PracticeAccounting FirmsPratice special: LLPs – tread carefully

Pratice special: LLPs - tread carefully

Disgruntled LLP members who want to leave their partnerships could face litigation from their firm if they just walk out

Many professionals face concerns about the financial stability of their firm
while others feel they aren’t being fairly remunerated and want a fresh start
elsewhere. In such times, it’s inevitable there will be unrest.

While much ‘credit crunch’ news coverage has surrounded the issue of
redundancies, there is another story.

This concerns disgruntled directors, partners and employees who wish to
escape from their current situation ­ and an increasing numbers of these
professionals are members of limited liability partnerships .

Dissatisfaction

The economic downturn has hit the professional services sector, which has
increasingly used LLPs as a vehicle for operating businesses. Consequently there
has been a marked increase in the number of ‘partners’ (or members) wishing to
stick two fingers up to their LLP and walk away. The reasons cited by members
range from losing out on remuneration to concerns that the LLP may be failing.

The first thing that any member considering walking away from an LLP should
bear in mind is that there are usually two strands to participation in an LLP.
There is the membership of the LLP itself, and there is usually an LLP agreement
that each member signs up to.

A well-constructed LLP agreement will contain provisions relating to
termination of membership, financial entitlements of an outgoing member,
restrictive covenants and obligations relating to confidentiality.

If an agreement is in place and a member exits in accordance with it, then
there are unlikely to be problems.

If, however, a member decides the agreement is no longer enforceable, for
example because they feel that the LLP has breached some of its obligations, or
there is no agreement in place, they cannot simply turn their back on the LLP,
as the underlying legislation still applies.

Acting rashly

In the absence of an agreement to the contrary, members can only exit an LLP
by death, dissolution (in the case of a corporate member) or by giving
reasonable notice.

This last point causes particular problems in relation to LLPs as they are a
relatively new legal entity, introduced by the Limited Liability Partnership Act
2000.

Consequently there are many questions largely untested in the courts and
anyone acting rashly to depart from an LLP is likely to face an uncertain future
at the moment they think they have broken free.

Quite what constitutes reasonable notice is one such question. Ultimately it
will depend on the facts of the individual case taking into account such factors
as length of membership and the position occupied within the partnership.
Determining this period could prove tricky and while the safest route is to
agree it between the LLP and its exiting member, in an acrimonious situation
this will not be possible.

An untested minefield

This issue is not confined to members wishing to exit an LLP. The LLP and its
subsisting members should also bear these issues in mind when dealing with an
exiting member or a member wishing to abandon the LLP in difficult times.

Members should seek proper legal guidance or may miss out on some of the key
protections afforded to them by statute or under their LLP agreement. By not
taking appropriate steps to enforce the rights of the LLP, members could find
themselves allowing a fellow member to leave, without receiving fair
compensation or protection for their business.

‘There has definitely been an increase in LLP disputes because of the
economic situation, with members either getting pushed out or deciding to go,’
explains Jeremy Callman, a leading barrister on LLPs and partnerships at Ten Old
Square. ‘People would be well advised to get proper advice if they are leaving
an LLP. They are much more likely to get a better result if their plans are
thought through and they get advice before they act. The area is legally
complicated.’

The law surrounding LLPs and what happens to an exiting member remains an
unwalked minefield. While professionals who are members of an LLP may feel
compelled to act rashly in such difficult times, it is important that both
individuals considering exiting a LLP and LLPs faced with an outgoing member,
should review their positions carefully before letting anyone simply walk away.

Normal partnerships

In these times many members may feel grateful that they are not part of a
normal partnership, where the members would have joint and several liability,
and feel safer in the LLP where their liability is more protected. However, in a
normal ‘partnership’ at will, if a partner leaves in the absence of a
partnership agreement, the partnership would normally face dissolution. With the
LLP, when a member exits, he or she will leave behind a subsisting LLP (a
corporate entity) that has rights and can bring claims against that member.

As a result members might find themselves liable to the LLP for any profits
made (in the absence of giving proper notice) from the moment they ‘turn their
backs’ and walk away.

Simply put, if an individual exits an LLP in an improper manner, without the
consent of the LLP, and goes on to make a profit from a business similar to that
of the LLP, he may be liable to account for and pay to the LLP all profits made
by him.

By way of example, a member could leave an LLP, start afresh on his or her
own and make a tidy profit only to find, a few months down the line, that they
are accountable for those sums to the LLP they thought they had left behind.

This highlights how crucial it is for members to make a clean and proper
break from an LLP, with correct advice.

Peter Weiss is a partner at
Davenport
Lyons

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