Partners in a partnership are fiduciaries. A fiduciary is a person who is bound to act for another’s benefit, in circumstances which give rise to a relationship of trust and confidence.
This means that partners owe each other and the business certain basic duties. The most important and fundamental of these duties is the duty of good faith.
This duty of good faith is owed to the other partners and to the partnership. This contrasts with duties of company directors or LLP members, whose duties are owed to the company/the LLP, rather than to directors/shareholders/other LLP members.
These duties – which are found in common law and in the Partnership Act of 1890 include:
1. To act in the utmost good faith to the partnership and the other partners.
2. Not to make a personal profit from the trust placed in them.
3. Not to place themselves in a position where their own interests conflict with their duty.
4. To account to the partnership for any benefit derived without consent of the other partners, from any transaction which involves the partnership or any use by the partner of the partnership property, name or business connection.
5. To account for and pay to the firm any profits made in any business which competes with the business of the partnership, without consent of the partnership.
6. To render true and accurate accounts and full information of all matters relevant to the partnership, to the other partners or their representatives.
7. Not to place themselves in a situation where their and/or another’s interest would or may conflict with duties owed to the partnership or the other partners.
This means that a partner is under an obligation to notify the partnership of any information concerning clients which is relevant to the partnership, and must not divert a business opportunity away from the business, if that opportunity is being negotiated while they are still a partner.
A partner must account for any benefit obtained or received by reason of their position, or from an opportunity or knowledge resulting from it.
The partnership must give its full informed consent to absolve a partner from their obligation to account for profits made.
Members of a Limited Liability Partnership
The partners in a Limited Liability Partnership are called members.
An LLP is a separate legal entity which provides full limited liability for its members/partners.
The Limited Liability Partnership Act provides that the mutual duties and rights of members of an LLP and those of the LLP itself, are to be governed by agreement between the members or between the LLP and its members.
In the absence of such an agreement, the relationship is governed by the default provision of the LLP regulations, which broadly speaking are similar to those contained in section 24 of The Partnership Act 1980 namely:-
1. A duty to give true accounts and full information.
2. A duty to account for profits from competing business.
3. A duty to account for benefits derived from transactions concerning the LLP and its business or property.
In most cases it is usual to have an LLP agreement which elaborates on these duties. Reference should therefore be made to any specific agreement.
What the legislation does not do is stipulate whether the relationship of the partners with each other and the LLP, is one of a fiduciary nature.
It is likely however that the members will be held to have fiduciary duties to the LLP (as they act as agents of the LLP).
Often the LLP agreement will specifically state that members do not owe fiduciary duties to each other, but instead owe fiduciary duties only to the LLP in accordance with principles of law, and the terms of the LLP agreement.
In the case of an unlimited partnership, each individual partner is the agent not only of the partnership, but also directly of each and every other partner. This therefore creates what might be seen as a “web” of agency relations (and therefore fiduciary duties) between the partners and the partnership.
In contrast, in the case of the LLP, the situation is more a “hub-and-spoke” arrangement, whereby each member is merely the agent of the corporate LLP.
The LLP agreement will also state that each member will show the utmost good faith to the LLP in all transactions relating to the business and the affairs of the LLP.
The members of the LLP may in certain circumstances find themselves liable to contribute to a claim based on their own negligence – for example presiding over working practices or guidelines which they ought to know are lacking or deficient in some way. Such a member may find themselves being sued personally along side the LLP.
If the LLP is sued, and a particular member is sued for negligence alongside the LLP, that negligent member might seek a contribution from his co-members based on an alleged breach of that duty to him of good faith.
LLP agreements would therefore often exclude a general duty of good faith between members themselves, because to incorporate an express duty of good faith as between members themselves compromises the very idea of limited liability protection for members
Liability of Partners to Third Parties - Partners in an Unlimited Partnership
In an unlimited partnership, every partner is jointly liable with all the other partners in the partnership, for all of the debts and obligations of the partnership, which were incurred during the period of membership.
Further, every partner is also jointly and severally liable for any losses or damages arising from the wrongful acts or omissions of any of the partners, carried out in the ordinary course of the partnership business or with the authority of the partners.
Where and a third party has suffered loss or damage, that third party may bring an action against any one or more of the partners separately, or an action against all of them together.
Every partner has unlimited liability and so is exposed to losing all of their personal assets if there is a substantial claim against the partnership which exceeds the insurance cover and any partnership assets.
Any partner who pays more than their agreed share, may recover the excess from the other partners.
Liability of Members of an LLP
The Limited Liability Partnership as the name suggests, offers “limited liability” to all of its members. This is the same as the concept of limited liability for shareholders of a limited company. The LLP is a separate legal entity and enters into contracts and can be sued and sue in its own name.
In this respect it is the same as a limited company.
Third parties will contract with the LLP rather than individual members of the LLP.
The LLP will be liable for any breach of its obligations, to the full extent of the assets of the LLP.
On the insolvency of an LLP, each member’s liability is limited to the amount that each individual member has contributed to the LLP by way of capital (just as the liability of a shareholder in a company is limited to the amount they have contributed by way of share capital).
Third parties generally have no recourse to the personal assets of a member of an LLP.
However on a liquidation of the LLP members may find themselves subject to the claw back rules contained in the insolvency legislation.
Under these rules, payments which have been made by the LLP to members by way of drawings – “withdrawals” – in the two years immediately proceeding the insolvency of the LLP, potentially are vulnerable to a claim that they should be repaid.
Such a claim will succeed if it can be demonstrated that a member knew at the time of the withdrawals that there were not any reasonable prospects of avoiding an insolvent liquidation and ought to have concluded that there was no reasonable prospect of avoiding an insolvent liquidation.
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