UK: England and Wales: unfair prejudice and directors' fiduciary duties

Interim post: Allegations concerning breaches of directors' fiduciary duties are often considered in the context of the unfair prejudice remedy (Section 994 of the Companies Act (2006), formerly Section 459 of the Companies Act (1985)). The recent High Court decision O'Donnell v Shanahan [2008] EWHC 1973 (Ch) provides a good example but the case is of particular interest because of the discussion of fiduciary duties. For example, the trial judge observes (at para. [212]):

Whilst the authorities make clear that, if a breach of the no conflict rule (and also the no-profit rule) is made out, it does not matter if the company (or trust or partnership) could not of itself have proceeded with the transaction, it does appear to me permissible to take into account when determining the scope of the directors' duties and in deciding whether 'there is a real sensible possibility of conflict' the inherent likelihood in fact of the company extending its existing scope of business into areas of business which might give rise to a conflict".

Notes:

[1] The judgment is not yet available on BAILII although it is available on Lawtel (for subscribers). The trial judge relied heavily upon the first instance decision Wilkinson v West Cost Capital & Ors [2005] EWHC 3009 (Ch). Update (28 August 2008): the decision is now available on BAILII - click here.

[2] The Companies Act (2006) has codified directors' fiduciary duties: see Part 10, Chapter 2 (and remember that the provisions within this Part have different implementation dates).  The O'Donnell case was concerned with the common law duties on which these codified duties are based. 

Jersey: partnership law reform

Legislation outlining the general principles of partnership law does not exist in Jersey although there are statutes dealing with particular forms of partnership (the Limited Partnerships (Jersey) Law (1994) and the Limited Liability Partnerships (Jersey) Law (1997)). This state of affairs is regarded as unsatisfactory by the Jersey Law Commission and in a consultation paper published earlier this year it is proposed that Jersey should introduce legislation, based on the UK's Partnership Act (1890), in order to make clear the basic principles of partnership law. Meanwhile, the Commission proposes that in the absence of Jersey authority, recourse should be had to English cases (which should be regarded as persuasive in the Royal Court). 

UK: Limited Liability Partnership Accounts Regulations published

The following Regulations have been published on the OPSI website and come into force on 1 October 2008. Their purpose is to apply to limited liability partnerships the accounting provisions of the Companies Act (2006). For further information see these FAQs prepared by BERR. 

[1] The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 - see here for the explanatory memorandum.

[2] The Small Limited Liability Partnerships (Accounts) Regulations 2008 - see here for the explanatory memorandum.

[3] The Large and Medium-sized Limited Liability Partnerships (Accounts) Regulations 2008 - see here for the explanatory memorandum.

UK: Scotland: does a dissolved partnership have a continuing legal personality?

The Scottish High Court of Justiciary, Scotland's supreme criminal court, has considered some interesting points regarding partnerships under Scots law and the Partnership Act (1890). In Balmer and others v Her Majesty's Advocate 2008 HCJAC 44, the court was required to consider whether a partnership continued to exist as a legal person after its dissolution. Lord Eassie delivered the court's opinion and held that "the dissolved partnership does not have any continuing legal personality following dissolution" (para. [83]). As a result, an indictment against a dissolved partnership was held incompetent.

Notes:

[1] Section 4(2) of the Partnership Act (1890) provides that "In Scotland a firm is a legal person distinct from the partners of whom it is composed".  Under English law the general partnership does not have a separate legal personality; however, in W Stevenson & Sons (A Partnership) and Anor v R [2008] EWCA Crim 273 (noted in this earlier post), Phillips LCJ stated (para. [30]):

In as much as business activities are conducted in the name of a partnership and the partnership has identifiable assets that are distinct from the personal assets of each partner there is no reason why a partnership should not be treated for the purposes of the criminal law as a separate entity from the partners who are members of it".

[2] The case has been reported on the BBC news website here, where the following comments of Solicitor-General Frank Mulholland QC are noted: "The prosecution of a dissolved partnership was previously unknown in Scots law. Today's decision of the Appeal Court has clarified the law in relation to the liability of a dissolved partnership for alleged crimes that occurred prior to it being dissolved. The Appeal Court has held that criminal liability does not rest with the former firm in its firm name".

