Shakespeare Putsman Llp v Meredith

This is an application which is brought by Shakespeare Putsman LLP against Paul Kelvin Meredith to restrain the presentation of a winding-up petition. It is, strictly speaking, an application to restrain him from doing that until the application for permanent relief can be heard.

Mr. Meredith’s position is that it is vitally important that, if he is going to bring a petition, he should do so before 21^st August this year because his standing to do so after that date is in serious doubt. Accordingly, I approach this application on the basis that I should accede to it only if satisfied that there is no answer to the applicant’s claim for permanent injunctive relief, whatever the evidence may ultimately turn out to be.

In approaching the matter in that way I must assume in Mr. Meredith’s favour that the evidence he wishes to put in, in particular expert evidence, will support the points he seeks to establish. Nonetheless it is contended that, even on that assumption, he is still bound to fail.

Mr. Meredith became a member of Shakespeare Putsman LLP, formerly Putsmans LLP, on 1^st April 2007, and the rights between all the members are governed by an LLP agreement dated 2^nd April 2007. There are provisions within the LLP agreement for members to be removed as such. Mr. Meredith was a full equity partner of his previous firm, Shakespeares, and it is clear from the evidence that the bringing about of the merger between Shakespeares and Putsmans LLP was not without its difficulties. There were a number of Shakespeare’s partners who were unhappy with the proposal and the proposed merger was originally voted down on two occasions. It is said on Mr. Meredith’s part that ultimately the doubting partners of Shakespeares were persuaded to go along with the merger upon the strength of assurances given by Mr. Wilson of Putsmans LLP (though exactly on whose behalf he was then acting may be open to doubt) that the newly acquired Shakespeare partners in the enlarged LLP would be safe from removal for a minimum of two years, albeit that the proposed LLP agreement was to provide (as it did) for six months notice. That was understood as meaning they were safe, if those assurances were met, for two years and six months.

In the events which have happened the removal provisions have, whether for good reason or bad, been triggered against Mr. Meredith, such that notice to remove him was given in February of this year, which will be effective on 21^st August next. What that means is that as from 22^nd August at the latest Mr. Meredith will, as is accepted, cease to be a member. Notwithstanding his imminent demise as a member he wishes to petition in that capacity for winding-up.

He would also, I apprehend, wish, were it open to him, to petition under what was formerly section 459 of the Companies Act 1985, now section 994 of the 2006 Act, but section 459 was specifically excluded from the LLP agreement by clause 21(5) and, accordingly, is of no assistance to Mr. Meredith in the present case.

Nevertheless, under section 122E of the Insolvency Act 1986, as amended by the Limited Liability Partnership Regulations 2001, a member is entitled to petition the court to wind up a limited liability partnership on the just and equitable ground. Praying in aid the well known case of Ebrahimi v Westbourne Galleries [1973] A.C. page 360, Mr. Meredith asserts that the pre-LLP agreement assurances gave rise to equitable considerations which made it wrong of Shakespeare Putsman LLP to trigger the retirement provisions contrary to the assurances that were given. I should mention that both sides agree that the assurances were not unqualified and the difference between the parties appears to relate to the extent of any caveat that may have been issued in relation to those assurances. I cannot resolve that issue upon this application and must proceed on the basis, as I do, that Mr. Meredith has an arguable claim that the assurances have been breached. I also proceed on the basis that that might, in ordinary circumstances, enable him to pray in aid the principle of Ebrahimi v Westbourne Galleries once all the evidence has been heard at trial.

Nonetheless, it is accepted that the effect of the notice of retirement that has been served is that he will cease to be a member by 22^nd August next. I therefore ask myself what is the point of a winding-up? No-one suggests that there is any possibility of the petition being heard before 22^nd August. Therefore, whenever it is heard Mr. Meredith will have ceased to be a member. What he will be entitled to is to receive the pay-out that under the LLP agreement will be due to him, when it falls due.

If the winding-up petition proceeds and a winding-up order is made, then ultimately there will, it is asserted by Mr. Meredith, be a surplus and he will be entitled to share in that surplus. I questioned at the outset of the argument the correctness of that assertion, because it seemed to me that as he would, by definition, have ceased to be a member, he would not be entitled to share in any surplus.

The LLP agreement deals with the question of surpluses on a winding-up in clause 52. Clause 52(1) reads as follows: “In the event of the winding-up of the LLP then any surplus assets of the LLP over its liabilities remaining at the conclusion of the winding-up, after payment of all money due to the creditors of the LLP ... shall be applied by the liquidator as follows. (a) First in paying to members any amount which represents undivided profits of the LLP as at the commencement of the winding up, such amount being treated as profits of the financial year in which the winding up date occurred and as divided amongst members accordingly. (b) Secondly, in repaying to the members rateably the amount standing to the credit of their capital accounts...” and then further consequential provisions are made. (c) Then “in paying any balance rateably to the A and B members in the proportions in which they shared profits of a capital nature immediately prior to the commencement of the winding up.”

