The UK government's response to the consultation on the Reform of Limited Partnerships has been published at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/762849/government-response-limited-partnerships.pdf
The consultation resulted from concerns that limited partnerships in the UK and in particular in Scotland (where partnerships have legal personality, which they do not in England and Wales or Northern Ireland) were being used to facilitate international money laundering and other illegal activities.
The government now proposes the following:
* applicants to register LPs must demonstrate that they are registered with an anti-money laundering (AML) supervisory body, and applications from overseas will be subject to equivalent standards - although the government is still considering how this might be achieved.
* LPs will need to demonstrate an ongoing link with the UK in the form of a principal place of business in the UK, a legitimate business activity in the UK, or continuing engagement with a UK AML supervisory body.
* all UK LPs will have to file an annual confirmation statement (rather than, as at present, only certain Scottish partnerships). This will include additional information not currently required to be registered, such as the date of birth and nationality of all partners.
* the Registrar will be given power to strike off LPs which have dissolved or are not carrying on business.
It is not clear whether the government intends to apply to the requirement to register Persons with Significant Control (PSC) over the partnership to all LPs (rather than, as at present, only certain Scottish partnerships).
The government has rejected the possibility of all partnerships having to file accounts (rather than, as at present, only those whose general partners are all either limited companies or unlimited companies/Scottish partnerships whose members are all limited companies).
The response states that the government will legislate "when Parliamentary time allows" - but when that will be is anyone's guess, given the ongoing Brexit shenanigans
(with apologies for the delay!)
Palmer’s Limited Liability Partnership Law, Geoffrey Morse, Paul Davies, Ian Fletcher, David Milman, Richard Morris, David Bennett and Peter Bailey (eds) (3rd edn, Sweet & Maxwell 2017), 1294pp., hardback, ISBN: 9780414056947.
The editorial team for this book reads as a ‘Who’s Who’ of the partnership and LLP law world, and provides a guarantee that the text will be both authoritative and comprehensive.
In 2011, when the previous edition of this book was published, LLPs had only been available in the UK for ten years, and there had been a relatively slow take-up of the entity during its earliest years. However, by the time of this new edition, the entity had almost doubled in age and vastly increased in number, resulting in a considerable increase in the number of cases coming before the courts and consequent development of the law governing LLPs. The expanding nature of the subject is, unsurprisingly, mirrored in an increase in the size and coverage of this volume. It is not available as an e-book despite the availability in that format of its chief competitor, Whittaker and Machell’s The Law of Limited Liability Partnerships.
The basic structure of the book remains the same as in the previous edition. The first part, accounting for approximately one-third of the total book, consists of a detailed explanation of the law relating to all elements of an LLP’s life, from formation to winding up and insolvency, including chapters on the nature of the LLP, public disclosure, accounting and auditing requirements, the relationships between LLPs and their members and between LLPs and outsiders, minority protection of LLP members and exit procedures, borrowing and security, arrangements and reconstructions, and insolvency and disqualification. However, more of the subheadings within the chapters are now included in the Contents list, which is helpful when it comes to locating material, although the use of paragraph numbers rather than page numbers can slow down the process of locating material.
The second part of the book continues to include the key pieces of LLP legislation, now updated to include the various statutory instruments which have been adopted since the previous edition, including the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016.
More notably, the third and fourth parts of the book set out versions of the key corporate statutes (including the Insolvency Act 1986) which have been amended by the editors to reflect the modifications to, and omissions from, those statutes made by the LLP legislation. These versions thus show how the corporate statutes apply to LLPs. As the editors rightly note, these resources ‘are of course a substitute for what a first world government ought to provide itself for its people’ – but given that the UK government has failed to provide them, their provision in this book is valuable, particularly given the difficulties encountered by anyone attempting to comprehend the law by cross referring between the corporate statutes and the modifications and omissions listed in the LLP legislation.
