Resist expulsion of partner

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Resist expulsion of partner

Our client, an architect, was being forced out of an LLP architects’ practice by the other two members.

Our approach to resolve the LLP dispute

We were instructed by the LLP member, and:

  • Confirmed that even in the absence of an LLP agreement, our client had certain rights that he was entitled to exercise.
  • Presented a petition at court for the LLP’s winding up on just and equitable grounds.
  • Brokered a settlement for our client, whereby our client withdrew his court petition in return for the sale of his share to the remaining LLP members.

Build-up to expulsion of partner

Three members incorporated and set up an LLP architectural practice in 2011. The three members believed incorporating an LLP would formally structure their relationship. Before 2011, they simply worked and marketed the business under a mutual name. Unfortunately, the three members did not draw up a formal written LLP agreement.

Events leading to an LLP exit

In late 2015, the members’ relationship deteriorated. In early January 2016, the other two members endeavoured to remove our client from the LLP. The pair:

  • Removed his right of entry and use of the IT system;
  • Locked him out of the office;
  • Deleted his profile from the LLP’s website;
  • Informed clients he no longer worked for the LLP;
  • Took over his clients.

The rights of an LLP member

Following these actions, our client asserted the fact that he remained a member of the LLP. He attempted to resolve the situation to avoid legal costs: if the two members purchased his shares for fair value, he would willingly retire from the LLP. The two members rejected our client’s offer.

There was no onus upon our client to make such an offer. Usually, the remaining LLP members avoid litigation costs by offering to purchase the departing member’s shares.

If no written LLP agreement

We were instructed to resolve the dispute. There was no written LLP agreement. However, there were oral “agreements” concerning some terms. Naturally, the members fundamentally disagreed as to what those terms stated.

With no written or clear oral agreement, the provisions in the Limited Liability Partnership Regulations 2001 apply. The default provisions state:

  • All members are entitled to equally share the LLP’s capital and profits;
  • Every member may take part in the LLP’s management;
  • No majority of the members can remove any member, unless a power to do so has been considered by express agreement between the members.

The questions in this case were therefore:

  1. Was there a power to remove our client; and if so,
  2. Was he validly removed from the LLP; and if not,
  3. Was the removal of our client from the LLP, conduct which was unfairly prejudicial entitling our client to bring a claim before the court.

Our arguments to resist the partners’ expulsion

Our case was that:

  • The removal of our client was invalid;
  • There was no power to remove or expel our client;
  • There was no formal LLP agreement;
  • The members had not reached any clear oral agreement as to how they would remove a member.

As a result, our case was that the default rules applied. Therefore, no vote by the majority of members can oust any other member, unless there is clear agreement between all members.

The other side’s arguments

The other side tried to argue that an express power to remove a member from the LLP had been agreed and exercised. However, their case constantly shifted and at best was weak.

For instance, one argument was that when all the LLP members joined, they understood they could be removed by a majority of members. However, they couldn’t prove or provide evidence to support their argument. In fact, the view held by our client was that the members agreed to build the LLP for a trade sale once sufficient goodwill had been built.

Our unfair prejudice petition

Tactics are key, and we intentionally raised the stakes. We presented an unfair prejudice petition, which also sought relief for the just and equitable winding up of the LLP.

An unfair prejudice petition allows a partnership member to apply to the court, by petition, for an order that the LLP be wound up and have its assets distributed. In this case, on the grounds that the LLP’s affairs are being, or have been, conducted in a unfairly prejudicial manner to:

  • The interests of the members generally, or
  • Some member’s interests.

Our case was strong. Our client’s unlawful removal and exclusion from the business was a clear instance of unfairly prejudicial conduct. Moreover, the relationship between the members had irretrievably broken down.

No doubt our client was entitled to wind up the LLP on a just and equitable basis. This would potentially devastate the two members. This was likely to bring them to the negotiating table.

Settlement

We quickly settled. The remaining members purchased our client’s share at fair value and an LLP retirement deed was executed.

Key Points

Note, if an LLP does not:

  • Have a well-drafted LLP Agreement that includes rights to remove, then it is difficult to remove partners. You are powerless to remove under-performing partners.
  • Address provisions for payment on leaving, then it’s likely the LLP must pay out on an equal share basis. The equal share rule applies irrespective of the exiting partner’s expended effort.

You avoid these problems with a partnership agreement. Note, LLP members can agree to exclude the operation of section 994 of the Companies Act 2006, unfair prejudice petitions. This avoids the uncertainty of litigation.

Buying the departing member’s interest

Wise members protect themselves from litigation costs by offering to buy-out the departing members share, prior to commencement of proceedings. We were surprised the remaining members refused our client’s offer to be bought out at fair value. Our litigation tactics forced the remaining members to re-consider.

LLP’s are common for those businesses providing professional services. The value in the LLP is in the clients of the LLP, and the knowledge of each individual member. John Deane leads the LLP team at Gannons. John acts for both exiting members, and those remaining. Sitting on both sides of the table, we know the issues that are often at play.