It is said on behalf of Mr. Meredith that the references there to the commencement of the winding up in subparagraphs (a) and (c) respectively, mean that as, in the event of a petition being presented before 22^nd August, Mr. Meredith will have been a member at that date, he will therefore be entitled to distributions because the 2 sub-clauses direct attention to the commencement of the winding up. Under section 129 of the Insolvency Act that means, in the circumstances of this case, the date of the presentation of the petition: see subsection (2) of that section.

I do not agree. Clause 52 deals with surplus assets remaining at the conclusion of the winding up. At that date Mr. Meredith will not be a member. Furthermore, the clause as a whole deals with distributions to members and members are defined as, unsurprisingly, including only individuals whose membership of the LLP has not ceased. By the time of any distribution Mr. Meredith’s membership, it is accepted, would have ceased. It therefore follows, in my judgment, that he would not be entitled to share in that distribution because he would not be a member at that stage.

As regards the remaining members, they would, of course, be entitled to share in the undivided profits then unpaid to them at the commencement of the winding up, and they would be entitled to ultimate surpluses, at least so far as A and B members (as defined) are concerned, in the proportions due to them at that earlier date, that is to say at the commencement of the winding up. But that does not deal with Mr. Meredith’s entitlement because he would not be a member. His entitlement is set out in the earlier provisions of the agreement, which I shall now consider.

My attention was drawn to clause 30 under which it is clear that Mr. Meredith will be entitled to his undrawn profits in respect of the period during which he was a member once the accounts have been approved. They have not been approved yet. Approval requires a special resolution of two classes of members, namely the A and B members. The accounts are in draft. He will also be entitled to payment out of his capital account but there is no immediate obligation to pay that amount. The LLP has two years to pay.

In those circumstances it seems to me that as member Mr. Meredith has no conceivable interest in a winding up because he would not receive any pay-outs in that capacity from a distribution, as by the time any petition is heard he will not be a member, but a creditor. Accordingly, it seems to me that a member’s petition, even if presented now in the final weeks of his membership, would be an abuse of process.

The question then arises as to whether or not he is entitled to petition as creditor. It is, as I have said, not disputed that he is due sums from the LLP, and I am reminded that the insolvency legislation specifically refers to the ability of a contingent or prospective creditor to petition. However, that is all he is: he is a prospective creditor in relation to sums due to him. Moreover, Mr. Meredith disclaims any assertion that the LLP is insolvent. Instead he wishes to put in evidence to demonstrate, not just that the LLP is solvent, but that had he been allowed to run what he says was the promised course down to 2010, he would have received even more on a distribution at that date.

I am not sure how that can be relevant, because what he would receive on a distribution in a winding-up, even were he entitled qua member to enjoy a distribution, would not be adjusted to make good his disappointed expectations. What he will receive as a creditor depends upon the provisions of the agreement which deal with retirement and the distribution of profits or losses. They do not include any provision for adjusting his share upwards to cater for his disappointed expectations.

Some debate has occurred before me on whether or not Mr. Meredith might also have a contingent claim for damages arising out of breach of the assurances, or for breach of collateral warranty, or for breach of obligations of good faith. Clause 14 of the LLP agreement confirms that the members owe the utmost good faith to the LLP, though notably there is no such provision in relation to the LLP itself owing obligations of good faith.

I can see that it might be possible to fashion a cause of action, including one against Shakespeare Putsman LLP, upon the footing that Mr. Wilson was acting in some way as its agent. It is by no means a straightforward claim. As Mr. Meredith’s counsel observed, that was why his client had not yet gone down that route. He did however leave the question of collateral warranty open. The route obviously has hazards, but I cannot rule out the possibility that it could come to fruition. It is not, however, appropriate for it to be pursued under a winding-up petition. It is well established that a winding-up petition should ordinarily only be used where there is an undisputed indebtedness and failure to pay. That has been described as a rule of practice not a rule of law, but the practice is, nonetheless, so well established that exceptional circumstances are needed to justify a departure from that rule.

In my judgment, given that Mr. Meredith can just as readily make any claim for damages by proceedings against whomsoever he may be advised to bring them, there is no justification for a winding up petition to be prayed in aid, the more so, as I have said, as it is his case that Shakespeare Putsman LLP is very solvent indeed.

In those circumstances I consider a creditor’s petition, as well as a member’s petition, to be an abuse of process and in the light of those conclusions it seems to me to follow that I should restrain the presentation of any petition.

The points I have decided, which have been decided not on the balance of convenience but as points of principle, seem to me also to determine the underlying application for final relief, which I will be minded to grant today and to vacate the hearing on Monday for directions.