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Important Foreign Cases On Partner’s Liability And Relations In An LLP And Their Importance For The Indian LLP Regime

Limited Liability Partnership is a hybrid corporate business model that provides the flexibilities and advantages of a partnership and most importantly at the same time, the advantage of limited liability as seen in a company. Chapter IV of the Limited Liability Partnership Act, 2008 contains the provisions relating to partners’ relations. Chapter V of the Act elaborates the extent and limitation of liability in LLP. Each partner in an LLP is the agent of the LLP but not of other partners. The basis of the Indian LLP Act, 2008 is the LLP Act, 2000 of the UK and therefore, a study of the decisions given by the UK Courts would be very helpful for a study of LLP. The roots of Indian LLP Act lies in the foreign LLP legislations and thereby they have a significantly high persuasive value in Indian disputes.

1. Flanagan V. Liontrust Investment Partners LLP

Overview

In Flanagan V. Liontrust Investment Partners LLP case, Eoghan Flanagan is the claimant and Liontrust Investment Partners LLP is the defendant. This case is a landmark with respect to the liability of the partners in an LLP and in this case, the Court was required to deal with the problem that whether repudiatory breach can apply to multi-party LLP agreements or not. The court gave the verdict against the claimant. It also dealt with the partners’ relations with respect to profit and capital when the LLP agreement is terminated. The decision, in this case, deals with problems in some uncharted territory of LLP provisions. The case deals with the provisions stated under Section 5 of LLP Act, 2000 of the UK which closely resembles Section 23 of LLP Act, 2008. It is also concerned with points 7 and 8 of Limited Liability Partnerships Regulations, 2001 of UK which resembles the points given in the First Schedule of Indian LLP Act, 2008.

Facts of the case

The claimant Eoghan Flanagan joined in 2011 the defendant LLP where he used to manage a hedge fund. The relation between the claimant and the other members of the LLP and the relations between the claimant and the LLP was governed by the LLP agreement and a Side Letter.

The LLP agreement also contained a provision that members of the LLP could be made to retire from the LLP if the Management Committee decides the same and the LLP agreement expressly separated itself from the points 7 and 8 of the LLPR, 2001 of UK.

The Side Letter contained provisions for remuneration of the claimant and fixed it at 125,000 pounds each year and a sum which depended on the performance. The Side Letter also fixed a compulsory membership period of two years and a notice period of six months and this notice cannot expire before the two-year anniversary.

The Management Committee decided in 2012 to part ways with the hedge funds and the claimant but the notice was served before six months of the two year anniversary.

Issues of the Case

  1. The first issue before the Court was to decide whether or not the retirement notice served and the decision to place the claimant on garden leave were invalid amounting to a repudiatory breach of the LLP agreement and the Side Letter.
  2. The second issue before the Court was to decide whether or not the default LLPR 2001 rules would apply if the LLP agreement was terminated due to the breach and therefore whether the claimant is entitled to an equal profit and capital share in the LLP.

Arguments raised by the parties

Issue (i)

Arguments put forth by the Claimant:–

  1. The claimant argued that he was not terminated in a legit manner and the proper procedure was not followed due to which repudiatory breach of the LLP agreement happened.
  2. The claimant argued that he was still a member of the LLP and therefore the LLP can only buy out his share and pay for the same and cannot terminate him.

Arguments put forth by the Defendant:–

  1. The LLP argued that the repudiatory breach principle was not applicable to multi–party agreements.

Issue (ii)

Arguments put forth by the Claimant:–

  1. The claimant argued that due to the repudiatory breach, the LLPR, 2001 provisions would be applicable which will entitle the claimant to an equal share of capital and profits in the LLP.

Arguments put forth by the Defendant:–

  1. The defendant argued that owing to non–applicability of repudiatory breach principle, only the damages are payable to the claimant due to non-payment of his fixed part of remuneration from the date of first retirement notice.
  2. The defendant argued that the breach of multi–party agreement will lead to chaotic decisions with the existing members still subject to the LLP agreement while the member who accepted the breach would be governed by the LLPR, 2001 provisions.

Judicial Reasoning and Decision

Valid termination notice period was a condition precedent. The notice period as agreed upon in the LLP Agreement was not followed by the LLP. The wrongful termination was a breach of the LLP Agreement. However, the doctrine of repudiatory breach is not applicable to multi–party agreements. To treat a member according to LLPR, 2001 provisions and rest of the members according to the LLP agreement would lead to clumsy and incoherent decisions.

