Flanagan v Liontrust Investment Partners LLP & Ors

Index

This judgment deals with liability issues in an “unfair prejudice” petition under section 994 of the Companies Act 2006 brought by Eoghan Flanagan (“Mr Flanagan”) in relation to the affairs of a limited liability partnership, Liontrust Investment Partners LLP (“the LLP”). Mr Flanagan joined the LLP on 4 October 2011 and claims still to be a member of it, although his membership has purportedly been terminated by notices of compulsory retirement served on him in August 2012, May 2014 and December 2014 respectively.

In this introductory section of my judgment, I will give an outline of the case and explain how the main issues arise.

Mr Flanagan is an experienced fund manager. He has worked in the asset management industry since 1997, when he joined Baring Asset Management as a graduate. In 2009 he joined a business called Occam Asset Management (“Occam”), with the title of Chief Investment Officer and Head of Emerging Markets. In March 2009, Occam launched a hedge fund called the Occam Emerging Markets Absolute Return Fund (“the Fund”), which was jointly managed by Mr Flanagan and a colleague, James Mellersh. By the Spring of 2010, the Fund had assets under management (“AUM”) of US $355 million, and had made an absolute return of 25% since it started. This was, in fact, to be the high water mark of the Fund’s performance. By the end of 2010, the AUM in the Fund had approximately halved in value and the absolute return from inception had fallen to 18%.

Occam was founded by Jonathan Hughes-Morgan, for whom Mr Flanagan had previously worked very successfully as a fund manager in a business called Thames River Capital (“Thames River”), which Mr Hughes-Morgan set up with a partner in 1998. It was Mr Hughes-Morgan who recruited Mr Flanagan to join Occam. Mr Mellersh had been a senior analyst in the Emerging Markets team at Thames River, and when Mr Flanagan joined Occam, Mr Mellersh agreed to go with him.

By early 2011, Occam was in a steadily deteriorating financial position and Mr Hughes-Morgan was anxious to find a purchaser for the business. Negotiations took place with the Liontrust group, a much larger asset management organisation with AUM then well in excess of £1 billion. Liontrust, for its part, was looking to expand its business through the acquisition of other established asset management operations. Occam was seen by Liontrust as a potentially valuable acquisition, despite its precarious financial state, because its funds, managers and sales force would fit in well with Liontrust’s business and largely complement it. The negotiations were initiated, and then supervised on behalf of Liontrust, by John Ions, the chief executive officer of the principal company in the group, Liontrust Asset Management Plc (“LAM Plc”).

The negotiations bore fruit in a Business Purchase Agreement dated 1 August 2011 (“the Business Purchase Agreement”), under which the main consideration payable by Liontrust was agreed to be 3% of Occam’s AUM at completion, provided that the AUM had not meanwhile fallen below a floor of $150 million, and £187,500 in cash. Occam had five funds under management, of which the Fund represented about 50% of the AUM. Unfortunately, however, the Fund was by now experiencing a period of very poor performance. In the months of August and September 2011, it made losses of 6.76% and 17.29% respectively, and by the end of September the cumulative return from inception had fallen to a loss of 11%, while the AUM in the Fund had fallen to $70.1 million. The “floor” proviso in the Business Purchase Agreement was breached, thereby entitling Liontrust to walk away from the deal. In fact, Liontrust chose not to do so, the terms were renegotiated, and the sale completed on 4 October 2011.

Mr Flanagan had for various reasons been reluctant to join in the move to Liontrust, but eventually he agreed to do so. In due course, I will need to examine in detail the events which led up to completion, what assurances were given to Mr Flanagan by Liontrust, and whether (as he alleges) an oral collateral contract was made at a meeting which he attended with Mr Ions, Adrian Collins (the chairman of LAM Plc) and Mr Hughes-Morgan at Christopher’s Bar on the evening of 3 October 2011.

The upshot of this meeting, according to Mr Flanagan’s pleaded case, is that Liontrust bound itself contractually, in consideration of Mr Flanagan’s agreement to join in the move and become a member of the LLP, to make all reasonable efforts to promote the Fund after the acquisition “with their own client base and/or generally”. Further or alternatively, Mr Flanagan says that Liontrust made representations to similar effect upon which he relied when deciding to become a member of the LLP.

At this stage, I need to say a little more about the organisation of the Liontrust Group, and the role of the LLP within it. The core business of the group, before the acquisition of Occam, was in the UK retail fund management market. Large parts of that business, such as the management of UK unit trusts and of segregated portfolios for investors, are of no direct relevance to the present case. But the group also provided a number of specialist funds, which (after the acquisition) were run as sub-funds of an open ended investment company acquired by Liontrust from Occam, Liontrust Umbrella Fund Plc (later renamed Liontrust Global Funds Plc (“LGF”)). For tax reasons, LGF was based in Dublin. Following the acquisition of Occam, the Fund became one of the sub-funds of LGF.

In 2010, Liontrust entered into new arrangements for procuring the services of its fund managers, and the LLP was established for that purpose. It was incorporated on 22 January 2010 under the Limited Liability Partnerships Act 2000 (“LLPA 2000”), the original subscribers being LAM Plc and its wholly-owned subsidiary Liontrust Investment Services Limited (“LIS”). On 7 July 2010, LAM Plc and LIS entered into (i) a limited liability partnership agreement between themselves, under which LIS made a capital contribution to the LLP of £1.195 million in order to provide it with regulatory capital; and (ii) a business contribution agreement, pursuant to which the LLP acquired the entire regulated business of LIS (with the exception of certain excluded assets) by way of a further capital contribution. On the following day, the individual fund managers joined the LLP on the terms set out in a further limited liability partnership agreement governing their relationship with the LLP and each other. LAM Plc resigned as a member, so the parties to the governing limited liability partnership agreement were LIS, the individual members and the LLP itself. It is convenient to refer to this agreement as “the LLP Agreement”, while recognising that it was amended and restated from time to time. The version in force when Mr Flanagan joined the LLP on 4 October 2011 was dated 11 April 2011. The version in force at the time of Mr Flanagan’s purported compulsory retirement, and on which the questions of construction which I have to determine turn, was dated 19 July 2012.

I will need to examine some of the terms of the LLP Agreement in detail later in this judgment, but for now a brief summary will suffice. The capital of the LLP was almost entirely provided by LIS, which was recorded as having made an initial contribution of £5,300,162. The individual members contributed only £5,000 each, which was usually left on call. The income (or revenue) profits for each financial year were divisible between the individual members (other than LIS) in accordance with the “side letters” between them and the LLP which they had signed upon joining. The allocation comprised a fixed amount and a variable amount, corresponding (in broad terms) to the basic salary and performance-related bonus to which they would have been entitled under a contract of employment. Any remaining profits, including all capital profits, were allocated to LIS. No individual member was entitled to any remuneration for acting in the business or management of the LLP. The obligations and duties of individual members included obligations to work full time for the business, not to engage in any other business, and to act at all times in the utmost good faith in all matters relating to the LLP and the business.

Clause 12 of the LLP Agreement provided for the management of the general business and affairs of the LLP to be vested in a Management Committee, except where any decision or action required approval by LIS as a Reserved Matter under clause 13, or as otherwise expressly provided to the contrary. The Management Committee consisted of designated representatives of LIS, and such individual members as LIS should appoint. By a document signed on 8 July 2010, LIS consented to all the individual members being appointed as members of the Management Committee. Provision was then made for meetings of the Committee, although (as I shall explain) it is now common ground that no validly convened meeting of the Management Committee took place until October 2013. Clause 13 in effect gave LIS a veto in relation to Reserved Matters, defined in clause 1.1 as “any of the matters referred to in Schedule 3”.

Clause 18.1 provided that an individual member would retire from the LLP and cease to be a member on his death, at the end of the financial year in which he attained the age of 65, or

“18.1.3

on the expiry of such notice period as set out in that Individual Member’s Side Letter following a decision of LIS (as a Reserved Matter) requiring him to retire as a Member.”

Clause 20 empowered the Management Committee, with the consent of LIS as a Reserved Matter, to expel or suspend an individual member in specified circumstances. Clause 21 empowered the Management Committee to place an individual member on “garden leave” for the whole or any part of his period of notice, where (inter alia) the member had been given notice to retire from the LLP under clause 18.1.3. Clause 24 contained post-termination restrictive covenants, the period of which was reduced by the length of any garden leave served before the date of retirement.

The side letter which Mr Flanagan signed on 4 October 2011 (“the Side Letter”) provided that his fixed allocation in each financial year should be £125,000, and his variable allocation should be a payment linked to his performance and the profits of the Emerging Markets Equities Team as calculated in accordance with Schedule A. Under the heading “Title”, the Side Letter said:

“Your title is Head of Emerging Markets Equities and tasked with heading the management of the Emerging Markets Opportunities Fund, and such other Emerging Markets Equity Funds as agreed between you and the LLP.”

Under the heading “Compulsory Retirement”, it was provided that:

“The notice period for the purposes of Clause 18.1.3 is 6 months. Reduces to 3 months when team assets under management first exceed £350 million, such notice to expire no earlier than the 24 month anniversary of you joining the LLP (“Compulsory Initial Term”).”

It can be seen, therefore, that Mr Flanagan was entitled to remain a member of the LLP for two years from the date when he joined. The notice period required for service of a notice of compulsory retirement under clause 18.1.3 was specified as 6 months, and such notice could expire no earlier than 4 October 2013.

Before leaving the Liontrust corporate structure, I should record that the LLP provided fund management services within the group pursuant to investment management agreements with the relevant entities. Mr Flanagan and Mr Mellersh continued to manage the Fund, after the move to Liontrust, under an Investment Advisory and Marketing Agreement of 7 August 2008 between Occam Umbrella Fund Plc (as LGF was then called) and another Occam company, as novated by an agreement of 4 October 2011 between those parties and the LLP. The sales and marketing staff who transferred from Occam to Liontrust did not join the LLP, but instead became members of a second LLP in the group called Liontrust Fund Partners LLP (or, in the case of more junior staff, became employees of LAM Plc).

To a substantial extent, the Liontrust group was run as a single entity, with Mr Ions as its chief executive and Vinay Abrol (“Mr Abrol”) as its chief financial officer and chief operating officer. Between them, they dealt with the day to day management of the LLP, and of the group as a whole. Mr Abrol was a member of the LLP, but Mr Ions was not.

In the months after Mr Flanagan joined Liontrust, the performance of the Fund was at best variable. In some months it outperformed the MSCI Emerging Markets Index (“the EM Index”), but more often it did not. The AUM in the Fund, after a modest increase in October 2011, continued to decrease, reaching a new low almost every month. At the end of December 2012 they had fallen to about $42 million, and by the end of February 2012 to a little under $20 million. The decline then continued, to $15.3 million by the end of May 2012 and $12.3 million by the end of August 2012. Against this background, there is a dispute whether Liontrust took reasonable steps to promote and market the Fund, and whether the terms of any collateral contract or representations made by Liontrust at the meeting on 3 October 2011 were breached.

Eventually, the senior management of Liontrust decided that they had no option but to close the Fund. Mr Ions also concluded that it would not be in the interests of the business to launch an alternative fund at that stage. On 16 August 2012, Mr Ions instructed Mr Flanagan to liquidate the portfolio of the Fund, and on 20 August the board of LGF (which technically had to take the decision, since the Fund was one of its sub-funds) resolved that the Fund should be closed because it was no longer economically viable.

By now, Liontrust had also decided that it wished to part company with Mr Flanagan. On 20 August 2012, Mr Ions and Mr Abrol held a telephone meeting in their capacity as the directors of LIS, and resolved to give notice of compulsory retirement to Mr Flanagan and Mr Mellersh. They also decided to place them on garden leave. No meeting of the Management Committee was convened, although Mr Abrol later prepared, and Mr Ions signed, fictitious minutes of a non-existent meeting of the Management Committee on that date.

The termination letter which was handed to Mr Flanagan on 20 August 2012 said this:

“Further to our meeting today, I regret to have to confirm that it has been decided by LIS as a Reserved Matter that your role as Head of Emerging Market Equities is no longer required and you are therefore being required to retire as a Member of [the LLP] under the provisions of Clause 18.1.3 of the LLP Agreement.

The notice period for your compulsory retirement under Clause 18.1.3 of the LLP Agreement (as amended and clarified by your Side Letter dated 4 October 2011 …) is six months, with such notice not to expire earlier than the 24 month anniversary of you becoming a Member of [the LLP]. Please accept this letter as such notice. You will cease to be a Member of [the LLP] with effect from 4 October 2013 (“the Retirement Date”).

In accordance with Clause 12.5 of the LLP Agreement you will automatically cease to be a Committee Member with effect from the date of this letter.

In accordance with Clause 21 of the LLP Agreement, you are hereby given written notice that with immediate effect until the Retirement Date you will:

1.

cease to carry out your normal duties;

2.

not attend the premises of [the LLP] or any member of [the Liontrust Group] unless John Ions or Vinay Abrol asks you to;

3.

not have any contact with any clients of [the LLP] or of [the Liontrust Group]; and

4.

not have any contact other than purely social contact with any other members of [the LLP] or with any employees of [LAM Plc] or any Member of Liontrust Fund Partners LLP.”

The letter went on to remind Mr Flanagan that he would continue to be bound by the terms of the LLP Agreement and the Side Letter, and until the Retirement Date he would continue to be entitled to his Fixed Allocation and Variable Allocation (if any), but would not be entitled to continue to receive any financial or other information circulated within the LLP. On the Retirement Date, he would only be entitled to receive the outstanding credit balances on his current and capital accounts, and would no longer be entitled to any share of the revenue profits. His post-termination restrictive covenants would, however, remain in force, as modified by the Side Letter, and he would be expected to comply with them.

The letter ended by thanking Mr Flanagan for his contribution, and wishing him every success in the future. It was signed by Mr Ions for and on behalf of the LLP, presumably in his capacity as a director of LIS.

This letter gives rise to a number of issues. In particular:

On 18 September 2012, after receiving legal advice from counsel (as to which privilege has not been waived), Mr Flanagan wrote to Mr Ions complaining about his treatment and asking for reinstatement. He said that, on returning to Liontrust, he should be allowed to deploy his skills, knowledge and experience in the management of a fund, that being the reason why Liontrust had persuaded him to join them from Occam in the first place. On 25 September 2012, the LLP’s solicitors (Macfarlanes LLP) responded. They argued that Liontrust had been entitled to close the Fund because of its poor performance. They argued that the retirement notice of 20 August 2012 was valid, because the notice did not expire until the end of the two year period. The letter ended by saying:

“Our client has given you notice requiring you to retire and has, in accordance with clause 21 of the [LLP Agreement], directed you not to perform any of your duties as a Member and does not at this time require your assistance to start a new fund as you propose. You will continue to be a member of [the LLP] to 4 October 2013 and if required our client may in this period direct you to perform such duties as it may allocate to you.”

There matters rested until 8 February 2013, when Mr Flanagan’s solicitors, Bolt Burdon, replied. They said they had received the advice of specialist counsel that the retirement notice was invalid. They argued that the conduct of the LLP and LIS amounted to a repudiatory breach of the LLP Agreement, including the Side Letter, and said that Mr Flanagan now accepted the repudiation, thereby bringing about the termination of the LLP Agreement and the Side Letter with immediate effect. As a result, Mr Flanagan would be entitled to damages for breach of contract, as well as relief under section 994 of the Companies Act 2006 (as applied to LLPs by regulations made pursuant to LLPA 2000).

The letter then advanced a new contention. Following acceptance by Mr Flanagan of the repudiatory breach, the terms of the LLP Agreement and the Side Letter would cease to apply, at least as between Mr Flanagan, the LLP and LIS. Instead, the default provisions set out in Regulation 7 of the Limited Liability Partnership Regulations 2001 (“the LLP Regulations 2001”) would apply in their place. On that footing, it was said that Mr Flanagan would be entitled to an equal share of the capital and profits of the LLP pursuant to Regulation 7(1), which on the basis that there were still 15 members of the LLP would entitle him to a one-fifteenth share; he would have the right to take part in the management of the LLP under Regulation 7(3), and to attend and take part in Management Committee meetings; and he would be protected by Regulation 8 from expulsion by a majority of the members. Bolt Burdon then gave notice, should Liontrust not accept the accuracy of this analysis of the contractual position, that Mr Flanagan would apply to the court for declarations: (1) that the LLP Agreement and the Side Letter had been terminated as between him and the LLP and LIS; (2) that the default provisions contained in LLPA 2000 and the LLP Regulations 2001 now governed the relationship of the LLP with Mr Flanagan, and his membership of the LLP; and (3) as to the practical effect of the default provisions, on the assumption that they did apply.

Macfarlanes responded on 5 March 2013. In relation to the retirement notice, Liontrust’s position remained unchanged. In relation to the allegations of repudiatory breach, they argued that the common law doctrine of repudiation did not apply to a limited liability partnership agreement, and, even if it did, that the terms of the LLP Agreement implicitly excluded any right to treat the agreement as discharged for repudiation. In any event, it was denied that Liontrust had committed any repudiatory breach, because its construction of the notice provisions in the LLP Agreement was correct, and (even if mistaken) was not repudiatory in nature. Furthermore, because the LLP Agreement was a multi-party contract, the doctrine of repudiation could only apply if the contract was discharged between the innocent party, i.e. Mr Flanagan, and all of the other parties. This could not be the position, because it was not suggested by Mr Flanagan that all of the individual members of the LLP were in repudiatory breach of contract. Finally, even if all these contentions were wrong, Mr Flanagan had in any event affirmed the LLP Agreement by continuing to receive his fixed allocation of profits during the period of over six months since the retirement notice was given to him.

This exchange of letters is enough to give an indication of the complex and difficult issues relating to repudiation which arise if it is held that the LLP acted in repudiatory breach of the LLP Agreement, and the repudiation was accepted by Mr Flanagan. In broad terms, those issues concern the applicability of the common law doctrine of repudiation to LLP agreements, and the problems caused by the fact that the LLP Agreement was a multi-party agreement. The correspondence also brings out the far-reaching implications of Mr Flanagan’s case, if his arguments on repudiation were to be accepted. Even though he voluntarily entered into the LLP Agreement on the footing that he would have no equity interest of a capital nature in the business, beyond the right to return of his initial capital contribution on retirement, he now says that the effect of his acceptance of the LLP’s repudiatory breach of the LLP Agreement is that the default provisions in the LLP Regulations 2001 apply, thereby entitling him to a pro rata share of the LLP’s capital and profits, potentially worth several million pounds, and to play a continuing active role in the management of the business, even though he has now been excluded from it for the best part of three years.

Issues of quantum have not yet been prepared for trial, as a split trial was ordered by Mr Registrar Nicholls on 27 November 2013; but in his skeleton argument for the pre-trial review on 3 December 2014, Mr Flanagan suggested that the value of the LLP was £160 million, in which case, on the basis that there are now 20 members including himself, his share would presumptively be worth approximately £8 million. According to Liontrust, this figure for the value of the LLP is greatly exaggerated, but it serves to bring out the extravagant nature of the result for which Mr Flanagan contends. His contribution to the capital of the LLP was only £5,000, yet he now claims to be entitled to an equity share worth several million pounds.

The correspondence between the parties’ solicitors continued inconclusively, and in early September 2013 Mr Flanagan started the present proceedings. Much of the relief which he seeks is declaratory in nature, relating to the various contractual issues which I have identified, and his present position in relation to the LLP. These issues do not, in themselves, involve allegations of conduct unfairly prejudicial to Mr Flanagan’s position as a member of the LLP, and they could in principle have been brought before the court in a separate Part 7 claim. Liontrust does not take any procedural point on this, however, as it is obviously sensible for all the issues to be resolved together, and nothing would be gained by requiring Mr Flanagan to issue a separate Part 7 claim.

In relation to the unfairly prejudicial conduct of which he complains, Mr Flanagan realistically accepts that the relationship between him and the LLP has on any view irretrievably broken down, and the appropriate relief would be an order requiring Liontrust to buy out his interest under the LLP at a fair valuation. Both sides agree that, if I reach that stage, consideration of the question against which of the Liontrust respondents it would be appropriate to make a buy-out order should be deferred until after this judgment has been handed down.

The respondents to the petition are the LLP, LIS, LAM Plc, and (as the fourth to twenty-third respondents) the other individual members of the LLP, including three who were but have ceased to be members. All of the respondents are represented by the same solicitors and counsel, but as Mr Machell QC explained to me on the first day of the trial, it is only the first, second and third respondents who are advancing a positive case against Mr Flanagan.

As I have already noted, Liontrust has attempted to improve its position by serving two further notices of retirement on Mr Flanagan, each one without prejudice to its predecessors. The first such notice was served by LIS on 7 May 2014, and the second on 22 December 2014. I will deal with these further notices in the context of my discussion of the issues relating to the first notice. For his part, Mr Flanagan has also alleged further repudiatory breaches which he accepted by a letter from his solicitors, Bolt Burdon, dated 22 November 2013.

Finally, I should explain that I use the term “Liontrust” in this judgment to refer either to the Liontrust group as a whole, or to individual entities within the group when the precise identity of the entity is not material.

With this introduction, I now propose to deal with matters in the following order:

In this section I shall fill in some more of the general factual background to the case, none of which (unless I state the contrary) is controversial.

