Aldermore Bank plc and another v Austin Law and others [2014] EWHC 2175 (Ch)

The third defendant had been a sole entitled to rely on all apparent partners practitioner but successfully of the old firm as still being partners of applied for SRA recognition of a it until he had notice of the change. partnership law firm, the first defendant in this case. The second claimant, Kuits, The court also held that the third then paid money to the law firm on defendant had been a partner in the behalf of the first claimant, the bank, firm. The documentary evidence for the purpose of enabling completion was limited, but she had received of a remortgage by a remortgagor for SRA correspondence which referred whom the law firm acted. As a result to her as the nominated compliance of fraud the money was diverted to officer for the firm and had not individuals who had no right to receive attempted to correct the implication it. Kuits reported this to the SRA which that she was to be a partner. Other intervened in the law firm’s practice. SRA correspondence indicated her extensive involvement in the future The claimants sought repayment from of the firm which suggested that the law firm and from the partners in it she was to be a partner. Further, she on the basis of undertakings given by had sent texts after the partnership it to complete the transaction within was recognised which referred to her three days of the transfer of the money becoming a partner and receiving a or return the money. The second promotion which, given that she was Legal Update Legal defendant disputed liability on the already a salaried partner in the third ground that she had subsequently left defendant’s sole practice, must refer to the firm. The third defendant disputed her becoming a partner in the full sense liability on the ground that she had not of that word.

gle Updae been a partner but only an employee. Other evidence also indicated that she As to the second defendant, the court was a partner. First, Kuits’ executive noted that undertakings given by partner had been told that the firm was were strictly enforced, and controlled by two partners including that a solicitor would not normally be the third defendant. Second, she was released from the undertaking other an authorised signatory on the client than with the consent of the beneficiary account. Third, she did not object to of it (Re Coolgardie Goldfields Limited the second defendant handing a letter [1900] 1 Ch 475). The undertakings of resignation to her or to the second here had not been released and the fact defendant describing her in that letter that the second defendant had resigned as being the supervising partner. from the firm or it had dissolved before Fourth, there was some evidence that the payment of the advance was she worked longer hours than the fixed irrelevant. Even if that were incorrect, part time hours that she had claimed, no notice of her resignation had been and although she had received a salary given to the claimants and they were rather than a profit share, the fact thus entitled to rely on s36 of the that the SRA intervention occurred Elspeth Berry, Reader in Partnership Act 1890, which provided only a month after the partnership Law, Nottingham Law School, that a person who dealt with a firm had been recognised meant that Nottingham Trent University after a change in its constitution was there had been no time for a profit

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sharing arrangement to take effect. third defendants from the date when Comment Although she had been described as a regulatory approval of the partnership This judgment provides useful examples salaried partner to the bank when the was received,. of the features of partnership as account was opened, this had taken opposed to employment status, features place before regulatory approval of The court concluded that the second which are frequently subject to scrutiny the partnership had been given and and third defendants were each liable by the courts in relation to salaried was therefore of limited significance. on the undertakings to return the partners and which have assumed a The court considered that, on the money. higher profile in the light of recent cases balance of probabilities, there was a concerning the related issue of the partnership between the second and employment status of LLP members.

Lie v Mohile [2014] EWHC 3709 (Ch)

