Proposed legislative changes to the Irish Investment Limited Partnership

Update on proposed legislative changes to the Irish Investment Limited Partnership by the Investment Limited Partnerships (Amendment) Bill 2019 available at:

 

https://www.williamfry.com/newsandinsights/publications-article/2019/06/26/upgrade-of-irish-investment-limited-partnership-product

 

The text Bill itself, and a summary of its legislative progress, is available at:

https://www.oireachtas.ie/en/bills/bill/2019/42/

 

New UK case on LLP member's duties

Riley v Reddish LLP, 7 June 2019, unreported

The appellant had been a member of an LLP which had acquired shares in a company.  He was sued by the seller of the shares for the purchase price of £1.3 million. The court held that the LLP was liable for the purchase price, but it went into liquidation and was unable to pay.  The LLP then sued and obtained judgment against the appellant for the purchase price. The appellant’s claim to have his judgment set aside on the grounds that he had refused service of the claim form and the particulars of claim was rejected.

On appeal, the court held that although the LLP had alleged that the appellant was a director who had breached his duties under the Companies Act 2006, LLPs did not owe fiduciary duties under that Act, and directors’ duties could not be transposed on to LLP members. Whether an LLP member owed duties depended on his role in the LLP affairs (see further F&C Alternative Investments v Barthelemy [2011] EWHC 1731 (Ch)). Here there was no evidence of any agreement about his role, and it was therefore not possible to establish that he was in breach of duty.  Since there was a reasonable prospect that he would be able to defend the claim, the court exercised its discretion under the Civil Procedure Rules (CPR) r.13.3 to allow the appeal and set aside the judgment against him.  The court noted that refusing the appeal would have meant imposing a substantial liability on the appellant as punishment for refusing to accept service of documents, which would be disproportionate.

The impact of the Italian insolvency law reform (by means of D.LGS. 12 January 2019, N. 14)

The amendments to Article 2257 of the Italian Civil Code

Article 377 of D. Lgs. 12th January 2019, n. 14 (Insolvency Law) has amended article 2257 of the Italian Civil Code regarding the administration of the partnership. The regulation previously in effect assigned the management of the partnerships to the partners. The current formulation instead specifies that the management of the partnership shall be under the exclusive responsibility of the managers, who have to carry out the operations functional to the fulfillment of partnership’s scope.
Such a provision entails significant interpretative problems. Firstly, it is unclear whether it permits the assignment of the management of a partnership to managers who are not also partners. Secondly, the provision causes a considerable confusion with regard to the relationships between partners who are managers, and partners who are not.

Article 377 is already in force.


The impact on the insolvency regulation

The new regulation retains the provision according to which the insolvency of the partnership automatically results in the insolvency of its general partners. The Italian legislator has therefore decided not to adopt the solutions proposed in other legal systems, such as in Germany or Spain, in which the problem concerning the protection of creditor is resolved by means of the partners’ civil liability and not by means of the automatic extension of the insolvency of the partnership to the partners.
Nevertheless, the provisions have been significantly amended.

Firstly, the new regulation (Article 256, paragraph 4) provides for the increase of the number of persons entitled to ask for a declaration of the bankruptcy against the hidden partners (or the hidden partnership): under the new Insolvency law, the public prosecutor and the creditors of the partners can now apply for such a declaration, in addition to the official receiver, the creditors of the partnership and another bankrupt partner.

Secondly, the reform (Article 256, paragraph 5) has confirmed the case law regarding the so-called super-società di fatto. The courts can declare the insolvency of a private company and its shareholders considered as a whole to be a ‘hidden partnership’ between them and the company. However, the lawmaker has not taken into account the criticisms raised by scholars (such as Guerrera, ‘Considerazioni sistematiche sulla c.d. supersocietà di fatto’, in Rivista di diritto societario, 2017, 975 and following), according to whom the proper instrument would have been the civil and criminal liability of the directors and shareholders (and not the insolvency regulation).

These provisions will be applicable from August 2020.


