against the entities. It was not necessary for the court to determine that the applicant had a claim against the company, merely that the claim should not be ‘merely shadowy’ (Stanhope Pension Trust v Registrar of Companies [1984] BCC 84, 90). The court concluded that there was sufficient evidence of a claim which was far from shadowy and which had real prospects of success.

In such circumstances, s1031(c) CA 2006 gave the court power to order restoration of the entity if it considered it just to do so. The principles governing the exercise of the discretion had been set out in Re Infund LLP [2018] EWHC 1306 (Ch), and included a presumption of restoration where one of the gateways for restoration set out in s1029, including s1029(f), applied. The court concluded that it was just to restore each of the four entities to the Register in order for the potential legal claims against them to be pursued.

iii) Malik v Hussain and others [2021] EWHC 1405 (Ch)
In an earlier judgment, the court had held that it was just and equitable to order dissolution of the partnership, winding up and a final account. In this judgment, the disputed issues were whether there should be a sale of the partnership assets to the highest bidder with both partners being permitted to bid to them, or a compulsory sale to the partner who was continuing to run the business at a valuation ordered by the court.

The court considered that since ss39 and 44 of the Partnership Act 1890 conferred the right on each partner of a dissolved partnership to have the surplus assets shared between them in accordance with their respective rights as partners, it would be wrong in principle for the court to make an order which had the effect that each partner did not receive their full share. In order to ensure that each partner received his full share, the normal rule was that the partnership property should be sold, since a sale was normally the most expedient means by which the true value of the partnership assets could be realised.

However, the presumption in favour of a sale was not absolute, and the court had a discretion to adopt another method of settlement if it was fair and just as between the partners. Thus in Syers v Syers (1876) 1 App Cas 174, the court declined to order a sale of the business as a going concern and gave one partner the right to buy out the other partner. The court concluded that there should be a sale process followed by a buyout if no sale was secured, rather than a straightforward sale or a straightforward buyout. Its reasoning was as follows:
i) the starting point, especially in the case of two equal partners, was an order for sale;
ii) while the objection to a buyout here was motivated in part by the desire to drive up the price through a bidding war, the objecting partner genuinely wished to acquire the property and the shareholding;
iii) it was possible that a third-party bidder could emerge;
iv) although the court was ‘reasonably confident’ that its ruling would allow a full and fair valuation of the property and the shareholding, the valuation of both was particularly difficult at the present time given the current uncertainty as to Covid-19;
v) although would be undesirable in terms of the management of the company for the objecting partner to become owner of the property and of 50% of the shares, his consideration was of relatively little weight when set against the overriding consideration that heshould not have his interest expropriated at less than full value
vi) however, it would not be fair and just to allow an unregulated bidding process, with the real risk of cynical bidding tactics to designed to increase the price with the intention of dropping out once the price had been driven up or with no real ability to make good on the purchase.

iv) Thomas v Luv One Luv All Promotions Ltd and another [2021] EWCA Civ 732
Two brothers had been in a band together. After the band split up, they disputed who had the right to use the name of the band. In earlier proceedings it was held that the band had been a partnership at will, and that the goodwill in the name was owned by the partnership prior to the band splitting up. In the course of continuing proceedings on the use of the band name after this time, the court noted that it was ‘of considerable importance’ to appreciate that the goodwill in the name was partnership property. It quoted (at para 58) the explanation of the nature of a partner’s interest in partnership
“As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business, and on dissolution realised for the purposes of paying debts and distributing any surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share.” (Emphasis added)
As partnership property, it was subject to the rules on the application of the assets of a dissolved partnership in s39 of the Partnership Act 1890, namely that every partner was entitled to have the partnership property used to repay partnership debts and liabilities, and then to share in any surplus. It was also subject to the duty of good faith between partners since this did not cease on dissolution, but continued until winding up was completed (Thompson's Trustee in Bankruptcy v Heaton [1974] 1 WLR 605; Don King Productions Inc v Warren [2000] Ch 291), with the result that it would have been a breach of duty for one partner to register for himself the exclusive right to use the name. The court also noted the judgment in Byford v Oliver (SAXON Trade Mark) [2003] EWHC 295 (Ch), [2003] FSR 39, which held that none of the members of a band which was a partnership at will owned the band name or the goodwill built up under it, and that any proceedings brought to restrain the use of the name by a future band would have to be bought by or on behalf of the partnership, even if some or most of the original partners were members of the second band.

v) Re Bell Pottinger LLP, Secretary of State for Business, Energy and Industrial Strategy v Geoghegan and others [2021] EWHC 672 (Ch)
The applicants sought to strike out disqualification proceedings brought against them under the Company Directors Act 1986 (CDDA), as applied to LLPs by the Limited Lability Partnerships Regulations 2001. Section 6(1) of the CDDA enabled the court to impose a period of disqualification on a person (a) who is or had been a director of an insolvent company, and (b) whose conduct as a director made them unfit to be concerned in the management of a company. Section 12C required the court to have regard in particular to the matters set out in Sch 1 when assessing unfitness. The applicants argued that since they were not members of the management board of the LLP, they were not responsible for its management and s6(1)(b) of the CDDA could therefore not apply to them.