Lie and Mohile were general medical in order to give effect to this licence replace Lie. Third, the medical practice practitioners who had practiced under was a partnership asset and Lie and a partnership agreement. Both the Mohile applied to discharge the order. Mohile remained jointly and severally agreement and their contract with the The court held that although it was liable to provide the services contracted primary care trust required the practice clear from the terms of the order that for. Although requiring partners who to be carried on from specified premises. it would expire on the making of the had fallen out so badly to work together The freehold title to the premises order at the trial of the dissolution under one roof could be damaging was owned by Mohile, who granted a proceedings, the licence itself did not for the practice and for the winding tenancy to himself and Lie in order to expire. The partnership business was not up of the business, they had already carry on the practice. terminated by the order for dissolution managed to carry on the business for but continued for purpose of winding up three years since the breakdown of their After relations between them and possibly to preserve goodwill, and relationship without any detriment to deteriorated, Mohile purported to give each partner had a right to participate the patients. notice of dissolution and terminated in the business which was being wound the tenancy, although he subsequently up unless and until the court appointed The court also concluded that there was accepted that the notice of dissolution a receiver on the application of any no basis to discharge the part of the was invalid. Lie was granted an partner. Thus the implied licence order requiring Mohile not to disable injunction restraining Mohile from continued while the partnership Lie’s NHS smartcard, or that requiring excluding him from the premises business continued to be carried on Mohile to restore Lie’s professional pending determination of his application at those premises. In addition, an subscriptions since Mohile’s continued for the grant of a new tenancy. This appeal court might grant an injunction to be paid. Although the requirement application was unsuccessful and the enforcing that entitlement pending the to pay Lie’s drawings could be dealt proprietary basis of the injunction hearing of the appeal. with instead as part of the account, thereby fell away but the court, citing Mohile had made drawings and incurred Harrison-Broadley v Smith [1964] 1 Although neither of these arguments expenditure to pay locums and the WLR 456 (a case notable also for the required the court to grant an injunction payments to Lie would in any event description by Harman LJ of accountants in favour of Lie, and the exercise of come into the final account, and the as ‘the witchdoctors of the modern its discretion depended on all the court therefore concluded that that part world…willing to turn their hands to circumstances of the case, the court of the order should also be continued. any kind of magic’), held that it was well held that on balance the order should established that in order to give effect be continued. First Mohile had acted Comment to the partnership the partner who precipitately in informing the staff The emphasis on the implied licence owned the premises from which the immediately after the dissolution given to partners to enter the premises business was carried on must be taken judgment that Lie was not to be allowed for the purpose of the business is of to have granted a licence to the other into the premises and that the police particular note here, as is the fact that partner to enter them for the purpose should be called if he attempted to do it is not determined by the dissolution of the business. In the present case the so. Second, he continued to practice of the partnership but only on the injunction has therefore been continued there and had had to employ locums to conclusion of its winding up.

15 Issue 42 – December 2014 Legal Update Continued...

The Connaught Income Fund, Series 1 (in liquidation) v Capital Financial Managers Limited and Blue Gate Capital Limited [2014] EWHC 3619 (Comm)

The claimant was an unregulated Second, the claimant did not lack the power to do all acts and execute investment scheme set up as a limited personality and capacity to sue, since in the name and on behalf of the partnership and operated at various it was an insolvent partnership acting partnership or any partner all deeds and times by each of the defendants. The through its liquidator in the name of the other documents. The latter was a self claimant alleged that the defendants firm or the names of the partners. The standing and not an ancillary power, unlawfully promoted it to investors proceedings were therefore not a nullity. and accepting a gratuitous asset and who became partners in it, in breach taking legal steps to protect it were of the Financial Services and Markets Third, the fact that the claimant was an actions which the liquidators could Act 2000 (FSMA), and were responsible assignee of the claims did not, without properly deem to be necessary. for misleading promotional literature. more, make it a fiduciary or someone It sued as assignee of those investors acting in a representative capacity and The court concluded that the claimant who had suffered losses. The defendant so the restrictions under the FSMA on should succeed, and could bring claims claimed that the assignments were rights of action by such persons did on the basis of the assignments. invalid and the proceedings were a not apply. Nor was the general right to nullity. assign restricted by the FSMA. Comment Insolvent partnerships, whether general The court held, first, that the authority Finally, the liquidators had not exceeded or limited, can be wound up informally of the partners under s38 of the their statutory powers under IA 1986, under the Partnership Act (as in Lie v Partnership Act 1890 to wind up a Sch 4. They had the power to bring or Mohile above) or under IA 1986, which is dissolved partnership was not relevant defend any legal proceedings with the applied to partnerships by the Insolvent because the action was not brought sanction of the liquidation committee Partnerships Order 1994. It is worth by the former partners in the claimant (which had been given here), the power remembering that the Order makes but the liquidators on behalf of the to do all such other things as may be significant modifications to IA 1986 claimant. necessary for the winding up of its albeit not in relation to the powers of affairs and distributing its assets, and the liquidator.

