This edition's question answered by Ami Bhatt, senior solicitor
Q I am a designated member of an LLP which is in financial difficulties, what do I need to be aware of?
Until recently, it was commonly understood that the rights and obligations of a designated member are set out either in an LLP agreement or the LLP Act. However, in a recent case the court found that designated members of an LLP owe the same duties to the LLP as directors owe to limited companies, as set out in the Companies Act 2006, existing common law and equity. This provides some useful guidance to the LLP members and also the creditors of the LLP.
In the case of A&C Restoration LLP, a designated member retired from the LLP in October 2017 and the LLP waived its claim in relation to excess drawing of profit by such retiring member. The LLP went into creditors’ voluntary liquidation in July 2018.
Among other things it was highlighted that an LLP could potentially agree to waive the liability of a member. However, while making such decisions the members must consider the financial position of that LLP at the time, and it is one of the duties for the designated members to regard the interest of creditors in the event of an LLP’s insolvency. At the time the retirement deed and the waiver of drawings in excess of the LLP’s profit was agreed, the LLP was already insolvent. In those circumstances, as with directors of limited companies, the creditors are entitled to expect LLP designated members to recover their debts rather than releasing them.
The decision made by the members to approve the LLP’s entry into the retirement deed containing release of debt provision could not have been made in the interests of the LLP’s creditors. Accordingly, there was a breach of fiduciary duty (misfeasance) by the designated members and the retired member was estopped in any event from relying upon that clause and his liability for the debt was deemed reinstated.
As a designated member of the LLP, if the LLP is facing financial difficulties, please hold regular members meetings, keep records of discussions leading up to a decision, regularly review the financial position of your LLP and engage creditors and advisers to demonstrate you conducted your duties diligently and in the best possible manner.
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