Corporate Focus - June 2010
Changing to LLP status – time for a clear change.
When a partnership converts over to a Limited Liability
Partnership, it is vital that it does exactly that, in every
sense.
The process of converting to and registering an LLP is
straightforward. After having filed the necessary paperwork
at Companies House, there is little that one would not expect to be
included in the checklist of things to be actioned (i.e. display
the LLP name outside the place of business and on stationary (along
with the LLP registration number), inform HMRC, file annual
returns, etc). However, conforming with the registration
formalities does not automatically afford members of the LLP the
protection of limited liability.
Since the advent of the Limited Liability Act 2000, there are
many issues that have not been tested in the Courts. One such
point, which has yielded no case law to date, is what would happen
in the event that a third party instructs or deals with the LLP on
the understanding that it is still a traditional
Partnership?
Many commentators argue that the Courts would make a finding
based on the make up of the organisation rather than what it is
called. This is consistent with existing Partnership caselaw
where there is evidence of parties holding out as Partners.
If that is proven to be the case, then there must be evidence of
reliance, which is borne out when the Claimant
proves that the holding out had a material influence on his/her
decision to proceed with the business dealing (Sangster
v Biddulph [2005]). In the case of LLPs there
is a real risk that this test would be satisfied, in that a
Claimant could quite conceivably persuade a Court that he/she only
proceeded on the basis that the Partnership’s liability would not
be limited.
So where are the areas of risk for LLPs? Many LLPs go
through the conversion formalities as mentioned above, but little
else changes. This includes the Members’ continuing use of
‘Partner’ on contracts, correspondence and marketing
material. Of course, the appropriate title should be
‘Member’. There is a risk that by using the title of Partner,
the reliance test could be satisfied.
There are many pitfalls to be avoided in contractual
documentation on conversion to an LLP. For example, the
inclusion of an indemnity clause or a clause to act in good faith
towards the other members (even if the term ‘Member’ is used) can
lead to a contractual and/or tortious claims arising between
Members as individuals which clearly bypasses the protection of
limited liability.
Another area of risk for Members of an LLP is if there has been
assumption of personal responsibility on the part of the
Member. Again, whilst there is no case law authority to show
how a court will find in such an instance, in Williams
& Anor v Natural Life Health Foods (1998), it was
established that, albeit in exceptional circumstances, an agent
acting on behalf of a company could be held to be personally liable
where it could be proven that the agent assumed some personal
responsibility for his actions. Again, the protection of
limited liability in that instance would be avoided.
So what can be done to safeguard against Member’s personal
liability biting? In the main, an LLP needs to ensure that
its documentation is seen to clearly evidence that its Members are
those of an LLP rather than a Partnership.
A further layer of protection can be created by a disclaimer,
albeit subject to the provisions of the Unfair Contract Terms Act
1977. Any such disclaimer would state that the client or
third party is contracting with the LLP rather than an individual
Member. This lowers the risk of establishing an assumption of
personal responsibility.
Signing off letters in the name of the LLP rather than the
Member’s individual name also reduces risk, and where signing off
in the personal name of the Member, include the wording ‘For and on
behalf of
[
] LLP’.
Finally, ensure that the LLP’s professional indemnity insurance
is current and adequate to cover the risks that the practice faces
in its course of business.