The impact on the over-indebtedness procedures

Article 65 of the new Insolvency Law expressly states where a partnership cannot be declared bankrupt because it does not meet the subjective and objective requirements provided by law, it is subject to another kind of insolvency procedure, the so called over-indebtedness procedure, which also applies to its general partners. These include debt relief and the possibility of a fresh start (i.e. a new start after debt discharging) for the general partners and the partnership itself. The reform has further taken into account the case of a partner of a partnership who also has the status of consumer; for such cases, the reform has provided for the possibility for a partner who is a consumer to apply for a personal debt-restructuring plan in all cases in which the situation of over-indebtedness derives from his personal debts (and not from partnership’s ones), even if the partnership is already subject to another kind of insolvency procedure.

These provisions will be applicable from August 2020.

Useful summary of Belgian partnership law

In the context of reforms to Belgian company law, the law firm Sirius Legal has provided a brief summary of Belgian partnership law, available at https://siriuslegaladvocaten.be/en/new-company-law-is-it-useful-to-convert-your-partnership-vof-or-gcv-to-a-private-limited-company/.

New UK case involving partnership with assets in the UK and India and judgments in both jurisdictions

Tarloch Singh Badyal v Malkat Singh Badyal and Santokh Singh Badyal [2019] EWHC 467 (Ch)

This judgment was given in the course of ongoing proceedings between three brothers who were partners.  In earlier proceedings, the English court had ordered the partnership to be wound up, and accounts and inquiries to be conducted, and declared two UK properties, four Indian companies and an Indian property development to be either partnership assets or held by the claimant on trust for all three partners in equal shares, and that the claimant must account to the defendants for his dealings with these assets as a fiduciary. The court had also declared that a further property was a partnership asset or held by the second defendant on trust for all of them. Subsequently, an Indian court ruled that the three partners should not seek enforcement of the English judgment, insofar as it related to Indian assets, without leave of the Indian court.

In this judgment, the English High Court ruled that although it should avoid making an order requiring any of the defendants to act in breach of the Indian Order, that Order did not prohibit the enforcement of orders for disclosure or the taking of accounts and inquiries, or of in personam orders against the claimant so long as those orders did not require him to dispose of, or alter rights in, Indian property or company shares. However, the Indian Order did not relate to one of the two companies in respect of which the defendants sought an order for the transfer of shares and, in the absence of anything in that company’s articles permitting it to refuse to register the share transfer already ordered by the English court, this transfer should be made. In relation to the other company, the court gave the defendants liberty to apply for a further order if the Indian court, before which proceedings were still ongoing, revoked or varied the Indian Order.

The court noted that since sales were taking place of the Indian property development, there was a clear risk of dissipation of assets in which the defendants owned equal shares with the claimant. The claimant had failed to give prior notification of sales to the defendants, as previously ordered by the English court, and therefore the court ordered the scheme which the claimant himself had previously proposed, whereby a court order would be required to authorise a sale if the partners could not agree on a valuation. Although this might result in delays in the sales, it was required in order to reasonably protect the defendants, and as it only operated as an order in personam against the claimant, it did not breach the Indian Order.

Since the claimant had failed to provide adequate information and disclosure, the court made the more specific and targeted order sought by the defendants as to what information and disclosure was required.

The court declined to order the sale of the property registered in the name of the second defendant, pending further information about the values of all the UK and Indian assets, and decisions as to which properties should be sold and which distributed in specie, and how the proceeds of sale were to be distributed.

New Australian case on whether partners can claim privilege against self incrimination or privilege from exposure to civil penalties

Sadie Ville Pty v Deloitte Touche Tohmatsu (A Firm) (No 3) [2018] FCA 1107, 357 ALR 695, 128 ACSR 625 (available free online at http://www.austlii.edu.au)

The defendant firm was sued in respect of losses alleged to have been sustained from share purchases made in reliance on representations made by it as the company’s auditor. As a matter of procedure, the Federal Court Rules 2011, r 9.41(2) permit proceedings to be brought in the partnership name against two or more persons claimed to be liable as partners, but the proceedings are in fact brought against all of the partners. (The position under the UK’s Civil Procedure Rules 1998, r 5.A3, is similar).

The court held that natural persons - including partners - could claim privilege against self incrimination and privilege from exposure to civil penalties, but legal persons such as companies (and thus corporate partners) could not. However, there must be a real and appreciable risk of prosecution or penalty proceedings, and only a person exposed to that risk could invoke the privileges; as a general rule, they could not do so merely because another person would thereby tend to be incriminated. Therefore, only those partners in the firm who were alleged to be involved in the wrongdoing could claim privilege.