The distinction between hedge funds and long-only funds

The Fund was a hedge fund, or absolute return fund – the two descriptions are interchangeable. This means that the object of the Fund was to preserve the money invested in it and generate a positive return for investors, whatever the market conditions. Thus, for example, in a falling market a hedge fund would still aim to make money by short selling of securities, so that it could benefit from a decline in the market prices of those securities. As Mr Flanagan explains in his evidence, a hedge fund generally holds its assets with a “prime broker”, usually an investment bank, which can offer the hedge fund access to the full range of futures, forward contracts, options, commodities and other instruments that it has the capability to trade. The prime broker can also lend equity securities to the hedge fund to enable it to sell them short, a process which Mr Flanagan describes as:

“the practice of borrowing an equity or debt security from a third party and selling it in the market with the intention of buying it back at a later point for a cheaper price (if the price of that security declines in the intervening period).”

More generally, Mr Flanagan says that:

“Hedge funds (in general) use short-selling, index futures contracts, traded options strategies, currency hedging and other strategies to protect (or “hedge”) themselves from market declines.”

A strategy of this nature is obviously easier to state than to achieve in practice. As Mr Flanagan says, a strategy which was perfectly hedged would not generate any return. Returns can only be achieved by taking risks. The goal of a hedge fund, therefore, is to use its financial flexibility to take the right risks at the right time on a selective basis, and to use hedging to eliminate risks it does not wish to take.

By contrast, a long-only fund invests its capital in equity securities or debt. It does not generally borrow money against its assets, nor does it engage in short selling. It is therefore a relatively simple form of investment vehicle, and its performance will generally be strongly linked to the market in which it invests. The performance of a long-only fund will normally be judged in relation to an index which is representative of the relevant market, and the task of a long-only fund manager is to outperform the relevant index, whether it is rising or falling. The skill of the fund manager lies, not so much in attempting to avoid losses when the market is falling, but rather in the construction and weighting of the portfolio. The word “long”, in the description “long-only”, does not imply that investments are necessarily held for a long time, but only that they are not subject to short selling.

Both hedge funds and long-only funds charge management fees to investors. In each type of fund, fees are typically charged as a percentage of AUM, for example 1.5% annually. In a long-only fund, there are usually no other management fees, but a hedge fund will generally also charge investors a performance fee linked to capital appreciation of the fund above a hurdle rate. So, for example, when the Fund was established by Occam investors paid a performance fee representing (in simplified terms) 20% of any quarterly gain (after deduction of the flat rate management fee and other fund expenses) of more than 1% in the value of the Fund in excess of the last high water mark.

The division of management fees between the operator of a fund and individual fund managers is, of course, an internal matter which depends on their contractual arrangements, and is of no concern to investors in the fund. The effect of the arrangements in schedule A to the Side Letter, again broadly stated, was that 30% of the management fees for the Fund, and 60% of any performance-related fees, were available for distribution as variable allocations to the Emerging Markets Equities Team headed by Mr Flanagan, in shares to be determined by Mr Flanagan and Mr Mellersh. The remainder of the fee income was allocated to LIS under clause 6.4 of the LLP Agreement.

The significance of the AUM in a fund

AUM are an important measure of the success and profitability of a fund or asset management business. There are at least three ways in which AUM matter. First, the more AUM a fund or business has, the higher its management fee income will be and the wider the potential base for it to earn performance fees (if it charges them, and if performance is positive). Secondly, the value of the AUM will be determined both by the unit price of the fund, as it rises or falls in accordance with the performance of the fund, and by flows of money in and out of the fund, as investors subscribe or withdraw their money. The Fund was a daily dealing fund, so investors could withdraw their money with only 24 hours’ notice. Inflows and outflows of money could happen very rapidly, and as Mr Flanagan explains:

“Outflows can happen for a number of reasons – obviously where investors are dissatisfied with the performance of the fund, but also in the normal course (for example where a financial institution has invested using its clients’ money, and has to repay its clients). So even to keep AUM steady, it is necessary to source a constant flow of new investors.”

Thirdly, in any fund there may come a time when the AUM have declined to such a level that it ceases to be economic to continue to run it as a going concern.

The relevance of the EM Index

In the case of a long-only fund, it is natural for performance to be judged by reference to one or more benchmark indices, not least because investors would normally be able to invest in an index-tracking fund, so if instead they invest in a managed fund, and pay management fees, they will be disappointed if the performance of the fund does not significantly outstrip the relevant index. The position with a hedge fund is less straightforward, however, because the effect of a successful hedging strategy is likely to be that the rises and falls in the value of the fund are less pronounced than those of the relevant index. For this reason, Mr Flanagan says in his written evidence that it is not appropriate to measure a hedge fund’s performance by reference to an index. His solicitors’ letter of 8 February 2013 to Macfarlanes went even further, saying that any attempt to compare the Fund’s performance relative to a benchmark was “fundamentally incorrect and misleading”, since the Fund was an absolute return fund.

Under cross-examination, however, Mr Flanagan accepted that even the sophisticated investors who choose to invest in hedge funds do sometimes compare the performance of hedge funds with equity markets when the market is rising, although they do not make the same comparison when the market is falling. He also accepted that marketing documents for the Fund produced both before and after his move to Liontrust included a graph showing how the Emerging Markets hedge fund which he had co-managed during his time at Thames River substantially outperformed the EM Index from September 2000 until September 2006. Mr Flanagan agreed that this was part of the sales pitch for the Fund at Occam, showing his proven track record; and the reason it formed part of the sales pitch was “because it was of potential importance to clients”. Consistently with this, a later passage in the sales document said:

“We believe that this approach [i.e. an absolute return mandate] will outperform passive indices in the future, as it has done in the past.”

Mr Flanagan agreed that this still remained an aspiration of the managers of the Fund in January 2012.

The truth of the matter, in my view, is that although there is some theoretical force in Mr Flanagan’s point that it is not appropriate to measure the performance of a hedge fund by reference to a passive index, this is in practice something that even sophisticated investors are prone to do, particularly in a rising market, and it is a form of comparison which many hedge fund operators will use for promotional purposes when it suits them to do so. Here, as in so many areas, it is pointless to argue with the perceptions of customers which actually influence their behaviour, and marketing strategies need to be framed accordingly.

As to the EM Index itself, Mr Flanagan’s uncontradicted evidence is that it is an index of shares listed on liquid Emerging Markets stock exchanges, compiled by a US firm called MSCI. It is generally agreed to be the most authoritative index available for the global Emerging Markets universe, in the same way as the FTSE index is for the UK stock market. The term “Emerging Markets” refers to countries at an intermediate stage of economic development such as China, South Korea, India, Indonesia, Turkey, Russia, Poland, Brazil, and Mexico.

The management of the Liontrust Group

As I have already said, the evidence establishes that the Liontrust group was at all material times run as a single entity, with Mr Ions as its chief executive and Mr Abrol as its chief financial officer and chief operating officer: see [17] above. In cross-examination Mr Ions said that he considered himself to be the chief executive officer of the group today, and the position was no different in 2011 and 2012. He agreed that he and Mr Abrol were together responsible for the day to day management, not only of the LLP, but also of the group as a whole. Mr Ions was ultimately responsible for running the fund management, sales and marketing elements of the LLP’s business, while Mr Abrol dealt with the administrative side of the business, including accounts and finance, risk and compliance, and human resource functions. This was what happened in practice, without complaint from anybody, even though the LLP Agreement conferred no specific role on either Mr Ions or Mr Abrol, and Mr Ions was not even a member of the LLP.

Mr Ions seems to have given little, if any, thought to the precise capacity in which he acted in relation to the LLP’s affairs, saying at different times that he was acting “ultimately” as the chief executive of LAM Plc, or that he was acting as a director of LIS. Mr Abrol, too, said that Liontrust was managed on a group-wide basis, with himself as the most senior financial officer within the group. I infer that for most practical purposes Mr Abrol found it unnecessary to distinguish between his capacities as an executive director of LAM Plc, a director of LIS and a member of the LLP. As he said in cross-examination, all the main operational areas of the business reported either to Mr Ions or himself, so they were ultimately responsible.

Mr Abrol also described in his oral evidence how there were three groupings of people organised by function across the group as a whole, called the fund management group, the asset gathering group and the operations management group. This was an informal structure set up before the establishment of the two LLPs in 2010, and it continued to operate in the same way after their establishment. According to Mr Abrol, these groups were in effect committees of the main board of LAM Plc, to which they reported.

The existence of this parallel and relatively informal quasi-committee structure may help to explain why the Management Committee under the LLPA remained for all practical purposes a dead letter until October 2013. Nor, on the evidence before me, did any member of the LLP, or indeed anybody else, complain about the absence of a functioning Management Committee, or question the validity of any decisions taken in the running of the LLP’s business. Perhaps this is not surprising, since, under the LLP Agreement, LIS was anyway in a position to ensure that the membership and decisions of the Management Committee would reflect its wishes. In practice, it seems that everybody was content to proceed on the footing that LIS ran the LLP without the need for any intermediate structure.

This section of my judgment draws on Liontrust’s written closing submissions, and the recent judgment of Warren J in Hans Henning Reinhard v Ondra LLP and Others [2015] EWHC 26 (Ch) (“Reinhard”) which was handed down on 14 January 2015, six days before the start of the present trial.

Limited liability partnerships were created as “a new form of legal entity”: section 1(1) of LLPA 2000. By virtue of section 1(2), an LLP is a body corporate, with legal personality separate from that of its members, which is formed by being incorporated under the Act. As Warren J pointed out in Reinhard at [22], the corporate body has “members” not “partners”, even though it is known as a limited liability partnership. Moreover, by virtue of section 1(5), except as far as otherwise provided by the Act or any other enactment, “the law relating to partnerships does not apply to a limited liability partnership”.

Sections 2 and 3 of LLPA 2000 provide for incorporation of an LLP. Two or more persons associated for carrying on a lawful business with a view to profit must subscribe their names to an incorporation document in a prescribed form, and incorporation is then effected by registration of the incorporation document by the registrar of companies.

The next group of sections of the Act deals with membership. For present purposes, the provisions of sections 4 and 5 are of particular importance, so I will set out the relevant parts of them:

“4.

Members

(1)

On the incorporation of a limited liability partnership its members are the persons who subscribed their names to the incorporation document (other than any who have died or been dissolved).

(2)

Any other person may become a member of a limited liability partnership by and in accordance with an agreement with the existing members.

(3)

A person may cease to be a member of a limited liability partnership (as well as by death or dissolution) in accordance with an agreement with the other members or, in the absence of agreement with the other members as to cessation of membership, by giving reasonable notice to the other members.

(4)

A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.

5.

Relationship of members etc

(1)

Except as far as otherwise provided by this Act or any other enactment, the mutual rights and duties of the members of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its members, shall be governed –

(a)

by agreement between the members, or between the limited liability partnership and its members, or

(b)

in the absence of agreement as to any matter, by any provision made in relation to that matter by regulations under section 15(c).

(2)

… ”

The regulations made under section 15(c) – i.e. the default rules – are to be found in Regulations 7 and 8 of the LLP Regulations 2001. Again, it is convenient to set them out nearly in full:

“Default provision for limited liability partnerships

7.

The mutual rights and duties of the members and the mutual rights and duties of the limited liability partnership and the members shall be determined, subject to the provisions of the general law and to the terms of any limited liability partnership agreement, by the following rules:

(1)

All the members of a limited liability partnership are entitled to share equally in the capital and profits of the limited liability partnership.

(2)

The limited liability partnership must indemnify each member in respect of payments made and personal liabilities incurred by him –

(a)

in the ordinary and proper conduct of the business of the limited liability partnership; or

(b)

in or about anything necessarily done for the preservation of the business or property of the limited liability partnership.

(3)

Every member may take part in the management of the limited liability partnership.

(4)

No member shall be entitled to remuneration for acting in the business or management of the limited liability partnership.

(5)

No person may be introduced as a member or voluntarily assign an interest in a limited liability partnership without the consent of all existing members.

(6)

Any difference arising as to ordinary matters connected with the business … may be decided by a majority of the members, but no change may be made in the nature of the business … without the consent of all the members.

(7)

The books and records … are to be made available for inspection at the registered office … or at such other place as the members think fit and every member … may when he thinks fit have access to and inspect and copy any of them.

(8)

Each member shall render true accounts and full information of all things affecting the limited liability partnership to any member or his legal representatives.

(9)

If a member, without the consent of the limited liability partnership, carries on any business of the same nature and competing with the limited liability partnership, he must account for and pay over to the limited liability partnership all profits made by him in that business.

(10)

Every member must account to the limited liability partnership for any benefit derived by him without the consent of the limited liability partnership from any transaction concerning the limited liability partnership, or from any use by him of the property of the limited liability partnership, name or business connection.

Expulsion

8.

No majority of the members can expel any member unless a power to do so has been conferred by express agreement between the members.”

Further regulations made pursuant to sections 14 and 15 of LLPA 2000 provide for the application to LLPs (with appropriate modifications) of substantial parts of the Insolvency Act 1986, the Directors Disqualification Act 1986 and the Companies Act 2006. In particular, the court is given power to wind up an LLP, under the relevant provisions of the Insolvency Act 1986, if it is unable to pay its debts, if it would be in the public interest to do so, or if it would be just and equitable to do so. The court also has power (unless excluded by agreement between the members) to grant relief to a member under section 994 of the Companies Act 2006, as modified in the following form by Regulation 48 of the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 (SI 2009 No. 1804):

“994.

(1) A member of an LLP may apply to the court by petition for an order under this Part on the ground –

(a)

that the LLP’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b)

that an actual or proposed act or omission of the LLP (including an act or omission on its behalf ) is or would be so prejudicial.

…

(3)

The members of an LLP may by unanimous agreement exclude the right contained in subsection (1) either indefinitely or for such period as is specified in the agreement. The agreement must be recorded in writing.”

It is common ground that Mr Flanagan’s right to apply to the court under section 994(1) has not been excluded by a written agreement of all the members of the LLP under subsection (3).

Although it makes good sense in many contexts to talk of the “share” or “interest” of a member in an LLP, and these terms are used in various places in the relevant primary and secondary legislation, they are nowhere defined. I respectfully agree with the observations on this topic of Warren J in Reinhard at [55] to [57], where he said that the rights carried by such a “share” can only be ascertained by reference to the agreements referred to in section 5(1) of LLPA 2000 and the default provisions in the LLP Regulations 2001. Warren J concluded, at the end of [57]:

“I agree with the way the nature of the share is succinctly put in Whittaker and Machell, the Law of Limited Liability Partnerships (3^rd edition) at 8-18:

“… the “share” of a member is the totality of the contractual or statutory rights and obligations of that member which attach to his membership; and that an “interest” of a member is one or more components of his share”.

Accordingly, it is not right to view a share in an LLP as something existing in abstract: it is a function of the contractual and statutory rights governing the relationship between the members amongst themselves and between the members and the LLP.”

Mr Flanagan

The only witness who gave evidence in support of the petition was Mr Flanagan himself. His principal statement is dated 17 November 2014; his other four statements (three of them very short, and admitted without objection by Liontrust) are responsive in nature. He was cross-examined for a day and a half by Mr Machell QC. Although understandably defensive to begin with, Mr Flanagan soon settled down and for the most part gave his evidence in a clear and straightforward manner, without rancour. On a few occasions I found his answers evasive or unconvincing, for example when he professed not to understand the concept of an equity interest in an LLP. There are no major issues about his credibility, however, and it is to his credit that he did not seek to embellish his evidence, for example in relation to what happened at the meeting in Christopher’s Bar on 3 October 2011. Indeed, it is no exaggeration to say that he all but destroyed his own pleaded case on collateral contract and misrepresentation by the answers which he gave to questions about what had been said to him by Mr Ions and Mr Collins on that occasion.

I will now fill in some more detail about Mr Flanagan’s career and experience before Liontrust expressed an interest in acquiring Occam. Mr Flanagan was born in 1976. In 1997 he graduated with a degree in Mathematics from Cambridge. Having joined Baring Asset Management as a graduate, he worked in the Emerging Markets department there as an investment analyst, covering a range of companies in Emerging Europe, which at that time included countries such as Greece, Portugal, Poland and Russia. He reported to Martin Taylor, a senior fund manager who ran two very successful funds investing in Emerging European markets.

In late 1999, Mr Taylor was approached by Thames River, a “hedge fund platform” business which had been set up by Charles Porter and Mr Hughes-Morgan in 1998 and employed around 30 people. The business model of Thames River was to approach fund managers who it thought were talented and likely to be successful, and offer them the opportunity to run hedge funds under its umbrella. It had the capability and expertise to set up funds, and to provide the necessary support services. It also had detailed knowledge of, and excellent contacts with, those investors who were likely to invest in hedge funds, and was thus able to provide what Mr Flanagan calls “a significant marketing and sales effort for the funds on its platform”. The financial arrangement with fund managers was that Thames River would be entitled to 50% of the management and performance fee income from the funds run under its umbrella, and the fund managers would be entitled to the other 50%. As Mr Flanagan says, this had the potential to be very lucrative for the managers if the assets of the funds grew and performance was good.

Mr Taylor agreed to join Thames River on this basis, and he offered Mr Flanagan a position as a junior partner, which he accepted. Together with Mr Taylor and another specialist in emerging markets who joined in the move from Baring Asset Management, Mr Flanagan formed part of a new Emerging Markets team under the Thames River umbrella.

At Thames River, the Emerging Markets team launched a hedge fund called the Nevsky Fund and, shortly afterwards, a long-only fund called the TRC Eastern European Fund. Both became very successful, and in time Mr Flanagan became a co-manager of each fund. The business was, in his words, “extremely profitable” and he made a large amount of money. Although Mr Flanagan had experience at Thames River of managing both a hedge fund and a long-only fund, he said in cross-examination that he “found hedge funds the more interesting vehicle”.

By the end of 2006, Mr Flanagan had been working with Mr Taylor for nearly ten years, and felt that he needed a change. He negotiated an agreement with Thames River whereby he would no longer be involved in running the funds, but would remain an equity partner in the Emerging Markets business that he had helped to establish. This arrangement continued until late 2008, when Mr Taylor bought out his residual interest in the emerging markets business. Meanwhile, Mr Hughes-Morgan had also run down his involvement with Thames River before leaving to set up Occam at or around the end of 2006.

During 2007 Occam recruited three investment teams to invest in European equities, Japanese equities and Asian equities. These funds sustained very substantial losses during the financial crisis of 2008, and only the European hedge fund remained open. In September 2008, Occam launched two long-only funds investing in Asia and Europe. Around the same time, Mr Hughes-Morgan approached Mr Flanagan about setting up an emerging markets business within Occam. Mr Flanagan regarded Occam as a relatively small and poorly capitalised business, but he was attracted by the calibre of some of the people working there, and he knew that they had valuable expertise in setting up, running and marketing hedge funds. Mr Flanagan then approached Mr Mellersh, who had been a senior analyst in the Emerging Markets team at Thames River, and Mr Mellersh agreed to join Occam with him as a co-fund manager. Although Mr Mellersh had no significant experience as a fund manager, Mr Flanagan felt that his extensive experience of emerging markets would be useful, and that in time, as he gained experience, he would become a successful fund manager, capable of managing the fund with Mr Flanagan, or by himself if Mr Flanagan was on holiday, meeting clients or otherwise engaged.

Mr Flanagan eventually joined Occam in February 2009, having secured the agreement of Mr Hughes-Morgan to bring Mr Mellersh with him. His title was Chief Investment Officer and Head of Emerging Markets. A year later, in March 2009, the Fund was launched. Mr Flanagan and Mr Mellersh hired an analyst, built up their coverage of emerging markets equity investments worldwide, and developed their investment strategy. Occam allowed its managers the “freedom to outperform”, which meant that their investment strategies were not dictated by the firm, but were left to the fund managers to set themselves. Mr Flanagan and Mr Mellersh took advantage of this latitude. Their general intention was to manage the Fund in much the same way as the Nevsky fund at Thames River had been managed. They were less pessimistic than some about the prospects of economic recovery after the financial crisis, and considered that the risk of an emerging market bank collapsing was low. They could see that many banks and commodity companies in emerging markets were under-valued, and they therefore decided to put a reasonable amount of the Fund’s capital at risk.

Initially, this strategy worked and the Fund was moderately successful. The sales team at Occam provided support and promotion for the Fund, to Mr Flanagan’s satisfaction, and the Emerging Markets team expanded to six, with Mr Flanagan and Mr Mellersh as the fund managers and four analysts assisting them. By the end of 2009, when the Fund had been running for 9 months, the value of the AUM in the Fund had reached $241.3 million, with an absolute return from inception of 24.4%. Over the same period, however, the EM Index had risen by 54.67%, so the Fund had underperformed the index by about 30%. Nevertheless, this clearly did not deter investors, and by the end of March 2010 the Fund had reached what was to be its high water mark in terms of cumulative performance, showing a return from inception of 25%. The value of the AUM in the Fund peaked in the following month, at $355.8 million.

From then onwards, however, the performance of the Fund began to deteriorate more or less steadily, whether viewed in terms of AUM or cumulative return. By Mr Flanagan’s own admission, the performance of Mr Mellersh and himself in 2010 was disappointing. The return on the Fund declined by 5.1% over the year, and there was a particularly bad period in mid-2010 when the cumulative return fell to 9% from its peak of 25% only 3 months earlier. Some of this ground was made up later in the year, and the cumulative return had risen to 18% by the year end, but AUM had by then fallen to $168.9 million, down by more than half from the peak at the end of April 2010. By comparison, the cumulative return on the EM Index, notionally rebased to zero as at the date of the Fund’s inception, had risen from 54.67% at the beginning of 2010 to 79.97% at its end.