Once an LLP Agreement has been made in a multi-party LLP, it has to be binding until terminated by an agreement or with an agreed procedure. It would not be a sound decision to permit the claimant to an equal share in profit and capital when only a fixed amount was agreed upon mutually in the LLP Agreement. The claimant would be entitled to only damages under the breach of the contract and non–payment of fixed income and not an equal share.

The Court held that there was repudiatory breach of LLP Agreement. However, the Court rejected the claims of the Claimant that LLPR, 2001 would be applicable on him and held that he would not be entitled to an equal share in LLP’s capital and profits under LLPR, 2001 and only damages would be paid for breach.

Conclusion

The decision in this case is important as it provides a basis to study and apply the default provisions with respect to the LLP and non – applicability of repudiatory breach doctrine in case of multi–party agreements which if not followed would lead to a clumsy application of default rules in a multi-party LLP. This decision is significant as it has avoided the construction of confusion regarding the applicability of default rules. This case is important while referring to the application of partner–generous rules according to the First Schedule of the LLP Act, 2008 when there already exists a mutually agreed LLP Agreement. The First Schedule interpretation is important for Section 23 of the Indian LLP Act, 2008.

2. Ederer V. Gursky

Overview

In this case, Louis Ederer is the respondent and Steven R. Gursky is the appellant. In this landmark case, a withdrawn partner sued the LLP and its other partners for breach of contract and accounting of funds owed to the withdrawn partner under a withdrawal agreement between him and the LLP. It gives out the principle that the limited liability shield is only applicable to third parties. A partner in an LLP cannot raise the limited liability shield in case of breach of partnership’s obligations to former partner. This case of USA can also be important in the context of Section 28 of the LLP Act, 2008. Related provisions for this case are Section 26 of the Partnership Law of USA and the general limited liability provision in LLP.

Facts of the case

Louis Ederer is the respondent in this case who is a partner of an LLP. The appellant is Steven Gursky and the defendants are referred to as the LLP partners except Ederer. In February 2001, the Gursky Ederer PC had changed into Gursky Ederer LLP and significantly, there was no LLP agreement.

On June 26, 2003, Ederer entered into a withdrawal agreement with the LLP and the PC. But, Ederer agreed to remain an LLP partner for a trial and in turn for this provision, the LLP agreed to pay him regular compensation and some other LLP rights. The trial ended and Ederer helped the LLP earn a huge amount from the trial.

In December 2003, Ederer lodged a complaint against the LLP for breach of withdrawal agreement and some accounting interests in LLP and also for breach of compensation agreement for the later trial and previous loans and interests.

Issue of the case

The Court had to decide on the question that whether or not a partner of an LLP can be shielded from personal liability for breach of the partnership obligations towards a former partner.

Arguments raised by the parties

Arguments put forth by the Appellant:–

  1. The appellant side raised the argument that the limited liability shield safeguards them from personal liability and the term “any debts” also covers the debts arising from within the LLP.
  2. The LLP partners argue that the legislative intention of the LLP Act is to provide a greater shield for personal liability in LLPs.
  3. They argue that the LLP has a corporate-styled limited liability rule which protects them from vicarious liability in LLP.
  4. The defendants argue that their fiduciary duties are not same as personal liability for the debts in accounting. They claim that the partners are liable personally only in a case in which the debt has arisen due to their own wrongful act or omission.

Arguments put forth by the Respondent:–

  1. The respondent argued that the partners of an LLP cannot raise the defense of limited liability when LLP or its partners owe an amount to some other partner which in this case is Ederer.
  2. The respondent put forth the claim that there was a personal liability of the part of the partners to pay his loans, interests and other accounting amounts due to him arising from the LLP.

Judicial Reasoning and Decision

Limited liability of the partners in an LLP does not free the partners from personal obligations towards a withdrawing partner in case of a breach of LLP related agreements between the outgoing partner and the other partners. They cannot simply raise the shield of limited liability in case of right to accounting which is restitutionary in nature.

Although in the new LLP, the partners did not enter into an agreement with Ederer but the original PC had some obligations towards Ederer and the LLP partners were the same as that of the previous PC which had changed into LLP. There was no agreement and therefore the Act provisions will come into play and the background and history of LLP legislation indicate that the phrase “any debts” does not cover the obligations towards a partner of an LLP.

J Read decides that a general partner of an LLP cannot be shielded from personal liability for a breach of the partnership’s or partners’ obligations to each other. J Ciparick, J Graffeo, J Pigott and J Jones concur with the decision of J Read.