The Queen on the application of Kerman & Co LLP v Legal Ombudsman [2014] EWHC 3726 (Admin)

Levy, a sole practitioner solicitor, purposes or the purposes of being a sole practitioner’s firm – as distinct provided services to a will trust as respondent to the complaint. However from the individual human being - to trustee. He subsequently entered into the ombudsman scheme rules referred the solicitor’s regulatory regime. The a merger agreement with the claimant to in the reference to ‘ceases to exist’ also did firm. A complaint arising out of his provided that where an authorised not refer to an individual but to the provision of those trustee services person ceased to exist and another cessation of the firm or legal entity was directed by the defendant legal person succeeded to the whole or subject to the regulatory regime. ombudsman to the claimant firm, on substantially the whole of its business, Further, the possible outcomes of a the basis that it was the successor complaints already outstanding against complaint under the ombudsman firm to Levy’s sole practice and was the former became complaints against scheme - an apology, limitation of fees, thus responsible for dealing with the the latter. Both the Act and the rules payment of compensation, rectification complaint. gave a broad description of the term of any error at the respondent’s expense ‘person’ and did not restrict it to an or any other action at the respondents The court accepted that the fact that individual human being. Indeed expense – all, with the exception of the the claimant was the successor firm for the authorisation regime under apology, assumed that the respondent insurance purposes did not necessarily the Solicitors Regulatory Authority remained an authorised person and mean it took Levy’s place for regulatory Practising Regulations subjected the would make little sense in relation to a

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retired sole practitioner. There was no respondent, since it received the benefit Comment doubt that the claimant acquired all or and goodwill of the business and The differentiation of a sole practice most of Levy’s business and that the therefore it was not unfair it they had to from the person who was the sole sole practice ceased to exist, which was accept the burden. practitioner might at first sight seem the end of that particular authorised surprising, but the result – that the person. The court concluded that the defendant successor practice also succeeds to the ombudsman had jurisdiction to proceed complaint against the former firm- is The existence of Levy as an individual to investigate the complaint in which not, being entirely consistent with the after that date did not affect the finding the claimant was the appropriate ombudsman scheme rules. that the claimant was the proper respondent.

Fennell v LLP [2014] EWHC 2744 (Ch)