When the performance of the Fund in 2010 was put to Mr Flanagan in cross-examination, he accepted that it was “definitely not good”, although not in his view a disaster. He agreed that performance is a major factor in investors’ decisions, and (after some hesitation) that it was the primary factor which led to the loss of half of the AUM in the Fund between May and December 2010. Furthermore, the downward trend continued into 2011, and Mr Flanagan again accepted that the performance of the Fund from the second half of 2010 onwards “was not as good as it should have been”. The Fund had lost money when the EM Index had gone up, and the investors’ capital had not been protected. When it was put to Mr Flanagan that the overall performance of the Fund from inception to the end of September 2011 had been “very bad”, he answered “I agree … Yes, I agree”.

The main witnesses for Liontrust

The main witnesses who gave evidence for Liontrust were:

Subject to what I will have to say later on about the fabrication and signing of Management Committee minutes by Mr Abrol and Mr Ions, there are no significant issues about the credibility of any of these witnesses, and I am satisfied that they did their best to assist the court.

Mr Ions

Mr Ions has been chief executive of LAM Plc since 2010. Before joining Liontrust, he worked in a similar role in various other asset management companies. He was also Head of Distribution at Aberdeen Asset Management. He is therefore very well acquainted with the fund management business, and is an experienced CEO.

In 2011, Mr Ions led the acquisition of the business of Occam. He explains that the acquisition seemed a good fit. The Liontrust business, which was based in the UK, was looking to broaden its product range, and Occam had teams specialising in emerging markets, Asia and Europe. In addition, Mr Ions had known Mr Hughes-Morgan for many years, and knew that he had been successful in establishing funds first at Thames River and then at Occam. Mr Ions also knew that Mr Flanagan had previously worked at Thames River on its very successful Emerging Markets fund. From Mr Ions’ perspective, Mr Flanagan “was probably the next most important person at Occam” after Mr Hughes-Morgan.

Mr Hughes-Morgan

Mr Hughes-Morgan has been a director of LAM Plc since October 2011. He has a wealth of experience in the fund management industry, having been involved in running and managing funds for over 28 years. He was the co-founder of Thames River, which in eight years acquired AUM of $16 billion. He describes his relationship with Mr Flanagan at Thames River as good, although they were not friends.

In 2006, Mr Hughes-Morgan left Thames River to found Occam. After Mr Flanagan and Mr Mellersh had joined Occam in 2009, and the Fund had been launched, Mr Hughes-Morgan and the sales department at Occam used their contacts to generate as much AUM for the Fund as they could. In their presentations to investors, as I have explained, they highlighted the performance of the Thames River Nevsky Fund, to show how it had outperformed the EM Index over a period of six years.

Mr Hughes-Morgan’s assessment is that initially the Fund “performed okay, albeit not particularly impressively”. By the end of 2009, the Fund was showing a cumulative return of 24%, but in the longer term better returns than this would in his view have been expected, particularly as the EM Index had risen by 55% over the same period. However, the performance of the Fund then declined throughout 2010 and the first part of 2011. It is worth quoting Mr Hughes-Morgan’s diagnosis of the basic problem:

“With the EM Fund, it seemed to be heavily invested (in the sense that a number of long positions would have been adopted) at the top of every fall in the market, and thinly invested at the bottom of every rise. The consequence of this was that it did not protect investors from the downside when the market was falling and did not generate enough of an upside when the market was more positive.

Emerging Markets are intrinsically more volatile than Developed Markets due to the fact that liquidity is lower and individual trades have more impact due to the lack of depth of the stock available in the market. However, the EM Fund should have been looking to reduce that volatility and generate an absolute return for investors. As I mentioned above, the EM Fund charged a fee of 1.75% per annum regardless of performance. To justify these fees, the EM Fund ought to have been performing much better than it did.”

Mr Hughes-Morgan went on to say that, apart from the EM Index, other indicators which clients or people in the industry might use to decide whether or not to invest in a fund include the value of AUM, the share price, and cumulative performance (as an indicator of the absolute return). The problem was that none of these indicators made the Fund attractive compared to other funds operating in the same sector. Mr Hughes-Morgan describes the cumulative performance of the Fund over its lifetime as “hugely disappointing”.

Mr Abrol

I have already described Mr Abrol’s various roles within the Liontrust group, and his evidence about the informal committee structure which in practice operated across the group both before and after the acquisition of Occam. The three groups met regularly, and Mr Abrol was a member of each of them. Mr Ions was a member of the asset gathering and fund management groups, but not of the operations management group. In his witness statement Mr Abrol says, without qualification, that Mr Ions and he between them dealt with the day to day management of the LLP. Rather oddly, to my mind, he quibbled over this in cross-examination, first saying that the day to day management decisions were taken by the three groups, even though the operations management group met only fortnightly and the other two groups less frequently, and then that he and Mr Ions dealt with the day to day management through the committees. I do not accept this evidence, and find that the unqualified statement by Mr Abrol in his witness statement is correct. Possibly Mr Abrol’s attempt to play up the influence of these rather shadowy committees on the conduct of the LLP’s business was prompted by the absence of a functioning Management Committee until October 2013. If so, the attempt was in my judgment misguided, not least because the committees clearly operated and drew their membership across the group as a whole.

Mr Abrol gave some evidence about the current size and composition of the Liontrust group. In recent years, it has expanded its product range and customer base, but its core business remains in the UK retail sector. Its largest fund is the Liontrust Special Situations Fund, which invests in UK equities and is around £1.3 billion in size. The total AUM of the group as at 30 September 2014 were valued at £3.818 billion.

Mr Collins

Mr Collins joined the board of LAM Plc in June 2009 as a non-executive director, and was subsequently appointed chairman in January 2010. He has worked in the fund management business for over 35 years, and was previously the managing director of Gartmore Investment Management Limited. He confirmed in cross-examination that his role at Liontrust is as executive chairman, with oversight of the group’s management. As the chief executive, Mr Ions reports to the board of LAM Plc which is chaired by Mr Collins. Mr Collins is not himself a member of either of the LLPs, nor is he a director of LIS.

Mr Collins gave his oral evidence with the gravity which one might expect from the chairman of a publicly listed company (LAM Plc has premium listing on the London Stock Exchange).

Mark Allpress

Mr Allpress joined Liontrust in 2010, as the head of retail distribution. He is now head of the strategic partnership division. Before joining Liontrust, he worked for Old Mutual.

In his written evidence, Mr Allpress explains that, before the acquisition of Occam, the sales team at Liontrust comprised five or six people. Their main contacts were with discretionary managers, wealth managers, stockbrokers, platform funds and private client fund managers. Liontrust’s AUM had fallen by around 60% in the year ending 31 March 2009, and it had taken some time to rebuild the business. Mr Allpress says that, at the time of the acquisition of Occam, Liontrust “was in some respects a business in recovery”. Throughout 2011, Liontrust “remained heavily focused on increasing the overall levels of [AUM]”. Liontrust’s basic strategy in pursuit of this aim was to have a “core” of funds on which the sales teams concentrated, and other “satellite” funds which were promoted alongside the best-sellers.

I found Mr Allpress an impressive witness. His answers to questions were clear, thoughtful and sensible, reflecting his experience in sales and marketing over the best part of three decades.

Simon Hildrey

Mr Hildrey joined Liontrust in July 2008 as head of communications, and from October 2009 to August 2014 he was head of marketing and communications. He is now the head of marketing and distribution strategy. As head of marketing and communications, he was responsible for managing all Liontrust’s marketing, UK sales strategy and external communications. His previous experience had been as a financial journalist.

In his capacity as head of marketing and communications, Mr Hildrey had no direct responsibility for selling to intermediary clients, although his role included communication and co-ordination with the sales team. His direct responsibility was for client communications, such as mail shots, articles in the press, and general promotion. Mr Hildrey was allowed a good deal of autonomy by Mr Ions, to whom he reported. He and Mr Ions would talk every day, so Mr Ions was well aware of what the marketing plans were. There was a lot of trust between them, and Mr Ions gave him the freedom to exercise his own judgment. Mr Hildrey summarised their relationship by saying that, while Mr Ions set the corporate strategy for the business, he (Mr Hildrey) was solely responsible for then setting the marketing strategy to enable the group to fulfil the corporate strategy.

I found Mr Hildrey to be another impressive witness, who gave thoughtful and sensible answers to the questions which were put to him.

The other members of the LLP

Witness statements were also served on behalf of Liontrust by 16 members (or, in one case, former member) of the LLP, all of whom are respondents to the petition. None of these witnesses was cross-examined, so their evidence is uncontradicted. They include Edward Catton, who is the head of risk at Liontrust; Neale Soffe, who is head of operations at Liontrust; and the holders of various other executive posts, as well as individual fund managers.

The evidence of these witnesses mostly relates to the history of the Management Committee; their involvement (or otherwise) in the decisions to close the Fund, compel Mr Flanagan to retire and place him on garden leave; and the subsequent conduct of the dispute.

I have already explained the background to Liontrust’s approach to Occam in early 2011. In short, Liontrust was looking to expand its business into new areas, after weathering a difficult period in the wake of the financial crisis, while Occam (in which Mr Hughes-Morgan owned a majority stake) needed to find a purchaser for its business if it was to remain viable. According to Mr Hughes-Morgan’s evidence, the value of Occam’s AUM was decreasing at such a rate that, unless a deal could be struck, Occam would cease to be viable in about six months. His hope was that a deal with Liontrust would enable his team at Occam to be kept together, and would give them breathing space in which to rebuild their performance track record.

Mr Flanagan had considerable reservations about joining Liontrust, partly because Liontrust was a much larger business, and Mr Flanagan felt it was more “corporate” and “old school” in its culture than Occam. In addition, Liontrust took 70% of performance fees earned by fund managers, whereas at Occam the split was 50/50. Nevertheless, Mr Flanagan recognised that there was little he could do to dissuade Mr Hughes-Morgan from selling Occam to Liontrust, although he made his reservations known to him. For his part, Mr Hughes-Morgan did his best to persuade Mr Flanagan to join, recognising that he was one of the more talented members of his team, and if Mr Flanagan were to announce his departure it was probable that further redemptions would cause the Fund to close, and Liontrust would probably be unwilling to proceed with the acquisition.

In May 2011 Mr Ions had a preliminary meeting with Mr Flanagan and other members of Occam’s staff. This provided an opportunity for Mr Ions to tell them about Liontrust, and to discuss some of the potential benefits of the acquisition. A few days after the meeting, Mr Flanagan reported to Mr Mellersh that the meeting had been less of a success than Mr Hughes-Morgan apparently thought, and the general view at Occam was that Mr Ions was “okay”, but a number of financial issues needed to be resolved.

Legal work on the deal progressed during the summer of 2011. The fund managers at Occam were told that, on joining Liontrust, they would be tied in for two years. Drafts of the LLP Agreement and the Side Letters were sent to Occam, and considered by its lawyers. Various changes to the documentation were agreed, including some requested by Mr Flanagan and Mr Mellersh.

On 1 August 2011 the Business Purchase Agreement was signed, and on 2 August Liontrust announced to its shareholders that an agreement had been reached to acquire Occam. The announcement was headed “Liontrust and Occam join forces”, and began with the following “key points”:

“Liontrust and Occam join forces in a highly complementary acquisition enhancing the fund management, distribution, marketing and operations teams.

Occam provides Liontrust with two of the faster growing asset classes by adding Asia and Global Emerging Markets funds to Liontrust’s existing UK and European range and two experienced and highly respected fund management teams.

Occam brings a Dublin range of funds and established distribution capability in continental Europe, the Middle East and other international markets to supplement Liontrust’s traditional focus on UK-based investors.

Occam brings a number of experienced and talented individuals to Liontrust.

The transaction marks the latest step in a successful 16 month phase of growth for Liontrust and the start of the Company’s next stage of expansion.”

The rest of the announcement continued in the same positive tone. It included biographical details of Mr Flanagan and Mr Mellersh, and described the Emerging Markets fund management team at Occam as having an excellent pedigree and strong long-term track record. The following passage is also worth quoting:

“There is also a good cultural fit between the two companies. John Ions and Jonathan Hughes-Morgan have known each [other] for many years and have like-minded views on the asset management industry. Jonathan Hughes-Morgan will bring experience and expertise in identifying and recruiting fund managers.

At both Liontrust and Occam, the fund managers are free to manage their funds according to their own investment processes and market views. There is a can-do attitude at both companies and bureaucracy is minimised to allow decisions to be made quickly and implemented rapidly. Therefore, we see the transaction as more of a merger than an acquisition.”

As I have already explained, August and September 2011 was a period of very poor performance for the Fund, and on or shortly before 26 September 2011 Occam’s AUM fell below the “floor” figure of US$ 150 million specified in the Business Purchase Agreement. This poor performance, at such a critical juncture, was (I am satisfied) both disappointing and embarrassing to Mr Flanagan. Mr Hughes-Morgan told Mr Flanagan that he needed to speak to clients to explain the poor performance, and to try and restore their confidence, but Mr Flanagan refused to do so. On 17 September 2011, he left on a fortnight’s pre-booked holiday in Sri Lanka and the Maldives. Before leaving, he had signed a Deed of Adherence to the LLP Agreement, and the Side Letter, and given them to Sarah McCrickard, the chief operating officer of Occam, so that they could be executed if the deal proceeded in his absence. In lawyer’s language, he signed these documents in escrow, and therefore committed himself to their terms if the deal proceeded in his absence and the documents were executed in accordance with the authority which he gave to Ms McCrickard. Mr Flanagan agreed in cross-examination that he could have asked Liontrust to incorporate a promise in relation to marketing and sales in the draft documents which he signed, but had never done so.

Before his departure, Mr Flanagan had also drafted some preliminary material for use in a “process sheet” relating to the Fund. A process sheet forms part of the explanatory material which is provided to potential investors. Mr Flanagan’s draft was sent to Mr Hildrey at Liontrust, who said in an email of 16 September 2011 to his counterpart at Occam, Natalie Pateman, that it contained some interesting points but “a bit more detail” was needed in certain areas, which he then set out.

When the AUM floor in the Business Purchase Agreement was breached, Liontrust would have been entitled to walk away from the deal. Emergency discussions took place between Mr Hughes-Morgan and Mr Ions, as a result of which Liontrust offered Occam three options: the first was that Liontrust would walk away; the second that they would do the deal, but for zero consideration; and the third that they would seek shareholder approval for the deal to proceed if Occam’s AUM had regained the level of $150 million by January 2012. Mr Flanagan was informed of these developments, and on 27 September he sent a confidential email to Mr Mellersh. This email reflected the personal dismay and embarrassment which he felt about the performance of the Fund. He said:

“I’ve read the couple of emails about the Liontrust situation. Can’t say I’m that surprised. But I do think we have a bigger problem than this month – namely our own performance. I don’t know that we can continue on with a 10% plus loss this month. This would mean that we’ve failed to provide significant downside protection to our investors, that we will have significantly exceeded the kind of draw down we told people to expect (12-15%), that we’ve failed to add value through either stock selection or market timing and that we will be on course for two loss-making years. I think it will be an impossible job to stop people pulling almost all the assets from the fund, and I don’t see how we can write a monthly that says “We are down 12 pct but it’s okay”. Despite the fact that valuations are stupidly cheap in many cases, investors simply will not (in my experience) invest money in a fund that has had this kind of draw down.”

Mr Flanagan asked Mr Mellersh to let him know his thoughts, and to keep their exchange confidential until they had agreed on the right course of action.

The options put forward by Liontrust were discussed at a partners’ meeting of Occam on 26 September. The first option was seen as the least palatable, while the third option would be time consuming, expensive, and unlikely to be well received. Moreover, Occam’s AUM would be likely to decline in the meantime, as many of Liontrust’s shareholders were investors in Occam. That left the second option (zero consideration), which was also unattractive, but less so than the other two options. It was agreed that Mr Hughes-Morgan should revert to Liontrust to see if any improvements on the second option could be agreed, including a reduction in the lock in period for partners from two years. Ms McCrickard emailed a summary of the meeting to Mr Flanagan and Mr Mellersh at 4.51 pm, adding “Any other thoughts of what to ask for welcome”. Mr Flanagan had evidently received this email before he sent his email to Mr Mellersh on 27 September at 1.40 pm. (It is convenient to note at this point that the timings shown on the relevant emails appear to be Greenwich Mean Time rather than British Summer Time, and one also needs to bear in mind that the local time for Mr Flanagan was several hours ahead of GMT).

On the morning of Wednesday, 28 September 2011, Mr Flanagan sent an email to Ms McCrickard saying that he wished to withdraw from the deal. He said:

“I want to withdraw my signing of the deed of adherence to the Liontrust LLP and any other document that commits me to joining Liontrust. I signed this on the understanding that a deal was going ahead which involved Liontrust paying for their acquisition and therefore involved payment to me as an LLP member. I’m not willing to be bound by it if the situation has very materially changed. The deal can still go ahead on Friday, but I’m not committing to joining Liontrust.”

Mr Flanagan added that he no longer considered himself bound by the documents which he had signed in escrow, because there had been a material change in the terms on offer. In that belief, he was, as a matter of law, quite correct.

At 2 pm on the same day, Mr Hughes-Morgan emailed Mr Flanagan asking him to reconsider his decision. The email is significant, so I will quote it almost in full:

“Trust the sun is shining and the fish are jumping or whatever it is they do in the Maldives.

I have just had a long chat with James [Mellersh] and he has told me where you are over coming back to run the fund etc in light of the deal.

I have a few points re that which I hope that you will take on board.

1.

Although you think that this month has not been great, please bear in mind that [the EM Index] is down around 15% month to date so many funds have been in exactly the same position as we are and clients have not indicated that they will sell the fund wholesale because of it.

2.

I realise how tough it has been for you over the course of this year but again this has applied to many funds not just us. This has been an extraordinarily difficult time for most managers and many big names are down far more than us this year. It is not a total disaster and the fact that everyone is feeling so bad about life probably indicates we are closer to the bottom than we think.

3.

We are on the brink of doing a deal to give us a chance to turn the performance around. The team are very keen to do this but realistically they cannot do it without you. If I have to announce that you have decided to leave the fund at this juncture, clients will definitely redeem and we will have to wind the team up immediately.

4.

David [Sheppard] and I have been round to Liontrust all morning to renegotiate the deal and have agreed that they will pay 2.1% of the AUM as at close on Friday this week. They have also indicated that over time they will add options to key staff in the firm that should make up for the reduction in the price which is driven by AUM slipping under the agreed minimum for the deal to proceed. They do not want to walk away from this deal and believe that we will become a major part of their business.

5.

Without you, I suspect that the whole deal will fall apart as they we [sic] will have to wind the fund up straight away which realistically means making all staff redundant. While I do not wish to put that burden on you it is the reality of the situation as it stands.

6.

I don’t know whether you simply [do] not want to run the fund any more, but in that case it would be feasible to come back for say your six month’s notice period and allow us time to slowly put James in the picture which would at least give him a chance to keep the fund going and keep the team together.

7.

I know you have never been delighted about this deal but you did say that you were happy after consideration to do it and I think that realistically this is the only way that we can have a chance of getting through this difficult period. It is supposed to complete on Friday with staff integration drinks etc happening tonight.

Would you please take a moment to consider what you would like to do and let me know this afternoon. I have not mentioned any of this to Liontrust or the team here and would obviously be delighted if you would agree to come back (at least for a while). I know that economically you do not have to but I suspect that you would rather not just suddenly walk away at the bottom.

Can you send me an email asap with your thoughts.”

It can be seen, therefore, that, in addition to putting the best gloss which he could on the poor performance of the Fund, Mr Hughes-Morgan also informed Mr Flanagan of the revised terms now on offer from Liontrust, and appealed to his better nature not to cause the whole deal to fall apart, and the Fund to be wound up, by “suddenly walk[ing] away.”

At 3.45 pm on 28 September, Ms McCrickard emailed Mr Flanagan to inform him of the latest proposal from Liontrust. As she said, it was “significantly better than zero, but less than had been approved”. She added:

“We’ll get the amended documents in the morning, and have another LLP meeting to vote on it, I’ll send you everything so you’re in the loop.”

She asked Mr Flanagan to let her know as soon as he could which way he wanted to go, so she could make sure the documents were drawn correctly.

A further unwelcome development on this day was the decision of Schroders NewFinance Capital LLP to redeem its investment in the Fund. Having received an update on the month’s dismal performance from Mr Sheppard of Occam, Mr Martin Blank of Schroders emailed Mr Sheppard to say:

“I think we will be redeeming now as this is outside of what I expected and follows a longer period of results that I have felt were disappointing and showed too much down capture for the up-capture achieved.”

This assessment tallies with Mr Hughes-Morgan’s diagnosis of the basic problem with the Fund’s performance, which I have little doubt reflected his true views at the time when he was not trying to cheer Mr Flanagan up and save the deal with Liontrust. The assessment also substantially coincides with the gloomy views which Mr Flanagan had expressed to Mr Mellersh on the previous day.