Other new material includes discussion of a number of significant judgments, including F & C Alternative Investments (Holdings) Ltd v Barthelemy [2011] EWHC 1731, in which the court held that LLP members did not, merely by virtue of that status, owe fiduciary duties to the LLP; Clyde & Co LLP and another v Bates van Winkelhof v [2014] UKSC 32, Tiffin v Lester Aldridge [2012] EWCA Civ 35 and Reinhard v Ondra LLP and others [2015] EWHC 26 (Ch) in which the courts battled with the difficult question of whether an LLP member could also be a ‘worker’ for the purposes of employment protection legislation; and Flanagan v Liontrust Investment Partners LLP [2017] EWCA Civ 985 in which the court held that, just as the doctrine of repudiatory breach does not apply to a partnership agreement, it does not apply to an LLP agreement, so that a purported acceptance of such a breach is of no legal effect and does not terminate the LLP agreement.
The book is clearly written – no mean feat given the extensive and somewhat indigestible statutory material underlying much of the subject. The footnotes are thorough, and include helpful cross references as well as extensive references to further sources of legal commentary, which will be of particular use to academics and postgraduate students.
In summary, this book continues to provide one of the few comprehensive sources of reference on LLP law. As noted above, this is a developing area of law, and one which will only become more important in the future, not only to LLPs members, their advisors, and commentators on this area of law, but also, given the interaction of LLP law with partnership and company law, to their partnership and company counterparts. It is thus recommended for all those advising on or studying any of these areas of law.
A Practical Guide to Partnership Law in Scotland, Stephen Chan (W Green 2018), 250pp, hardback, ISBN: 9780414059771
This new text, authored by a senior Scottish solicitor with extensive experience in partnership law, is unique in providing a thorough explanation of the law relating to Scottish partnerships and LLPs in the 21st century.
Although the key governing statutes apply to both English and Scottish firms, the Partnership Act 1890 makes a number of distinctions between English and Scottish partnerships (in relation to legal personality (s4(2)), partner liability (s9), partnership property (s20(2) and (3)), partners’ separate judgment debts (s23(5)), notification of partner departures (s36(2), partners’ authority in winding up (s38) and partner bankruptcy (s47)). The Limited Liability Partnerships Act 2000 and the various LLP Regulations also draw some distinctions, albeit of a more minor and procedural nature. In addition, the fact that Scotland has its own legal system separate from that of England and Wales produces differences in a number of areas of law which impact on partnerships, including land law, criminal law and insolvency.
The thorough coverage of Scottish partnership and LLP law in this book is therefore important for not only to Scottish lawyers and academics, who have for some years lacked a text dedicated to Scottish law, but also to their English compatriots, since substantial parts of the law apply equally to English firms. The explanations in the book include discussion of a number of unreported Scottish cases which may be unfamiliar – and thus of particular interest – to English partnership lawyers, as well as to practitioners with a more general commercial practice. The differences between Scottish and English partnership law (and, to a lesser extent, LLP law) are clearly highlighted in the context of the relevant material, although a separate summary of the key differences would have been helpful to lawyers in both jurisdictions.
The book is particularly timely because partnership law developments in Scotland have been prominent in recent years, including legislative developments to address the problem of how to bring a criminal prosecution against a partnership which has dissolved, and that of identifying persons with significant influence over Scottish firms in order to combat money laundering, and the current government consultation on possible further regulation in relation to the misuse of Scottish limited partnerships in particular.
The structure of the book is that general partnerships are considered first, from formation (the requirement to register persons with significant influence), through partner liability and authority, decisionmaking, partner duties, separate legal personality (which Scottish partnerships, unlike English partnerships, possess), partnership property, changes in partners and partner disputes, to dissolution and winding up. The practitioner focus of the book is enhanced by the inclusion of chapters on loans and security, and on accounts. Limited partnerships are considered separately, with an emphasis on those areas where they differ from general partnerships, such as the registration requirements. There is also an interesting chapter on how limited partnerships are used in practice, and a further chapter is devoted to the private fund limited partnership (PFLP) variant on the limited partnership. The remainder of the book covers LLPs, with chapters on similar areas to those in the general partnership section, although there are also chapters on conversion to LLP status and on LLP agreements.
The book is fluently written, and the chapters are broken down into short and clearly labelled sections, with the result that it is easy to read and, together with a detailed index, easy to locate material within it. The law is fully referenced in footnotes, as are leading practitioner commentaries and, to a lesser extent, academic discourse.
In summary, this is an essential text for those advising on Scottish partnership or LLP law, but it also contains much of interest to English practitioners, and to academics and students in this area of law.