The key issue which arose was whether the provisions requiring the word ‘member’ of an LLP to be substituted for the word ‘director’ in the CDDA indicated the Parliament had intended it to include junior members of a large LLP who had no involvement in its management. The court held that it did. It noted that the purpose of the CDDA was to protect the public against the future conduct of companies by persons whose past records as directors had shown them to be a danger to others, and to raise the standards of those who trade with the benefit of limited liability.

Regulation 4(2) of the LLP Regs provided for the CDDA to apply to LLPs with modifications including that ‘references to a director…shall include references to a member of [an LLP]’. The court held that this meant that s6 CDDA applied to an LLP member whose conduct as an LLP member made them unfit to be concerned in the management of a company or an LLP. The CDDA stated that such conduct included ‘conduct in relation to any matter connected with or arising out of the insolvency’ without referring to management, and none of the matters to be taken into account in assessing unfitness set out in Sch 1 CDDA referred to management. Parliament must have intended the CDDA to apply to all LLP members, since this was consistent with its application to all directors, and indeed all partners, and the LLP Act 2000 only defined members and did not require LLPs to have a management board or any particular structure.

Dissolution of Indian partnerships

Indian law firm Sakshar Law Associates has published an article on the dissolution of Indian partnerships. It is available at:

https://s3.amazonaws.com/documents.lexology.com/ce195c41-98e0-4e28-90fa-28e4c50b95aa.pdf?AWSAccessKeyId=AKIAVYILUYJ754JTDY6T&Expires=1619171485&Signature=YcWqF6vQH3ZQVgmxJOhjQ%2FB8etQ%3D

Update on application of 'economic substance' requirement for partnerships on offshore jurisdictions

Law firm Macfarlanes has published an update on this requirement as applied in a number of offshore jurisdictions including Bermuda and the Isle of Man. See:

https://blog.macfarlanes.com/post/102h3i9/economic-substance-extension-to-partnerships

Short article on UK case on rational decisionmaking when allocating partner profits

Law firms Macfarlanes, and Kingsley Napley, have both published brief articles on the recent case of Tribe v Elborne Mitchell on the duty to act rationally when allocating profits. They are available at: 

https://www.macfarlanes.com/what-we-think/in-depth/2021/decision-to-allocate-partnership-profits-had-to-be-taken-rationally/.

https://www.kingsleynapley.co.uk/insights/blogs/employment-law-blog/law-firm-partners-profit-share-allocation-was-a-reasonable-exercise-of-discretion

Proposed changes to taxation of Israeli partnerships

Law Herzog Fox & Neeman have published a short article on these interesting proposed changes, available at:

https://trailer.web-view.net/Show/0XE431C22AAA67948F071799E854B311F25164B7D8D55A7F1B8B9BC3B09E143C38FC7B75182448CBB4.htm

Reforms to partnership formation law in Alberta, Canada

The Canadian province of Alberta has reformed its law on partnership formation. Law firm Burnet, Duckworth & Palmer has published a short article on this, 'Proclamation by the Government of Alberta streamlines formation process for limited partnerships', available at:

https://www.bdplaw.com/publications/proclamation-by-the-government-of-alberta-streamlines-formation-process-for-limited-partnerships/

Canadian case on the authority of the general partners in a limited partnership

Law firm McCarthy Tétrault LLP has published a short on article, 'Enforcing the Unenforceable: Limited Partners May be Bound by Unauthorized Conduct of General Partner', on a recent Canadian caseADAG Corporation Canada Ltd v SaskEnergy Incorporated [2021] SKCA 74 which examined the extent to which the acts of a general partner acting outside their authority could bind the limited partners.

The article is available at:

https://www.mccarthy.ca/en/insights/blogs/canadian-appeals-monitor/enforcing-unenforceable-limited-partners-may-be-bound-unauthorized-conduct-general-partner

The judgment is available at:

https://www.canlii.org/en/sk/skca/doc/2021/2021skca74/2021skca74.html?autocompleteStr=2021%20SKCA%2074&autocompletePos=1

 

Modernisation of German partnership law

New German legislation to modernise partnership law was enacted earlier this month and will enter into force on 1 January 2024. Law firm Oppenhoff has published a short article on the new legislation, 'The German Act to Modernise the Law on Partnerships (Gesetz zur Modernisierung des Personengesellschaftsrechts - MoPeG) - amendments and the need for companies and partners to act'. It is available at:

https://www.oppenhoff.eu/en/news-detail/the-german-act-to-modernise-the-law-on-partnerships-gesetz-zur-modernisierung-des-personengesellschaftsrechts-mopeg-amendments-and-the-need-for-companies-and-partners-to-act

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