Early the next morning, Mr Flanagan had a telephone conversation with Mr Hughes-Morgan, and at 1.27 pm GMT he sent a further email to Mr Mellersh from his iPad:

“So that you and I are on the same page, I spoke to JHM today. I told him that I am not willing to commit to joining Liontrust in a deal completing on Friday. I told him that I thought it was pretty remarkable that, on the one hand I’m being told that I’m critical to the whole deal and on the other hand, the deal was being rushed through while I was on holiday.

The reason I have changed my view – from previously, when I was happy to go along despite misgivings – is our performance. I have outlined my thoughts on this to you previously. I bear significant responsibility for it, and I accept this. But the thought of being castigated repeatedly for it over the next 12 months (by hindsight investors who will tell us that X, Y and Z were obvious) is more than I can bear. In truth however, if the fund were to finish tomorrow, I would invest all of the proceeds of my investment in our top 10 positions. Make of that what you will. However, at the same time I feel that, given the nature of the hedge fund industry (which is founded on lies) we will not be able to sell our fund for the foreseeable (that word is not chosen lightly) future.

I am happy to spend time talking through the issues on Monday and will listen to all reasonable arguments. However, I’m not going to be bullied into something that I think will result in an unpleasant life for me for the next two years. I don’t think I can be asked to make that sacrifice for the greater good. We have all made mistakes over the last 18 months, not just me.

See you on Monday,”

Mr Hughes-Morgan had no recollection of the conversation described by Mr Flanagan, but he accepted that they must have spoken. The probability is that Mr Flanagan called Mr Hughes-Morgan, having considered his “jumping fish” email of the previous day. It is apparent, therefore, that Mr Flanagan remained impervious to Mr Hughes-Morgan’s appeal, at any rate in relation to a deal completing on the following day while he would still be on holiday. On the other hand, Mr Flanagan informed Mr Mellersh, and I infer probably also told Mr Hughes-Morgan, that he would be happy to talk through the issues further on his return to the office on Monday 3 October. This email is also notable, in my view, for the feelings of wounded pride and personal embarrassment which it evinces about the poor performance of the Fund, and for Mr Flanagan’s cynical view about the nature of the hedge fund industry. In cross-examination, he said that this was a “very candid” email, but did not represent his considered view. I accept it was written at a time when Mr Flanagan was under great pressure, but his candour is in my judgment nevertheless revealing, and provides an accurate record of what he thought and felt at the time.

Later the same day, Mr Mellersh replied to Mr Flanagan. He sympathised with Mr Flanagan’s feelings, but said he thought there were “two immediate things we can do that will alleviate some of the pressure you feel, one relatively easy, one difficult”. The easy bit, said Mr Mellersh, was that he could do all investor meetings for a while, if that suited Mr Flanagan. He added:

“This is an equal partnership and I’m in arrears on marketing, since you did it when I found it daunting at the start. I’ll be out for a period when our little girl arrives but otherwise you can count on me to deal with the hindsight merchants either all the time or whenever you want a break. You should still front us to the Liontrust sales team or they’ll get confused, but there’s lots of goodwill from them.”

Mr Mellersh then went on to the harder part, which was to fix the performance of the Fund. After making various suggestions, he concluded:

“If you buried what you feel right now it would just cost us later in some way. We can all be adults and work out a way forward. But after more than two years of blood, sweat and tears I want to do this with you and make it work. We still can.”

The next morning, Mr Flanagan replied to Mr Mellersh:

“Hi,

Just wanted to say that I appreciate you writing this email in the way you have. I know you’ve got an awful lot going on and I do appreciate that you are making a great effort to see things from my perspective. Let’s talk on Monday.

Your friend,

E.”

On Monday, 3 October 2011, Mr Flanagan returned to the office after his holiday. Mr Hughes-Morgan was anxious to speak with him, and they arranged to meet between 11 am and noon. Neither Mr Flanagan nor Mr Hughes-Morgan was able to recollect the detail of their conversation, but at 11.54 am Mr Flanagan emailed Mr Mellersh saying:

“The upshot of that conversation with JHM is that I have agreed to go through with the Liontrust deal if I get an exit option after 1 year.

We should go out for dinner sometime this week. Obviously, it has been an extremely difficult time and I think we need to make sure that we keep communicating with each other …”

I see no reason to doubt that, in this email, Mr Flanagan meant exactly what he said, namely that he had reached an agreement with Mr Hughes-Morgan to go through with the Liontrust deal provided that he secured an exit option after one year, instead of two. Although Mr Flanagan maintained in his written evidence that he had not made a firm decision at this meeting, that is not what the email says, and in cross-examination he agreed, after some prevarication, that he had indeed made a firm, albeit conditional, commitment to join Liontrust. It is sufficient to quote the following passage from his cross-examination (day 2, page 99):

“Q. Well, let me put it this way: had somebody emailed you at [11.55] on the Monday saying, “It is agreed you can have a one-year exit arrangement”, then your decision was made?

A. Probably, yes, if that had happened, yes.

Q. Not probably.

A. Yes, if that had happened, yes.

Q. And you had made that decision without having had any assurances from Liontrust about marketing or sales?

A. That’s correct. ”

As neither Mr Flanagan nor Mr Hughes-Morgan can remember the content of their discussion, and as Mr Flanagan did not explain his thinking to Mr Mellersh, it is unclear what caused Mr Flanagan to change his mind. I suspect that Mr Hughes-Morgan’s appeal to his better nature, and Mr Mellersh’s offer to take the lead in meeting and dealing with dissatisfied clients, both played their part. In any event, the important point is that Mr Flanagan did indeed change his mind, and by noon on 3 October he had decided to join Liontrust, on the revised terms offered by Liontrust, provided only that he could secure an exit option after one year.

Shortly after the end of Mr Flanagan’s meeting with Mr Hughes-Morgan, Mr Ions contacted Mr Flanagan by email in order to arrange a meeting between them later that day. Mr Ions said he had meetings at 2 pm and 4.30 pm, so he suggested 3.15 pm at Liontrust’s offices. This did not suit Mr Flanagan, because an important survey was due to be released at 3 pm which could have a significant impact on the Fund’s performance. It was therefore agreed that he and Mr Ions would meet at 6 pm, and (at Mr Flanagan’s suggestion) that the meeting should take place in a pub. Mr Ions then proposed Christopher’s Bar in Wellington Street, so that is where the meeting took place.

The evidence is inconclusive on the question of how much Mr Ions knew about Mr Flanagan’s position before the meeting took place. Neither Mr Ions nor Mr Hughes-Morgan had any positive recollection of how much (if anything) Occam had told Liontrust about Mr Flanagan’s reluctance to join Liontrust, either in the course of the previous week or during the morning of 3 October. On balance, I think it probable that Liontrust would have realised by the end of 30 September that there was a problem involving Mr Flanagan, even if this had not been explicitly explained by Mr Hughes-Morgan. All of the other key personnel who were transferring from Occam had signed up by that date, including Mr Mellersh; and the fact that Occam was unable or unwilling to complete the deal on the 30^th, as originally planned, would have suggested that there was a problem. I also think it much more probable than not that, immediately after his meeting with Mr Flanagan on the Monday morning, Mr Hughes-Morgan would have informed Mr Ions of Mr Flanagan’s willingness to join in the move provided that he had the option to leave after one year. I therefore find on the balance of probabilities that Mr Ions knew about this before he contacted Mr Flanagan shortly before 1 pm.

Possibly for this reason, it was also arranged on the Liontrust side that Mr Collins would accompany Mr Ions to the meeting. Mr Collins’ recollection, however, is simply that he happened to be in the office at the time, and from his point of view the meeting was typical of the type of meeting that might be held in the context of an acquisition, in order to discuss the opportunities that would be created by the acquisition with key individuals. On any view, the meeting was of a relatively informal nature. It took place while the three of them were standing at the bar, and no arrangements had been made for anybody to make a record of what was said. I accept the perception of Mr Collins that it was the occasion for a discussion, rather than a formal presentation by Liontrust. I am also satisfied that Mr Ions and Mr Collins knew of the agreement which Mr Flanagan had reached with Mr Hughes-Morgan during the morning, and that despite his earlier reservations Mr Flanagan had now agreed to join in the move, subject to one condition which was unlikely to be a deal-breaker and on which Liontrust could, if necessary, give way. The main focus of the meeting, therefore, was on discussing the future of the business with Mr Flanagan, answering his questions, and doing their best to reassure him that he would not regret the decision which he had already made in principle. For his part, Mr Flanagan had arranged that Mr Hughes-Morgan would join them after about 30 to 40 minutes, so as to give Mr Flanagan some time alone with the Liontrust people first. In fact, most of the key discussion had taken place before Mr Hughes-Morgan arrived, so his participation in the meeting is of only peripheral significance.

In his first statement, Mr Flanagan describes his recollection of what Mr Collins and Mr Ions told him at the meeting as follows:

“79.

I clearly recall that what Mr Collins and Mr Ions actually told me was that they were aware that we had had a very difficult time over the last two months, but that they felt that, with Liontrust’s client relationships, we could build the assets of the Fund by marketing it to their existing client base. We did not discuss figures, but it was apparent from what they said (and this was public anyway) that they were aware of what the performance of the Fund had been, but that this had not put them off. Their basic message was that the overall performance of the Fund had not been so bad, that they were comfortable with this and that they nevertheless thought that the Fund could be marketed to their client base, which was large and well-established.

80.

That accorded with my prior understanding from Jonathan Hughes-Morgan that Liontrust were keen to do the deal despite the Fund’s very disappointing performance in the last two months. It also accorded with common sense – it did not seem to me to make any sense for Liontrust to acquire Occam (and to try to persuade me to join Liontrust) if they did not want to make something of the Fund.

81.

A lot of what Mr Ions said to me on 3 October 2011 was directed at me personally – he led me to believe that he thought that I was a good fund manager with a strong reputation. He also talked a lot about Liontrust’s client relationships and marketing. For example, I remember that he mentioned two large clients … and said words to the effect that “if we get you in front of those guys, they will like the way you manage money”. He was clearly saying that he thought that the Fund would be attractive to many of Liontrust’s clients. He also talked more generally about marketing the Fund to Liontrust’s established client base. That was obviously an attractive proposition for me and one of the key benefits, along with additional resources for marketing and sales, of joining a large business like Liontrust.”

This summary of what was said at the meeting seems to me to accord with its general purpose, as I have identified it, and to fall well short of what one would objectively expect to find if the parties had intended their discussion to have legal effect, whether in the form of a collateral contract or in the form of representations upon which Mr Flanagan would be legally entitled to rely.

This impression is strongly reinforced by the evidence which Mr Flanagan gave in cross-examination. Mr Flanagan said that his conversation with Mr Ions and Mr Collins took place while they were standing in a line in front of the bar. It was a Monday evening, so the bar was not particularly busy. Nobody suggested that they should sit at a table for privacy. Neither Mr Ions nor Mr Collins said that they were speaking on behalf of any particular Liontrust entity, and this was not something that Mr Flanagan thought about. When it was put to Mr Flanagan that their conversation was never intended to have legal effect, but was a chat between professionals or businessmen, he replied:

“It certainly wasn’t a meaningless chat, it was a discussion at a rather crucial point of the acquisition of Occam by Liontrust to discuss the business going forward, whether synergies existed, what the business plan would be and how this would affect me as a fund manager.”

Mr Flanagan then agreed that at no stage in the discussion did Mr Ions make any explicit promise on behalf of Liontrust:

“A. No it was more in terms of assurances of what Liontrust was capable of doing and the synergies they saw between my fund in particular and their business.

Q. So it was a discussion where what he was doing was describing Liontrust’s business and how it operated?

A. And the potential synergies between the funds I ran and that business.”

A little later (day 2, page 106), in response to the suggestion that there was a general discussion in which neither Mr Ions nor Mr Collins made him any promises about what Liontrust would do, or what might come of the synergies, Mr Flanagan said:

“A. They didn’t make specific representations as to what would come of the synergies. But they did discuss the synergies that they believe existed specifically between the fund that I ran and their business.

Q. So they were expressing –

A. But they didn’t express defined –

Q. They were expressing their opinions about the business with which they were associated.

A. And the synergies with the fund that I ran.

Q. Their opinions about those synergies?

A. They are, I agree.

Q. Yes. There was a general discussion about the performance of your fund, wasn’t there?

A. In very general terms.

Q. And there was an acknowledgement between the three of you that, again in very general terms, that the performance had been poor?

A.

Yes.”

It was then put to Mr Flanagan that he was drawing an inference from the general discussion, to the effect that Mr Ions and Mr Collins were sufficiently comfortable with the performance of the Fund that they were not just going to close it down the day after he arrived. Mr Flanagan agreed, and acknowledged that the sub-text of the conversation was that performance would need to improve before the Fund would be able to attract any inward investment. Importantly, Mr Flanagan also accepted that there was no discussion in the bar about his not having made up his mind to join Liontrust. He said that, to the best of his recollection, no such discussion took place.

In the light of Mr Flanagan’s written and oral evidence, it seems to me quite impossible to conclude that any form of collateral contract was entered into during the meeting. I am similarly satisfied (a) that no representations intended to have legal effect were made by either Mr Ions or Mr Collins, and (b) that nothing which either of them said could reasonably have been understood as amounting to such a representation.

On 4 October, Liontrust sent to Ms McCrickard an amended version of Mr Flanagan’s Side Letter, and she forwarded it to him to sign and return if he was happy with it. The amendments would have permitted Mr Flanagan to retire from the LLP by giving one month’s notice on the first anniversary of his joining it, but they would also have permitted Liontrust to serve a notice of compulsory retirement on him at the same time under clause 18.1.3, with a notice period of only one month. Furthermore, and perhaps more significantly, if Mr Flanagan chose to retire early, he would then be subject to a 12 month non-compete covenant, whereas under the Side Letter in its original form the non-compete restrictive covenant in clause 24.1.1 of the LLP Agreement was disapplied. Mr Flanagan was unhappy with the combined effect of these proposals, which in his view would have left him worse off than the terms of the Side Letter in its original form. What he wanted, and had discussed with Mr Hughes-Morgan on the previous day, was the right to leave Liontrust after one year and then take another job, if necessary. Mr Flanagan therefore made it clear (either to Mr Hughes-Morgan or to Ms McCrickard) that he was unwilling to accept the proposed changes, so the Side Letter reverted to its original form.

On the same day, the acquisition of Occam by Liontrust was completed, and Mr Flanagan signed both a Deed of Adherence to the LLP and the Side Letter.

I conclude with an obvious point. If Mr Flanagan had indeed made an oral agreement on the previous day with Liontrust, or if he really thought that legally binding representations had been made to him, it is to my mind a near certainty that he would have raised the matter with Occam’s lawyers, and probably also made a careful written record of what had been said, before committing himself to join the LLP. The force of this point is strengthened by the fact that he had to give active consideration on 4 October to the terms of the Side Letter, which Liontrust had agreed to amend so as to permit him to leave after one year, albeit on conditions which were not acceptable to him.

The first termination letter

I now turn to the question whether Mr Flanagan’s membership of the LLP was validly terminated by the letter handed to him on 20 August 2012, and the linked question whether he was then validly placed on garden leave.

In the introductory section of this judgment, I have described the general background which led Liontrust to decide in August 2012 that it wished to part company with Mr Flanagan. I have also summarised the main relevant provisions of the LLP Agreement, and set out the wording of clause 18.1.3, together with the relevant parts of the Side Letter: see [11] to [15] above. The main issues which arise are set out in [24].

Before considering those issues, I will place the main provisions upon which Liontrust purported to rely when giving notice to Mr Flanagan (clauses 18.1.3 and 21.1) in the context of the group of clauses in the LLP Agreement which relate to termination of membership. Clauses 18 to 22 of the LLP Agreement provide, so far as material, as follows:

“18 Compulsory retirement and retirement due to death

18.1

an Individual Member will retire from LIP [i.e. the LLP] and cease to be a member:

18.1.1

on his death;

18.1.2

at the end of the Financial Year in which his sixty-fifth birthday falls; or

18.1.3

on the expiry of such notice period as is set out in that Individual Member’s Side Letter following a decision of LIS (as a Reserved Matter) requiring him to retire as a Member.

…

18.4

If an Individual Member is given notice requiring him to retire as a Member in the circumstances envisaged in Clause 18.1.3, he shall promptly following receipt of such notice resign, without claim for compensation for loss of office, from all such directorships, trusteeships or other offices or appointments held by him in connection with funds managed by LIP or any member of LIP’s Group.

19 Voluntary Retirement

19.1

Any Individual Member may retire as a member of LIP on giving such period of notice as set out in that Individual Member’s Side Letter to the Management Committee (or such other period of notice as may be agreed by that Member with the Management Committee).

…

19.3

[This is in the same terms, mutatis mutandis, as clause 18.4]

20 Expulsion

20.1

The Management Committee shall be entitled, with the consent of LIS as a Reserved Matter, immediately on notice to the relevant Individual Member(s) to (a) expel from LIP any Individual Member if such Individual Member shall or (b) suspend any Individual Member if LIS in its sole and absolute discretion considers that [the] Member may have or shall:

20.1.1

commit any serious breach or persistent breaches of this Agreement or persistently fail or neglect to comply with his obligations under this Agreement;

20.1.2

[Other grounds of expulsion are then set out, in sub-clauses 20.1.2 to 20.1.11]

…

20.2

Any such notice as is referred to in Clause 20.1 shall give sufficient details of the reasons for the expulsion or suspension to enable the same to be properly identified.

…

20.5

[This is again in the same terms, mutatis mutandis, as clause 18.4]

21 Garden leave and suspension

21.1

Where an Individual Member has served notice to retire as a Member under Clause 19 or has been given notice to retire from LIP in the circumstances envisaged by, or pursuant to, respectively, Clause 18.1.3 and Clause 20.1, the Management Committee may by written notice to such Individual Member require him for the whole or any part of his period of notice to:

21.1.1

perform such duties as the Management Committee may allocate to him or not to perform any of his duties as a Member;

21.1.2

exclude him from any premises of LIP or any member of LIP’s Group;

21.1.3

require him to have no contact with any clients of LIP or any Member of LIP’s Group; and/or

21.1.4

require him to have no contact (other than purely social contact) with any other Members or with any employees of LIP or any Member of LIP’s Group.

21.2

[This empowers the Management Committee to suspend an Individual Member for a period of up to two months]

21.3

During any period when Clause 21.1 or Clause 21.2 applies, the Individual Member concerned will continue to be entitled to his Fixed Allocation and Variable Allocation. However, he will not be entitled to continue to receive any financial or other information circulated or otherwise made available to the Members generally, except to the extent required to enable him to carry out his statutory duties as a member of LIP.

22 Provisions relating to cessation of Membership

22.1

If an Individual Member ceases to be a Member of LIP pursuant to clause 18, then that Individual Member shall only be entitled to receive the outstanding credit balances on his Current Account and Capital Account as at his Retirement Date representing his Fixed Allocation and any Variable Allocation.

…

22.7

For the avoidance of doubt, except for the payments referred to in Clause 22.1 … an Individual Member who ceases to be a Member and becomes a Former Member will not be entitled to:

22.7.1

any share of his Fixed Allocation or Variable Allocation which arises after his Retirement Date; or

22.7.2

any share of the present or future assets or goodwill of LIP.

…

22.9

This Agreement shall automatically terminate with respect to the rights of any Member, if that Member ceases to be a Member save as regards:

22.9.1

any rights, obligations or liabilities of that Member which have accrued or arisen on or prior to his Retirement Date;

22.9.2

in the case of a Member that is an Individual Member, any rights, obligations or liabilities of that Individual Member as detailed in his Side Letter or this Agreement that are expressed to continue beyond his Retirement Date;

22.9.3

the liability of any Party by reason of its antecedent breach of the terms of this Agreement (but without prejudice to the rights, obligations or liabilities of any Party which shall have accrued or arisen prior to such termination); and

22.9.4

Clauses 1 (Definition and Interpretation), 24 (Restrictive Covenants), 31 (General), 32 (Notices) and 33 (Governing law and jurisdiction).”

The first question is whether the notice given to Mr Flanagan was invalid because it was given more than six months before 4 October 2013, which would have been the second anniversary (or “24 months anniversary”, as it is rather illogically called in the Side Letter) of the date when he joined the LLP. According to the Side Letter, the period of notice specified for the purposes of clause 18.1.3 was “6 months”, for so long as the team assets under management did not exceed £350 million. This threshold was never reached at any material time. In addition, the six months’ notice had to expire no earlier than 4 October 2013, thereby ensuring that Mr Flanagan could not be removed from membership of the LLP (except for cause, in accordance with the expulsion provisions of clause 20) before the end of his “Compulsory Initial Term” of 24 months.

The argument for Mr Flanagan is straightforward. The earliest date on which a compulsory retirement notice could be served on him under clause 18.1.3 was 6 months before 4 October 2013, i.e. 4 April 2013. Any notice served on him before 4 April 2013 would still have to be stated to expire on 4 October 2013 at the earliest, so it would necessarily give him notice for a period in excess of the stipulated 6 months. In the present case, notice was given to Mr Flanagan on 20 August 2012, and it informed him that he would cease to be a member of the LLP with effect from 4 October 2013, which was defined as “the Retirement Date”. Thus the period of notice which he was given was not six months, but approximately 13 and a half months.