Conclusion

The majority judgment is very important to formulate an exception to the limited liability principle in the LLP and also the dissenting judgment is equally important to put forth the idea that the judiciary should not devise exceptions to the LLP provision of limited liability in cases like this, and should not draw a line between liabilities towards a former partner and third parties. These both opinions may form very important to formulate an Indian stand on this kind of dispute in which the nature of the liability of a partner towards a former partner has to be determined under Section 28 of the LLP Act, 2008. In the author’s view, the dissenting opinion is more reasonable as it protects the partners from personal liability in cases which are not mentioned in the legislation.

3. Hosking V. Marathon Asset Management LLP

Overview

In this case, Jeremy Hosking is the claimant and Marathon Asset Management LLP is the defendant. This case relates to the partner’s relations inter se in an LLP and covers the important aspect of forfeiture of profit share of a partner when the partner has breached the fiduciary duties of the limited liability partnership. The case is landmark because despite the fiduciary duties being one of the most elusive concepts in law, there has not been a rule for their application in the newer concept of LLP. The question raised in this case was that whether the principle of losing the right to remuneration due to breach of fiduciary duties can be extended to LLPs or not and the answer held was in affirmative.

Facts of the case

The defendant Marathon Asset Management LLP is an investment management business which was started in 1986 by the claimant and another person. The defendant entered into LLP agreement in 2004. The claimant had converted into a non–executive member which received 50% of what an executive member receives as profits.

The claimant Jeremy Hosking has appealed under Section 69 of the Arbitration Act, 1996 against the award of the arbitrator in favor of the defendant. The arbitrator’s award was based on the finding that the claimant had breached his fiduciary duty along with the contractual obligations.

The arbitrator had established that Hosking planned to establish a new business with four other employees which harmed the interests of the defendant as it lost a substantial chance of retaining three important clients. The arbitrator on October 30, 2015 declared a compensation of 1.38 million pounds to the defendant due to the loss of this corporate opportunity and held that the claimant had to forfeit, proportionately and equitably, half of the payments he received which formed his remuneration but would retain half of his profits in the event.

Issue of the case

The sole question placed before the Court, in this case, was whether or not the share of profits of a partner in an LLP can be subject to the principle of forfeiture in case the partner concerned has breached fiduciary duties which he/she had towards the LLP.

Arguments raised by the parties

Arguments put forth by the Claimant:–

  1. The counsel for the claimant stressed the need to not simply substitute the phrases ‘profit share’ and ‘remuneration’ just because the LLP is being provided with services by the partner. The claimant side raised the point that even though the profits can remunerate the partner’s services, it is mainly given as a consequence of the interest of the partner in partnership.
  2. The claimant raised the argument that due to these reasons, the principle of forfeiture cannot extend to the partner’s share in profits in an LLP due to lack of explicit mention of this in the LLP Act.
  3. The claimant also stressed on the point that there is no explicit or implied provision in the LLP agreement regarding this point which is the source of any LLP.

Arguments put forth by the Defendant:–

  1. The defendant side argued that the laws of partnerships, in general, are not completely stated in the Acts and thus the exclusion of forfeiture principle cannot be considered as a deliberate omission from the Acts. It argued that there is no material consideration in distinguishing remuneration and profit share in this case.
  2. It put forth the argument that the profit share of the partner can be forfeited as he has breached his fiduciary duty towards the LLP. Any payment to the partner has to be considered as remuneration for this act and thereby can be forfeited too. The defendant argued that it would make no sense to distinguish between profits and remuneration in order to exclude profits from forfeiture principle.
  3. The defendant argued that it is not relevant that payment for services is made by profits or remuneration when the partner or member has breached his fiduciary duty.

Judicial Reasoning and Decision

A partner or a member in an LLP is the agent of the LLP. The principle which is attached to the practice of agency may well be applied in this capacity of being an agent of the LLP and hence the sum received for undertaking certain activities can be subject to forfeiture.

Profit and remuneration cannot be said to be the same in all cases but this does not mean that they are always different from each other. Profit should not be distinguished from remuneration when it acts as a reward for undertaking specific duties. Profits though seen as interest of a partner in an LLP, can be considered remuneration when it is given as compensation for some services and therefore can be forfeited.

The Acts do not represent a complete codification of the laws relating to partnership and LLP. Lack of mention of a principle would not mean that there is no scope for it in an LLP. The principles of equity and common law are applicable to partnership and LLP disputes.

The profit share of a partner or member of an LLP can be forfeited under the forfeiture principle. The challenge to the arbitrator’s decision by the claimant has no scope and is therefore liable to be dismissed.

