Questions & Answers

My clients are minority members of a limited liability partnership,
in which a majority of the members has just voted for the LLP to pay the
majority members (but not my clients) a ‘bonus’, and ‘for operational reasons’
to transfer some of the LLP’s valuable ongoing contracts and projects to the
majority members’ own company, in which the LLP has only a very small interest.
What should my clients do?

Name and address supplied

Under the LLP regulations, the default rule, in the absence of any contrary
agreement, is that income and capital profits must be shared equally.

There are several things that you need to think about. The first
consideration is whether there is a members’ agreement providing for any other
basis of profit-sharing.

If not, all profits must be shared equally and the majority cannot vote
themselves a bonus.

Some members’ agreements allow a stated majority of members to alter the
terms of the agreement, or to appoint a remuneration committee to decide on how
profits should be shared out. Such provisions have to be exercised strictly
according to their terms. For example, a remuneration committee may be required
to take certain matters into account.

Unless expressly agreed, there is no statutory duty of good faith between
members. That said, some commentators believe that in professional LLPs there
may be an implied duty not to act in such a way as to undermine mutual trust and
confidence (see Whittaker & Machell on The Law of Limited Liability
Partnerships, 2004, para 11.24).

Acting for personal gain without regard to the interests of the LLP, or
members as a whole, might well be a breach of any such implied duty and would
almost certainly be a breach of any express duty of good faith.

Without a good commercial reason, for the clear benefit of the LLP, and
within its powers, no majority of members can ratify the transfer of any asset
of the LLP to another entity, unless the whole benefit of the transferred asset
will still be retained by the LLP (for example, following transfer into a
company wholly-owned by the LLP).

If this issue fails to be resolved by negotiation, your clients have a number
of potential courses of action, including: an unfair prejudice petition under
section 459 of the Companies Act 1985 (if not excluded by any members’
agreement); a petition to wind up the LLP; an action brought by them on behalf
of the LLP for the return of its property; and/or an injunction application.

Peter Garry is head of the partnerships and professional practices group
at solicitors practice Cripps Harries Hall LLP

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