High Court: Doctrine of repudiatory breach does not apply to LLPs with more than two members

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12 August 2015


LLP agreement gave fund manager “no entitlement to capital profits”

The common law doctrine of repudiatory breach does not apply to limited liability partnerships (LLPs) with more than two members, the High Court has held.

Mr Justice Henderson said the case involved a fund manager, Eoghan Flanagan, whose capital contribution to an investment firm was only £5,000, but now claimed “to be entitled to an equity share worth several million pounds”.

Henderson J said it would “fly in the face of” an express exclusion in the LLP agreement of Liontrust Investment Partners, if acceptance of a repudiatory breach of contract brought the “default rules” into operation.

Under the default rules, set out in the LLP Regulations 2001, Mr Flanagan argued that, as a departing member, he was entitled to a pro rata share of the LLP’s capital and profits.

However, Henderson J said it would “offensive to common sense, and contrary to the reasonable commercial expectations of the parties” if Mr Flanagan was entitled to share in the LLP’s profits on the basis of “notional equality” with the other members when the agreement gave him only a fixed allocation of income profits and “no entitlement to capital profits”.

The High Court heard in Flanagan v Liontrust Investment Partners LLP [2015] EWHC 2171 (Ch) that Mr Flanagan was an “experienced fund manager” and chief investment officer and head of emerging markets at Occam Asset Management.

When Liontrust bought Occam in October 2011, Mr Flanagan joined the LLP under an agreement which specified that members contributed only £5,000 each, but shared income (or revenue) profits each year.

Henderson J said it comprised a “fixed amount and a variable amount” and corresponded, in broad terms, to the salary and performance-related bonus they would have been entitled to under a contract of employment.

Following Mr Flanagan’s arrival at Liontrust, the judge said the value of the hedge fund he managed with James Mellersh declined, “reaching a new low almost every month”.

Henderson J said Liontrust responded by closing the fund and giving notices of compulsory retirement to the two men.

The judge agreed with Mr Flanagan that this was a repudiatory breach, but ruled that the doctrine of repudiatory breach did not apply to “multi-party” LLP agreements made under section 5 of the Limited Liability Partnerships Act.

“Whether the doctrine would also be excluded in the simple case where an LLP has only two members is not a question which arises in the present case, and I therefore leave it open.

“For present purposes, the important point is that Mr Flanagan’s attempt to claim the benefit of the default rules fails at this stage. In particular, I can see no proper basis in law upon which he might be entitled to claim any pro rata share in the profits of the LLP.”

Guy Pendell, partner in CMS Cameron McKenna’s dispute resolution group, said this was the first time the High Court had held that repudiatory breach did not apply to LLP agreements involving more than two members.

As a result, Mr Pendell said “breach of an LLP agreement does not entitle the innocent party to accept the breach as repudiating the agreement, however serious that breach may be”.

He went on: “The innocent party is nevertheless entitled to claim damages for losses suffered as a result of the breach.”

Mr Pendell added that the ruling eliminated “a significant risk that was believed by some to exist in the LLP regime”.

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