Liontrust’s main counter-argument is that the Side Letter specifies the minimum period of notice which needs to be given, and does not preclude the giving of a longer period of notice provided that it is stated to expire no earlier than 4 October 2013. In other words, the Side Letter should be construed as requiring a notice period of at least six months. Liontrust submits that the parties cannot sensibly have intended that Mr Flanagan’s compulsory retirement could be triggered only by a notice of precisely six months’ duration. On the contrary, once the decision has been taken to require a member to retire, it makes good sense to tell the member sooner rather than later, and thus give him the maximum opportunity to arrange his affairs and secure an alternative source of income before he has to leave.

Liontrust supported this argument by referring to the decision of Goulding J in Davstone (Holdings) Ltd v Al-Rifai (1976) 32 P & C R 18, where, if the lessors of a 14 year underlease of a flat wished to trigger a rent review at the expiry of the first seven years of the term, they had to “give to the lessee three months previous notice in writing expiring on … October 20, 1974”. The relevant notice was given by a letter dated 19 June 1974. The lessee argued that the notice was invalid, saying that the right to increase the rent was an option, which required strict compliance with the conditions prescribed for its exercise. One of those requirements was service of a three months’ notice expiring on 20 October 1974. Accordingly, argued the lessee, the lessors had to establish that the letter satisfied the twin requirements of giving him three months’ notice and giving him a notice which expired on 20 October 2974.

Goulding J rejected this argument, saying at 28:

“Mr Browne-Wilkinson [counsel for the lessee] put his case as a dilemma. If received (using that word as used in clause 8) on June 20, the notice is a four months’ notice, therefore bad; if it is a three months’ notice, and therefore good, it is not received until July 20. I am unable to accept that argument. I think it is a wholly novel method of construction, and to my mind it is inconsistent with the ordinary use of language. In universally accepted practice a requirement of three months’ previous notice expiring on a specified date means notice of not less than three months expiring on that date; and receipt of notice in writing, unless otherwise explained, means receipt of the document.”

In my judgment the assistance which I can derive from Davstone is very limited, for at least three reasons. First, the principle of construction stated by Goulding J in the passage which I have quoted applies only where the requisite period of notice has to expire on a specified date. In the present case, by contrast, the notice need only expire no earlier than (or not before) a specified date. Secondly, despite the “universal acceptance” which Goulding J confidently ascribed to his principle, I was not shown any other case in which the principle has been stated in similar terms. Thirdly, and more generally, I agree with the submission of counsel for Mr Flanagan that the relevant agreement between the LLP and himself (contained partly in the LLP Agreement, and partly in the Side Letter) must be construed by reference to the now familiar principles set out in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL), as elaborated upon by the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, in the judgment of the Court delivered by Lord Clarke of Stone-cum-Ebony JSC (“Rainy Sky”).

The key principles to be derived from Rainy Sky appear from paragraphs [21] and [23] of Lord Clarke’s judgment:

“21.

The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.

…

23.

Where the parties have used unambiguous language, the court must apply it …”

Those principles must now, in turn, be read in the light of the observations of Lord Neuberger of Abbotsbury PSC in Arnold v Britton [2015] UKSC 36, [2015] 2 WLR 1593, judgment in which was delivered on 10 June 2015, after the conclusion of the hearing in the present case. Speaking for the majority, Lord Neuberger discussed the interpretation of contractual provisions at [14] to [23]. For the purposes of that case, which concerned an ill-drafted provision for annual increases in the service charges payable under a number of long leases of holiday chalets, Lord Neuberger emphasised seven factors, of which the first was this:

“17.

First, the reliance placed in some cases on commercial common sense and surrounding circumstances (e.g. Chartbrook [2009] AC 1101, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focusing on the issue covered by the provision when agreeing the wording of that provision.”

Lord Neuberger’s third point, at [19], was that “commercial common sense is not to be invoked retrospectively”. It is “only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made”.

In applying these provisions, the first question is whether there is any ambiguity in the language of clause 18 of the LLP Agreement read with the relevant part of the Side Letter. In my opinion, there is not. The requisite period of notice is specified as “6 months”, to expire “no earlier than” 24 October 2013. Those words mean what they say. The parties did not say “at least 6 months”, as they easily could have done if that was their intention. Nor is there any practical difficulty, let alone impossibility, for Liontrust in complying with such an obligation. All that Liontrust had to do was to give Mr Flanagan a written notice, signed by or on behalf of the LLP, which was stated to expire six months after it was served on him. The expiry date could either be specified as a particular date (e.g. 24 October 2013 for a notice served on 24 April 2013), or described as the date which fell six months after the date on which the notice was served on Mr Flanagan. The rules relating to service of notices are contained in clause 32 of the LLP Agreement. Their effect, briefly stated, is that any notice delivered personally is deemed to have been received at the time of delivery, while any notice served by pre-paid recorded delivery or registered post, to the address specified for the relevant member in Schedule 1, is deemed to have been received 48 hours from the date of posting. No other method of service was permitted under the clause.

Since there is no ambiguity, considerations of commercial common sense do not need to be considered. In case I am wrong on the question of ambiguity, however, it seems to me that there are at least four factors which, viewed objectively and taken in combination, would have made it entirely reasonable for the parties to stipulate a fixed period of six months’ notice, no more and no less. Those factors are:

The cumulative force of these points is illustrated if one imagines a situation where, within a month of his joining the LLP, the relationship between Mr Flanagan and Liontrust had broken down without any fault or misconduct on his part which would have justified Liontrust in expelling or suspending him under clause 20. If Liontrust’s construction of clause 18.1.3 and the Side Letter is correct, Liontrust could nevertheless then have served notice of compulsory retirement on Mr Flanagan and immediately placed him on garden leave for the remaining 23 months of his compulsory initial term. Assuming that the Fund was also wound up, and not continued or replaced, Mr Flanagan would then have been locked in for the best part of two years, unable as a matter of contract to work for anybody else, and confined to receipt of his Fixed Allocation of £125,000 per year.

It is no answer to this point, in my judgment, to say that a court would in practice probably be unwilling to enforce some of these provisions by way of injunction. What matters is the position that the parties would objectively have contemplated at the time when Mr Flanagan joined the LLP, having regard to the terms of their agreement and the mutual obligations which they freely undertook. I can see no good answer to the simple point that the concept of a mutually beneficial compulsory initial term of two years would have been denuded of much of its commercial content had it been open to Liontrust to force Mr Flanagan to retire, and then place him on garden leave throughout the remainder of the period, virtually as soon as the agreements had been signed. Conversely, if the requirement of six months’ notice is interpreted as meaning that no valid notice may be given under clause 18.1.3 before 24 April 2014, the parties knew where they stood from the outset, and Mr Flanagan had a period of at least 18 months in which to prove himself and attempt to turn round the performance of the Fund.

Furthermore, I am not deterred from concluding that notice of precisely six months had to be given by the fact that, in certain improbable circumstances, this might lead to a strange-looking result. The example which Mr Machell gave in his oral submissions assumed that Liontrust had prepared a written notice giving six months’ notice to Mr Flanagan stated to expire on 4 October 2013, and intended to serve the notice on Mr Flanagan by post on 2 April, so that Mr Flanagan would be deemed to receive the notice on 4 April. Surely it could not be contended that the notice was invalid, said Mr Machell, if the letter was in fact received by Mr Flanagan on the day after it was posted, or if the person charged with taking the letter to the post office had happened to meet Mr Flanagan and handed the letter to him. The answer in the first of these scenarios, I think, is that clause 32 of the LLP Agreement would still conclusively deem the notice to have been received by Mr Flanagan on 4 April, notwithstanding its actual receipt by him on the previous day. In the second scenario, I agree that the notice would have been invalid, if Mr Flanagan chose to take the point. But the problem would only arise if the notice were stated to expire on a particular day, rather than six months after it was served; and, in any event, improbable examples of this kind can always be constructed where there is a requirement for a fixed period of notice to be given.

The next question is whether the termination letter, although served on Mr Flanagan on 20 August 2012, can be treated as having become a valid notice on 4 April 2013, six months before the expiry of the compulsory initial term. Liontrust submits that the letter both can, and should, be so treated. This is, of course, a fall back submission, which applies on the assumption that I have ruled against Liontrust on its primary argument, and held (as I have) that notice must be given for a period of precisely six months expiring on or after 4 October 2013.

In arguing for an affirmative answer to this question, Liontrust stresses that the trigger for service of a valid notice under clause 18.1.3 is simply the expiry of the requisite period of six months’ notice, rather than the service of a notice expiring on a fixed date. Looking at the position as at 4 October 2013, Mr Flanagan had indeed been given notice for the necessary period of six months, and the fact that he had actually known of Liontrust’s intention to invoke clause 18.1.3 for a longer period is to his advantage, because it gave him longer to plan for his future. There is no reason in law or logic, submits Liontrust, why the invalid excessive notice should not be treated as ripening into a valid notice on the earliest date on which it could validly have been served. In effect, the argument is that the letter of 20 August 2012 can be treated as if it were a post-dated notice served on Mr Flanagan on 4 April 2013, and (in the absence of any prejudice to him) it should be so treated in the interests of business efficacy.

There are a number of reasons why I am unable to accept this argument. In the first place, the letter of 20 August 2012 was plainly intended to have effect at once, not least because it purported to place Mr Flanagan on garden leave “with immediate effect” pursuant to clause 21 of the LLP Agreement. Such a step could only be taken by the Management Committee where the member in question had (relevantly) been given notice to retire from the LLP under clause 18.1.3. Service of a valid compulsory retirement notice was therefore a condition precedent to any decision to place the member on garden leave. Construed objectively, the letter must therefore be read as intended to give Mr Flanagan immediate notice under clause 18.1.3. It cannot be construed as a post-dated notice which would only become effective on 4 April 2013.

Secondly, I would anyway not accept that clause 18.1.3 contemplates anything other than service of a notice of the correct duration. It is true that it is expiry of the requisite period of notice which triggers the retirement of a member from the LLP, but the notice has to be given in writing and satisfy the other requirements of clause 32, and if (as I have held) notice of precisely six months expiring on or after 4 October 2013 was required, I do not think the parties’ agreement can reasonably be construed as permitting service of a premature notice which by mere effluxion of time might mature into a valid notice. To make the same point in a different way, I think that a member is entitled to disregard a notice under clause 18.1.3 if, when served upon him, it purports to give more than the specified period of notice.

Thirdly, and in any event, I reject the notion that giving Mr Flanagan notice of more than six months was somehow to his advantage. For the reasons which I have already given in relation to the length of notice, I consider that clause 18.1.3 was essentially a provision which benefited Liontrust, and made a limited encroachment on Mr Flanagan’s compulsory initial term of two years. In that context, the giving of notice by Liontrust before 18 months had elapsed cannot fairly be regarded as a benefit to Mr Flanagan, but rather represents a premature attempt by Liontrust to exercise the power in its own interests.

The conclusions which I have already reached mean that the termination letter of 20 August 2012 was ineffective to achieve its purpose, because it failed to give Mr Flanagan the requisite notice of six months, and it cannot be treated as if it became a valid notice on 4 April 2013. It is therefore strictly unnecessary for me to consider Mr Flanagan’s alternative ground of challenge to his removal, namely that the decision was taken by LIS alone without the involvement of the Management Committee. I will, however, deal with the question, partly in case I am wrong on the issues relating to notice, but also because the question provides an introduction to other issues concerning the role of the Management Committee.

I emphasise that the question which I am now considering is one of construction, and turns on the meaning to be attributed to the words “following a decision of LIS (as a Reserved Matter)” in clause 18.1.3 of the LLP Agreement. It is undisputed that LIS (acting through its directors Mr Ions and Mr Abrol) took a positive decision to require Mr Flanagan to retire as a member. It is equally clear that the dormant Management Committee played no part in this decision. The basic question is whether, as a matter of construction, the words “(as a Reserved Matter)” meant that the Management Committee had to be involved in the giving of a valid notice under clause 18.1.3.

At this point, I need to refer in more detail to the provisions in the LLP Agreement relating to the Management Committee and Reserved Matters (I have already given a brief summary in [12] above).

Clauses 12 and 13 provide, so far as material, as follows:

“12.

Management Committee

12.1

Subject to and on the terms of this Agreement, the management of the general business and affairs of LIP (including, strategy development, financial planning and performance, employment and termination decisions, marketing and fund raising, facilities and technology) and all other affairs of LIP shall be vested in the Management Committee except where any decision or action requires approval by LIS as a Reserved Matter in accordance with Clause 13 or as otherwise expressly provided to the contrary in this Agreement or by the Law.

12.2

The Management Committee shall consist of the following persons, each of whom shall be an appropriate approved person for the purposes of the FSA Rules:

12.2.1.1 the representatives of LIS (being the Liontrust Management Committee Members), as appointed pursuant to Clause 12.3.1; and

12.2.1.2 Individual Members (being the Non-Liontrust Management Committee Members), as appointed pursuant to Clause 12.3.2.

12.3

LIS, upon written notice to LIP, shall:

12.3.1

be entitled to appoint such number of its representatives as Committee Members as it thinks appropriate and shall have the sole and exclusive right to remove and fill vacancies of the Committee Members so appointed; and

12.3.2

have the sole and exclusive right to appoint further Committee Members (not being its representatives) and to remove and fill vacancies of the Committee Members so appointed.

…

12.6

Meetings of the Management Committee may be called by any Committee Member on at least three Business Days’ notice to each Committee Member (except that notice to any Committee Member may be waived in writing by such Committee Member) and, where the business of the meeting includes any Reserved Matter, notice must also be given to John Ions, being a director of LIS, or in Mr Ions’s absence, to any other director of LIS and shall be held in such place or places as may be determined by the Management Committee, or as shall be stated in the notice of the meeting. Any such notice of meeting shall, unless otherwise agreed by LIS, include an agenda, a draft of any resolution to be proposed at such meeting and a copy of all papers relevant to the matters to be discussed at such meeting and must highlight any matters which may directly or indirectly relate to Reserved Matters. Failure to give notice of any meeting of the Management Committee in accordance with this Clause shall render any decision of the Management Committee taken at that meeting void.

…

12.9

Matters arising at any meeting of the Management Committee will decided by a simple majority of votes of the Members of the Management Committee who are present in person or by telephone … provided that Clause 13 shall apply in relation to Reserved Matters.

12.10

Save as otherwise provided in this Clause 12, the Management Committee will meet together for the dispatch of business, adjourn and otherwise regulate its meetings as it thinks fit.

…

13.

Reserved Matters

13.1

Each Liontrust Management Committee Member shall have a veto right on all resolutions on Reserved Matters proposed to be passed by the Management Committee at each meeting of the Management Committee at which they are present.

13.2

If there is no Liontrust Management Committee Member present at any meeting of the Management Committee at which a resolution on Reserved Matters is passed that resolution shall be voidable at the option of LIS.”

Clause 1.1 defines “Reserved Matter” as meaning “any of the matters referred to in Schedule 3”. In common with all the other definitions, it applies “except insofar as the context requires otherwise”: see the opening words of clause 1.1. The list of Reserved Matters in Schedule 3 includes, as item 27, “The expulsion of any Member”, but does not expressly include the compulsory retirement of a member, nor does it refer to clause 18.1.

The formula used in clause 18.1.3 (“following a decision of LIS (as a Reserved Matter)”) does not appear to be replicated anywhere else in the LLP Agreement. There are, however, other provisions which expressly require “the consent of LIS as a Reserved Matter”, usually in conjunction with a decision by the Management Committee: see clauses 10.2, 17.1, 20, 24.2, 27.1 and 30.2. So, for example, the power of expulsion in clause 20.1 is exercisable by the Management Committee, with the consent of LIS as a Reserved Matter. That formula gives rise to no difficulty, in that it clearly requires a decision to be taken by the Management Committee with the concurrence of LIS, although a question could still arise whether the express requirement for the “consent” of LIS goes beyond the rights conferred on LIS and its appointed representatives on the Management Committee by clause 13.

The problem in the present case is caused by the apparent tension, or even inconsistency, between the words “following a decision of LIS” in clause 18.1.3, which appear to vest the primary power to require a member to retire in LIS, and the words which follow, which appear to envisage that the decision is a Reserved Matter, and thus involves a decision by the Management Committee subject to the rights of veto and avoidance conferred on LIS and its representatives on the Management Committee by clause 13. Liontrust argues that the tension should be resolved by ignoring the words “(as a Reserved Matter)”, and supports this argument by pointing to the absence of compulsory retirement from the list of Reserved Matters in Schedule 3. I have little hesitation in rejecting this argument, however, for three main reasons. First, the absence of compulsory retirement from Schedule 3 is explicable on the basis that clause 18.1.3 itself expressly provides that the decision is to be a Reserved Matter. It would be a strange process of construction which relied on an apparent gap in the definition of Reserved Matter to override an express provision in the body of the agreement which says that a particular decision is to be a Reserved Matter. Secondly, the definition of Reserved Matter in clause 1.1 is anyway displaced where the context otherwise requires. It seems to me clear that the context of clause 18.1.3 explicitly requires the decision to be treated as a Reserved Matter, and therefore overrides Schedule 3. Thirdly, Liontrust’s approach is open to the basic objection that it gives no force at all to the words “(as a Reserved Matter)”, in breach of the general principle of construction that, wherever possible, effect should be given to all the words which the parties have chosen to use.

The search must therefore be for an interpretation which reconciles, and gives force to, each limb of the disputed wording. In my judgment this can be achieved, with a minimum of violence to the language used, if it is read as imposing a dual condition which the decision must satisfy. First, there must be a positive decision by LIS to require the member in question to retire. Secondly, the question must also be considered by the Management Committee as a Reserved Matter. Since LIS will already have decided to remove the member, the substance of this second limb of the condition lies in the requirement for the matter to be considered and approved by the Management Committee. Such a requirement seems to me to make good business sense, since the removal of a member without cause under clause 18 falls clearly within the remit of the Management Committee under clause 12.1, including as it does “employment and termination decisions”. As all the individual members of the LLP were members of the Management Committee, the effect of treating the decision as a Reserved Matter was to add a positive requirement for a majority vote in favour of the decision by the members to the primary decision taken by LIS. In my view this accords with business common sense, and is more likely to be what the parties objectively intended than that a decision of such potential importance to all the individual members should be taken by LIS alone.

Liontrust objected that, if clause 18.1.3 were interpreted in this way, the requirements for a valid exercise of the power would in practice be identical with the differently framed requirements for expulsion of a member under clause 20.1. There is some force in this point, but I do not regard it as a serious objection in a context where everyone agrees that something has probably gone awry with the drafting of clause 18.1.3. Furthermore, there are still some differences of potential significance between the preconditions for exercise of the two powers which might help to explain the different way in which they have been drafted. Under clause 18.1.3, the primary decision is clearly taken by LIS, whereas under clause 20.1 it is the Management Committee which takes the lead. There may also be an issue, as I have already indicated, whether the requirement for the consent of LIS in clause 20.1 goes beyond the machinery of clause 13 and requires a positive decision by LIS. I am therefore unpersuaded that the interpretation which I have adopted of clause 18.1.3 should be rejected merely because its result would be similar, or even identical, to that produced by the very differently worded provisions of clause 20.1.

Since the first termination letter was in my judgment invalid for all the reasons given above, it was obviously ineffective to terminate Mr Flanagan’s membership of the LLP, whether on 4 October 2013 or at any other time. The attempt to exercise the power of compulsory retirement in clause 18.1.3 was a legal nullity, and it had no effect on Mr Flanagan’s rights and duties as a member of the LLP.

Liontrust argues that service of an invalid retirement notice on Mr Flanagan was not, in itself, a breach of contract by the LLP, LIS or any other Liontrust entity. It was merely an abortive attempt by LIS and the LLP to exercise the relevant power, based on a mistaken view of when and how the power could validly be exercised. If one looks at the purported exercise of the clause 18.1.3 power in isolation, this argument may have some theoretical validity. A party does not necessarily breach a contract by misconstruing its terms and taking a step which has no legal effect. The taking of such a step, however, and the misconception upon which it is based, may quickly lead to a situation where the contractual rights of the other party are breached. Thus, for example, it is common ground that, if the first termination letter was invalid (as I have held), the LLP breached its contract with Mr Flanagan when it ceased paying him his Fixed Allocation of profits with effect from 4 October 2013.

A more immediate consequence of the invalidity appears from the termination letter itself. In the belief that Mr Flanagan’s membership of the LLP had been terminated with effect from 4 October 2013, the letter purported to remove him as a Committee Member with immediate effect, and also to place him on garden leave in accordance with clause 21: see [21] above. The purported removal of Mr Flanagan from the Management Committee was, on any view, ineffective, because clause 12.5 only provides for automatic retirement from the Management Committee “with effect from the date on which [the retiring member] gave notice of his Retirement”, and no such notice was ever given by Mr Flanagan. More importantly, the decision to place Mr Flanagan on immediate garden leave was also invalid, for two separate reasons. First, in the absence of service of a valid notice under clause 18.1.3, the power to place Mr Flanagan on garden leave under clause 21.1 had not arisen and therefore could not be exercised. It is clear that service of a valid retirement notice (whether under clause 18.1.3, 19 or 20.1) is a condition precedent to any exercise of the power to place a member on garden leave. Secondly, the power in clause 21.1 is conferred on the Management Committee alone, and LIS has no role to play. It should be noted that the power to place a member on garden leave is not a Reserved Matter, presumably because the power only becomes exercisable (save in cases of voluntary retirement) where the member has been given notice to retire under clauses 18.1.3 or 20.1, each of which is a Reserved Matter. Since it is now common ground that the Management Committee played no role in managing the affairs of the LLP until October 2013, Liontrust necessarily admits that, for this reason alone, the decision to place Mr Flanagan on garden leave was invalid.