The uninvolved partners appealed unsuccessfully against this ruling in Sadie Ville Pty v Deloitte Touche Tohmatsu (A Firm) (No 5) [2018] FCA 2066.

It is understood that the defendant firm has applied for leave to appeal and, if successful, the hearing has been set down for 6 May 2019 (see further Shanta Martin, ‘The Hastie Class Action: the Privileges of Partnership?’ CommBar Matters Blog, available at http://www.commbarmatters.com.au/2019/03/08/the-hastie-class-action-the-privileges-of-partnership/).

On the position in relation to the privilege against self-incrimination in the UK, see further Elspeth Berry, ‘The Zone of Interaction between Partnerships, LLPs and Human Rights in United Kingdom Law’ (2011) EHRLR 11(3): 503, 511-513.

New US law on partnership audit

New partnership audit rules came into force in the US in 2018. Katten Muchin Rosenman LLP has published a number of brief updates outlining the new rules and the possibilities of for smaller partnerships to opt out of them, available at:
New Partnership Audit Regime Set to Take Effect in 2018 Proactive Planning Recommended
Are You Ready for the New Partnership Audit Regime
Electing Out of the New Partnership Rules

Payments to outgoing partners: Court of Appeal case

Robert Alan Liddle and others v Stuart David Liddle and others [2019] EWCA Civ 346
This case involved a dispute over the purchase of the shares of the respondents, who were the outgoing partners of a family partnership, by the appellants, who were the continuing partners. The partnership agreement provided that the purchase price was to be the net value of the partner’s share as shown in the accounts, that it was to paid in instalments according to a specified timetable, and that the balance would become payable if any payment was in arrears for more than 21 days.

The Court of Appeal reversed the rather curious ruling of the High Court that the appellants were obliged to make payments under this clause even before the purchase prices had been ascertained, and held that no sum was payable until the prices were ascertained. However, it rejected the appellants’ argument that the purchase prices were not ascertained when the accounts were produced, but only when the appellants accepted them, not least because the contrary ruling would allow the paying partners to effectively delay payment by refusing to agree obviously correct accounts. As a result, the court also rejected the appellants’ argument that they were not in default of their payments; they had not made the correct payments within 21 days of the prices being ascertained, and the balance had therefore become due.

Book Review: The Law of Limited Liability Partnerships

The Law of Limited Liability Partnerships, John Whittaker and John Machell QC (4th edn, Bloomsbury Professional 2016), 688pp., hardback, ISBN: 9781784510763
526504852. Also available as a PDF ebook ISBN 9781784510787 and an EPUB ebook ISBN 9781784510770.

Although this edition is not a particularly recent publication, this review is intended to draw reader’s attention to a key text in the important area of LLP law in the UK which might otherwise be missed by overseas readers or those new to this area of practice or study. It is one of two leading texts on UK LLPs, the other being Palmer’s Limited Liability Partnership Law (reviewed elsewhere on this website).

This book is multi-authored and the wealth of practical experience and expertise of its authors is reflected in a book which continues to be a comprehensive and authoritative source of reference on all aspects of LLP law. John Machell QC, the General Editor of this edition, is a senior barrister focussing on commercial law including partnerships and LLPs, and John Whittaker, the Consultant Editor, is a retired barrister. Suzanne Foster, Clare Murray and Bettina Bender, who are all experienced solicitors specialising in partnership and employment law, contributed the chapter on discrimination and whistleblower protection. Colin Ives, a senior partner in a leading firm of accountants, contributed the chapter on taxation. John Goodhall, a partner in a leading City firm who specialises in asset management and financial regulation, contributed the chapter on Financial Services Regulation.

