LLP member forfeits profits for breach of fiduciary duties

Posted: March 3, 2017

The recent case of Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch) (05 October 2016) provides a salutary example of the consequences of a breach of fiduciary duties by a member of a limited liability partnership (LLP). In confirming that the principle of forfeiture can apply to profit share when a member breaches their fiduciary duties, the High Court held in this case that a member of an LLP who breached his fiduciary duties was obliged to return profit share in a sum of over £10 million.

Fiduciary duties

The Limited Liability Partnerships Act 2000 is silent on whether the relationships between members and an LLP are fiduciary. However, under common law, a member of an LLP is an agent of the LLP.  Fiduciary duties apply to agents and therefore can apply to LLP members.  In addition, fiduciary duties can be specifically provided for in an LLP agreement itself.

Examples of fiduciary duties include a duty of confidentiality, a duty of good faith and a duty of no conflict.

Summary of facts and decision

The claimant (a member of an LLP) was subject to arbitration proceedings after breaching his fiduciary duties by discussing a new business proposal with four of the LLP’s employees.

It is well established that when an agent breaches their fiduciary duties, they can lose their right to remuneration.

The arbitrator decided that the member should return 50% of the profit share that he received during the period of the breaches, thus extending this principle beyond remuneration, as well as applying it in the context of a member of an LLP.

The member appealed the decision to the High Court. The question raised was whether this principle was capable of applying to profit share of a partner in a partnership or a member of an LLP.

The claimant argued that there is a conceptual difference between profit share and remuneration. Remuneration was characterised as money payable in exchange for services irrespective of the profitability of the firm, whereas the profit share of a member reflects their ownership of interest in the LLP and their status as a member.

The LLP argued that profit share payable for performing certain duties can be understood as remuneration, and to exclude such rewards from forfeiture would make no sense.

It was decided that where profit share is, in reality, remuneration for services, it can be subject to forfeiture. In this case, 50% of the profit share received by the member during the period of the breach was deemed to be remuneration; the judge therefore dismissed the appeal.

Comment

This case shows that an LLP member’s profit share can be subject to forfeiture in the event of a breach of fiduciary duties. The exact amount that is subject to forfeiture will depend on whether that profit share amounts to remuneration, but the availability of such a remedy, particularly on the scale seen in this case, should be a powerful disincentive to LLP members from acting in a way that breaches their fiduciary duties to their fellow members and the LLP.

Calum Bryant