Fennell and eight others fixed share delay the payment of any sum payable Comment members in Halliwells LLP resigned to the retiring member under the This judgment may prove to be a pyrrhic before it went into administration and retirement deed or the LLP deed. victory for the fixed share members then into compulsory liquidation. The if the liquidators’ claim by under s238 liquidators sought to recover drawings The court held that the language and of the Insolvency Act 1986, which made by them on account of profits meaning of the retirement deed were the parties agreed to deal with in a which were never made. clear. Clause 3.2 did not state, as it separate application, is successful. The could have done, that the drawings liquidators argued that if the effect of Clause 7.2 of the LLP deed provided that would be paid on the same basis as they the retirement deed was that the LLP drawings which subsequently proved had previously been paid, which would had agreed to make payments to the to have exceeded a member’s share have allowed for the recovery provisions fixed share members and to HMRC of profits for the relevant period must in clause 7.2 of the LLP deed to be on their behalf regardless of whether be refunded to the LLP. However, the applied. This provided that drawings the LLP made profits – which is what fixed share members had entered into which subsequently proved to have the court concluded in this judgment retirement deeds with the LLP. Clause exceeded a member’s share of profits for - then it had entered into a transaction 3.2 provided that the LLP guaranteed the relevant period must be refunded to at an undervalue contrary to s238 of to pay the retiring member monthly the LLP. the Insolvency Act 1986, since the drawings until his cessation date at the fixed share partners had provided same rate and on the same date that The undertaking and agreement in consideration which was worth they were paid prior to the service of his clauses 3.2 and 10.3 not to reduce significantly less than that provided notice of retirement, and to credit his or reclaim the drawings were not by the LLP - indeed no consideration tax reserve account amounts equal to expressed, as they could have been, at all - at a time at which it was heavily its reasonable estimate of his tax liability to be subject to clause 7.2 of the LLP insolvent. If the s238 claim succeeds, up to his cessation date. Clause 3.2 Deed. Nor were they expressed, as the court may make such order as it sees further provided that the LLP undertook they could have been, to be subject to fit for restoring the position to what not to reduce, reclaim, claw back or set any temporal limitation. The LLP had it would have been if the LLP had not off against any drawings which were to waived and released any claim to pursue entered into that transaction – and may be paid in full without deduction, and the retiring fixed share members for thus order repayment of the drawings clause 10.3 provided that the LLP would any overpaid drawings or tax. Leave to and the tax (see further s241). not seek to claim, reduce, extinguish or appeal was refused.

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Dinesh Kotak v Jagdish Kotak [2014] EWHC 3121 (Ch), judgment of 2 October 2014

The parties were brothers who had wrongfully taking money out of the was given, the offer price was increased been in partnership together. The partnership, and that he had forged to £3.7 million. The court considered relationship between them had broken J’s signatures on the loan and charge that this was unlikely to be bettered and down and the partnership subsisted documentation. The court noted that noted that although the bank would still only for the purposes of winding up. in any event D would have been able suffer a considerable loss on the sale, it The court had previously ordered, inter to bind J as his partner under s5 of the must have considered it to be a good alia, that the two properties owned partnership Act 1890 unless the bank price or it would not have agreed to by the partnership be sold at open was aware that the signatures were release its security over the property. market value by private treaty and that forged, and that as the bank had not both partners had permission to bid or been made a party to the proceedings The court therefore directed a further submit an offer to buy the properties. and there had been no allegations that hearing to be held at which it was it was not entitled to enforce its loans minded to sanction D’s offer unless However, one of the partners, D, sought and securities against the properties, cogent evidence suggested a major a pre-emptive sale order in favour of the case should proceed on the basis change in the true market value of the a company owned by him and his son that it was able to enforcement them. property over and above the offer, and in relation to one of the properties. at which it would give directions for The offer was for £3.4 million and the The court stated that it had initially the conduct of the allegations currently property had previously been valued considered that the assets of the made by J against D and would at £3.71 million if marketed for up to a partnership should be sold for the consider whether the bank should year, or £2.7 million if only marketed for purposes of winding up and that since be joined in to the proceedings. The 6 months. CPR 40.16 gave it the power to order a court also noted that the present Part sale of land and PD 40D paras 2 and 3 8 claim form needed to be changed The partners owed their bank £11 gave it wide powers as to the conduct to a true partnership action to allow million, secured by charges on both of the sale, including authorising a for the taking of accounts and other properties, and the partnership had party to bid, it could therefore sanction partnership matters to be dealt with. an annual shortfall of £162,000. The a particular sale to occur immediately It concluded by directing that PD partnership therefore appeared to even if that sale was to a party. 40E paras 2.3-2.9 should not apply, be unable to pay its debts as they fell Nonetheless, as this was a ‘draconian’ so that the judgment would not be due. D argued that the partnership sanction (at para 29 of the judgment) it confidential in the period between its debts would be met from his personal should be held over until independent circulation to the parties and its formal assets and that his reputation as a solicitors and estate agents had been handing down, on the ground that it businessman would suffer, whereas appointed and an attempt made to was important that the bank and the J had no assets. J argued that D assess the present market. However, solicitors and estate agents should know had acquired the purchase money after the hearing and before judgment about it and be able to act upon it.

