This guide explains some of the rules surrounding Limited Liability Partnerships (“LLPs”) and disputes within LLPs under English Law in general terms. The intention of the guide is not, however, to advise you on your position and what you should do in the event that you find yourself in a dispute within a LLP (which will depend on the facts of your case). The subject of any partnership dispute is a complex area and no guide can ever set out all the factors relating to a particular case. This guide is not therefore a substitute for detailed advice on your case. If you would like further explanation of any points in this guide, or advice on your particular case, please contact us.
Nature of an Limited Liability Partnership (LLP) and its legal framework
An LLP is a body corporate which is formed under the Limited Liability Partnerships Act 2000 (LLPA 2000), which came into force on 6 April 2001.
In an LLP, you and your business partners are legally referred to as LLP “members” rather than partners
Unlike a general partnership, an LLP has legal personality separate from its members. This means that like a company: -
The majority of law applicable to LLPs, is modified company law: -
Setting Up a LLP – Why You Need a Members’ Agreement
Setting up any business is an exciting time. Enthusiasm to get an LLP started can result in shortcuts being taken and insufficient consideration being given to properly setting up an LLP. This can give rise to serious problems, or even litigation, later down the line.
It will almost always be advisable for members of a LLP to enter into a LLP Members’ Agreement in order to avoid the application of any inappropriate default provisions in the LLPR 2001, or to supplement the statutory provisions where they are insufficient.
What Should be Included in your LLP Members’ Agreement
When it comes to drafting your Members’ Agreement, as its provisions will override, or vary, the default provisions of the LLPR 2001, it’s important to make sure that the agreement covers the needs of your particular business and circumstances – and that is properly drafted by an experienced solicitor.
Some of the more essential clauses of that Limited Liability Partnership Members’ Agreement should cover the following issues:
Members owe the LLP duties of a fiduciary nature, however, it is not currently clear whether members of an LLP owe fiduciary duties to each other, so it is common for an LLP agreement to clarify this issue and set out a list of specific duties to be performed or observed by members of an LLP. These duties may include that each member must:
What happens when there is no LLP Members’ Agreement
The LLPR 2001 set out default provisions that will apply to the operation of an LLP in the absence of any specific agreement between members to the contrary.
The default provisions of partnership law applying to LLPs are set out in Regulations 7 and 8 of the LLPR 2001, and are as follows:
The LLPA 2000 and the LLPR 2001 do not specify the mechanics for the holding of member meetings or the passing of member resolutions.
Common Reasons for Disputes within LLPs
Disputes can arise within LLPs for a number of reasons. The most common reasons tend to be exclusion from management and issues surrounding the desired expulsion of one or more of the members, unauthorised or negligent actions of individual LLP members, and breaches by members of contractual restrictions.
Exclusion from Management and issues surrounding the desired expulsion of one or more of the members
A common occurrence is for one of the Members to conclude that the business would be better if one or more of their business partners was excluded. They may look for ways of getting those other members removed, or decide to walk away from the existing business and start another similar business in its place. This understandably causes problems for the LLP. In the event of any dispute, the first place to look for the way out of the problem is any dispute resolution clauses contained within the Members’ Agreement.
In the absence of a clause in any Members Agreement permitting members to do so, there is no right to unilaterally exclude or expel another LLP member, or other LLP members. If this occurs, it could result in court action and the risk of a significant legal costs order being made against the LLP Member(s) perpetrating the exclusion.
In the event of any disputed exclusion of expulsion of an LLP Member, specialist legal advice should be sought.
Liability of LLPs and Individual Members
Like shareholders of a company, the members of an LLP enjoy limited liability up to the amount of any financial contribution to the LLP. This is the main way in which an LLP differs from general partnerships.
A member of an LLP is an agent of the LLP, however, an LLP is not bound by anything done by a member if: -
Like shareholders of a company, a member may still be personally liable if they, rather than the LLP, are the contracting party in any particular transaction or matter, and also for their own acts of negligence.
Breach of Members’ Contractual Restrictions
As is the case with any Directors’ Services Agreements, Shareholder Agreements and contracts of employment, an LLP Members’ Agreement will usually set out certain obligations and restrictions such as non-solicitation and non-compete covenants and ongoing confidentiality provisions that will apply to an outgoing member.
Any restrictions must be no greater than reasonable required to protect the legitimate interests of the LLP; however, the courts are more likely to uphold extensive restrictions on members than those that may be imposed on employees.
Until recently a common tactic in LLP disputes was for Claimants to assert that a repudiatory breach had occurred which either entitled them to leave the LLP without serving a notice period, or to remain a member of the LLP but on terms governed by the LLP default rules rather than the LLP agreement. This could be particularly advantageous for Claimants with a low profit share, since under the default rules, the members are entitled to an equal share of LLP profits. In Flanagan v Liontrust Investment Partners LLP and others [2015] EWHC 2171 (Ch) the High Court has now, however, held that the doctrine of repudiatory breach does not apply to LLP agreements (although the court left open the possibility that the doctrine may apply to LLPs with only two members).
Protection Afforded to Members of LLPs in the Event of Dispute
Unfair Prejudice
By virtue of Regulations 48 and 49 of the LLPR 2009, the provisions relating to unfair prejudice actions that apply to companies also apply to LLPs, with some modifications, giving a member a potential claim if:
This may give a member of an LLP who is excluded from its management, when he has an entitlement to take part in it, the ability to bring a claim for unfair prejudice.
Regulation 48 of the LLPR 2009 lists the particular types of orders which may be made by the Court if it decides that there has been unfair prejudice, although the court retains general discretion to make any order it thinks fit.
The powers replicate those listed in s996(2) of the Companies Act 2006 and provide that the court can: -
It is important to remember, however, that LLP agreements commonly exclude a right to bring an unfair prejudice claim. This is permitted by Regulation 48 of the LLPR 2009.
For further guidance and assistance in connection with setting up an LLP, please contact Jonathan Croley on j.croley@ashfords.co.uk.
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