Conclusion

This case is very significant as it addresses the scope of extension of the forfeiture principle to the laws of LLP. This case may have a persuasive value in disputes arising in the newborn LLP provisions of India and can be important to hold a partner liable in case he breaches the fiduciary duty which he owes to the LLP in the capacity of being an agent as envisaged in Section 26 of the LLP Act, 2008. This case also addresses the question that whether the distinction between profits and remuneration can save a partner when he has breached his fiduciary duty. This case may also be relevant to address the concerns of increased liability of a partner in case there is a wrongful act/omission on his part with respect to Section 28(2) of the LLP Act, 2008 and partners’ relations among themselves in the aspect of profits.

4. Colliers, Dow And Condon, Inc. V. Schwartz & Ors.

Overview

In this case, Colliers, Dow and Condon, Inc. is the Appellant/ plaintiff and Leonard Schwartz and K.F. Associates, LLP are the respondents. This case is landmark because the court, in this case, held that a partner in an LLP did not have personal liability on an agreement which was executed by the partner on behalf of the LLP. The contention that the LLP had entered into an agreement with the plaintiff through the partner which would hold the partner personally liable was turned down and it was held that the LLP can only transact its business through a partner.

Facts of the case

  1. The parties had entered into a property agreement in September 1997 and the dispute stems from misidentification of the owner of the property. The property was owned by K.F. Associates, LLP which was the successor of K.F. Associates which was a general partnership.
  2. Before the agreement, Schwartz had a number of dealings with the plaintiff not only as an agent of K.F. Associates but also individually. Schwartz who was managing partner in K.F. Associates became a general partner in the new LLP.
  3. The defendants had entered into the agreement with the understanding that Schwartz is entering the agreement on behalf of a general partnership K.F. Associates and Schwartz did not tell that he was entering into the agreement on behalf of an LLP, K.F. Associates, LLP.
  4. Colliers, Dow and Condon, Inc. is the Appellant/ plaintiff and Leonard Schwartz and K.F. Associates, LLP are the respondents.

Issue in the case

The court in this case was required to answer the question that whether or not a partner in an LLP can be personally held liable for an agreement executed by the partner on behalf of the LLP.

Arguments raised by the parties

Arguments put forth by the Appellant:–

  1. The plaintiff argued that the trial court improperly ignored the law of the case in the previous judgment and also ignored the judicial admission of the partner and thus failed to hold the general partner liable on personal terms.
  2. The plaintiff argued that Schwartz individually was liable as he was the managing partner of the partnership prior to when it became an LLP.
  3. The plaintiff side argued that since they thought that Schwartz has entered the agreement on behalf of the general partnership and he did not negate this explicitly, he should be held liable on personal terms. Schwartz should be held culpable and negligent as he failed to inform that the general partnership had converted into an LLP.

Arguments put forth by the Respondent:–

  1. The respondents argued that the agreement was between the plaintiff and K.F. Associates and the property was owned by K.F. Associates, LLP.
  2. The Respondent argued that being a general partner in an LLP, he cannot be held as personally liable to the plaintiff.

Judicial Reasoning and Decision

The Court in Colliers – I did not mean that Schwartz was liable in his individual capacity and therefore the trial court judgment did not go against the previous judgment in Colliers – I. K.F. Associates, LLP, could not have signed the agreement by itself and Schwartz physically entered the agreement but only on behalf of the LLP and not individually or on behalf of general partnership. The trial court did not violate the law when it held that there was no personal liability of Schwartz. The plaintiff has failed to prove that the defendant Schwartz owed it a duty which he failed to fulfil and the breach was the proximate cause of the actual injury and therefore the plaintiff has failed to hold the defendant Schwartz as negligent towards the plaintiff.

The court held that a partner in an LLP which in this case was Schwartz did not have personal liability in an agreement executed by the partner on behalf of the LLP which was K.F. Associates, LLP.

Conclusion

This judgment is very important as it puts forth the principle that when a partner enters into an agreement on behalf of the LLP, it does not make him liable personally in that agreement just because he has entered into it on the LLP’s behalf. The LLP cannot enter into an agreement by itself. Just because the opposite party is not aware of the LLP, it would not render the partner personally liable. The judgment has upheld the foundation stone of an LLP – limited liability of the partner.  The judgment may form an important consideration while dealing with questions and disputes relating to Section 28 of the Indian LLP Act, 2008 and the liability of partner as an agent of the LLP. The case may have a high persuasive value in Indian disputes regarding the newer law of LLP.

Author’s description: This article is written by Shivesh Didwania. He is a second-year law student at Maharashtra National Law University, Mumbai. Shivesh has interned under lawyers and has participated in moot courts and ADR competitions. He is proficient in research and is interested in legal writing.

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