This 4th edition has increased in length but the basic structure remains the same as the 3rd edition, with a detailed consideration of the law relating to all aspects of a partnership’s life from formation to winding up. In addition to the separately authored chapters referred to above, it includes chapters on incorporation, post incorporation formalities, the practical and legal issues arising on conversion from a partnership, and the nature of the LLP as a corporate entity. There are several chapters on aspects of membership, including shadow and de facto members and - albeit briefly as the book predates the introduction of the People with Significant Control (PSC) Register for LLPs – PSCs, covering employment and worker status, designated members, members’ duties and rights (including derivative claims but not unfair prejudice, which is covered separately), decisionmaking, and the cessation of membership. There are two separate chapters on LLP agreements, helpfully covering both general issues such as execution, rescission, repudiation and remedies for breach, and the suggested contents of an agreement. There are several chapters on financial issues including charges and debentures, funding and profits and losses, and two chapters on accounts and audit. There are also two separate chapters on the LLP and the outside world, and the member and the outside world, which both deal with aspects of agency and liability. Insolvency and winding up are covered in detail in nine chapters, with further chapters on arrangements and reconstructions, disqualification, and striking off together with the separate topic of investigations.  There is also a brief but interesting chapter on LLPs in other jurisdictions, and a separate chapter combining a section on dealing with overseas LLPs with a brief section on jurisdiction in relation to UK LLPs with foreign connections (although an equally brief section on the applicable law is not found here but in one of the chapters on LLP agreements). The Appendices include the full text of the Limited Liability Partnerships Act 2000 and the Limited Liability Partnerships Regulations 2001, though not – unsurprisingly given their length – the Limited Liability Partnerships Regulations 2009.


The text is highly readable. As the above summary indicates, the reader needs to be aware that some closely related material is contained in separate chapters. However, there are plenty of cross references, and the use of numbered paragraphs and chapter subheadings, as well as the detailed contents list and index, assists in ensuring that all relevant material can be located by the reader. There are substantial footnotes directing the reader to relevant primary sources, and often providing considerable further information. It would be helpful for the academic audience if there were a few more references to academic commentary but, in fairness, this is a text aimed at legal practitioners and LLP law is an area where there are relatively few academic publications.

This 4th edition has been updated to include new chapters on employment and worker status, and on discrimination and whistleblower protection, reflecting the significant decisions in this area since the 3rd edition in 2009, particularly Tiffin v Lester Aldridge LLP, Bates van Winkelhof v Clyde & Co LLP (discussed in the review of Lindley & Banks on Partnership posted earlier on this website) and Reinhard v Ondra LLP. It also contains commentary on leading judgments in other areas including Flanagan v Liontrust Investment Partners LLP (discussed in the review of Palmer’s Limited Liability Partnership Law on this website), the lengthy judgment in F&C Alternative Investments (Holdings) Limited v Barthelemy and others on members' duties, and Inversiones Frieira SL v Colyzeo Investors II LP (discussed in the review of Lindley & Banks) and Hilton v D IV LLP on members' rights to information.  

This edition therefore remains an essential reference text for practitioners in this area of law, and also for academics and postgraduate students. Given the close relationship of LLPs to general and limited partnerships in many respects, and to limited companies in many other respects, the commentary in this book will also be of interest to practitioners and researchers in those areas.

Report on the Joint Conference of the Partnership, LLP and LLC Law Forum and CIBL on the Regulation of Partnerships and Closely Held Corporations

The second annual conference of the Forum, which was supported by CIBL (the Centre for Business and Insolvency Law) and Nottingham Law School, attracted over thirty registered delegates including academics from the UK and overseas, solicitors, barristers, representatives of HMRC and publishers, and students. It is an integral part of the Forum's mission.

David Milman, Michael Twomey and Elspeth Berry

 

The opening address was given by the Hon. Mr Justice Twomey, judge of the Irish High Court and formerly a specialist partnership lawyer and lecturer. He discussed a number of areas of difference between Irish and UK LLPs, in particular the restriction of Irish LLPs to law firms, and the absence of disclosure requirements cf UK LLPs which have to disclose accounts and other information. He concluded by highlighting a number of interesting and entertaining cases, including those involving the Beatles, Apple, and the Smiths.

The keynote speaker was Professor David Milman (Lancaster University), who examined the importation of partnership principles of good faith, based on equity, into company law through the judicial construct of the 'quasi partnership'. He noted the usefulness of this approach to litigants seeking to bring an unfair prejudice petition under s994 of the Companies Act 2006, but also the reluctance of the courts to import such principles, particularly where (as is increasingly common) there are shareholder agreements or other company documents to which those principles would be contrary.