 

UK: Companies Act (2006) implementation - BERR update

Yesterday BERR published an update on its Companies Act (2006) website concerning (a) statutory instruments with a 1 October 2008 commencement date, (b) the restoration to the register of companies dissolved prior to 1969, (c) the amendment of Tables A to F of the Companies Act (1985), (d) the draft Overseas Companies Regulations and (e) accounts and reports guidance.

For further information see: 

BERR update | Regulations made or before Parliament | Application of the Companies Act (2006) to Limited Liability Partnerships | Frequently Asked Questions | Companies Act (2006) |

Jersey: the general principles of partnership law

Earlier this year the Jersey Law Commission confirmed that the basic principles of the law of partnership should be placed on a statutory footing and that, in the interim, recourse should be had to English authorities in the absence of local authority: see here. The Commission's recommendations follow the publication of a consultation paper in 2008 (available here, pdf).

UN Principles for Responsible Investment - Progress report

The UN Principles for Responsible Investment report for 2008 has been published here.  In the accompanying press release (issued today) it is stated:

The Principles for Responsible Investment (PRI) Initiative, a partnership between global investors and two UN agencies surpassed a new milestone today. At an official ceremony in Seoul it was announced that the number of signatories more than doubled in 2008 to 381, representing USD 14 trillion in assets under management.

At the same time, a comprehensive survey from the PRI shows some of the world’s largest institutional investors are making significant progress in integrating environmental, social and governance (ESG) issues into their day-to-day business. Though there is also still much to do".

 

UK: England and Wales: Guernsey limited partnership not a company or 'hybrid' company

Last month, in Pillar Securitisation SARL & Ors v Spicer & Anor (Court Administrators) [2010] EWHC 836 (Ch), Mrs Justice Proudman held that administrators had not been validly appointed in respect of a limited partnership formed under the Limited Partnership (Guernsey) Law 1995 (available here, pdf) and which was a body corporate.

The administrators’ appointment had been made on Form 2.10B, which applied where the appointment was made in respect of a company. Mrs Justice Proudman held that a limited partnership was not a company under Guernsey law or within the definition of a company provided in Schedule B1 of the Insolvency Act 1986. Her Ladyship held that legislation was needed for the partnership to fall within the Schedule B1 definition. She also rejected the argument, based on a beneficent construction of the rules about prescribed forms, that the limited partnership should be regarded as a “hybrid” company because it was a body corporate with legal personality: "I do not think there is such a thing as a hybrid" she observed (para. [38]).

UK: the application of the Companies Act (2006) to limited liability partnerships

The Government has published its response to the consultation on the application of the Companies Act (2006) to limited liability partnerships (LLPs).  The Government proposes to apply to LLPs  those provisions of the 2006 Act which correspond to those provisions in the Companies Act (1985) that were applied to LLPs, with modifications where needed.  More detailed proposals are contained in the Government's response, including one for two sets of regulations governing the form and content of LLP accounts (one for small LLPs and another for medium and large LLPs).

Europe: freedom of establishment and the 'life and death' of companies

Yesterday, Advocate General Poiares Maduro gave his opinion in Cartesio Oktató és Szolgáltató Bt. (Case C-210/06). The case concerned a limited partnership (Cartesio) which wanted to move its headquarters from Hungary to Italy. Hungarian law prevented Cartesio transferring its headquarters to another Member State whilst retaining its status as a partnership governed by Hungarian law. The only way for Cartesio to transfer its operational headquarters was by dissolving its business in Hungary and reestablishing in Italy. Does this amount to a restriction on freedom of establishment under Articles 43 and 48 of the EC Treaty?

