LLP Case Shows Need for Members' Agreement

Limited liability partnerships (LLPs) are becoming increasingly common. For example, all of the ‘Big Four’ accounting firms have been LLPs for several years now.

Recently, the acrimonious bust-up of an LLP led to one of the ex-members suing the others for unfair prejudice after he had been locked out of the LLP offices, had his access to the LLP’s IT system denied and so on. The claim was brought under Section 994 of the Companies Act 2006.

Section 994 allows the court to remedy prejudice towards a member of a company or LLP who suffers as a result of the mismanagement of the company or LLP. The normal result of such an action, if successful, is to require the remaining shareholder(s) to buy out the interest of the shareholder who has suffered.

The members had failed to create a written members’ agreement, which meant that there was no guidance on what they had agreed to do in the event that the LLP was dissolved. The High Court therefore ruled that default Regulation 7(1) of the Act applied and the outgoing member was entitled to a 1/3rd share in the net assets of the LLP – a proportion corresponding with his investment in it.