Elspeth Berry

 

In the insolvency session, Elspeth Berry (Reader in Law, Nottingham Trent University) and Professor Rebecca Parry (Nottingham Trent University) discussed the difficulties of adapting corporate insolvency legislation to partnerships and LLP, given the very significant differences between companies and partnerships and, to a lesser extent, between companies and LLPs. Elspeth suggested that the result was that the insolvent partnership legislation governing winding up and joint bankruptcy was unfit for purpose and should be repealed, given that the Partnership Act enables informal winding up and partners have personal liability for partnership debts in any event. In contrast, insolvent LLP legislation should be retained (albeit with considerable revisions) in order to protect creditors. In a separate paper, Professor Parry discussed the corporate insolvency reforms recently proposed by the government, and whether they would shift the balance of power in an insolvency, including through an increased role for directors and a reduced role for insolvency practitioners.

Jeremy Callman

 

In the practitioner session, Jeremy Callman (Barrister, Ten Old Square, Lincolns Inn, London) discussed issues arising on partners and LLP member exits, including the differences between expulsion and compulsory retirement, and their legal requirements and tactical advantages and disadvantages. He also considered the impact of the Braganza judgment, which potentially introduces a Wednesbury-style unreasonableness test into judicial examination of partnership and LLP decision making, both in terms of the procedure followed to reach a decision, and the nature of that decision. Stephen Chan (Partner, Harper Macleod LLP, Edinburgh) then presented an examination of the key differences between Scottish and English partnerships, noting that the separate legal personality of Scottish partnerships may not be continuing legal personality but that the concept of "contracts with the house" may overcome the lack of perpetual succession. He also outlined the very different insolvency procedures applicable to Scottish partnerships, and discussed the transmission presumption whereby if a new firm takes over the business of an old firm and certain conditions are met, it will take over the liabilities of the old firm.

Stephen Chan

 

In the penultimate session, Gary Wilson (Reader in Law, Nottingham Trent University) examined the predecessor to the Partnership Act 1890, Bovill's Act 1865, and the confusion surrounding its enactment. He noted that there was confusion both as to whether the Act conferred limited liability on partners (something which in fact only arose as a result of the Limited Partnerships Act 1907); and as to whether a change in the law was intended, given that although Bovill's Act provided that a lender who received in return a share of profits did not automatically thereby become a partner (as the Partnership Act now provides), the House of Lords in 1860 had already decided much the same in Cox v Hickman.

In the final session, delegates were treated to a change of focus with a paper by Richard Smith (freelance journalist with expertise in investigating limited partnerships for media outlets including the BBC and the Scottish Herald). He explained the abuse of partnerships, and LLPs, in bank fraud and various 'laundromat' money laundering scandals across Europe. He noted that recent legislation requiring Scottish limited partnerships to publish details of Persons with Significant Control (PSC) over them had led to an increase in the abuse of English and Northern Irish partnerships. Finally, he outlined the proposals put forward by the government in December 2018 to tackle these problems, noting that they were likely to be ineffective because they did not address the problems of minimal disclosure of information about firms or partners, or the under-resourcing of Companies House and HMRC.

 

The round table discussion which concluded the event considered:

  1. It was essential to have a regular Conference.The website alone was not an adequate substitute for academics and practitioners being able to meet and discuss relevant issues.
  2. The Conference should take place annually or at least 18-monthly, but two-yearly would be better than nothing.
  3. The Conference should focus on partnerships, LLPs and (US-style) LLCs and any similar types of business organisation, as that is its unique selling point - whereas there are many other general business-or company-themed conferences.
  4. The Conference should continue to include practitioner speakers.
  5. The ideal would be 6 papers, split equally between academics and practitioners.
  6. Other possible speakers or delegates who should be contacted included partnership tax advisers, partnership accountants and partnership mediators.
  7. The Association of Partnership Practitioners(APP) should be approached to see if it would be interested in participating in a joint conference, in order to increase practitioner participation.
  8. Other possible sponsors who could be approached included publishers, specialist law firms or accountants, or local law firms.
  9. September was identified as another possible time of year to hold the conference(eg September 2020) if Easter or Christmas was not possible(and might be more attractive than a winter conference given daylight hours, weather and the timing of the CPD year for Scottish solicitors). NB Conference feedback forms indicated that for some, Christmas was a good time for the conference due to being less busy at work, particularly cf Easter.

Links to presentation slides

Resources

Biographies

Links

Second Annual Conference of the Partnership, LLP and LLC Law Forum 10 January 2019

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