How to Recover Losses from a Rogue Partner or Member in a General Partnership or Limited Liability Partnership (LLP)

This article contains information to help you recover losses incurred by the dishonest actions of a rogue partner in a partnership or rogue member in an LLP.

What does the Partnership Agreement say?

The first step is to take a look at the firm’s Partnership Agreement if it has one. A properly drafted Partnership Agreement should have a clause, which obliges all partners/members to act in the best interests of the firm.

If a single partner/member is not doing so, then they can be sued for damages in breach of the agreement. For more information on Partnership Agreements read our article HERE (Still to be Published)

Recovering Losses for a General Partnership

In a general partnership, if you don’t have a partnership agreement or as an alternative if you do, you can rely on the Partnership Act 1890 (the Act) to help frame an action for losses against a rogue partner.

The Act includes the following provisions:

Section 28 – Duty to Render Accounts and Full Information, partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.

Section 29 – Accountability of Partners for Private Profits; every partner must account to the firm for any benefit derived by him from any transaction concerning the partnership, or from any use by him of the partnership property, name, or business connection. This clause emphasizes the obligation not to profit from the partnership without full disclosure and consent.

Section 30 – Duty not to compete with the Firm; if a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business. This clause prevents conflicts of interest by prohibiting partners from engaging in competing businesses.

Using the above, under the Act you can demand a full account of a partner’s financial affairs that relate to the partnership, including outside activities. If those activities include competing with the partnership, there is a specific obligation to repay any profits earned back to the firm. Read the Act in full by clicking HERE

Recovering Losses for an LLP

In an LLP, as in a general partnership, you can rely on statutory duties in addition or as an alternative to the obligations in a partnership agreement. In the case of LLP’s, you can rely on the Limited Liability Partnership Act 2000 (the LLP Act) and the Limited Liability Partnership Regulations 2001 (the Regulations) to bring a claim to recover losses incurred by the firm as a result of the actions of one of its members.

Section 6 of the LLP Act states that every member of a limited liability partnership is the agent of the limited liability partnership. By designating members as agents, this clause requires them to act in the best interests of the LLP

Section 7 of the LLP Act 2000 is incredibly direct and states that if a member, without the consent of the firm, carries on any business of the same nature as and competing with it, he must account for and pay over to the limited liability partnership all profits made by him in that business. Read the LLP Act in full HERE

The Regulations state that

Regulation 7(9); if a member, without the consent of the LLP, carries on any business of the same nature as and competing with the firm, he/she must account for and pay over to the LLP all profits made by him in that business.
Regulation 7(10) every member must account to the LLP for any benefit derived by him without the consent of the LLP from any transaction concerning it, or from any use by him of the property of the LLP, name or business connection.

Read the Regulations in full HERE

Whilst the Act and Regulations do not explicitly impose fiduciary duties on members, courts have recognised that LLP members may owe similar duties to each other and to the LLP as partners in a traditional partnership would. These include duties of good faith, which would implicitly require members to act in the interests of the LLP and the duty of care, skill, and diligence.

Members of an LLP are typically expected to perform their duties with reasonable care, skill, and diligence, like the statutory duties imposed on company directors by the Companies Act 2006 (Section 174). These expectations can arise through the LLP agreement or fiduciary duties.

LLP’s can use both the LLP Act and the Regulations to demand full disclosure of business activities of any members as they relate to the LLP and bring an action for any profits made to the firm’s detriment to be paid to it, based either on explicit obligations to repay profits or on the breach of a members’ obligations to the LLP.

Breach of a partners/members’ Fiduciary Duties

The effect of the statutes referred to above is to impose obligations on partners and members that arguably go beyond the common law fiduciary duties placed on them.

However, that does not prevent you from including in an action a breach of common law fiduciary duties in a claim. It is common practice to do so.

What is a Fiduciary Duty?

A fiduciary duty is a legal responsibility requiring one person to act in the best interest of another. The person holding this duty is known as the fiduciary. The fiduciary must be loyal, avoid conflicts of interest and refrain from self-serving actions.

This duty is crucial in relationships where trust is placed by one person in another, such as between business partners or members of a general partnership or an LLP.

What is the Test for a Fiduciary Relationship

To determine if a fiduciary relationship exists consider the following:

Undertaking to Act: The fiduciary undertakes to act for and on behalf of another party,
Trust and Confidence: The circumstances give rise to a relationship characterized by trust and confidence,
Obligation of Loyalty: The fiduciary has an overriding obligation of loyalty to the principal,
Good Faith: The fiduciary must act in good faith,
No Profit from Position: The fiduciary must not profit from the trust placed in them. That is, they must not profit from their position at the expense of the other.
Avoiding Conflicts of Interest: The fiduciary must not place themselves in positions where their duty and personal interest may conflict,
Informed Consent for Personal Benefit: The fiduciary may not act for their own benefit or the benefit of a third party without the informed consent of the principal

There is rarely any difficulty in establishing that a partner in a partnership or a member of an LLP is bound by a fiduciary duty to the firm.

Remedies

Bringing an action against a partner or member based on either breach of a partnership agreements, breach of statutory duties and/or breach of fiduciary duties entitle the other partners or the LLP to a full account of all the losses incurred by the rogue partner/member and for compensation from them personally to make good those losses.

However, claiming damages does not in itself allow you to dismiss the rogue partner/member from the partnership or LLP.

If there isn’t a specific provision in a partnership agreement that allows you to dismiss a partner or member you may find yourself in the difficult position of bringing a court action for damages against someone you are obliged to continue in partnership with.

For more on getting rid of problem partners/member read our article (still to be published)

In some cases, it may be preferable to dissolve a partnership. If you find yourself in that unfortunate situation, please read our article on Dissolution HERE

For LLP’s the situation is different, please read our article, Winding Up an LLP.

(still to be published)

Let’s Talk

If you think you have a similar issue with a partner please talk to us. We would be happy to discuss your specific circumstances and give an initial assessment. Contact us by using the Book a Meeting button on this page or contact us by phone or email. Our details are at the top of this page and HERE.