The High Court dismissed an application (the “Application”) by former members of an LLP to strike out claims against them pursuant to section 6 of the Company Directors Disqualification Act 1986 (“CDDA”) in the case of Re Pottinger Private Limited [2021] EWHC 672 (Ch) (also known as Secretary of State for Business, Energy and Industrial Strategy (“Secretary of Strategy or “Claimant”) v Geoghegan) (the “Pottinger Case”).
The High Court confirmed that any member of an LLP is potentially liable to disqualification proceedings under section 6 of the CDDA and therefore disqualification is not limited to only those members who hold a management position or equivalent with the relevant LLP. The distinction between designated members and members of an LLP was deemed irrelevant under section 6 of the CDDA.
This case is of relevance to members of an LLP, as it serves as a reminder of the fact that any member of an LLP may face disqualification because of improper conduct occurring in the running of the LLP’s business, regardless of what duties they perform (i.e., whether they sit on the management board or not).
LLP STATUS
An LLP is a separate legal entity that combines both features of a company and some of a traditional partnership. Most notably, the partners are offered the protection of limited liability. Amongst other legislation, LLPs are chiefly governed by the Limited Liability Partnership Act 2000 (the “LLP Act”) and the Limited Liability Partnership Regulations 2001 (the Regulations) which apply various aspects of the Companies Act 2006, the CDDA and the Insolvency Act 1986 (together, the “Regulations”).
Members of an LLP are, in effect, its partners and LLPs often have a management board, comprising some of the members, known as designated members.
CDDA
Section 6 of the CDDA concerns directors of insolvent companies. Per Section 6(1)(b) of the CDDA the Court must disqualify (for a minimum of 2 years) a director of a company that has become insolvent if the Court is satisfied that their conduct “as a director of [the] company” concerned makes them “unfit to be concerned in the management of a company“. References to a person’s conduct as a director of any company include references to their conduct in relation to any matter connected with or arising out of the insolvency. Furthermore, Section 6 of the CDDA has been transposed accordingly and as required by the Regulations to apply to LLPs, to read as follows “his conduct as a member of that [LLP]” concerned makes them “unfit to be concerned in the management of a company or a [LLP]“.
In the Pottinger Case, the First and Second Defendants (together, the “Applicants” in the Application) focused on the interpretation of “management” and argued that the relevant “conduct as a director” is limited solely to conduct in the “management” of a company (or LLP).
BACKGROUND
The disqualification claim brought by the Secretary of Strategy in respect of BP LLP (i.e., the “Claimant” in the Pottinger Case) against the Applicants arose out of the collapse of the well-known PR agency, Bell Pottinger LLP in 2017 (“BP LLP”). The Applicants were both members of BP LLP. The Secretary of State (i.e., the “Claimant” in the Pottinger Case) alleged that the Applicants were unfit to be concerned in the management of a company or LLP by reason of their improper conduct in respect of one client, Oakbay Investments Pty Limited (the “Oakbay Account”) managed by BP LLP, claiming that they had conducted a campaign in South Africa for the Oakbay Account in a manner which demonstrated a lack of commercial probity and/or which contravened their duties under the BP LLP partnership agreement. As a result of the Applicants involvement with the Oakbay Account, the Applicants had been removed as members of BP LLP and, shortly afterwards, BP LLP went into administration and later into compulsory liquidation.
In respect of the Application, the details of the Applicants’ alleged misconduct were not relevant to the Application, save that it was accepted that the allegation concerned their conduct of the Oakbay Account and not their conduct in relation to the management of BP LLP’s business as a whole.
THE CASE
The Applicants therefore made the Application to strike out the disqualification proceedings brought by the Secretary of Strategy, arguing the following, that:
- BP LLP had approximately 40 members, with a selection of designated members on a management board, of which the Applicants were not a part of. As they were not members of the management board of BP LLP, they were not involved in or responsible for the management and control of the business and affairs of BP LLP;
- section 6 of the CDDA did not apply to them and as such should be struck out stating that the phrasing of section 6 in using the phrase “member of an LLP” applied to designated members only and as they were not designated members, the legislation did not apply in their circumstance; and
- the claim put forward by the Claimant related to their conduct of a specific account (i.e., the Oakbay Account) and that as this was a trading activity below management board level, it cannot be concluded that the Applicants are unfit to be a part of the management of a company or LLP, which is the test that the Court must apply.
The matters put forward in the Application for the Court to consider concerned the extent to which the CDDA applies to LLPs and whether a member of the LLP must be concerned in the LLPs management for the CDDA to apply.
THE OUTCOME
The Court rejected the Applicant’s argument that only those members of an LLP who sit on the management board fall within the remit of CDDA. Therefore, the Court dismissed the Applicants Application to strike out (and for summary judgment on) the Claimant’s claim for disqualification orders against them.
The Court revisited the precise wording of the text of section 6(1)(b) CDDA and stated that it is clear that “conduct as a director” and being “concerned in the management of a company” were two separate thresholds. The Court commented that the former defines the relevant capacity in which the director is alleged to have misconducted themselves, while the latter sets out the test of unfitness that the Court must apply in relation to such misconduct and whether it renders the director “unfit to be concerned in the management of a company“. The conduct is confined to allegations in relation to the specific company in question, whereas the test is whether the director’s conduct shows the person to be unfit to be concerned in the management of any company.
Therefore, the Court concluded that the meaning of s.6(1)(b) CDDA in relation to directors, cannot have a different meaning when applied to members of an LLP. In summary therefore, the Court held as follows:
- all members of an LLP are potentially liable to face disqualification proceedings;
- there is nothing in section 6 of the CDDA that states that a member must be on the management board or at a level equivalent to a director in a company or LLP to be disqualified;
- the conduct that can be relied on is anything that is done in the capacity of a member of the LLP;
- the test for unfitness is the same as in relation to companies (i.e., whether such conduct makes them unfit to be concerned in the management of a company or an LLP); and
- is up to the Court’s final determination if alleged misconduct is proven and whether this makes such a person not suitable to be involved in the management of a company or LLP.
Furthermore, the conduct that can be relied upon in support of disqualification is anything that is done in the member’s capacity as a member of the LLP, whether a designated member or not.
PRACTICAL TIPS
LLPs should take note of this outcome, as it is important for members to bear in mind that liability for their improper conduct cannot be avoided even if responsibility for the LLP’s affairs are delegated elsewhere, such as to the management board. The outcome of the Application and analysis provided by the Court in respect of the application of the CDDA in the Application, clearly demonstrates the correct understanding of the law in that a member of an LLP, no matter what their role, can be subject to proceedings under Section 6 of the CDDA.
LLPs responsibilities, akin to directors, have a general fiduciary duty to the LLP and to act in the best interests of the LLP and the Court does not take breach of this duty lightly. LLPs will need to be aware of their duties and the role they play within the broader LLP structure, as although LLPs may not be involved in the day to day running of the LLP, they will still be held accountable for the duties expected of them regardless of position within the LLP/group structure.
To review the Pottinger Case in more detail, please click here.
For more information, and any guidance or advice on your liability as a member of an LLP, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.
