James Mather, a Barrister at Serle Court Lincoln’s Inn, wrote in City AM recently that partners in a limited liability partnership (LLP) are not as safe as they might think, especially in an insolvency situation. The recent collapse of Law firm, Halliwells, has been a high profile failure of an LLP. A subject on which we have blogged in the past (Halliwells carved up in pre-pack administration).
The partners in a traditional partnership are no doubt worse off than their LLP counterparts, as they invariably need to pay creditors from their own pocket.
However, under insolvency law, even the most junior of partners in an LLP is treated much the same as a company director. In larger firms, this can be very tough on them as junior partners may be kept out of some of the more strategic decision making. Once a member of staff has been promoted to partner they do not always negotiate on the fine print. However if the partnership is insolvent the law requires that all the partners act in the “best interests of the creditors”.
If the LLP should have ceased to trade earlier than it did, i.e trading whilst insolvent all members are potentially liable to repay creditors' losses where they should have done more to cease trading. Of course, those with management responsibilities are likely to be most exposed. All members, too, may potentially have to repay any money received from the LLP – including salary and profit share – within the two years before it was wound up, a rule without equivalent for companies.
Personal guarantees from members for the LLP’s debts are are likely to be called upon if the LLP fails. If the LLP tries to reduce its partners liaibilites to those creditors' holding personal guarantees, when it is technically insolvent, then it will be seen as creating a preference to those creditors at the expense of the others.
As a shareholder of a company, it is possible to enjoy the benefits of ownership without being responsible for its management. In an LLP, some partners may not have a stake in the profits but all are potentially liable for its losses.
So if you are unsure or worried about the potential for losses or insolvency at your firm LLP or traditional partnership then give us a call or have a read of our partnership top 10 tips. Take a look at the tests for insolvency if you think your firm might be insolvent
We have experience of rescuing limited liability partnerships (LLP). See how we rescued an LLP law firm with a CVA