The New Zealand government is proposing to reform New Zealand's law of general partnership law, which was originally based on the UK's Partnership Act 1890. In the government's own words "The Bill's purpose is to re-enact the Partnership Act 1908 to make it more accessible, readable, and easier to understand. It is not intended to make policy changes."
Further details at http://www.pco.govt.nz/assets/Uploads/legislative-documents/plb/exposure-draft-Partnership-Law-Bill.html.
Gregory Wild v Malcolm Wild, Jean Wild and Abigail Wild [2018] EWHC 2197 (Ch)
The claimant and the first defendant were brothers who had been partners in a dairy farm, and associated retail milk business. The partnership had been established in 1978 by their late father (who had inherited the farm from his parents) and the first defendant, and was dissolved in 2016. The claimant alleged that the farm was partnership property. The defendants disputed this but argued that the claimant’s milk round, which he continued after the dissolution, was a partnership asset even though the first defendant had stopped supplying him with milk from the partnership herd.
Section 20(1) of the Partnership Act 1890 provides that ‘property and rights and interests in property originally brought into the partnerships stock….are called in this Act partnership property, and the question therefore arose whether the father had brought the farm into the partnership stock. The court held that the key issue was whether the partners had agreed or consented to the property becoming partnership property. However, although the relevant agreement or consent could be inferred or arise by implication, no more agreement should be inferred by the court than was absolutely necessary to give business efficacy to what had happened (Miles v Clarke [1953] 1 WLR 587 at 540). The fact that a particular item of property was used by a partnership for the purposes of its business did not necessarily give rise to an inference that the partners had agreed that the item was to be a partnership asset, and the implication of such a term was not normally necessary to give business efficacy to the partnership. This was particularly so in the case of land used by a farming partnership (Ham v Bell and others [2016] EWHC 1791). Nor was it determinative that the item had been included in the partnership accounts.
The court concluded that it would have been surprising had the father made the farm an asset of a partnership which he had just formed with his 16 year old son when the farmhouse was his home, the first defendant was not his only child, and the partnership was created for tax purposes. It was therefore not open to the court to infer an agreement or imply a term that the farm was brought into the partnership stock. However, the claimant’s milk round was a partnership asset despite the fact that the first defendant had ceased to supply the claimant with partnership milk, because the claimant continued to use a milk float which was a partnership asset, and the goodwill in the customers of the milk round was a partnership asset.
Milne, Liquidator of Premier Housewares (Scotland) LLP) v Rashid [2018] CSOH 23
The liquidator of an LLP sought an order against the respondent, who was a member of the LLP, under s214A of the Insolvency Act 1986 (IA 1986). In the event of an insolvency, the LLP Regulations 2001 create an additional sanction for LLP members which is not applicable to companies, the so-called ‘clawback’ under s214A IA 1986. This provides that in a winding up of an LLP the court can order an LLP member to make a contribution to the LLP’s assets if, within two years before the commencement of the winding up, that member withdrew LLP property (described in Milne as ‘limb 1’), and it is proved to the court’s satisfaction that he knew or had reasonable grounds for believing that the LLP was at the time of the withdrawal unable to pay its debts within the meaning of s123 IA 1986 or would become so unable after that withdrawal (‘limb 2’). Section 214A further provides that the court may not make an order unless the member knew or ought to have concluded that after the withdrawal there was no reasonable prospect of the LLP avoiding insolvent liquidation, taking into account his actual knowledge, skill and experience and that reasonably to be expected of a person carrying out the same functions as him (‘limb 3’). In Milne, the court was concerned with the Scottish version of s214A but the minor differences between that version and the English version were not at issue.
It was undisputed that limb 1 of the test was met, and the court also held that limb 2 was met because s123 deemed an LLP to be unable to pay its debts in certain circumstances, including it being unable to pay its debts as they fell due, which did not mean that a business which was currently paying its debts as they fell due could not be deemed to be unable to pay its debts since it was concerned not only with debts presently due, but also those due from time to time in the reasonably near future; and its assets being less than its prospective and contingent liabilities, although it was not conclusive that liabilities exceeded assets at a particular point in time but whether the LLP could reasonably be expected to meet its prospective and contingent liabilities. Although the respondent in Milne did not know, nor ought he to have concluded, that the LLP was unable to pay its debts as they fell due, he knew or ought to have concluded that the LLP could not reasonably be expected to meet its liabilities and therefore had reasonable grounds to believe that the LLP was unable to pay its debts. However, the fact that limb 2 was met did not did not mean that limb 3 was also met, and the court concluded that it was not. There was a reasonable prospect of the LLP avoiding insolvent liquidation and so the respondent could not have known, nor ought he to have concluded, that there was no such prospect. A s214A contribution order should therefore not be made against him.