In the next main section of this judgment, I will explore the question whether Mr Flanagan’s exclusion from participation in the LLP during his period of purported garden leave constituted a breach of his contractual rights, and (if so) whether the breach was of such a nature as to entitle him to terminate the contract at common law. Before doing so, however, I will first briefly describe and comment on the second and third termination notices which were served on Mr Flanagan in May and December 2014 respectively.

The second termination letter

The second termination letter was not served until 7 May 2014, some six months after service of the amended petition by Mr Flanagan in November 2013. It was preceded by a meeting of the board of LIS, attended by Mr Ions and Mr Abrol, at which the decision was taken to serve a second retirement notice on Mr Flanagan pursuant to clause 18.1.3 in case the first notice was invalid and Mr Flanagan was still a member of the LLP. In their written evidence, Mr Ions and Mr Abrol explain that legal advice had been taken, in respect of which privilege was not waived. Each of them said that he understood it to be a matter for LIS to decide, and confirmed that he did not consult any of the members of the LLP in relation to the second notice or ask them to approve it.

After referring to the first termination letter, the second letter continued as follows:

“Whilst we consider that the Original Decision was valid and that, accordingly, you are no longer a member of the LLP (a “Member”), we acknowledge that you have brought a claim against the LLP and its members (including [LIS]) in which you allege, amongst other things, that the Original Decision was invalid. We are therefore serving this retirement notice on you in case the Original Decision is found to be invalid.

Accordingly, without prejudice to the Original Decision and the Original Retirement Notice, we hereby give you notice in accordance with clause 18.1.3 of the LLP Agreement (assuming it to remain in effect) that if you are currently a Member, we have decided to require you to retire as a Member. If you are still a Member, you will therefore cease to be a Member on the expiry of the 6 month notice period set out in [the Side Letter].”

It can be seen, therefore, that this second retirement notice was served on the twin assumptions that the first notice was invalid and the LLP Agreement was still in force. The correctness of the second assumption depends on the issues which I have yet to consider concerning repudiatory breach of the LLP Agreement. Making those assumptions, I would comment that, since the (now functioning) Management Committee was still not involved in the making of the decision, the second notice must have been as invalid as its predecessor if I am right in my construction of clause 18.1.3. It is only if the involvement of the Management Committee was not required that the second notice could have been effective. In that event, I would accept that it validly terminated Mr Flanagan’s membership of the LLP six months after the date when the second notice was served on him.

In their written closing submissions, counsel for Liontrust contend that Mr Flanagan is estopped from arguing that authority to give notice of compulsory retirement lay with the Management Committee, because the contention had been added to the petition by way of amendment and Mr Flanagan had previously adopted the position that the power lay with LIS, either making a representation to that effect, or on the basis of a convention between the parties, upon which Liontrust had relied to its detriment when serving the second notice without Management Committee approval. This contention was not developed orally. It is enough to say that I find it far-fetched, and reject it.

The third termination letter

The third termination letter was dated 18 December 2014, and delivered to Mr Flanagan on 22 December only a few weeks before the beginning of the trial. For the first time, this letter purported to deal with the position if a resolution of the Management Committee was required under clause 18.1.3. The relevant paragraph in the letter reads as follows:

“Accordingly, without prejudice to the [previous decisions of LIS, and the first and second retirement notices], we hereby give you notice in accordance with clause 18.1.3 of the LLP Agreement (assuming it to remain in effect) that, pursuant to a meeting of the Management Committee (a certified copy of the minutes of which are enclosed) if you are currently a Member, we have decided to require you to retire as a Member. If you are still a Member, you will therefore cease to be a Member on the expiry of the 6 month notice period set out in [the Side Letter].”

The letter went on to purport to place Mr Flanagan on garden leave for the whole of his notice period. It was signed for and on behalf of the Management Committee.

This letter arrived on the scene so late that it is not dealt with in the witness statements, and the attached Management Committee minutes do not appear to have made their way into the bundle. Any comments which I make on it are therefore of a preliminary nature only. That said, Mr Flanagan submits that Liontrust has still not succeeded in getting it right. Given the invalidity of the two previous notices, and the failure of LIS to take any effective steps to remove him from the Management Committee, Mr Flanagan says that he remained a member of the Committee in December 2014, and was not given notice of any meeting at which the third termination letter was purportedly approved. Accordingly, any decisions taken at any such meeting in December 2014 were expressly void under clause 12.6 of the LLP Agreement.

Liontrust attempts to counter this argument in two ways, on the hypothesis that in December 2014 Mr Flanagan was still a member of the LLP. Liontrust’s first argument is that membership of the Management Committee depends upon status as an “approved person for the purposes of the FSA Rules” under 12.2. Mr Flanagan ceased to be an approved person when Liontrust deregistered him with the FSA on 4 October 2013, on the (mistaken) footing that he then ceased to be a member of the LLP. This point was not explored before me in any depth, but I would be inclined to accept the submission for Mr Flanagan that clause 12.2 simply identifies a qualification which all persons appointed by LIS to the Committee under clauses 12.2 and 12.3 must have at the date of their appointment. Mr Flanagan was an approved person when he was first appointed, and the fact that he apparently lost his approval when Liontrust deregistered him does not mean that his membership of the Committee automatically came to an end. A contrast may be drawn in this respect with clause 12.5, which provides for automatic cessation of membership of the Committee when a member gives notice of his retirement from the LLP.

Liontrust’s second argument relies on a document dated 1 August 2013 in which Mr Abrol, on behalf of LIS, informed the LLP that LIS consented “to all Individual Members being appointed as Committee Members”. Some (but not all) of the members were then listed by name, in some cases with another member shown as an alternate. Unsurprisingly, Mr Flanagan’s name does not appear on the list.

Mr Abrol says in his witness statement that in around August 2013 it was decided to change the previous tripartite committee structure and to start holding meetings of the Management Committee, but with a reduced number of members. He says that the notice which I have described was intended to give effect to these changes, and to appoint the named individual members as members of the Committee. The difficulty with this evidence, however, is that it does not tally with the document dated 1 August 2013. As I have said, the first paragraph of the document gave the apparently unqualified consent of LIS to “all” the individual members being appointed as Committee Members. It follows that, if Mr Flanagan was still a member of the LLP, this document had no effect on his continuing membership of the Management Committee. The purpose of the list of names which then follows is obscure, not least because the LLP Agreement makes no provision for alternates; but on no view can it reasonably be read as removing Mr Flanagan from membership of the Committee, on the assumption that he was then an existing member of it.

My provisional conclusion, therefore, is that neither of the arguments advanced by Liontrust is sound, and that if Mr Flanagan remained a member of the LLP in December 2014, he also remained a member of the Management Committee, with the consequence that the third termination letter was also invalid because he was never given notice of the Management Committee Meeting at which it was purportedly approved.

Did Mr Flanagan’s exclusion breach his contractual rights under the LLP Agreement and the Side Letter?

I now move on to the question whether Mr Flanagan’s exclusion from the LLP breached his contractual rights under the LLP Agreement and the Side Letter. If it did, it is then necessary to consider whether the breaches were of a sufficiently repudiatory or fundamental nature to entitle him at common law to terminate the LLP Agreement, as his solicitors first purported to do on his behalf on 8 February 2013: see [26] above.

There is no dispute that Mr Flanagan was in fact excluded from the business of the LLP from 20 August 2012 onwards, on the footing that the notice of compulsory retirement which had been served on him, and the associated decision to place him on garden leave, were valid and effective. His request for reinstatement was rejected, and Liontrust consistently maintained its position that the first termination letter was in all material respects valid, with the result that Mr Flanagan would remain on garden leave until 4 October 2013 when his membership of the LLP would terminate.

Since I have held that the compulsory retirement notice and the decision to place Mr Flanagan on garden leave were each invalid, and devoid of legal effect, the proposition that his complete exclusion from active participation in the business of the LLP involved no breach of his contractual rights is at first sight a startling one. Nevertheless, that is the case which Liontrust now advances. For the reasons which follow, I would reject it.

In the first place, it is important to remember that Mr Flanagan was not an employee of the LLP, or of any other Liontrust entity. He was a partner in a limited liability partnership, which is a form of business relationship which has features in common with both partnerships and limited companies. His participation in the business of the LLP was governed by the terms of the LLP Agreement and the Side Letter. Those terms included the following:

Against this contractual background, it seems clear to me that Mr Flanagan had both the right and the duty to play a full role in the business of the LLP for at least the first 18 months of his compulsory initial term, and that if the LLP unjustifiably prevented Mr Flanagan from doing so, the LLP would thereby have breached its contract with him. If necessary, the position could perhaps be analysed in terms of breach of an implied term to provide Mr Flanagan with a right to work, a subject which was debated at some length before me, but I would prefer to rest my analysis on a broader examination of the contractual nexus between the parties, and on the general principle of contract law (probably more accurately described as an implied term) to the effect that the parties to a contract must be taken to wish it to be performed, and no party will actively prevent such performance. On this last point, see the judgment of Sales J in F & C Alternative Investments Ltd v Barthelemy (No. 2) [2011] EWHC 1731 (Ch), [2012] Ch 613, at [268] to [272].

In whatever way the matter is analysed, the complete exclusion of Mr Flanagan from the business, without any prior warning or discussion, left him wholly unable to fulfil his role as an active member of the LLP. It is enough to recall that the first termination letter informed Mr Flanagan that he would automatically cease to be a Committee Member with immediate effect, that he was to cease performance of his normal duties, that he was not to attend the premises of the LLP or any other Liontrust company unless Mr Ions or Mr Abrol asked him to, that he was not to have any contact with any clients, and that he was also to have no contact (other than purely social contact) with any other members of the LLP, any employees of LAM or any member of Liontrust Fund Partners LLP. The effect of these comprehensive prohibitions was to reduce Mr Flanagan’s continuing involvement in the LLP to one of purely passive membership, with no substantive rights other than continued receipt of his Fixed Allocation and Variable Allocation (if any), and continued entitlement to certain fringe benefits such as health insurance, until 4 October 2013.

Liontrust may have thought that it was expedient to bring about this state of affairs because it had misconstrued the LLP Agreement, and wrongly thought it had the right to exercise the power of compulsory retirement in clause 18.1.3 well over a year prematurely. The very fact that Liontrust sought to exercise this power, however, combined with the garden leave terms which it imposed on Mr Flanagan, show that Liontrust wished to terminate its commercial relationship with him at once, and saw no future role of any kind for Mr Flanagan in the business. It is relevant to have this in mind when considering the alternative ground on which Liontrust now seeks to justify its conduct, namely that following the closure of the Fund there was no longer any work for Mr Flanagan to do, with the result (so it is said) that he had no implied right to continue to work, and there was thus no breach in implementing the garden leave notice.

There is no dispute about the starting point of this argument, which is that by 20 August 2012 the Fund had ceased to be viable and there was no realistic option but to close it. Even Mr Flanagan accepts this, and it is striking that on 14 August 2012 he had already given notice of his intention to redeem his own investment in the Fund. The actual decision to close the Fund was technically a matter for LGF, which took the necessary decision on 20 August. In practice, however, Mr Flanagan’s role as manager of the Fund became redundant once he received an email instruction from Mr Ions on Thursday, 16 August to liquidate the Fund pending the meeting between them and Mr Collins which had been arranged for Monday, 20 August. Clearly, once the Fund had been liquidated there was no longer any scope for the exercise by Mr Flanagan of his skills as a fund manager in relation to it.

Mr Flanagan says, and I see no reason to doubt, that he expected the meeting on 20 August to involve a discussion about ways forward for the Emerging Markets team and products, including the possibility of launching new funds. In particular, he expected Mr Ions to raise again his proposal for setting up a long-only emerging markets fund, about which Mr Flanagan had been notably unenthusiastic in the past, but mainly on the basis that he would not wish to consider managing such a fund unless and until the performance of the Fund had been restored to a healthy position. In fact, however, there was no discussion at the meeting on 20 August, which was attended by Mr Ions, Mr Collins, Mr Mellersh and Mr Flanagan. Mr Mellersh and Mr Flanagan were each presented with letters in similar terms, terminating their membership of the LLP and placing them on garden leave. Mr Flanagan was shocked, and saw no point in engaging in further discussion or asking why the decision had been made. He left the meeting immediately. Later the same day, the three analysts in the Emerging Markets team were also given notice terminating their employment. Mr Flanagan was told by Mr Ions that he had until 22 August 2012 to clear his desk and leave the building. He did so on 21 August, returning his keys and building pass. Later that week, he discovered that his Bloomberg and email access had been shut off. Mr Flanagan complained about this on behalf of himself and Mr Mellersh, but received a dismissive response on 24 August from Mr Ions who said:

“Given your current status, the Bloomberg services and your email are now not necessary for the performance of your duties.”

The next stage in Liontrust’s argument is that there was no obligation on Liontrust to launch a new product to replace the Fund. Any such decision would have to be made in the interests of the business as a whole, and this is recognised in the Side Letter which expressly provided that Mr Flanagan’s task was only to manage such other Emerging Markets equity funds as might be agreed between him and the LLP. In other words, if Mr Flanagan was ever to manage any funds other than the Fund, this would have to be the result of an agreement between him and the LLP; and, in the absence of such agreement, it was clearly contemplated that a time might come when there would be no alternative fund for Mr Flanagan to manage. That is the position which was reached on 20 August 2012, says Liontrust, and in the absence of any work for Mr Flanagan to do the LLP was entitled to exclude him from the business.

Liontrust supports this argument by referring to an employment case, William Hill Organisation Ltd v Tucker [1999] I.C.R. 291 (CA), where the issue was whether an employee who was the senior dealer in a spread betting business had a right to be provided with work during a period of notice when his employer had placed him on garden leave, in the absence of any express garden leave provision in the contract. This question was answered in the employee’s favour, as a matter of construction of the contract of employment, but Morritt LJ (with whom Robert Walker and Stuart-Smith LJJ agreed) said at 299H:

“It is important to appreciate the limits to the obligation for which Mr Tucker [the employee] contends. It is not suggested that there is an obligation to find work if there is none to be done or none which can be done with profit to the employer. Nor does he contend that the employer is bound to allocate work to him in preference to another employee if there is not enough for both of them. He submits that if the job is there to be done and the employee was appointed to do it and is ready and willing to do so then the employer must permit him to do so.”

It is apparent from this passage that the proposition upon which Liontrust now relies appears to have been conceded on Mr Tucker’s behalf, no doubt because it was not alleged that there was no work for him to do, and he did not wish to formulate the implied term for which he contended more widely than was necessary. It may at least be said, however, that the Court of Appeal gave no sign of disagreement with the general proposition that an employer cannot be bound to find work for an employee if there is no work to be done.

Liontrust’s argument was skilfully advanced by Mr Machell, but in my judgment it does not go nearly far enough to negate a breach of contract in the present case. As I have explained, Mr Flanagan was appointed to his position for a minimum effective period of 18 months, and it was also envisaged that he would be able to play an active role in the management of the LLP throughout that period, quite apart from his duties heading the management of the Fund (and any other EM funds which he and the LLP might agree). Moreover, he was not an employee but a member with a stake (albeit mainly of an income nature) in the prosperity of the business. In those circumstances, it would in my opinion have been completely unjustifiable for the LLP and Liontrust to treat the closure of the Fund as an event which automatically left Mr Flanagan with nothing to do. It follows that the closure could not have justified his complete exclusion from the business, without recourse to the garden leave provisions in clause 21. At the very least, Liontrust should have entered into constructive discussions with him in good faith to see whether there was any realistic possibility of starting up a new EM fund for him to manage, or if there was any other way in which the business could make use of his talents. Furthermore, he should have been permitted to continue playing an active role in the management of the business until (at the earliest) a notice of compulsory retirement could validly be served on him and he could be placed on garden leave. Instead, none of this happened and he was unceremoniously removed from any further active role in the business in the way I have described.

I therefore conclude that the complete exclusion of Mr Flanagan from the business of the LLP on or shortly after 20 August 2012 constituted a breach of his contractual rights under the LLP Agreement and the Side Letter. The party in breach was the LLP itself. Counsel for Mr Flanagan argued that LIS was also in breach, but I do not think that can be right. Mr Flanagan’s only contractual relationship with LIS was as a fellow member of the LLP, but it is not alleged that LIS breached any express duty owed by it to Mr Flanagan under the LLP Agreement, and (as I shall explain) the members did not in my view owe each other any implied duty of trust and confidence. Nor was LIS a party to the Side Letter, which was signed by Mr Abrol on behalf of the LLP.

Was the breach repudiatory?

The next question is whether the breach of contract by the LLP which I have identified was repudiatory in nature, i.e. such as to justify termination of the LLP Agreement by Mr Flanagan.

In considering this question, two different types of case need to be distinguished. The first is where the party in breach by words or conduct renounces the contract, or as it is put in Chitty on Contracts, 31^st edition, vol. I, para 24-018:

“A renunciation of a contract occurs when one party by words or conduct evinces an intention not to perform, or expressly declares that he is or will be unable to perform, his obligations under the contract in some essential respect.”

The second type of case is where the term of the contract which has been breached is properly to be classified as a condition of the contract, or alternatively is an intermediate (or innominate) term, and there has been a failure of performance which (as it is often said) goes to the root of the contract, or frustrates the commercial purpose of the contract: see Chitty, para 24-041. Various formulations of the test have been used in the case law, not all of which are easy to reconcile, but the seminal formulation probably still remains that of Diplock LJ in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 66:

“Does the occurrence of the events deprive the party who has further undertakings to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?”

Renunciation

Mr Flanagan submits that the service of the invalid retirement notice and his immediate exclusion from the LLP on the basis of purported garden leave on 20 August 2012 probably amounted to an immediate renunciation by the LLP of the LLP Agreement, and certainly did so when combined with the LLP’s decision to continue to rely on the first termination letter despite Mr Flanagan’s protests in his letter of 18 September 2012. As the inter-solicitor correspondence shows, the LLP maintained its position even after Mr Flanagan’s objections to the validity of the retirement notice and garden leave had been fully explained. Consistently with this stance, the LLP treated Mr Flanagan’s membership as having terminated on 13 October 2013, it ceased to pay him his Fixed Allocation after that date, and he was never given notice of Management Committee meetings.

Next, Mr Flanagan submits that, in the case of a true partnership, the exclusion of a partner in a manner inconsistent with the partnership agreement would normally amount to a repudiation of the agreement, on the assumption that the doctrine of repudiatory breach applied to partnerships (a question to which I will need to return): see Lindley & Banks on Partnerships, 19^th edition, paras 24-06 and 24-09, Hurst v Bryk [2002] 1 AC 185 (HL) at 190F – 192A (per Lord Millett, describing the course of the proceedings in the lower courts) and Mullins v Laughton [2002] EWHC 2761 (Ch), [2003] Ch 250, at [94] to [103] per Neuberger J.

This analogy needs to be treated with considerable caution, in my view, because any analysis of the repudiatory nature of the exclusion of a partner from an English partnership is likely to take as its starting point the duty of complete good faith between partners in all partnership dealings and transactions: see, for example, Mullins v Laughton at [95]. By contrast, no such duty is to be implied into limited liability partnership agreements, for the reasons given by Sales J in the F & C case at [207] to [216], with which I respectfully agree. Furthermore, an English partnership has no separate corporate existence, whereas an LLP does, and the contract which has to be examined in the present context is the contract between the LLP and Mr Flanagan, not the agreement between Mr Flanagan and his fellow-members of the LLP. Under the LLP Agreement, Mr Flanagan owed a duty of the utmost good faith to the LLP under clause 8.2, but no reciprocal duty of the same nature was owed to him by the LLP, nor (in the absence of any express provision) did the members owe each other such a duty.

Liontrust argues that there was no renunciation by the LLP, because it never intended to abandon and altogether refuse to perform the LLP Agreement. Instead there was a purported exercise of the compulsory retirement and garden leave powers in the contract, and Mr Flanagan continued to be treated as a member of the LLP (entitling him to payment of his fixed profit share and the provision of other contractual benefits) until the end of the notice period. The fact that Liontrust misconstrued the relevant provisions in the LLP Agreement, and took action on that basis, cannot turn Liontrust’s conduct into a repudiation. Liontrust’s intention, it is said, was not to breach the LLP Agreement, but to enforce it according to its terms.

In support of this argument, Liontrust relies on the principles stated by the majority of the House of Lords in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 WLR 277 (“Woodar”), and by the Court of Appeal, following a full review of the authorities by Etherton LJ, (delivering the only reasoned judgment), in Eminence Property Development Ltd v Heaney [2010] EWCA Civ 1168, [2011] 2 All ER (Comm) 223 (“Eminence Property”).

Given the comprehensive review of the case law by the Court of Appeal in Eminence Property, it is unnecessary for me to traverse the same ground again and I can move straight to the general observations made by Etherton LJ in that case at [61] to [64]:

“61.

