Limited Liability Partnerships (LLP's) - Insolvency - Overview of LLP's and the related insolvency rules

Before we get to the nitty gritty of explaining the insolvency options open to Limited Liability Partnerships (LLP's) you need to understand more about the legal nature of an LLP.

The Limited Liability Partnerships Act 2000 (“LLPA”), which came into force on 6 April 2001 introduced a new vehicle for transacting business, which, although given the “partnership” label is in fact a body corporate.  In other words it has great similarities to limited companies - And in consequence has somewhat similar insolvency laws to those relating to limited companies).

Section 1 of the LLPA provides that the Limited Liability Partnership (“LLP”) is a new form of legal entity, a body corporate, with a legal personality separate from that of its members, and with no restrictions on the kind of business which it can transact. The scheme of the LLPA is that it will be the LLP and not its members which will be liable to third parties.

Formalities

By section 2 of the LLPA upwards of two people subscribe their name to an incorporation document (there is no set format) which is then delivered to the Registrar of Companies with a declaration of compliance stating the name of the LLP, where its registered office is to be, the name of the incorporators and who the members are to be. There is no reason why the incorporation document cannot be a bog standard partnership agreement modified for the purpose. Most LLP’s will want a detailed agreement or by-laws to rebut certain terms implied by law, as discussed below.

Incorporation

The LLP is incorporated in largely the same way as a company by the issue of a certificate of incorporation which states the name of the LLP, and which is conclusive evidence of incorporation.

Members

By section 4 of the LLPA, members of the LLP are those who subscribe their names to the incorporation document, and a member joins the LLP by agreement with the existing members. No particular form is prescribed. Cessation is provided for, and in the absence of express agreement, a member may exit an LLP by giving reasonable notice to the other partners. Members are not deemed to be employed by the LLP unless they would be regarded in a normal partnership as salaried partners.

Rule of Internal Management

Section 5 of the LLPA provides that rights and duties of members of an LLP among themselves are governed by agreement, or by regulations made under the LLPA. Pre-incorporation agreements can impose liabilities on the LLP.

By Section 6 of the LLPA, every member of the LLP is the agent of the LLP, but the LLP is not bound in relation to acts of a member if the member has no authority and the person with whom he was dealing knew of that fact. On ceasing to be a member, liabilities cease, provided that notice is given to the Registrar of Companies. In relation to outsiders a former member is able to bind the LLP unless the outsider knows of his exit. An LLP has joint and several liability as a result of a wrongful act or omission in the course of the business of the LLP, as in the case of a normal partnership.

Ex Members

By section 7 of the LLPA, where a person has ceased to be:

• A member of the LLP;
• Has died;
• Has become bankrupt;
• Has had his estate sequestrated or has been wound up (in the case of company members);
• Has granted a trust deed for the benefit of his creditors;
• Assigned the whole or part of his share in the LLP.

The personal representative including a trustee in bankruptcy or his assignee generally may not interfere in the management or administration of any business or affairs of the LLP. This does not affect any right to receive sums due from the LLP.

Designated Member

Section 8 of the LLPA introduces the concept of designated members who are those designated on incorporation (or later) and their general role is to perform the administrative and filing duties of the LLP, but their duties are expanded to include some of the obligations under the Companies Act and the Insolvency Act 1986, (of which more later).

Changes in Membership

Section 9 of the LLPA requires that if a person becomes or ceases to be a member (or designated member) notice must be given to the Registrar within 14 days. Changes in member’s particulars must be notified within 28 days.

Taxation

Section 10 of the LLPA provides that the LLP is treated as a partnership for CGT and Income Tax purposes, despite being a body corporate. The members are also treated as partners in a partnership for the purposes of inheritance tax. Section 12 provides relief from stamp duty on transfers of property to a newly incorporated LLP to facilitate the transfer from an unincorporated partnership to the LLP. Members are treated in effect as self-employed persons.

Section 14 - The Insolvency Regulations relating to LLP's - Insolvency & Limited Liability Partnerships

Section 14 of the LLPA permits regulations to be made to import, as appropriate, all the provisions of the Insolvency Act 1986 relating to CVA’s, administrations, receivership and liquidations to the LLP and also the provisions relating to transactional avoidance. Power is also taken to extend the provisions relating to the insolvency of UK incorporated LLPs to overseas incorporated LLPs.

The Regulation of Limited Liability Partnerships

The Limited Liability Partnerships Regulations 2001 (“LLPR”) import the provision of the companies and insolvency legislation into the governance of LLPs.

Regulation 3 of the LLPR subjects LLP’s are thus required to submit annual returns, appoint auditors, prepare and file accounts and comply with accounting standards. Interestingly, the provisions of section 459 of the Companies Act regarding relief from unfair prejudice to members are extended to LLPs.

By Regulation 4 of the LLPR, the provisions of the Company Directors Disqualification Act are applied to LLPs so that references to “company” are deemed to include references to an LLP.

By Regulation 5 of the LLPs, the provisions of the Insolvency Act 1986 are extended to LLPs so that the full range of insolvency provisions in relation to companies is applied, with the exception of the provisions for winding up overseas companies. This means that LLPs may enter into CVA’s, administrations, administrative receiverships and voluntary and compulsory liquidations. Note that there is no provision as yet to extend the new small company moratorium under the 2000 Insolvency Act to LLPs.

References to directors are treated as references to members of the LLP, and references to shadow directors include references to shadow members. Schedule 1 to the LLPR sets out the text of the modifications to the Company Directors Disqualification Act 1986 and the Insolvency Act 1986 and also to the Companies Act 1985.

There are some interesting issues arising from these modifications to Section 214 of the Insolvency Act. Members of an LLP can be required to repay all forms of drawings taken from the time when they knew or ought to have concluded there was no reasonable prospect of the LLP avoiding an insolvent liquidation.

Section 216 on the re-use of names applies. You will need to be a licensed insolvency practitioner to deal with a formal appointment to an LLP. Regulations 7 and 8 of the LLPR provide that unless an internal partnership agreement applies among the members of an LLP, then profits are shared equally, there are majority voting and duties to account. No majority however can expel a member unless the LLP by-laws or agreement expressly provide for it.

Conclusions

The concept of the LLP was introduced to assist large professional partnerships to run their affairs in a more corporate way. An LLP also enables partnerships to limit their liability to claimants by protecting personal assets. The recourse of claimants will be to the assets of the LLP and not beyond. For this privilege certain wider duties, which have hitherto only applied, to companies are applied to LLPs. The concept of the LLP therefore is of interest to all professional partners.

For more information and free advice on the insolvency options open to Limited Liability Partnerships (LLP's) please contact Chris Parkman