Walsh and others v Needleman Treon (A Firm) and others [2014] EWHC 2554 (Ch), judgment of 25 July 2014

The claimants appealed against a The court held, first, that Prior was not a “employment”. It also referred to a summary judgment finding that one of partner but an employee. The original requirement to agree holiday times with the defendants, Prior, was not a partner offer letter from the partnership to a partner, which was to be expected of in the defendant firm of solicitors, and Prior was clearly one of employment, an offer of employment as distinct from had not been held out as such under notwithstanding that part of the any other relationship, and the terms s14 of the Partnership Act 1890. The remuneration package was a bonus and conditions were unequivocally appeal was dismissed, the court finding based on a percentage of profit costs. indicativee of an employment that the judge had been entitled to Although labels were not determinative, relationship. The proceedings for reach the conclusions that he did. the letter referred consistently to unfair dismissal which Prior had

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brought against the defendant firm particular firm, is liable as a partner Comment had proceeded on the fundamental to anyone who has on the faith of The case is noteworthy not only for premise that Prior was an employee, and such representation given credit to the issues of partnership law, but also the court pointed out “as is common the firm. Prior had sought and been because of the parallel apparently ground, status as an employee is granted partner status from the outset drawn with partnership law by s4(4) of inconsistent with true partnership” (at of his employment, was described as the LLP Act. The position of salaried LLP para 20). The fact that the fee for Prior’s such on the firm’s notepaper and was members has been under considerable practising certificate was charged at the introduced to other employees as a scrutiny recently, both by the tax partner rate reflected the fact that the partner,. The claimants were clearly authorities and by the courts in Clyde v SRA charged this rate for those held out aware of this holding out since the Bates van Winkelhof. In the light of the as a partner and was not inconsistent first claimant had been a client of comment of Lady Hale in Clyde that the with employment status. the firm and so would have seen the challenge by counsel to the traditional notepaper, and his wife had been an legal position that employee status is The court also held that Prior had not employee of the firm while Prior worked inconsistent with true partner status incurred liability to the claimants under there. However, the claimants had not was a “serious” one, it is interesting s14 of the Partnership Act. Section 14 produced evidence that they had relied that the court in Walsh asserted with provides that anyone who represents on this representation; in fact, they had confidence and without debate that himself, or knowingly suffers himself advanced funds to the firm both before traditional position. to be represented, as a partner in a and after Prior had been involved in it.

Catch a Ride Limited, Rachel Rees and William Rees v Gardner, Carville and Hallmark Chauffeur Services LLP [2014] EWHC 1220 (Ch), judgment of 23 January 2014

The parties had conducted a joint light of this, the court held that it was • the receiver was to be a co-signatory venture through the medium of an unlikely that injunctive relief would be on all LLP bank accounts LLP which had previously been set up successful. This left it with the stark • the receiver was at liberty to enter by Gardner and Carville but in which choice between awarding no relief at all into a management and trading the Reeses, were subsequently been or appointing a receiver. agreement with Gardner and Clarke, registered as members. The Reeses who was another current manager alleged that they, together with Catch The court noted that the granting of of the business, to whom the task of A Ride Limited which was ultimately interim relief in partnership actions supervising the day to day business owned by Rachel Rees, were members in and quasi-partnership companies was could be delegated, the LLP. common in an attempt to maintain the • no salary should be paid to any of the status quo pending the final resolution individual alleged LLP members Gardner and Carville accepted that of the dispute. This was because • the committal proceedings the claimants had some economic monetary compensation was related commenced by the Reeses in interest in the LLP by way of resulting to the value of the business which relation to alleged breaches of the or constructive trust, but denied that was in dispute, and it was therefore undertakings by Gardner should be they were members. They changed important to preserve its value pending stayed, the locks on the LLP’s premises, refused its realisation. The court therefore • the claimants’ claim form should be to provide any information about it to “unhesitatingly” decided to appoint a served but the proceedings stayed for the claimants, and ran it for their own receiver of the business and gave the three months pending mediation, and benefit. following directions; • the receivership should take effect until a specified deadline or until The claimants initially sought, and • the receiver must confirm the the expenses amounted to £10000, received, undertakings that Gardner appointment of the current general at which time the claimants could and Carville would not prevent them manager of the LLP for the discharge apply for a continuation or alternative accessing the LLP’s premises, destroy of his existing duties, relief, and the receivership and any LLP information or deal with its assets • it was the function of the receiver and management and trading arrangement without their consent. However, the manager to undertake, or procure should continue until that application parties subsequently agreed that the at modest cost, the conduct of the had been disposed of. undertakings had not worked. In the business,

