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.
Lindley & Banks on Partnership, Roderick I’Anson Banks (ed) (20th 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.
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).
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.