The Advocate General held that the Hungarian legislation, which applied to partnerships and companies, breached Articles 43 and 48 of the EC Treaty. Articles 43 and 48, in his opinion, precluded rules which make it impossible for a company or partnership formed under the national law of a Member State to transfer its operational headquarters to another Member State. In this regard, and after considering recent case law of the Court, the Advocate General observed:

... it is impossible, in my view, to argue on the basis of the current state of Community law that Member States enjoy an absolute freedom to determine the ‘life and death’ of companies constituted under their domestic law, irrespective of the consequences for the freedom of establishment. Otherwise, Member States would have carte blanche to impose a ‘death sentence’ on a company constituted under its laws just because it had decided to exercise the freedom of establishment".

The Advocate General nevertheless recognised that restrictions of the kind in the Hungarian law could be justified on grounds of general public interest including the prevention of fraudulent conduct or the protection of the interests of creditors, minority shareholders, employees or the tax authorities. The Hungarian law did not, however, contain any grounds of justification.

NB:

[1] The Advocate General's opinion is not binding on the Court but in the majority of cases such opinions are followed.

[2] In 2004 the European Commission consulted on a proposed Directive (the 14th Company Law Directive) on the right of limited companies to transfer their registered office from one Member State to another. However, in December 2007 the Internal Market Commissioner Charlie McCreevy decided that legislative action was not required (see here). In the impact assessment it was explained why:

Since the practical effect of the existing legislation on cross-border mobility (i.e. the cross-border merger directive) is not yet known and that the issue of the transfer of the registered office might be clarified by the Court of Justice in the near future, the assessment concludes that it might be more appropriate to wait until the impacts of those developments can be fully assessed and the need and scope for any EU action better defined"

UK: Companies Act (2006): Draft Regulations published

Earlier this month, BERR published the following draft regulations:

(a) The Companies (Reduction of Share Capital) Order.
(b) The Companies Act 2006 (Commencement No. 7 and Transitional Provisions) Order.
(c) The Company Names Adjudicator Rules.
(d) The Companies (Disclosure of Address) Regulations.

Copies of the above, along with explanatory notes and impact assessments, are available here.

In addition, the following draft Regulations have been published concerning the application of the Companies Act (2006) to limited liability partnerships (these are due to come into effect for LLPs on 1 October 2008 for financial years beginning on or after that date):

(a) The Large and Medium -sized Limited Liability Partnerships (Accounts) Regulations 2008.
(b) The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006 ) Regulations 2008.
(c) The Small Limited Liability partnerships (Accounts) Regulations 2008.
(d) The Limited Liability Partnerships (Late Filing Penalties) Regulations 2008.

For copies and further information click here.

US: New York: The derivative action and LLCs

In 1994, New York State introduced a new legal form: the Limited Liability Company (LLC). The LLC is, to quote directly from the Guide produced by New York State's Division of Corporations:

"...an unincorporated business organization of one or more persons who have limited liability for the contractual obligations and other liabilities of the business. The Limited Liability Company Law governs the formation and operation of an LLC. An LLC may organize for any lawful business purpose or purposes. The LLC is a hybrid form that combines corporation-style limited liability with partnership-style flexibility. The flexible management structure allows owners to shape the LLC to meet the needs of the business. The owners of an LLC are "members" rather than shareholders or partners. A member may be an individual, a corporation, a partnership, another limited liability company, or any other legal entity".

The question before the New York State Court of Appeals in Tzolis v. Wolff, N.Y. Slip Op. No. 01260 (N.Y. February 14, 2008) was whether members of a LLC could bring a derivative action. The Limited Liability Company Law is silent on this issue. The majority in Tzolis held that a member could bring such an action, referring to early English and American cases; Smith J. observed (pp. 5-6):

"...we continue to heed the realization that influenced Chancellor Walworth in 1832 [in Robinson v Smith (3 Paige Ch 222)], and Lord Hardwicke ninety years earlier: When fiduciaries are faithless to their trust, the victims must not be left wholly without a remedy. As Lord Hardwicke put it, to 'determine that frauds of this kind are out of the reach of courts of law or equity' would lead to 'an intolerable grievance' (Charitable Corp. v Sutton, 2 Atk at 406 [(1742) 26 ER 642]). To hold that there is no remedy when corporate fiduciaries use corporate assets to enrich themselves was unacceptable in 1742 and in 1832, and it is still unacceptable today. Derivative suits are not the only possible remedy, but they are the one that has been recognized for most of two centuries, and to abolish them in the LLC context would be a radical step".

