Limited liability partnerships and disputes within them

This guide outlines some of the key rules around Limited Liability Partnerships (“LLPs”) and how disputes within LLPs are generally handled under English law. It is intended to give a general overview only; every partnership dispute is different and so this guide is not a substitute for legal advice tailored to your particular case. If you have any questions, or would like advice on your own situation, please contact us.

Limited liability partnerships

What is an LLP?

An LLP is a legal business structure that combines elements of a traditional partnership with the benefits of limited liability typically associated with companies.

Registered under the Limited Liability Partnerships Act 2000 (LLPA 2000) an LLP is a separate legal entity from its members. This means that, unlike a general partnership, an LLP:

is liable for its own debts;
can enter into contracts with third parties in its own name;
hold property; and
can sue, and be sued in its own right

In other words, an LLP can do anything that a natural person can do so the doctrine of ultra vires does not apply.

In an LLP, you and your business partners are legally referred to as LLP “members” rather than partners. Most of the law governing LLPs is modified company law:

Limited Liability Partnership Regulations 2001, SI 2001/1090 (LLPR 2001) applies provisions of partnership law to LLPs;
Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009, SI 2009/1804 (LLPR 2009) applies many parts of the Companies Act 2006 (CA 2006) with appropriate modifications to LLPS; and
Limited Liability Partnerships (Accounts & Audit) (Application of the CA 2006) Regulations 2008, SI/2008/1911 applies parts of the CA 2006 in relation to accounts and audit of LLPs.

Setting up an 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 – but such failures can give rise to serious problems later down the line, sometimes resulting in litigation.

It will almost always be advisable for members of an LLP to enter into a members’ agreement to avoid the application of any inappropriate default provisions in the LLPR 2001 and/or to supplement the statutory provisions where they would otherwise be 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:

identifying LLP members;
setting out members’ profit shares and their contributions to the capital of the business;
explaining how losses are to be dealt between the members;
describing how money is to be taken out of the business;
setting out how members are expected to act in relation to the business, e.g. are they permitted to have any other business interests – and if so are there any limitations on such outside work;
identifying what happens when one of the members dies;
setting out the arrangements for additional members to be bought into the LLP – including details on how their share of the business is to be valued, and how payments are to be made (e.g. by prearranged instalments);
identifying the rules for leaving the LLP; and
setting out how to resolve a dispute in your LLP.

The LLPA 2000 does not indicate whether the members' relationships with each other and the LLP are of a fiduciary nature. It is therefore common for a members’ agreement to list specific duties to be performed or observed by members of an LLP. For example, for the member to:

Devote all / a specified amount of their time to the LLP;
Act in good faith towards the LLP and the other members;
Conduct themselves in a diligent and professional manner;
Serve as a designated member if required to do so;
Give a true account of and full information concerning their activities in relation to the LLP;
Account for profits made in competition with the LLP;
Indemnify the other members against breaches of the LLP agreements;
Keep matters relating to the LLP, its business and any of the other members confidential; and
Comply with policies of the LLP.

What happens when there is no LLP members’ agreement

In the absence of an LLP Members’ Agreement, the LLPR 2001 sets out default provisions (at regulations 7 and 8 will apply to the operation of an LLP. These may not be satisfactory for your LLP or its members. Importantly, the LLPA 2000 and the LLPR 2001 do not specify the mechanics for the holding of member meetings or the passing of member resolutions.

Disputes within LLPs

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

A common occurrence is for one member 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, there is no right to unilaterally exclude or expel another LLP member(s). 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 or expulsion of an LLP member, you should seek specialist legal advice.

Unauthorised or negligent actions of an individual LLP member(s)

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 but an LLP is not bound by a member’s actions if:

The member in fact has no authority to act for the LLP by doing that thing, or
The person with whom the member seeks to deal with knows he has no authority, or does not know or believe him to be a member of the LLP

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

LLP members’ agreements 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 such restrictions must be no greater than reasonably required to protect the legitimate interests of the LLP.

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:

The LLP's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or to some of the members (including at least himself); or
An actual or proposed act or omission of the LLP (including an act or omission on its behalf) is or would be so prejudicial.

This may give a member of an LLP who is excluded from its management, when they have 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:

Regulate the conduct of the LLPs affairs in the future;
Require the LLP to:
- refrain from doing or continuing an act complained of, or
- do an act which the petitioner has complained it has omitted to do;
Authorise civil proceedings to be brought in the name and on behalf of the LLP by such person or persons and on such terms as the court may direct;
Require the LLP or the members of the LLP not to make any, or any specified alterations in the LLP agreement without the leave of the court;
Provide for the purchase of the rights and interests of any members in the LLP by other members or by the LLP itself.

It is important to remember, however, that LLP member agreements commonly exclude a right to bring an unfair prejudice claim which is permitted by Regulation 48 of the LLPR 2009.