LLP Case Shows Need for Member Agreement

Posted: 20th April 2011

Limited Liability Partnerships (LLPs) are becoming increasingly common – for example, all of the ‘Big 4’ accounting firms have been LLPs for a few years.

LLPs are a strange beast – a sort of halfway house between a partnership and a company. Accordingly in some areas company law applies to them.
Recently, the acrimonious bust-up of an LLP led to one of the ex-members suing the others for unfair prejudice after he had been locked out of the LLP offices, had his access to the LLP’s IT system denied and so on. The claim was brought under s994 of the Companies Act 2006.
s994 allows the Court to remedy prejudice occurring to a member of a company or LLP who suffers as a result of the mismanagement of the company or LLP. The normal result of such an action, if successful, is to require the remaining shareholder to buy out the interest of the shareholder who has claimed to be prejudiced.
The members had failed to create a written members’ agreement, which meant that there was no guidance on what they had been agreed to do in the event that the LLP was dissolved. The High Court ruled that default Regulation 7(1) of the Act therefore applied and the outgoing member was entitled to a 1/3rd share in the net assets of the LLP – a proportion corresponding with his investment in it.
The moral of the story is – in any business organisation, partnership, company, or LLP, you should have a clear written agreement as to what will happen in the event that the business ceases or the founders decide to part company with one another. Failing to do so is in all too many cases a false economy.