Cheema v Jones and others [2017] EWCA Civ 1706
Cheema and Jones were doctors who had practised in partnership together and had subsequently invited three more partners to join them. Negotiations on the terms of the new partnership continued after the three new partners had started work. When the relationship between Cheema and Jones broke down, Jones sought to prevent Cheema from practising as a doctor at the practice. Cheema claimed that the partnership of five partners had never been formed and was granted an interim injunction to restrain Jones from preventing him exercising his rights under the original partnership agreement. Jones then purported to give notice dissolving the partnership at will between the five partners.
The Court of Appeal held that a new partnership at will between the five partners had come into existence when the three new partners had joined the original two, and that this had been validly dissolved by the giving of notice. Since the discussions about the new partnership were focussed on a new agreement and there was no reference to the old agreement as a fall-back position, it was to be inferred that Jones and Cheema intended to abandon the old agreement and enter into a new contractual relationship which would supersede the old partnership. The fact that no new agreement was signed did not affect that inference. Although dicta in Austen v Boys suggested that if a new partner was taken into a partnership without specifying the terms on which he became a partner, the original partnership agreement would govern the new relationship, that dicta concerned the different situation of a new partner being admitted in the absence of any intention by either the existing or the new partners to enter into a new agreement. Here,` there was no evidence that the new partners intended to be bound by the original agreement, or even that they had all seen it.
Elspeth Berry, 'Square pegs and round holes: why company insolvency law is a bad fit for partnerships and LLPs' (2018) 31(3) Insolvency Intelligence 88
A much longer version will appear in a forthcoming issue of the Nottingham Insolvency and Business Law e-Journal, which will also contain articles based on the papers given at the Inaugural Conference of the Forum.
The name of the Forum has now been changed to The Partnership, LLP and LLC Law Forum.
It is hope that this change (removing the word 'Academic') will make it clear that Forum is intended to be as inclusive as possible, and in particular that practitioner involvement in the Forum is welcomed, including contributions to the website, and papers at any future conference. Please do spread the word to our practitioner colleagues!
Thank you to those who proposed and supported this change at the round table discussion at the Inaugural Conference.
Elspeth Berry, ‘Limited partnership law and private equity: an instance of legislative capture?’ (2018) Journal of Corporate Law Studies, forthcoming in hard copy.
A limited number of free e-copies are available at https://www.tandfonline.com/eprint/3N5vFFjxbgF2Jwnvz5dg/full
Abstract
The number of limited partnerships in the UK has grown rapidly since the 1980s, largely due to the use of the limited partnership vehicle by private equity. The political and economic influence of private equity has enabled it to exert considerable influence on the UK government amounting to legislative capture, and this in turn has driven reforms to limited partnership law, predominantly deregulation, for the sole benefit of private equity. This distortion of the partnership legislation disadvantages other users or potential users of the limited partnership vehicle, since the private equity-inspired reforms do not apply them, and other reforms which would be of benefit to them have been ignored. Furthermore, reduced regulation is in some respects harmful to private equity itself, and the overall result is harm to the wider economy.
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).
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.
The round table discussion which concluded the event considered:
1) Publication of Conference papers in a special partnership edition of the Nottingham Insolvency and Business Law Journal, including the possibility of producing a hard copy of the edition (normally only available online).
2) The future of the Forum:
a) The success of the Conference, both in terms of the quality of papers and the opportunity to meet colleagues working in this area of law, prompted calls to make the Conference an annual event if possible. Ideas for the future included practitioner speakers, seeking sponsorship from partnership insurers, approaching law firms to host the event, and asking a PhD student to act as Secretary of the Forum and thus of the Conference.
b) The value of the Forum website as a knowledge exchange mechanism was noted. Ideas for development included separate sections for particular jurisdictions or themes, and a change of the Forum name in order to make it clear that practitioners were welcome to participate.