Is Winding Up an LLP the Best Way to Deal with a Rogue Member?

In our article on the dissolution of partnerships, read our article HERE, we suggest that seeking a court-order for dissolution of a general partnership on the grounds of it being “just and equitable” can be an effective strategy to recover losses from a rogue partner and terminate the partnership.

But does this approach hold true for winding up a Limited Liability Partnership (LLP)?

Winding Up an LLP; the Same as Company Insolvency

The process of winding up an LLP closely mirrors the insolvency procedures for companies, diverging significantly from the dissolution of a traditional partnership. The Limited Liability Partnerships Act 2000 (LLPA 2000) integrates the Insolvency Act 1986 (IA 1986) and the Insolvency Regulations 2016 (IR 2016) into the framework for LLPs, ensuring that:

References to a company in the IA 1986 and IR 2016 include LLPs.

References to directors or officers encompass LLP members.

Articles of Association for companies correspond to the LLP Agreement.

“Contributory” refers to any current or past LLP member liable to contribute to the LLP’s assets upon winding up.

The Insolvency (Miscellaneous Amendments) Regulations 2017 further align the Limited Liability Partnerships Regulations 2001 (LLPR 2001) with the insolvency procedures under the IA 1986 and IR 2016.

Voluntary and Just and Equitable Winding Up of an LLP

A voluntary winding up of an LLP requires unanimous consent from all members, unless the LLP Agreement states otherwise. If the goal is to expel a rogue member and recover losses, obtaining their vote for winding up is improbable, though they might see it as an escape route.

Failing unanimous consent, you can petition the court for a winding up order on the grounds that it is just and equitable. Typically, an irreparable rift between LLP members suffices for the court to grant such an order. However, unlike partnership dissolution, the court will not consider and order asset division before issuing a winding up order.

Post Winding-Up Order Procedures

Once a winding up order is issued, the process mirrors that of company insolvency, with minor adjustments per LLPR 2001, Schedule 3. The winding up commences with the petition’s presentation. Post-order, the Official Receiver initially assumes the role of liquidator, unless an alternative is pre-selected. Creditors or contributories can vote for a different liquidator later in the procedure.

Upon the granting of a winding up order, members lose control of the LLP, which transfers to the liquidator or Official Receiver. The liquidator investigates the LLP’s affairs, including member conduct. If misconduct is found, the liquidator may seek funding from interested parties to pursue action against the rogue member.

Conclusion: Not Recommended

In conclusion, pursuing a voluntary or just and equitable winding up of an LLP is not a recommended strategy for recovering losses from a rogue member. A rogue member is unlikely to support voluntary winding up unless no prior corrective actions are taken. This leaves the liquidator solely responsible for recovering losses.

A just and equitable winding up order involves significant time and costs, ultimately transferring LLP control to a liquidator. Even if you select the liquidator, their professional obligations limit your influence. Any action against a rogue member will likely require further funding from you.

Moreover, winding up terminates the LLP, necessitating the repurchase of assets like intellectual property and goodwill. We advise exploring alternative methods to recover losses from a rogue member. Please see our article on How to Recover Losses and Damages from a Rogue Partner or Member HERE

Finally, prevention is better than cure. Establish a Partnership Agreement with explicit provisions for member dismissal based on wrongdoing. For more insights, read our article on LLP disputes and Partnership Agreements HERE

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.