Cabvision Limited v Feetum & Marsden (also known as Feetum v Levy)  1 WLR 2576,  EWCA Civ 1601; Tower Taxi Technology LLP v Marsden & others  EWHC 1084,  EWCA Civ 1503
These two linked cases demonstrate how readily the case law relating to limited companies can be applied to (and indeed developed in the context of) issues arising in relation to limited liability partnerships (LLPs). The observations made below are as relevant to legal and other professional practice LLPs as they are to trading LLPs.
Tower Taxi Technology LLP (TTT) was a 41-member LLP formed for the purposes of acquiring the technology required to install video facilities into taxis, and exploiting that technology to generate advertising revenues.
In December 2003, TTT entered into a software purchase agreement with a company called Cabvision Limited.
In April 2004 Cabvision in effect guaranteed certain indebtedness of TTT, and in return TTT granted a debenture to Cabvision, which took effect as a floating charge.
By late 2004 a dispute had arisen between Cabvision and TTT, and on 3 December 2004 Cabvision purported to appoint administrative receivers pursuant to the terms of the debenture. Those receivers wrote to each member of the TTT board setting out the board members' personal obligations (as designated members) in light of the receivership, including the requirement to provide a statement of affairs under section 47 of the Insolvency Act 1986.
Shortly afterwards, those board members issued a claim form seeking a number of declarations to the effect that no event which could lead to appointment of administrative receivers had occurred, and that none of the exceptions to the general rule prohibiting appointment of administrative receivers applied (see generally sections 72A and E of the Insolvency Act 1986, as inserted by section 250 of the Enterprise Act 2002 and applied to LLPs by regulation 5 of the Limited Liability Partnerships Regulations 2001).
Cabvision contended that the rule in Foss v Harbottle (1843) 2 Hare 461 applies to LLPs, and that the claimant members were prohibited from bringing what Cabvision characterised as a derivative claim. Company lawyers will know that, in essence, shareholders cannot sue to enforce a company's rights, save in exceptional circumstances (for example, fraud on the minority shareholders where the alleged wrongdoers control the company).
The judge found that the claimant members were not seeking to pursue TTT's right to challenge the purported receivership. Rather, given that the receivers had asserted in letters that the claimant members were obliged to act as instructed by the receivers, the claimant members were entitled to apply to the court seeking declarations that would resolve whether or not they were indeed personally obliged to act as instructed. Thus no question of any derivative claim arose.
The Court of Appeal affirmed those findings. Dicta in the case of Secretary of State for Trade and Industry v Jabble & Others  1 BCLC 598, to the effect that directors of a limited company over which administrative receivers had been appointed 'never had any [personal] standing to challenge the appointment even in proceedings properly constituted against the bank', were obiter and wrong.
While it was unnecessary for either the judge at first instance or the Court of Appeal to consider whether an LLP member can indeed bring a derivative action on behalf of an LLP, neither did the judgments cast any doubt as to that possibility. There appears to be no reason in principle why an LLP's claims should not be pursued by one or more of its members in a suitable case (and note that rule 19.9 of the Civil Procedure Rules relating to derivative claims, applies expressly to claims brought on behalf of 'other incorporated bodies' as well as to claims brought on behalf of companies). It seems more than likely that companies case law would be applied.
Whereas derivative claims by shareholders on behalf of companies are often eschewed in favour of petitions under section 459 of the Companies Act 1985 (unfair prejudice), LLP members may be deprived of the possibility of relief under section 459 by virtue of express exclusion of that jurisdiction by their members' agreement (under section 459(1A) of the Companies Act 1985), or if not so deprived may be unable to pay the costs of a contested section 459 and/or winding-up petition out of their own pockets.
The immediate advantage of a derivative claim would be that the court can order at an early stage of the proceedings (if the claimant does not have adequate resources to pursue the claim) that at least a substantial proportion of the claimant's costs should be borne immediately out of the company's/LLP's assets, and that the company/LLP should indemnify the claimant in respect of any adverse costs orders (see Smith v Croft (No1)  1 WLR 580). Once fraud has been established and/or assets recouped, any winding-up and/or section 459 remedies that are appropriate and available would be more straightforward to pursue, and less risky and costly.
Tower Taxi Technology
Following the judgment, Cabvision gave notice to TTT purporting to terminate the software purchase agreement. Its right to do so was disputed by TTT.
In March 2005, three board members of TTT were removed from the board by member vote, and two new board members were appointed, all pursuant to the terms of the members' agreement. The three former board members presented a petition to the court seeking the winding up of TTT on the just and equitable ground, contending that the 'substratum' of TTT no longer existed by virtue of the purported termination by Cabvision of the software purchase agreement (relying on Re Perfectair Holdings Limited  BCLC 423). TTT and its board members applied to strike out the petition.
The judge indicated that in a case where the substratum of an LLP had truly been lost, it would normally be appropriate for that LLP to be wound up. However, on the facts of this case the substratum had not been lost. Negotiations were in hand between TTT and Cabvision with a view to reviving the software purchase agreement. In addition, there was at least a possibility that if the negotiations foundered, TTT might sue Cabvision for specific performance of the software purchase agreement.
It was not appropriate to allow the petition to remain in existence to await future events, on a just-in-case basis, and it was struck out.
The Court of Appeal agreed, referring to Re German Date Coffee Company [1881-2] LR 20 ChD 169, in which (at 188) it was said that there must be 'an utter impossibility in carrying on the business of the company' before it can be said that the substratum has gone.
Peter Garry is head of the partnerships and professional practices group at south-east firm Cripps Harries Hall
By Peter Garry, partner, Cripps Harries Hall