In this alert, we summarise three of the most notable and interesting Partnership and LLP law cases heard by the UK courts in 2021, with some practical commentary on how these cases might affect LLPs and partnerships, and their members and partners.
1. Dixon Coles and Gill (a firm) v Right Reverend, Nicholas Baines, Bishop of Leeds and another [2021] EWCA Civ 1097
Summary of case
The Court of Appeal held that innocent partners in a firm of solicitors are not always liable to former clients of the firm for losses caused by the acts of a fraudulent partner.
One of three individuals carrying on a solicitor’s partnership, Partner C, had been misappropriating funds from the firm’s client account for many years. Partners A and B were entirely innocent and unaware of the misappropriation. Approximately three years after discovery of the fraudulent conduct, proceedings were issued against all three partners by a former client of the firm, on the basis that they were trustees of the funds that the client had paid into the client account of the firm and which Partner C had misappropriated. Specifically, the former client relied upon sections 10 (liability of the firm for wrongs), 11 (misapplication of money or property received for or in custody of the firm) and 12 (liability for wrongs joint and several) of the Partnership Act 1890.
Partners A and B sought to defend claims in relation to certain losses on the basis that claims had been commenced after expiry of the relevant limitation period. The key issue related to whether the innocent partners could rely on sections 21 (1) and (3) of the Limitation Act 1980 (“LA”), which provide as follows:
(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action –
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by him and converted to his use.
(3) Subject to the proceedings provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.
The partners argued that they were not “party or privy” to Partner C’s misconduct. The Court of Appeal agreed that the innocent partners were not “party or privy to” the misconduct, and that they could therefore rely on section 21 of the LA as a defence to claims against them in respect of monies appropriated by Partner C more than six years before the commencement of litigation.
Practical takeaways
The Court of Appeal’s decision will offer some reassurance to innocent partners facing claims from former clients because of a fellow partner’s misconduct, to which they are not party or privy. It should also serve as a useful reminder to those advising on claims to be brought against individual partners of a partnership that a delay in issuing proceedings may enable innocent partners to avoid liability to a certain extent by relying on relevant provisions of the LA.
2. Re Bell Pottinger LLP, Secretary of State for Business, Energy and Industrial Strategy v Geoghegan and others [2021] EWHC 672 (Ch)
Summary of case
The High Court held that members of an LLP, who were not members of the LLP’s management committee, could potentially be liable to face disqualification proceedings under the Company Directors Disqualification Act 1986 (“CDDA”).
The Secretary of State for Business, Energy and Industrial Strategy (“Secretary of State”) sought disqualification orders against three members of former PR Agency, Bell Pottinger LLP (“Bell Pottinger”), which went into liquidation in September 2019, on the ground that they were not fit to be concerned with the management of a company or an LLP. Only one of the members had been a member of Bell Pottinger’s management committee. The other two members tried to argue that the CDDA did not apply to them as they were not members of the management committee and were not involved in its management.
It was held that Parliament intended to “cast a wide net” and, therefore, that potential liability to face disqualification proceedings was not limited to members on the management board or at a level equivalent to a director in a company. The Court also confirmed that the conduct relied upon for disqualification could be anything done in their capacity as an LLP member.
Practical takeaways
Some may view this as a harsh decision, given the potential exposure to disqualification faced by members of an LLP who do not sit on the management committee of an LLP and are not otherwise concerned or authorised to deal with the management of the LLP. However, it serves as a reminder that those who take up positions as members of an LLP and who benefit from limited personal liability for loss and damage caused to third parties by the LLP, should reasonably be expected to be held to high standards of behaviour.
3. Tribe v Elborne Mitchell LLP [2021] EWHC 1863 (Ch)
Summary of case
The High Court held that, when deciding how to allocate profits to members of an LLP under the terms of an LLP Deed, management need to act rationally.
The partner concerned claimed that he was not awarded a fair profit share in his last two years at the firm after more than 25 years of service. The court agreed that the principles developed in Braganza v BP Shipping Ltd Braganza v BP Shipping Ltd [2015] UKSC 17, concerning the exercise of discretionary powers, applied to the senior partner’s decision to make recommendations as to allocations among the partners. This meant that, in making his recommendations, the senior partner had been duty-bound not to “take into account irrelevant matters or ignore relevant ones”. His recommendations could not be “outside the range of reasonable proposals that might be made in the circumstances”. Indeed, in this case, the court found that the profit allocation had been within the range of proposals that it was reasonable for the senior partner to make.
Practical takeaways
The High Court’s decision confirms that members of an LLP, particularly those exercising management powers, will be held to a particular standard when allocating profits and cannot act capriciously or irrationally in the decision-making process. However, it also shows that following a reasonable and explicable process should make it difficult to challenge any ultimate decision as to profit allocation. Those exercising discretionary powers in making recommendations and/or decisions regarding the allocation of profit (or indeed other discretionary decision making regarding LLP members such as, for example, equity partner promotions or partner suspension or exits), would be well advised to consider the basis of previous decisions and clearly document the basis of their current decision and rationale, setting out a non-exhaustive list of the range of relevant matters to be taken into account and irrelevant factors to be ignored in the exercise of their discretionary powers.
If you have any questions arising from this alert, or require specific legal advice in relation to similar issues, please contact Zulon Begum or Clare Murray (Partners), who specialise in partnership issues for partnerships, LLPs, partners and LLP members. Please click here to see the overview of our market-leading Contentious and Non-Contentious Partnership Practice.
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