I would make the following general observations on all those cases. First, in this area of the law, as in many others, there is a danger in attempts to clarify the application of a legal principle by a series of propositions derived from cases decided on their own particular facts. Instead of concentrating on the application of the principle to the facts of the case in hand, argument tends to revolve around the application of those propositions, which, if stated by the Court in an attempt to assist in future cases, often become regarded as prescriptive. So far as concerns repudiatory conduct, the legal test is simply stated, or, as Lord Wilberforce put it, “perspicuous”. It is whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to perform the contract.

62.

Secondly, whether or not there has been a repudiatory breach is highly fact sensitive. That is why comparison with other cases is of limited value. The innocent and obvious mistake of Mr Jones in the present case has no comparison whatever with, for example, the cynical and manipulative conduct of the ship owners in The Nanfri.

63.

Thirdly, all the circumstances must be taken into account insofar as they bear on an objective assessment of the intention of the contract breaker. This means that motive, while irrelevant if relied upon solely to show the subjective intention of the contract breaker, may be relevant if it is something or it reflects something of which the innocent party was, or a reasonable person in his or her position would have been, aware and throws light on the way the alleged repudiatory act would be viewed by such a reasonable person. So, Lord Wilberforce in Woodar (at p. 281D) expressed himself in qualified terms on motive, not by saying it will always be irrelevant, but that it is not, of itself, decisive.

64.

Fourthly, although the test is simply stated, its application to the facts of a particular case may not always be easy to apply, as is well illustrated by the division of view among the members of the Appellate Committee in Woodar itself.”

The “innocent and obvious mistake” in Eminence Property was a miscalculation of the completion date for the sale of a block of flats to Mr Heaney, who was a property developer. As a result of the miscalculation, Eminence served a formal notice of rescission of the contract a few days prematurely, in purported compliance with a standard condition in the contract. Mr Heaney, who wished to extricate himself from the contract, promptly responded through his solicitors, contending that the premature rescission constituted a repudiatory breach of contract, which he thereby accepted. In Woodar, the allegedly repudiatory conduct also arose in the context of a contract for the sale of land. The purchaser, Wimpey, sought to exercise a right to rescind the contract pursuant to a special condition entitling it to do so if, before the date of completion, “any authority having a statutory power of compulsory purchase shall have commenced to negotiate for the acquisition by agreement … of the property or any part thereof”. It was subsequently held that Wimpey’s purported exercise of this right was invalid, as a matter of construction of the condition, and this gave rise to the question whether, by invoking the special condition, and in the circumstances, Wimpey was to be taken as having repudiated the contract.

Having formulated the issue in those terms, Lord Wilberforce said at 280G:

“My Lords, I have used the words “in the circumstances” to indicate, as I think both sides accept, that in considering whether there has been a repudiation by one party, it is necessary to look at his conduct as a whole. Does this indicate an intention to abandon and to refuse performance of the contract? In the present case, without taking the appellants’ conduct generally into account, the respondents’ contention, that the appellants had repudiated, would be a difficult one. So far from repudiating the contract, the appellants were relying on it and invoking one of its provisions, to which both parties had given their consent. And unless the invocation of that provision were totally abusive, or lacking in good faith, (neither of which is contended for), the fact that it has proved to be wrong in law cannot turn it into a repudiation.”

After considering the evidence, and concluding at 282H that Wimpey’s conduct “manifested no intention to abandon, or to refuse future performance of or to repudiate the contract”, Lord Wilberforce added these observations at 283D:

“In my opinion therefore the appellants are entitled to succeed on the repudiation issue, and I would only add that it would be a regrettable development of the law of contract to hold that a party who bona fide relies upon an express stipulation in a contract in order to rescind or terminate a contract should, by that fact alone, be treated as having repudiated his contractual obligations if he turns out to be mistaken as to his rights. Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations. To uphold the respondents’ contentions in this case would represent an undesirable extension of the doctrine.”

Lord Keith of Kinkel also stressed the importance of looking at all the circumstances of the case, and said at 297B:

“Where one party, honestly but erroneously, intimates to the other reliance upon a term of the contract which, if properly applicable, would entitle him lawfully to rescind the contract, in circumstances which do not and are not reasonably understood to infer that he will refuse to perform his obligations even if it should be established that he is not so entitled, legal proceedings to decided that issue being in contemplation, I do not consider it in accordance with ordinary concepts of justice that the other party should be allowed to treat such conduct as a repudiation.”

This citation brings out the point that, in Woodar, the time for performance had not yet arisen when the notice was served. Wimpey needed to serve a notice in order to reserve its position, and the subsequent discussions between the parties proceeded on the basis that its service was not to be regarded as a hostile act, that Wimpey’s entitlement to serve the notice would be determined by the court, and that both parties would abide by the result: see the judgment of Christopher Clarke J in Dalkia Utilities Services Plc v Celtech International Ltd [2006] 1 Lloyd’s Rep 599 at [149], cited in Eminence Property at [59], distinguishing Woodar on this basis.

The other member of the majority in Woodar, Lord Scarman, agreed with the reasons given by Lord Wilberforce: see 298B. He too emphasised (at 299E-H) the honest belief of Wimpey that the contract entitled it to serve the notice.

In the light of these principles, I ask myself whether, looking at all the circumstances objectively, from the perspective of a reasonable person in the position of Mr Flanagan, the LLP clearly showed “an intention to abandon and altogether refuse to perform the contract”. If the only reason why the LLP served the first termination letter on Mr Flanagan had been a mistake made in good faith about the length of notice required by clause 18.1.3, Liontrust might have been able to argue with some plausibility that (as in Woodar and Eminence Property) the test would not have been satisfied. But this was only part of the overall picture. The letter also purported to remove Mr Flanagan from the Management Committee, and to place him on garden leave, in each case with immediate effect. The power to place a member on garden leave was unambiguously vested in the Management Committee alone, but no meeting of the Committee had been convened or taken place. This must have been apparent to Mr Flanagan, or to a reasonable person in his position, because it was generally known that the Management Committee had been dormant in the past, and notice of any meeting would anyway have had to be given to Mr Flanagan before the Committee could validly decide to place him on garden leave. Furthermore, since Mr Flanagan had not given notice of voluntary retirement to the LLP, there was no basis upon which his membership of the Committee could have terminated automatically under clause 12.5, although an assertion to this effect was made in the termination letter.

The conclusion which a reasonable person in Mr Flanagan’s position would have drawn, in my judgment, is that Liontrust and the LLP had decided to terminate his active involvement in the affairs of the LLP with immediate effect, and they were prepared to disregard the clear provisions of the LLP Agreement where they conflicted with this aim. To put the point differently, the LLP had evinced a clear intention to be bound, not by the LLP Agreement as it stood, but by a version of it which completely ignored Mr Flanagan’s rights as a member of the Management Committee, and the need for a resolution of the Committee before he could validly be placed on garden leave. These were matters which in my view went to the root of the contract between Mr Flanagan and the LLP, and objectively they must have been apparent to the LLP when the first termination letter was served.

To make matters worse, Liontrust was clearly aware that a valid resolution of the Management Committee was needed, and it decided to remedy the problem by fabricating minutes of a non-existent meeting held on 20 August 2012. The pre-trial disclosure given by Liontrust included a document which purports to record a formal meeting of the Management Committee held at Liontrust’s London offices at 9.30 am on that day, attended by Mr Ions as chairman on behalf of LIS, Mr Abrol (by telephone) and four other named members of the LLP. The “Minutes” continue as follows:

“1.

Notice and quorum

The Chairman noted that due notice of the Meeting had been given, that a quorum of Management Committee Members was present and that, accordingly, the Meeting was duly constituted.

2.

Previous meeting

IT WAS RESOLVED THAT the Minutes of any previous meetings of the Management Committee remaining to be considered be and they are hereby approved.

3.

Purpose of the Meeting

The Chairman explained that [LIS] had decided to require Eoghan Flanagan and James Mellersh to retire as members of the LLP pursuant to clause 18.1.3 of [the LLP Agreement], as a Reserved Matter … and that the purpose of the Meeting was to consider and, if thought fit, approve a letter to Eoghan Flanagan and James Mellersh communicating that decision to them and putting them on garden leave for their notice period which runs to 4 October 2012 [sic] and 30 September 2013 respectively (in accordance with clause 21 of the LLP Agreement) (the “Letters”).

4.

Letter

4.1

There was produced to the meeting a draft of the letters.

4.2

After careful consideration, IT WAS RESOLVED THAT the Letters are hereby approved and any Management Committee Member be authorised to sign the Letter subject to any amendments he considers necessary or desirable and deliver the Letters to Eoghan Flanagan and James Mellersh.

5.

Close of Meeting

There being no further business, the Chairman declared the Meeting closed.”

This document was then signed by Mr Ions as chairman of the supposed meeting.

In his witness statement, Mr Abrol describes the genesis of this document. At the relevant time he was abroad on holiday in India, and on 20 August 2012 he spoke to Mr Ions by telephone. In their capacity as the directors of LIS, they resolved to require Mr Flanagan and Mr Mellersh to retire as members of the LLP. Mr Abrol recorded this resolution in a minute which he prepared when he returned to the office on 4 September 2012. He then says:

“56.

John Ions and I went on to discuss putting Eoghan and James on garden leave. I knew that this was a matter to be determined by the Management Committee of the LLP. I asked John who else was in the office and he identified the individuals who I later referred to in the minutes … I suggested that he consult with them. When I returned to the office on 4 September 2012, I drew up the minutes … I knew that I had not attended a meeting with the persons identified and that notice of the meeting had not been given to all members of the Management Committee. However, I assumed that John had spoken to the persons he had told me were in the office on 20 August and I listed them in the minutes. I did not speak to them (or any of the other members of the LLP) and I did not show any of them a copy of the minutes at the time, although, as I have explained, I contacted Edward Catton on 16 August 2012 to ask him to obtain LGF’s approval for closure of the Fund. The minutes were not placed before a Management Committee meeting and, for the avoidance of doubt, there was no Management Committee meeting in relation to requiring Eoghan to retire and/or placing him on garden leave. My view remained as it had been when it became clear the EM Fund should be closed and no other fund would be launched: it was in the best interests of the LLP that Eoghan and the other team members should not have access to the offices, computer network and/or their Bloomberg accounts when they did not require it for the purposes of carrying out their roles.

57.

John Ions signed both sets of minutes on 4 September 2012, to the best of my recollection. I would have then given them to Mark Jackson (as Company Secretary).”

This account is substantially corroborated by Mr Ions, who says he has no recollection of signing the “minutes” prepared by Mr Abrol, but believes that he did so when the document was handed to him by Mr Abrol “on the basis that it was part of the formal documents relating to Eoghan’s position”. Mr Ions then says:

“However, a meeting of the Management Committee did not take place on 20 August 2012 and, so far as I am aware, the Management Committee did not meet to approve Eoghan’s retirement or garden leave on any other date, and I appreciate now that I should not have signed the minutes. I would not have circulated the minute to other members or retained a copy of it and, as far as I am aware, it was never approved by any subsequent Management Committee meeting.”

In order to place this document in context, it is necessary to go back to early July 2012. On 4 July, Mr Hughes-Morgan sent an email to Mr Ions saying he was coming round to believe that the EM team “would work much better as a unit without [Mr Flanagan] running it”. He gave his reasons for this belief, including that Mr Flanagan was “becoming very user unfriendly with clients”, and Mr Hughes-Morgan was “getting plenty of negative feedback re attitude, language dress etc etc”. He said that Liontrust were not going to raise any money in the short term for the Fund, whether Mr Flanagan was there or not. Mr Mellersh, by contrast, was “much more user friendly” and “happy to run a long fund anytime”. Mr Ions forwarded this email to Mr Abrol, who replied saying that he completely agreed with Mr Hughes-Morgan. He then said:

“Note, Eoghan is on a two year initial term, which ends 4 October 2013.

My view, just dust off the letter that we gave to Mickey and use it with Eoghan, he will either breach the LLP Agreement, which means we can stop paying him or negotiate for an early exit.

Will certainly make for a more harmonious 7^th floor.”

The “letter that we gave to Mickey” was a letter dated the previous day, 3 July 2012, purportedly terminating the membership of another member of the LLP, Mickey Morrissey, and placing him on immediate garden leave. The letter was in all material terms very similar to the letter subsequently sent to Mr Flanagan on 20 August 2012. Mr Abrol explained in cross-examination that in his experience the approach adopted with Mr Morrissey nearly always resulted in the member negotiating for an early exit, and this was what he expected Mr Flanagan to do.

By the middle of August, it was clear that the Fund could no longer continue. On 14 August, Mr Flanagan informed Mr Ions of a US $750,000 redemption from Nordea, which he said made it unfeasible to continue. Mr Flanagan added that he would be redeeming his own money imminently. On the next day, Mr Hughes-Morgan also decided to redeem his own investment of approximately $1.5 million in the Fund, despite advice to the contrary from Mr Abrol. Mr Ions was on holiday in Portugal, and Mr Abrol was in India, so any communication involving them had to be by telephone or email. Mr Ions decided to involve Mr Collins in sorting out the problem, and instructed Mr Abrol to obtain advice from Macfarlanes on what Liontrust’s options were. Mr Ions also had a telephone conversation with Mr Hughes-Morgan, a transcript of which is in the bundle subject to certain redactions which presumably relate to privileged legal advice. In the course of their conversation, Mr Ions said he needed Macfarlanes to come back to him, “because what I want to do is … obviously liquidate the fund and get them to do it and put them all in the garden and then negotiate in an exit position from then”.

Later the same day, Mr Ions sent an email to Mr Abrol and Mr Collins, setting out his latest thoughts. These were to give an order to liquidate the Fund’s portfolio the next day, and to arrange a meeting on Monday 20 August. He said:

“I will deal with team Monday as you suggest put them all in garden then negotiate from there. Will we have the paperwork by then?”

By this stage, therefore, the decision had been taken to place the whole of the EM team on garden leave, and not just Mr Flanagan. Mr Abrol replied to Mr Ions and Mr Collins that he was happy for the Fund to be liquidated, and he had “done the paperwork” for Mr Flanagan and Mr Mellersh, subject to getting it checked by Macfarlanes. Mr Abrol confirmed in oral evidence that he had done the paperwork himself, even though he was still in India, and had sent it from his laptop.

Mr Abrol was well aware that a Management Committee decision was needed in order to place Mr Flanagan on garden leave: he expressly confirmed this in cross-examination. He also agreed that this was one of the matters he discussed with Mr Ions on the telephone early in the morning on 20 August. Although he did not recall the exact details of the conversation (of which there is no transcript), he did remember asking Mr Ions which of the LLP members were in the office. By an email timed 10:10 hours to Mr Ions, Mr Abrol said:

“Just in case eoghan bangs on about the legitimacy about what we have done. There are two processes, one is that [LIS] as a Reserved Matter has met (our call this morning) and decided to compulsory retire EF and JM, the Management Committee of [the LLP] has also convened (you and me plus any other LIP member that you spoke to before your meeting with them), to which EF and JM were not invited (as is allowed under the LLP agreement).”

This email is illuminating for a number of reasons. First, it shows that Mr Abrol recognised the need for due process to be followed under the LLP Agreement, and that Mr Flanagan might be expected to question the legitimacy of what had been done. Secondly, Mr Abrol also recognised that there were separate formal requirements for the decisions to give Mr Flanagan notice of compulsory retirement and to place him on garden leave, the latter of which had to be taken by the Management Committee. Thirdly, Mr Abrol implicitly suggested to Mr Ions that the Management Committee could be treated as having validly convened merely by virtue of their prior telephone conversation and any other conversations that Mr Ions might have with other members before the meeting with Mr Flanagan and Mr Mellersh, neither of whom needed to be given notice of the Management Committee meeting. I find it difficult to conceive how Mr Abrol could have formed this last view in good faith, and I am afraid his oral evidence came nowhere near convincing me that it is possible to regard this email, and the subsequent preparation by Mr Abrol of bogus minutes of a Management Committee meeting on 20 August, as the product of no more than an innocent misunderstanding. It seems to me that Mr Abrol was entirely reckless whether the requirements for a valid Management Committee meeting (which he admitted he had not checked) were followed, and that he was content to fabricate the minutes of a non-existent meeting in the hope that Mr Flanagan, or anybody else who investigated the matter, would be misled into supposing that due process had been followed.

Mr Ions for his part, was willing to go along with Mr Abrol’s suggestions, and he signed the minutes prepared by Mr Abrol in circumstances where he now rightly recognises that he should not have done so.

In my view this sorry episode reflects no credit on either Mr Abrol or Mr Ions. For present purposes, however, the important point is that their recklessness about compliance with the necessary formalities to place Mr Flanagan on garden leave strongly reinforces the repudiatory nature of the breach of contract by the LLP, and makes it impossible for me to conclude that the LLP was acting in good faith when it purported to place Mr Flanagan on garden leave. The relevance of good faith in assessing the repudiatory quality of a breach is repeatedly emphasised in the authorities: see, for example, the passages from the speeches of Lord Wilberforce and Lord Keith in Woodar which I have quoted above.

Fundamental breach

In view of my conclusion on renunciation, it is unnecessary for me to consider in any detail whether the LLP’s breach of contract was also repudiatory because it deprived Mr Flanagan of substantially the whole benefit which he was objectively intended to obtain under the LLP Agreement. It is enough to say that Mr Flanagan’s exclusion, in the circumstances which I have related, would in my judgment have satisfied this test too. Looking first at the position before 4 October 2013, Mr Flanagan was in effect deprived of all his rights of membership of the LLP other than his Fixed Allocation of income profits and some fringe benefits. Despite the closure of the Fund, it seems to me that this exclusion went to the root of the contract and was almost wholly inconsistent with the reasonable expectations of the parties when Mr Flanagan signed up for an initial compulsory term of two years. In case that is wrong, the position is even more stark after 4 October 2013. Although he remained a full member of the LLP, his exclusion was then total, and he was not even paid his Fixed Allocation. Thus, even if Mr Flanagan’s first acceptance of repudiatory breach on 8 February 2013 had been premature, he was in my judgment plainly entitled to accept the further repudiatory breaches set out in his second letter of acceptance dated 22 November 2013.

Did Mr Flanagan affirm the LLP Agreement?

On the footing that (as I have held) the LLP was in repudiatory breach of the LLP Agreement, and on the assumption (which I have yet to consider) that the common law doctrine of repudiatory breach applies to LLPs, the next question is whether Mr Flanagan by his conduct affirmed the LLP Agreement with knowledge of the breach, and thus lost his right to terminate the contract. The question needs to be considered as at the dates of his two letters purportedly accepting the breach, 8 February 2013 and 22 November 2013.

The main conduct which Liontrust relies upon is the continued acceptance by Mr Flanagan of his fixed allocations of profits from 20 August 2012 until 4 October 2013. These sums were paid directly into his bank account at Barclays by automatic transfer once a month, pursuant to clause 17.1.1 of the LLP Agreement. His unchallenged evidence is that he asked the bank whether it was possible for him to block the payments, but was told by his relationship manager that this could not be done. This enquiry by Mr Flanagan was made after his solicitors had sent the first letter of acceptance of breach on 8 February 2013. Liontrust relies on the facts that Mr Flanagan made no request to the LLP to stop the monthly payments, either before or after 8 February 2013, and that he took no steps to return them following receipt. Liontrust also points out that, although Mr Flanagan’s case was that he remained a member of the LLP on the default terms set out in the LLP Regulations 2001, notwithstanding the termination of the LLP Agreement, the default provisions would not have entitled him to monthly payments on account, but only to payments in respect of his right to an equal share of profits as and when annual accounts were prepared and agreed. Accordingly, it is said, Mr Flanagan’s acceptance of these payments is completely inconsistent with an entitlement to treat the LLP Agreement as terminated, and therefore constitutes unequivocal affirmation.

To a lesser extent, Liontrust also relies on the continued provision to Mr Flanagan of private health insurance until 4 October 2013, and the fact (as Mr Flanagan confirmed in oral evidence) that he did not put his own insurance in place until after that date. Mr Flanagan accepted that this was not a coincidence, and it was only at the end of his guaranteed two year period that he made private arrangements for himself and his family. On the other hand, he also said, and I accept, that after 8 February 2013 he knew that he could not claim on the Liontrust policy, and had the need arisen he would have chosen to pay the necessary medical expenses out of his own pocket.

I would add that in December 2014 Mr Abrol asserted that in August 2013 a member of Mr Flanagan’s family had attempted to make a claim on the Liontrust policy, but Mr Flanagan was able to demonstrate in his third statement dated 14 January 2015 that the allegation was mistaken. I think it is regrettable that Liontrust should have pleaded this allegation, and supported it with Mr Abrol’s evidence in reply, which was based on enquiries made of the firm which administered the medical insurance scheme, without taking the simple precaution of first raising the matter with Mr Flanagan’s solicitors. The necessary explanation could then have been given, and Mr Flanagan and his family would have been spared the avoidable distress caused by reference to this matter in formal court proceedings.

There is no dispute about the relevant principles of law. They are conveniently summarised in Chitty, para 24-003:

“Where the innocent party, being entitled to choose whether to treat the contract as continuing or to accept the repudiation and treat himself as discharged, elects to treat the contract as continuing, he is usually said to have “affirmed” the contract. He will not be held to have elected to affirm the contract unless, first, he has knowledge of the facts giving rise to the breach, and, secondly, he has knowledge of his legal right to choose between the alternatives open to him. Affirmation may be express or implied. It will be implied if, with knowledge of the breach and of his right to choose, he does some unequivocal act from which it may be inferred that he intends to go on with the contract regardless of the breach or from which it may be inferred that he will not exercise his right to treat the contract as repudiated. Affirmation must be total: the innocent party cannot approbate and reprobate by affirming part of the contract and disaffirming the rest, for that would be to make a new contract.”

