IN ALIMITED-LIABILITY PARTNERSHIP THERE IS NO DEFAULT DUTY OF GOOD FAITH
The LLP - limited-liability partnership - is often a safe haven for architectural practices (see box opposite). But, inevitably, some LLPs don't work out.
A scenario that is all too common in partnerships has also emerged for LLPs. One member, A, takes a dislike to another member, B, and tries to hound B out of the LLP. Typically, A enlists other members in the campaign. B is not given a proper opportunity to defend himself and becomes marginalised; his management roles and responsibilities may be severely curtailed in a 'reorganisation', the aim being to try to persuade him to resign.
There can be other motivations than dislike at work too.
For example, there might be the prospect of a lucrative sale of LLP assets at a price well above balance-sheet value, from which A does not wish B to benefit.
What rights does B have, and how could these rights impact on the LLP and its other members?
The foundation idea of partnership (as distinct from the legal entity, the LLP) is the duty of good faith between partners. It is this duty that is said to create a 'partnership ethos'.
In a partnership, the conduct of A, and any others conspiring with him, would constitute a breach of that duty, giving rise to remedies for B. These might include damages and/or a dissolution and winding up of the affairs of the partnership (see, for example, Blisset v Daniel, 1853).
However, any temptation to try to apply partnership law to LLPs was expressly squashed by the legislation that brought LLPs into being (Section 1(5) of the Limited Liability Partnerships Act 2001). While it is possible to recreate in an LLP the same net effect that applies under any given partnership deed, the default position is by no means the same.
In an LLP there is no default duty of good faith between members: see the default rules governing LLPs in Part 6 of 'The Regulations' (the Limited-Liability Partnerships Regulations 2001). LLP members owe certain duties to the LLP as its agents, but generally members cannot sue one another for damages or other remedies in instances of breaches of good faith.
It has been suggested that in professional practice LLPs, there may be an implied duty of good faith between members, but only litigation could determine whether that is the case in a particular LLP.
Paragraph 7(3) of ' The Regulations' provides that every member of an LLP may take part in management. This provision can be excluded by agreement. But where it has not been excluded, arguably, Paragraph 7(3) does not cater for situations in which a management role is merely reduced or changed.
LLP members are also at liberty to include in their members' agreement a clause requiring good faith between members. They can also include (a default position) or exclude (by express choice) the unfair prejudice legislation under section 459 of the Companies Act 1985, which gives the court power to order one member or group of members to buy out or sell to another, at a price determined by the court.
Such means of expressly extending the range of remedies available to a member can be viewed as a good thing, enabling any member to seek justice when required. On the other hand, having achieved limited liability to the world at large by converting to LLP status, members need to be careful about letting potential personal liability to fellow members in by the back door.
Disgruntled members, whose claims may be unmeritorious, can nonetheless wreak havoc with the right litigation weapons.
Going back to member B in our scenario above; if there was no express duty of good faith written into the members' agreement, nor unfair prejudice rights, B could still fall back on 'just and equitable' winding up, which cannot be excluded by agreement. This enables the court, in a suitable case, to provide a remedy similar to dissolution and winding up in a partnership.
In this scenario, B might well be advised to offer to leave the LLP provided that he is paid a proper valuation for his share of the assets, including a proper share of the coming windfall.
If that offer is refused by the other members, he might well be entitled to an order winding up the LLP (so that its assets can be sold and distributed fairly).
There are three crucial differences between the winding up of a partnership and a LLP:
? if there is an arbitration clause, in a partnership the arbitrator can in effect handle the whole process behind closed doors. For an LLP, although the arbitrator is likely to do all of the fact finding behind closed doors, the disgruntled member will at some stage have to petition the court for winding up, as arbitrators never have the power to make the actual winding up order (Re Magi Capital Partners LLP, 2003). Of necessity, the petition has to set out all facts relied upon, and is a public document;
? in the dissolution of a partnership, in order to save money, the partners are often allowed to wind up the practice themselves.
In the case of dissolving an LLP, a liquidator (who must be a licensed insolvency practitioner) must always be appointed, and has to be paid. This eats into assets that would otherwise be available for distribution to the members; and - in the winding up of either a partnership or an LLP, assets such as work in progress and leases, that have value or utility in a going concern, often realise much less or become liabilities in a winding up. For a partnership, the result can be personal insolvency, or a very large bill, as partners have unlimited liability and cannot simply walk away. For this reason, threatening dissolution in a partnership dispute is sometimes regarded as being akin to Mutually Assured Destruction in the Cold War, since a hard-doneby partner such as B will still be responsible for all partnership liabilities to creditors (Hurst v Bryk, 2000). But in an LLP, as the liability of members is limited, a member may regard the risk of the loss of his investment in the LLP as worth taking in order to bring pressure to bear on his co-members to settle his claim.