However, in a powerful dissent, Read J. observed (p. 20):

"The enacting (not a subsequent) Legislature considered and explicitly rejected language authorizing the very result that plaintiffs have successfully sought from the judiciary in this case. Fourteen years after the fact the majority has unwound the legislative bargain. The proponents of derivative rights for LLC members -- who were unable to muster a majority in the Senate -- have now obtained from the courts what they were unable to achieve democratically. Thanks to judicial fiat, LLC members now enjoy the right to bring a derivative suit. And because created by the courts, this right is unfettered by the prudential safeguards against abuse that the Legislature has adopted when opting to authorize this remedy in other contexts"

UK: Scotland: Law Commission to examine criminal liability of partnerships

The Scottish Law Commission has published its eighth programme of law reform (2010-2014): see here (pdf). One of the short-term projects identified is a review of the criminal liability of partnerships, about which the Commission notes:

Following a fire in a nursing home run by a partnership, the partnership was dissolved, and attempts to indict the dissolved partnership, and/or the members of it, in relation to the causes of the fire failed [see Balmer v Her Majesty's Advocate 2008 SCCR 765, 2008 SLT 799, [2008] HCJAC 44]. It is clear that the traditional concepts of the law of partnership do not fit easily into the modern regulatory structure within which many of these organisations operate. While we and the Law Commission for England and Wales investigated and proposed reforms of the general law of partnership in 2003 [here, pdf], we did not focus particularly on criminal liability. It is, however, an area in which the public might reasonably expect a greater degree of clarity than is currently provided by the law".

England and Wales: Partnerships: a separate entity for the purposes of criminal liability?

Under English law, partnerships do not have a separate legal personality. This raises many interesting academic and practical questions, one of which the English and Scottish Law Commissions referred to in their 2003 report on the law of partnership (para. 4.43):

"Whether a partnership governed by English law can commit a criminal offence is rather obscure. There are some judicial dicta which indicate that it cannot. On the other hand, our researches have revealed some old statutes which show or appear to show an intention or assumption that a partnership can commit an offence under the statutes in question. The courts have not explored the matter in recent years and we are not aware of any modern prosecutions of a partnership in England and Wales".

Against this background a recent Court of Appeal decision is of particular interest. One of the questions considered in W Stevenson & Sons (A Partnership) and Anor v R [2008] EWCA Crim 273, The Times Law Reports, March 5, 2008, was whether it was possible for legislation to render a partnership criminally liable as a separate entity from the individual partners. Phillips LCJ stated (para. [30]):

"In as much as business activities are conducted in the name of a partnership and the partnership has identifiable assets that are distinct from the personal assets of each partner there is no reason why a partnership should not be treated for the purposes of the criminal law as a separate entity from the partners who are members of it".

The Law Commissions recommended that "except so far as is provided by or under any enactment, whether expressly or by necessary implication, a partnership should not be capable of committing an offence" (para. 4.47). The Government declined, however, to implement the Commissions' recommendations concerning general partnership law (see the ministerial statement).

UK: limited partnership reform - DBERR consultation paper published

In November 2003 a joint report (Law Com No 283; Scot Law Com No 192) concerning the reform of partnership law was published by the English and Scottish Law Commissions. Although the Government does not plan, at present, to implement the Commissions' recommendations with regard to general partnerships, changes to the law governing limited partnerships have been proposed by the Department for Business, Enterprise and Regulatory Reform in a consultation paper published last week. 

DBERR's aim is to remove doubts about the operation of limited partnerships and to produce a coherent body of law relating to them. The consultation paper contains recommendations falling within the following categories:

• The establishment, registration and de-registration of a limited partnership.
  
• The liability of limited partners to third parties.
  
• The rights and obligations of general and limited partners in a limited partnership.
  

The consultation paper contains a draft of the The Legislative Reform (Limited Partnerships) Order 2009 and The Companies Act 2006 (Index of Company Names and Consequential Provisions relating to Limited Partnerships Act (1907) Order 2008.