Logo

Insights - 07/12/2021

Duties of Designated Members of an LLP

The duties incumbent on directors of companies are long established in common law and equity, and have been recently codified in the Companies Act 2006 (the Companies Act). The seven general duties are:

  1.  To act within powers.
  2.  To promote the success of the company.
  3.  To exercise independent judgment.
  4.  To exercise reasonable care, skill and diligence.
  5.  To avoid conflicts of interest.
  6.  Not to accept benefits from third parties.
  7.  To declare an interest in a proposed transaction or arrangement.

It is also established that, should the threat of insolvency loom over a company, the directors of that company owe a duty to consider or act in the interests of creditors of the company.

Whilst the above is established in respect of directors of limited companies, there is less established authority in relation to the members of an LLP.

The recent case of Re A&C Restoration LLP (Manolete Partners plc v Riches) [2020] EWHC 1404 (Ch) concerned an LLP Designated Member (Designated Member) who, on his own retirement from the LLP, entered into a retirement deed pursuant to which the debts he owed to the LLP were waived. At the time of his retirement, the LLP was “hopelessly insolvent” and subsequently went into creditors’ voluntary liquidation.

A claim was brought against the Designated Member for misfeasance. Significantly, the court held:

  1. that the duties owed by designated members to LLPs include the same duties that directors owe to limited companies; and
  2. when an LLP is insolvent, they include a duty to take into account the interests of creditors.

The claim against the Designated Member was successful on the basis that, by waiving the debt he owed to the LLP, he was acting in breach of his fiduciary duty owed to the creditors of the LLP. The Court dismissed the debt waiver and reinstated the debt owed by the Designated Member to the LLP.

Whilst this judgment relates to a designated member of an LLP (rather than all members of an LLP), it is important to remember that:

  1. an LLP must have at least 2 designated members at all times; and
  2. if no designated members are appointed, then all members are deemed to be designated members

The appointment of designated members has, to now, not been the cause of much controversy. Given this ruling and the additional burden placed on them, it may be wise for LLP members to take stock before agreeing to become a designated member, particularly if other members of the LLP are not making a similar commitment.

If you would like to discuss the issues raised in this article please contact the Corporate and Commercial team at Morrisons by getting in touch with your usual advisor or emailing Alex O’Leary, a Senior Associate in the team on [email protected]


Back to listing
Print Share