It is commonly understood that whilst directors owe certain statutory duties to limited companies, the duties of a designated member of an LLP are determined by the LLP agreement. However, recent case law suggests otherwise.

In his judgment on 1 May 2020 in the case of Manolete Partners PLC v Andrew Michael Riches [2020] EWHC 1404 (CH), ICC Judge Jones found that designated members of an LLP owe the same duties to the LLP as directors owe to limited companies, as set out in Part 10 of the Companies Act 2006, existing common law and equity.

Given that there have been few case law decisions which establish duties owed by LLP designated members to LLPs, ICCJ Jones’s finding is significant and can be seen as useful guidance to LLP designated members, creditors of an insolvent LLP, and officeholders.

Factual Background:

The case concerns a designated member of A&C Restoration LLP (the LLP), who retired under a retirement deed made on 10 October 2017. Pursuant to the terms of that deed, any claim by the LLP for sums owed by the member as a result of drawings which exceeded profit (from the member’s capital or current account) was waived – effectively waiving the LLP’s claim for £126,871 against the member. This liability was recorded as owed by the member in the LLP’s accounts for the year ended 29 June 2017. The LLP entered creditors’ voluntary liquidation on 19 July 2018.

The Claimant, an insolvency litigation funder and the assignee of the claim, claimed that:

• No retirement/leaving accounts had been produced as had been envisaged by the waiver and therefore, the waiver was ineffective;
• In the alternative, the waiver was a transaction at an undervalue pursuant to s238 of the Insolvency Act 1986 (IA1986);
• As a further alternative, there had been a wrongful withdrawal of the LLP’s property within the meaning of s214A of the IA1986;
• As a further alternative, the member was in breach of his duty owed to the LLP, by causing the LLP to enter into the retirement deed to the detriment of its creditors.

Judgment

ICCJ Jones was satisfied that designated members of an LLP owed the same duties to that LLP as directors owed to limited companies, as set out in Part 10 of the Companies Act 2006, existing common law, and equity. He was also satisfied that these duties include a duty to regard the interest of creditors in the event of a company’s (or, in this case, an LLP’s) insolvency.

• The waiver provision was effective as a matter of construction: while the LLP agreed that it would waive any balance of money owed by the member as shown in the leaving accounts when they were drawn, no distinction should be drawn between the June 2017 accounts and any subsequent leaving accounts.
• An LLP could potentially agree to waive the liability of a member. Nevertheless, this is subject to the financial position of that LLP at the time. At the time the retirement deed was entered into, the LLP was hopelessly insolvent and therefore, had the waiver been enforceable, the creditors of the LLP would have suffered. As with directors of limited companies, the creditors are entitled to expect LLP designated members to recover their debts rather than releasing them. The decision made by the members to cause the LLP to be party to a retirement deed that contained a release of debt provision could not have been made in the interests of the LLP’s creditors. Accordingly, there was a breach of fiduciary duty (misfeasance) by the designated members; the member would be estopped in any event from relying upon that clause; his liability for the debt would be reinstated, as shown in the last accounts.
• The fact that there was a breach of fiduciary duty meant that a damages claim resulted against the member. This claim, insofar as the waiver could be treated as binding, would be for the amount waived.
• The member would not be able to rely upon s1157 of the Companies Act 2006 for the Court to grant relief – this was due to the fact that the decision to waive one’s own liabilities, in the context of insolvency, could not be regarded as ‘reasonable’.
• Given the above, the issues regarding a transaction at an undervalue and withdrawal of property under s214A of the IA 1986 did not have to be dealt with.

Conclusion

This case highlights the importance of LLP designated members carefully considering their duties owed to an LLP, as well as those set out by the LLP agreements, especially when an LLP is in financial difficulty. Should they fail to act in accordance with their duties, personal liability could potentially arise for misfeasance.