Right to Recover: LLP

Introduction

Lord Clark issued his decision in the Court of Session case of The Liquidator of Premier Housewares (Scotland) LLP v Rashid on 14th March 2018.  The case was the first reported example we are aware of, of a Liquidator seeking to make a recovery under Section 214A of the Insolvency Act 1986.

Section 214A

Although related to Section 214, the wrongful trading provision, Section 214A applies to LLPs.  It provides that in the case of an LLP a person who has been a member and who has taken drawings during the two years prior to insolvency may be ordered by the court to make repayment, if at the time of the withdrawal the LLP was unable to pay its debts (within the meaning of Section 123 of the 1986 Act) or would become unable to pay its debts after withdrawal.  For repayment to be ordered the court also has to be satisfied that after each withdrawal the member “knew or ought to have concluded… there was no reasonable prospect that the limited liability partnership would avoid going into insolvent liquidation.”  In this case the LLP was a long time loss making business which had survived through credit being extended by a related limited company (each of the members had at some time been a director of that related limited company).  A number of the directors and members respectively were related.  Lord Clark accepted evidence to the effect that the decision to liquidate the LLP came about suddenly following upon a family disagreement.

The Decision

Lord Clark held that the member “knew or had reasonable ground for knowing the company was insolvent at the time withdrawals were made”.  However, on the evidence led Lord Clark decided:

“The Noter has not established that the Respondent knew, or ought to have concluded, that there was no reasonable prospect of the LLP avoiding insolvent liquidation.  On the evidence, there was no suggestion of any creditor being likely to initiate an insolvency process nor was there evidence suggesting voluntary initiation of the process.  Further, there were good reasons…  Why LTC and the family members would not want insolvency to occur and indeed would continue to support the LLP.  The evidence on these points, taken together, suffices to establish existence of a reasonable prospect of avoiding insolvent liquidation.”

Lord Clark therefore refused to order repayment of any sums by the former member.

Advice

This decision is worth noting because it shows Section 214A in operation.  It will be of some surprise to a number of practitioners.  It has been commonly thought that it will be enough to show the insolvency of the LLP at the time of withdrawals for Section 214A to be engaged.  However, the decision of Lord Clark shows that in cases where there was some reasonable basis to believe that insolvent liquidation would be avoided (to a great extent following the wrongful trading case law under Section 214) repayment may not be ordered.  It remains to be seen if any appeal will be noted.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk).This briefing note is current as at 14th March 2018 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).