A Limited Liability Partnership (LLP) is often compared to being a hybrid between a partnership and a limited company. Generally, as the LLP is a separate legal entity, the members (or “partners”) have limited liability and they will not need to meet the LLP’s liability personally. Having said that, this is subject to certain exceptions. Commonly, the members may be required to pay or contribute to the LLP’s liability if either:
- A member is guilty of misfeasance or falls within special clawback provisions under the Insolvency Act 1986; or
- A member must contribute by agreement between the members; or
- A member is a sole member of the LLP trading as such for more than six months.
Exceptions 2 and 3 above are relatively straightforward and self-explanatory. However, often members may be unaware that they may be guilty of a misfeasance in accordance with the Insolvency Act 1986.
Members duties
Members’ duties to other members of the LLP are usually contained within a ‘partnership agreement’. This is a private document that is confidential to the members and does not need to be disclosed at Companies House.
However, members often forget that as the LLP is a separate legal entity, the members also owe duties to the LLP. There are few authorities dealing with these duties but broadly, they are fiduciary duties and are similar to those owed by a director to a limited company. The duties include but are not limited to:
- A duty to act in good faith;
- A duty to act in the best interest of the LLP;
- A duty to exercise reasonable care, skill and diligence.
The members’ fiduciary duties to the LLP were reiterated in the recent case of Re A&C Restoration LLP (Manolete Partners plc v Riches) [2020] EWHC 14141 (Ch) (1 May 2020). The case concerned a misfeasance application brought by an assignee of a liquidator’s claim against a retired member of an LLP.
The terms of the Respondent’s retirement were contained within a retirement deed. Amongst other things, the retirement deed provided that the LLP would waive a debt owed by the Respondent to the LLP for excessive drawings.
Following the Respondent’s retirement, the LLP went into creditors’ voluntary liquidation. Upon investigation of the LLP’s accounts, it became apparent that the LLP was hopelessly insolvent at the time that the retirement deed was agreed and that the debt owed by the Respondent was its principal asset. The Court considered the position and held that the duties owed by designated members include the same duties that directors owe to limited companies, as set out in the Companies Act 2006, the common law and equity.
On that basis, the Court found that the creditors’ interests should have been considered at the time that the retirement deed was being drawn up i.e. they were entitled to expect that the members of the LLP to recover its debts and not release them. Including a clause waiving the respondent’s debt, was a breach of the designated members’ fiduciary duty. The Respondent was therefore estopped from relying on the waiver and his debt to the LLP was deemed reinstated.
The case serves as a helpful reminder of the members’ varying duties between those owed to the other members and those owed separately to the LLP itself. Although you may not consider that your actions amount to a breach, the law surrounding members’ duties can be complex. Whether you are concerned that you have committed a breach, would like guidance on mitigating any risk or believe that another member has breach his or her fiduciary duties, DTM Legal’s specialist, Insolvency, Litigation and Corporate departments are here to assist with any queries you may have.
Should you require any assistance or further information about anything contained with this article, please do not hesitate to contact our Commercial Team on 01244 354 800.