19 Issue 42 – December 2014 Legal Update Continued... Comment It appears from this judgment that registration as an LLP member is not APP Committee Members conclusive of membership, at least for internal purposes such as management and information rights and financial entitlements. Peter Saunders – Chairman (Deloitte) [email protected]

Gavin Foggo – Hon Secretary (Fox Williams LLP) The APP Christmas quiz Answers: [email protected]

1. John Grisham 2. Inner Temple 3. Honolulu, Hawaii 4. Gringotts Wizarding Bank, Louis Baker – Hon Treasurer (Crowe Clark Whitehill LLP) from the Harry Potter books 5. 1880 6. An accountant 7. Hilary Clinton [email protected]

8. Ebenezer Scrooge 9. They all studied accounting. 10. Aristotle Jonathan Haley (Farrer & Co. LLP) [email protected]

APP Arbitration and Mediation Directory Jennifer Haywood (Serle Court) For further information on those listed below please visit the Directory on the APP Website [email protected] http://www.app.org.uk. Frank Maher (Legal Risk LLP) [email protected] Berry, Christopher Edwin Coe LLP Arbitrator Solicitor Giles Murphy (Smith & Williamson) Blackett-Ord, Mark 5 Stone Buildings Arbitrator Barrister [email protected] Djanogly FCIArb Arbitration and Forensic Daniel Djanogly Arbitrator Jim Pittick FCA MAE, Daniel Accounting Corinne Staves (Maurice Turnor Gardner LLP) Furst, David Powell & Gilbert LLP Mediator Chartered Accountant [email protected]

Garry, Peter Keystone Law Mediator Solicitor William Wastie ( LLP) Haywood, Jennifer Serle Court Mediator Barrister [email protected]

Haywood, Jennifer Serle Court Arbitrator Barrister Disclaimer Except where otherwise stated, the views and opinions recorded Angela Hennessey in this newsletter are the personal views of the contributors Hennessey, Angela Arbitrator Chartered Accountant and do not reflect the views of the Association as a whole. The FCA FCIArb information contained in this newsletter is not intended to be an exhaustive statement of the law. The articles appearing in Howell-Richardson, Independent Mediator and Consultant Mediator this newsletter are for general information purposes only and Phillip Mediators in ADR do not constitute professional advice on which reliance should be placed. Readers should seek their own professional advice Partnership before making any decision in relation to the subject matter of I'Anson Banks, any article. Counsel, 48 Bedford Arbitrator Barrister Roderick Row Copyright All matter appearing in this newsletter is protected by Partnership copyright. No matter contained herein may be reproduced, I'Anson Banks, duplicated or copied by any means without the prior consent Counsel, 48 Bedford Mediator Barrister Roderick of the holder of the copyright, requests for which should be Row addressed to the publisher. No legal responsibility can be accepted by the Association of Partnership Practitioners for the Chartered Accountant, articles which appear in this publication.

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20 Issue 42 – December 2014