Insolvency of LLPs and liability for Partners
Insolvency of LLPs and liability for Partners remain like that experienced by directors of limited companies.
However, differences exist.
Limited Liability Partnerships?
A Limited Liability Partnership in the UK remains a separate legal entity, undertaking in place, of the LLP members. If the LLP becomes insolvent, the members remain liable to add to the LLP’s assets in the amount designated by the LLP agreement.
Member may therefore, in the event of insolvency, remain required to return the property of the LLP.
How is a limited liability partnership (LLP) different from a partnership?
Limited Liability Partnership aims to offer partnership benefits with limited personal liability. Therefore, a Limited Liability Partnership partner protects a partner from any acts by another partner, like misconduct or negligence. However, all aspects of a partnership firm usually apply to a limited liability partnership.
Authority to change withdrawals in an Insolvency of LLPs
By s214A, the court has the power to order a member of the LLP (past or present) to add to the LLP’s assets in such amount as it deems proper, up to the total of sums withdrawn over two years as per s214A insolvency act 1986
A Liquidator may commence recovery of monies under s214A from an LLP member, where:
- Liquidation inside two years before the winding-up;
- LLP member removed property, including any share of profit of the LLP and salary paid;
- Knowing in the belief that paying themselves any money would cause the:
- LLP unable to pay creditors as and when due;
- By withdrawing monies, LLP is unable to pay its creditors as and when due.
- Member had prior knowledge of the LLP failing and pending liquidation.
Two-year period Claim Time
Thus, any range for claims is time-limited: s214A captures only withdrawals made in the two years before the winding-up.
When an LLP enters administration, avoiding a winding-up petition, the time employed to prepare the administration will reduce the look-back time, decreasing the extent for a claim. In Milne v Rashid  CSOH 23, the administration continued for 14 months before entering liquidation. Therefore, any action under s214A by the liquidator remained confined to withdrawals performed within the ten months before the administration commencing.
Insolvency of LLPs and liability for Partner, and an incapability to pay debts of the LLP
Not paying debts as and when they fall due is covered by the 1986 Insolvency Act s.123, about the LLP’s balance sheet and cash flow and trading while insolvent.
An appointed liquidator though needs to prove that at the date withdrawals were taken, the LLP member knew of the LLP’s insolvency. However, proving that knowledge at that time is difficult. However, members involved in the firm’s financial control are likely to be more exposed.
No chance of eluding insolvent liquidation
Finally, the LLP member, when withdrawing monies, knew of the insolvency of the LLP and hence its forthcoming liquidation.
The legal test has regard to what would be appreciated or ascertained by an individual possessing:
- Knowledge, experience, and skill required of a person carrying out the same office as the member;
- The knowledge, skill and understanding of the member.
This two-fold test introduces basic objective standards, which are further advanced by the member’s expertise. The analysis is like a measure applied to directors in the context of wrongful trading claims per Insolvency Acts.214 of the Act.
Therefore not a robust defence for a member to deny any knowledge of the LLP’s risky financial situation, as the minimum material standards catch them needed. Having a financial experience in the business means they have greater insight into the LLP.
Financial claims against members of an LLP under s214A give heightened risk during the Coronronavirus COVID19 Pandemic and the unknown effects if any of BREXIT in 2021. Liquidators must realise monies from members who took distributions, while the LLP’s financial situation did not support payment.
LLP members remain exposed for repaying monies drawn is a situation to consider its acceptability and risk. A two-period can equate to a large amount and indeed worrying.
Members of an LLP are however not excused from remaining informed of the financial status of an LLP. If the business is failing, individuals need Insolvency advice. Continuing is dangerous, indeed.
For further help, read Partnership Issues In Business.
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