Going home empty-handed – The pitfalls of departing from LLP’s without an LLP Agreement

It is a surprising legal lacuna that current legislation provides little guidance for a Limited Liability Partnership (“LLP”) member or partner wishing to leave their LLP when no LLP agreement is in place. While a range of options still exist for this situation, many of them depend on the co-operation of the remaining LLP member(s),

Home » commercial law » Going home empty-handed – The pitfalls of departing from LLP’s without an LLP Agreement

It is a surprising legal lacuna that current legislation provides little guidance for a Limited Liability Partnership (“LLP”) member or partner wishing to leave their LLP when no LLP agreement is in place. While a range of options still exist for this situation, many of them depend on the co-operation of the remaining LLP member(s), which in life is not always feasible.

The position under the Limited Liability Partnership Act 2000 (“LLPA 2000”)

The LLPA 2000 provides little guidance for LLP members’ who wish to depart their LLP without an LLP agreement, beyond section 4(3) instructing that a member wishing to leave has to give the other members reasonable notice of this.

This may seem simple enough, however difficulties often arise at the next stage when the departing member wishes to know what share of the LLP profits and capital they are entitled to extract from the LLP. Likewise, the remaining members and the LLP itself (LLP’s are considered a separate legal entity from their members under the LLPA 2000) will want to know the share of liabilities an outgoing member is responsible for. This clash of competing objectives is often where disagreements begin if no LLP agreement is in place for the members to reference. There are no provisions outlining how to proceed in cases of deadlock between the members.

Whilst the Partnership Act 1890 (“PA”) is useful to LLP partners without an agreement in showing them the manner assets are divided after dissolution in a regular partnership, the PA 1890 does not apply to LLP’s. This means that it cannot be relied upon as a statutory indication for the division of LLP assets after retirement or dissolution.

Below are a range of options an LLP member or partner could pursue if they find themselves in this position. Each option is a potential solution to this issue, but as will become clear, some are more suitable than others for each circumstance;

Options for a departing LLP member/partner without an LLP agreement

1)    LLP Agreement & Retirement Deed

The member wishing to leave should ensure an LLP agreement is drafted at the earliest available opportunity, including retirement provisions. Similarly the LLP members need to agree and draft a form of retirement deed which sets out the assets and liabilities a departing member will share. In addition, this should cover any indemnities the LLP and the remaining members will provide an outgoing member/partner.

If the remaining members/partners wish to continue the business and are aware of a potential purchaser for the departing member’s share, a member’s interest purchase agreement can also be drafted. This process will require legal advice as some detailed negotiations will take place for an agreement, especially when the business has been operating for some time. Likewise, a specialist LLP valuation accountant may be required to evaluate the assets and liabilities with how to apportion them correctly.

2)    Resignation by Giving Notice

A member can resign from the LLP by giving notice in accordance with the LLPA 2000 without taking any assets. This is often an unsatisfactory path for the departing member unless the business is at its end. There may also be some unsavoury personal by-products of pursuing this option in small two-member LLP’s. An LLP is only allowed to drop to one designated member for up to six months before it is wound up by the Court or official receiver and that remaining member can be made personally liable for any LLP debts . A departing member wishing to maintain a relationship with the remaining member should consider this before pursuing this option.

3)    Member’s Voluntary Liquidation

The members can decide to begin a Members Voluntary Liquidation process. In order to do this members must meet various requirements contained in the Insolvency Act 1986 (“IA 1986”) such as preparing a statement of solvency for the LLP that it can pay its debts for the next twelve months and notifying floating charge holders so that they may object. There are various additional administrative requirements to formally liquidate the LLP, including appointing a liquidator who will value and divide the remaining assets after meeting all the liabilities. To divide the remaining assets, a liquidator may only have the course of dealing as a reference point for how to proceed. This option is only viable if the members can collectively agree to bring the LLP to an end, bearing in mind the cost involved in completing this process.

4)    Strike LLP off the Companies Register

Another option for members in agreement to end their LLP is to apply to strike the LLP off the Companies House register. One drawback to this procedure is that all remaining assets in the LLP will pass to the Crown under the bona vacantia rule. LLP members would need to hire a competent LLP valuation accountant to ensure the assets are apportioned fairly between the LLP members. The remaining assets must then be extracted from the LLP before any strike-off application is made. This option will again require cooperation of the LLP members and a shared desire to bring the business to an end.

5)    Court Petition to Wind Up

The members of the LLP can present a petition to the court to wind up the LLP as an entity under the Insolvency Act 1986. A sole remaining member may also present this petition. The disadvantage with this procedure is that the resulting compulsory liquidation process will see a court-appointed liquidator take control of all the assets of the LLP and LLP member may not interfere with. The court-appointed liquidator will use these to meet the LLP’s liabilities to any creditors in a prescribed order, which may result in few assets remaining for the LLP members. This option will also bring the LLP as an entity to an end.

6)    Unfair Prejudice or Just and Equitable Winding Up Claims

This is a final resort for a member wishing to depart an LLP when the situation between members has become unresolvable. The member intending to depart should consider if an understanding has ever developed between the members that an outgoing member would receive a certain share of the LLP, even without an agreement. This could form the basis for any claim they attempt they may bring. However, petitions when a member feels prejudiced under s.994 Companies Act 2006 or to wind up the LLP under the Insolvency Act 1986 are often cost-heavy, unpredictable and lengthy. As the case of Eaton v Caulfield [2011] demonstrates, the England & Wales courts are yet to develop clear and consistent guidance on the outcome of these cases for LLP members, making for an uncertain outcome.

Knowing the above, one must carefully consider their position before leaving an LLP when no LLP agreement is in place. It is advisable to get advice on drafting an LLP agreement as soon as possible to set out the LLP’s operating parameters and retirement provisions, since the risks of not doing so leave to chance the departing member or partner going home empty-handed.

This article does not constitute legal advice [and should not be relied on as such]. If you would like further information or advice on preparing LLP Agreements or if you wish to discuss the options available to you, please contact us on 020 8951 6666 or complete the enquiry form on the site.

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