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LLPs 10 years on
Tuesday 08 May 2012 by Fergus Payne
In fact, limited liability partnerships (LLPs) have been with us for just over 11 years since their introduction in April 2001. Although it was possible to operate a law firm as a limited company prior to 2001, an LLP has been viewed as a more obvious alternative to a traditional partnership, not least because of its tax transparency. After a slow uptake in the legal profession, LLPs have become a common structure for law firms of a certain size. This is borne out when looking at the top-200 law firms ranked by turnover; indeed Slaughter and May is the only firm in the top 50 which is not an LLP. According to Solicitors Regulation Authority figures, approximately 13% of all law firms in England and Wales are LLPs. This may not sound a high figure but one should not forget that one-third of the total number are sole practitioners.
Over time, larger firms faced with challenges over conversion to an LLP, such as bringing their international offices within the structure of an LLP, or legacy issues, typically around partner annuities, found a way to address these problems. Now, the most oft-cited reason for not converting is a reluctance to publish financial results as it is necessary for LLPs to prepare and file statutory accounts in accordance with the Companies Act. Others take the view that it is not worthwhile if personal liabilities to third parties, such as landlords and banks, cannot be removed at day one.
Looking back over the last 11 years, one might be struck by how little case law there has been on LLPs. There are only two significant cases which have a direct impact on the use of LLPs in the legal sector. The first relates to whether fixed-share partners are real partners or, in fact, employees. The latest decision in the case of Tiffin v Lester Aldridge LLP has given us greater clarity about this and many firms will draw comfort from the decisions which support the view that, in most circumstances, a fixed-share partner is unlikely to be regarded as an employee.
The second case, concerning a hedge fund business, was F&C Alternative Investment (Holdings) Limited v Barthelemy. Here, the High Court ruled that LLP members do not owe fiduciary duties to each other, a view long held by most commentators. However, the court rejected an argument that the members owed fiduciary duties to the LLP beyond any contractual obligations in the LLP agreement. This probably came as a surprise to many and is a decision that may not have been reached in the context of a typical law firm LLP structure.
In truth, given the relative youth of LLPs, it is not surprising that there has been so little case law, particularly as many of those formative years were during a benign economic climate. Turning to the future, I think we can expect to see developments in LLP case law over the next decade. The most obvious area is in relation to the personal liability of LLP members in an insolvent liquidation. It is quite possible that this may happen as part of the ongoing disputes in relation to the collapse of Halliwells. The contentious area is likely to centre on whether partners who did not participate in the management of the business can be liable for wrongful trading and/or repayment of monies withdrawn prior to the insolvency (the clawback provision under section 214A of the Insolvency Act 1986).
I also think that we have not heard the last of potential claims by fixed-share partners that they should be regarded as employees or on the extent of fiduciary duties owed by partners to the LLP. What we have yet to see is a claim for personal liability on the part of an LLP member in the context of negligent advice. With the advent of LLPs, this was identified as a real risk for individuals trading through this structure. To date, the LLP has proved a robust liability shield but that’s not to say it will not be tested at some point.
Given the timely arrival of the Supreme Court decision in Seldon v Clarkson Wright & Jakes, it would be remiss of me not to comment on the still vexed issue of the legitimacy of retirement ages for LLP members. Although the Seldon case concerned a traditional partnership, the age discrimination issues will apply equally to LLPs. This is very much an area where we expect to see further case law.
So as the song goes, 'look to the future now, it’s only just begun'...
Fergus Payne is a partner at the law firm Lewis Silkin LLP, and joint head of its Partnerships and LLPs group.
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