Counsel for Mr Flanagan also rely on judicial statements that the court will be slow to conclude that a wronged party has irrevocably elected to persist with the contract rather than terminate, and that the wronged party is allowed a reasonable opportunity to pause for thought to consider what to do in response to the breach: see Yukong Line v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604 at 608 (per Moore-Bick J) and Force India Formula One Team Ltd v Etihad Airways PJSC [2010] EWCA Civ 1051 at [121] to [122] per Rix LJ. In the latter case, Rix LJ said at [122]:

“The present case concerns a complex and medium term relationship, which a takeover has destabilised, and where it necessarily and legitimately takes time for the consequences to become clearer and for the innocent party to consider his position. That is the middle ground between acceptance of a repudiation and affirmation of a contract which I discussed in the earlier Stocznia case …”

In the light of these principles, I do not think it would be right to treat Mr Flanagan as having unequivocally elected to affirm the LLP Agreement merely because he continued to accept monthly payments on account of his fixed profit allocation until October 2013, and took no steps to arrange private medical insurance until after that date. It is true that Mr Flanagan took legal advice (from his present leading counsel, Mr Thompson QC) at an early stage, before sending his letter of 18 September 2012 to Macfarlanes. Privilege has not been waived in respect of the advice which Mr Flanagan received on that and subsequent occasions, but it is reasonable to infer that it must have included advice on the question of repudiation and the need not to take any steps that could constitute affirmation of the contract. I bear in mind that Mr Flanagan took no positive steps to procure the continuation of the monthly payments, and it is well established that “mere inactivity after breach does not of itself amount to affirmation” (Chitty, para 24-003, in a passage subsequent to that quoted above). Moreover, his continued acceptance of the payments was broadly consistent with his contention that he remained a member of the LLP, even after termination of the LLP Agreement, with default rights to share in profits which would entitle him to much larger sums than those which he received, albeit not by way of monthly payments on account. I also consider the present case to be a good example of “a complex and medium term relationship” of the kind in respect of which Rix LJ recognised that “it necessarily and legitimately takes time for the consequences to become clearer and for the innocent party to consider his position”: see the passage from his judgment in the Force India case quoted above. I would therefore hold that Mr Flanagan had not lost the right to repudiate the contract before 8 February 2013, and that the position was not changed by his continuing receipt of monthly payments for a further nine months after that date.

Even if I am wrong in so concluding, I consider that Mr Flanagan clearly acquired a fresh right to terminate the contract after 4 October 2013 when his monthly payments ceased and the LLP treated him as having no membership rights of any description. Mr Flanagan’s prior affirmation of the LLP Agreement would not prevent him from accepting the subsequent repudiatory breach of it. As Jonathan Sumption QC (sitting as a deputy High Court Judge) said in Safehaven Investments Inc v Springbok Ltd (1996) 71 P & C R 59 at 68:

“If … the repudiating party persists in his refusal to perform, the innocent party may later treat the contract as being at an end. The correct analysis in this case is not that the innocent party is terminating on account of the original repudiation and going back on his election to affirm. It is that he is treating the contract as being at an end on account of the continuing repudiation reflected in the other party’s behaviour after the affirmation.”

Accordingly, I am satisfied that even if Mr Flanagan were precluded by affirmation from terminating the LLP Agreement on 8 February 2013, he was not so precluded when he accepted the LLP’s continuing repudiatory breaches on 22 November 2013.

In this section of my judgment I will deal with a number of related issues concerning the applicability of the common law doctrine of repudiatory breach (“the doctrine”), both in the context of LLPs generally, and with particular reference to the breaches of the LLP Agreement by the LLP which I have identified and found to be repudiatory in nature. In outline, Liontrust submits that the doctrine cannot apply, as a matter of law, to agreements which fall within the scope of section 5 of LLPA 2000 (“section 5 agreements”), save perhaps in some cases where the LLP in question has only two members. Mr Flanagan submits that the doctrine is of general application in the law of contract, and there is nothing in the statutory scheme governing LLPs which excludes it, either expressly or by necessary implication.

A convenient starting point may be found in the speech of Lord Millett in Hurst v Bryk, loc. cit., where at 193A-E he described the consequences of acceptance of a repudiatory breach of contract and stated that the doctrine was of general application:

“The consequences when a contract is brought to an end by the acceptance by one party to it of a repudiatory breach of contract by the other party are well established. They were clearly stated by Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 476-477, where he said:

“When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.”

This passage has been expressly approved by your Lordships’ House: see Johnson v Agnew [1980] AC 367, 396 per Lord Wilberforce, and Colonial Bank v European Grain and Shipping Ltd [1989] AC 1056, 1098-1099, per Lord Brandon of Oakbrook.

The doctrine of accepted repudiation is of general application in the law of contract, and there is no reason why it should not apply to an agreement to enter into partnership or to the contractual obligations which the partners mutually undertake to observe after the partnership has come to an end. But I have considerable doubt that it can be employed to bring about the automatic dissolution of the partnership itself.”

Lord Millett went on to explain the reasons for his doubt whether the doctrine could be used to terminate a partnership. His reasons were partly historical, drawing on the development of partnership law as a subject within the equitable jurisdiction of the Court of Chancery and the controls which that court exercised over the dissolution and winding up of partnerships. He also drew a distinction between the contract of partnership on the one hand, and the relationship between the partners on the other, suggesting that even if the doctrine might apply to the former (as Harman J had decided in a case in 1982), it was much more doubtful that the doctrine could operate “to bring about the automatic dissolution of the partnership relationship” (195A, Lord Millett’s emphasis).

Lord Millett was also influenced by the fact that the non-exhaustive codification of the law of partnership in the Partnership Act 1890 said nothing about the doctrine, and contained at least one provision (section 35(d)) which would “sit uneasily” with it. As Lord Millett explained at 195E, section 35(d) gives the court a discretionary power to decree a dissolution of a partnership, at the suit of an innocent partner, when a partner:

“wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practical for the other partner or partners to carry on the business in partnership with him”.

Lord Millett then said:

“It is difficult to envisage a case in which conduct of this description would not constitute a repudiatory breach of [contract] which the party suing could accept by bringing proceedings.”

Lord Millett returned to this point at 196A-B, where he said:

“To my mind, however, the strongest argument against admitting repudiatory breach as a further ground for the automatic dissolution of a partnership is that, wherever applicable, it would circumvent the discretionary power of the court under section 35. Even where the plaintiff establishes conduct on the part of his fellow partners which comes within section 35(d), the court is not bound to order a dissolution. This reflects equitable principles, but is in sharp contrast to the approach of the common law.

By entering into the relationship of partnership, the parties submit themselves to the jurisdiction of the court of equity and the general principles developed by that court in the exercise of its equitable jurisdiction in respect of partnerships. There is much to be said for the view that they thereby renounce their right by unilateral action to bring about the automatic dissolution of their relationship by acceptance of a repudiatory breach of the partnership contract, and instead submit the question to the discretion of the court.”

It should be stressed that the whole of the discussion of the doctrine by Lord Millett in Hurst v Bryk was obiter, because the courts below had found that the dissolution of the partnership between solicitors in that case had been brought about by the acceptance by Mr Hurst of his partners’ repudiatory breach, and there was no challenge to that finding in the House of Lords. Lord Millett was content to proceed on the same basis, while reserving for future consideration the question whether it was correct: see 196D-E, and the comments of Lord Nicholls of Birkenhead to the same effect at 189D. Nevertheless, Lord Millett’s discussion has proved to be as influential as one would expect, given its source, and it must now be taken as settled at first instance in England that the doctrine has no application to traditional partnership agreements governed by the 1890 Act: see Mullins v Laughton at [87] to [93] per Neuberger J and Golstein v Bishop [2013] EWHC 881 (Ch), [2014] Ch 131, at [114] to [123] per Christopher Nugee QC. The latter case went to the Court of Appeal, but on different grounds which involved no challenge to the judge’s conclusion that the doctrine was inapplicable even in the case of a two-partner firm: see [2014] EWCA Civ 10, [2014] Ch 455, at [9] to [10] per Briggs LJ, who took the opportunity to add his personal view (without the benefit of adversarial argument) that Lord Millett’s analysis was correct.

Mr Flanagan submits that none of the reasons which have led the English courts to conclude that the doctrine has no application to partnership agreements is applicable to LLPs and section 5 agreements. Thus, he argues:

For these, and similar, reasons, the consensus among most of the text book writers (including Mr Machell QC in his authorial capacity) appears to be that the doctrine applies in the usual way to section 5 agreements: see Lindley & Banks on Partnerships, 19^th edition, para 24-08; Palmer’s Limited Liability Partnership Law, para A5-10; and Whittaker and Machell, The Law of Limited Liability Partnerships, 3^rd edition, paras 9.23 ff; but note the more cautious approach of Blackett-Ord and Haren, Partnership Law, 5^th edition, (2015) para 25.75.

It is, however, worth noting the thoughtful comments of the editors of Palmer on the difficulties which may arise from application of the doctrine, assuming it to be applicable, in a multi-party context. At the end of para A5-10, the editors say this:

“Nevertheless, assuming [the doctrine] is applicable, there are considerable unresolved issues arising out of the application of the doctrine of repudiation to LLP agreements. The situation is relatively simple to analyse in a two-party situation, for example, in the context of an LLP agreement between the only two members of an LLP. Acceptance of the repudiation discharges both parties from further performance under the agreement and, instead, their future relations are governed by the default rules, discussed below. However, typically a LLP agreement will be a multi-party agreement and the analysis of the impact of repudiation in such a case is more challenging. In Hurst v Bryk, Lord Millett analysed a multi-party partnership agreement as creating a series of bilateral obligations among the parties to the agreement, each of which sets of bilateral obligations had to be analysed separately to determine the impact on it of an accepted repudiation. Taking the relatively simple situation of one group of repudiatory partners and one group of innocent partners who all accepted the repudiation, Lord Millett analysed the situation as one in which the bilateral obligations between the innocent and guilty partners would be ended for the future, but within each group of partners the agreement would continue in force. If this analysis is transposed to the LLP agreement – and there seems to be no reason why it should not be – the relations among some of the members would be governed by the default rules, whilst those amongst others of the members would be governed by the agreement. Presumably, on this analysis, if there are three groups of members (the third group being innocent members who have not accepted the repudiation), the LLP agreement will continue to operate among them and in their relations with the guilty group. Sustained operation of the LLP on the basis of two different sets of internal governance arrangements is unlikely to be feasible and the best that can be said about this analysis is that it may encourage settlement of the underlying dispute.”

The relevant passage in Lord Millett’s speech in Hurst v Bryk is at 195F-196A, where he considers whether there would be any role left for section 35(d) of the Partnership Act 1890 to play on the assumption that the doctrine did apply to partnership agreements. Lord Millett said this:

“Even if [the doctrine] brought about the automatic dissolution of the partnership, it would not follow that paragraph (d) was altogether empty of content. It would not be needed where there are only two partners, but it would still be needed where there are more than two partners and there is at least one partner who is innocent of any wrongdoing and who does not accept the repudiation. It would also arguably be needed even in a case like the present where there are numerous partners who fall into only two camps, those who are alleged to have committed a repudiatory breach and those who claim to have accepted it. What is there to bring the contract to an end as between the parties who are in the same camp? It is noticeable that the Act expressly provides that the death or bankruptcy of any partner operates to dissolve the partnership as regards all the partners. The contractual doctrine applies to multiparty as well as to two party contracts, but it merely effects the mutual discharge of reciprocal obligations. It necessarily operates bilaterally as between each party in breach and each party accepting the breach as repudiatory by discharging them from their reciprocal obligations. It is difficult to see how it can operate to discharge the parties in the same camp, whether guilty or innocent, from the obligations they owe each other. This can only be achieved by agreement.”

Lord Millett therefore expressly envisaged a situation in which the reciprocal obligations of the guilty partner and each partner who had accepted the breach as repudiatory would be discharged, but the mutual obligations of all parties in the same camp (whether guilty or innocent) would remain in full force. I observe that Lord Millett also envisaged the possibility of a “three camp” case, where the partnership agreement was validly discharged by acceptance of repudiatory breach between the guilty and accepting partners, but there is also “at least one partner who is innocent of any wrongdoing and who does not accept the repudiation”. In argument before me, partners in this third category (innocent non-acceptors of the breach) were described as “breach agnostics”. It should be noted, however, that Lord Millett’s views on this topic do not appear to have been the subject of any adversarial argument before the House, and were “doubly obiter” in the sense that the whole of the passage which I have quoted was predicated on the assumption (which Lord Millett provisionally rejected) that the doctrine could apply to partnership agreements.

Building in part on difficulties of the kind illustrated by the editors of Palmer in the passage which I have quoted, and Lord Millett’s discussion of the operation of the doctrine in a multi-party case, Mr Machell QC argued for Liontrust that the consensus of most of the text book writers (himself included) is wrong, and Parliament cannot have intended the doctrine to be capable of application to section 5 agreements. At the forefront of his oral submissions he placed a simple proposition. Section 5 of LLPA 2000, properly construed, has the effect that the mutual rights and duties of all the members of an LLP must be governed either by agreement between the members (as incorporated in one or more section 5 agreements) or (in the absence of agreement on any matter) by the default provisions. In other words, the same regime must apply to all the members for the time being, whether that regime is contained in section 5 agreements, the default rules, or a combination of the two. What Parliament cannot have contemplated, submits Mr Machell, is a situation where the mutual rights and duties of the members and the LLP are simultaneously governed by two potentially inconsistent sets of provisions, the first contained in one or more section 5 agreements (or a combination of such agreements and the default rules), and the second contained in the default rules alone.

Yet that, according to Liontrust, is the result for which Mr Flanagan contends, on the assumption that the doctrine applies to section 5 agreements. If (as in the present case) an LLP commits a repudiatory breach of an exhaustive section 5 agreement (i.e. one which leaves no scope for operation of the default rules while it remains in force), and if the breach is accepted by an innocent member (“M”), the result would be that the relationship between M and the LLP is thenceforth governed by the default rules alone for as long as M remains a member of the LLP, while the relationship between the LLP and the other members would continue to be governed by the section 5 agreement. Similarly, the relationship between M and his fellow members would also continue to be governed by the section 5 agreement, provided that they too were innocent parties. Still further complications would arise if any of the other members had participated in, or adopted, the breach by the LLP, and if their breaches had been accepted by M. There would again be a “three camp” scenario of the type envisaged by Lord Millett, and the default rules would apply as between M and the guilty members whose breaches M had accepted, while the section 5 agreement would presumably remain in force as between M and the other members, and also (arguably) between the individual members in each of the three camps (innocent, guilty and breach-agnostic).

In my judgment, it is all but self-evident that the co-existence of two different contractual regimes governing the same LLP is likely to lead to results which are legally incoherent and could only be resolved by further agreement between all the members. Mr Machell gave two examples. The first example was of an LLP with five members, one of whom (A) is in repudiatory breach of the section 5 agreement which governs the LLP, and another of whom (B) accepts the breach. Under the section 5 agreement, B has a small profit share, say 1%, but an equal share would entitle him to 20%. How, then, are the profits to be distributed after B has accepted A’s repudiation? As between A and B, B would now be entitled to share equally in the profits under the default rules; but the other members retain their original entitlements, so if both A and B were paid 20% the combined profit shares of the five members would exceed 100%. Nor would there be any existing contractual mechanism which would enable the additional 19% now payable to B to be deducted from A’s share; and, even if there were, the other members would presumably still be entitled to say to B that his only right was to receive 1%, and if he received more than that, he should repay it.

Mr Machell’s second example concerned decision making. Assume that, under the same section 5 agreement, complete decision making control is vested in A. Following B’s acceptance of A’s repudiatory breach, B would now have the right as against A to participate equally in decision making under the default rules, and he would therefore be entitled to prevent A from making any decisions without his consent. But the other three members, assuming them to be breach-agnostics, would still be entitled to insist on decisions being taken by A alone, even if B objected to them. That would be an impossible state of affairs, submits Mr Machell, which Parliament could never have intended.

Mr Flanagan’s response to these examples is not to deny that difficulties of this kind could in theory arise if the doctrine applied to section 5 agreements, but rather to argue that such difficulties are anyway inherent in the application of the doctrine to multi-party contracts under the general law, and in practice the parties could be expected to find a sensible way around them. I accept that there is some force in at least the former of these arguments, but in my view neither of them answers the basic question whether Parliament could reasonably have intended to create a statutory framework for LLPs under which the same subject-matter might foreseeably be governed by inconsistent provisions (under a section 5 agreement and the default rules respectively) following acceptance of a repudiatory breach of a section 5 agreement. In my judgment, the statutory scheme should if reasonably possible be construed in a way which avoids this possibility.

In my view it is reasonably possible to construe the statutory scheme in such a way, without doing any violence to the wording of either section 5 or the default rules. I would accept Liontrust’s submission that it is implicit in the statutory regime for the internal governance of LLPs that, in relation to any particular matter, an LLP and all of its members for the time being must be subject to the same set of rules, whether those rules are contained in an exhaustive section 5 agreement, or (in the absence of any section 5 agreement) in the default rules alone, or in a combination of a section 5 agreement and the default rules. This does not mean, of course, that the rules have to treat all the members alike, or that the rules may not themselves be subject to amendment or modification in accordance with procedures to which all have previously agreed. But it does mean, in my judgment, that there is no place for operation of the doctrine in relation to section 5 agreements, save perhaps where the LLP has only two members.

Another way of expressing the same principle is to say that, once a section 5 agreement has been made, it will continue to bind the LLP and the members until either it is terminated by common agreement, or it is varied in accordance with a procedure to which all the relevant parties have previously subscribed. It is only in such circumstances, in my judgment, that there could be “the absence of agreement as to any matter”, within the meaning of section 5(1)(b) of LLPA 2000, in relation to a matter which was previously covered by the section 5 agreement, so as to allow the matter to be governed for the future by the default rules.

I am fortified in reaching this conclusion by a number of further considerations.

First, it is only in this way that the possibility of mutually inconsistent rules applying to the same subject matter can clearly be avoided. I am not attracted by an alternative submission advanced by Liontrust to the effect that, if the doctrine does apply, the membership of the breach acceptor terminates automatically upon his acceptance of the breach. Membership is governed by the separate provisions of section 4, and section 4(3) sets out the different ways in which membership may cease: by death, by dissolution of the LLP, by agreement with the other members, or (in the absence of such agreement) by the member giving reasonable notice to the other members. The acceptance of a repudiatory breach would not fit into any of those categories. In particular, as Lord Millett explained in Hurst v Bryk at 195C:

“The theory that a repudiatory breach of contract is an offer to terminate the contract which can be accepted by the offeree, thereby bringing the contract to an end by mutual consent, is discredited. The contract is brought to an end by the exercise of a right conferred by law on the parties to the contract from the outset, not by virtue of a new agreement between them.”

Secondly, the LLP Agreement in the present case contains an express exclusion of the operation of the default rules. Clause 31.16 provides as follows:

“The provisions of Regulations 7 and 8 of the Limited Liability Partnership Regulations 2001 and any other default provision mentioned in section 5(1)(b) of the Act will be excluded in their application to LIP, the Business or any of the Members of Former Members.”

It would fly in the face of this express exclusion, to which Mr Flanagan freely agreed when he joined the LLP, if the result of his acceptance of the LLP’s repudiatory breach were to bring the default rules into operation. If that were the inexorable result of the statutory scheme, the agreement in clause 31.16 would have to yield to it; but I prefer to construe the statutory scheme in a way which enables a section 5 agreement which is intended to be exhaustive to take effect accordingly.

Thirdly, it would in my judgment be offensive to common sense, and contrary to the reasonable commercial expectations of the parties, if the effect of the doctrine were to permit Mr Flanagan to share in the profits of the LLP on a basis of notional equality with the other members, when the LLP Agreement itself gave him only a fixed allocation of income profits and no entitlement to any capital profits, all of which were allocated to LIS. The appropriate remedy for a member in Mr Flanagan’s position is a declaration as to his continuing membership of the LLP and a right to damages, if he can establish that he has suffered any loss as a result of his exclusion.

Fourthly, although there is a surprising dearth of authority on the operation of the doctrine in relation to multi-party contracts, there are at least some cases where judges have held that the doctrine cannot apply where it would be unworkable in practice or would produce wholly unreasonable results: see Artistic Upholstery Ltd v Art Forma (Furniture) Ltd [1999] 4 All ER 277 at para 49, per Lawrence Collins QC (as he then was), and Tanner v Everitt [2004] EWHC 1130 (Ch), [2004] BPIR 1026, at [67] per Mann J. Conversely, I have not been shown any case where application of the doctrine has led to a result which the parties could never sensibly have contemplated.

Fifthly, it would in my view be somewhat surprising, at a more general level, if Parliament had intended to allow scope for operation of the doctrine when creating a new form of legal entity which combines features of the law of partnership with features of the law of limited liability companies. As I have explained, it is now clear (at least at first instance) that the doctrine cannot apply to English partnership agreements. Equally, it has never been suggested, to my knowledge, that the doctrine could apply to the articles of association of a company. I recognise, however, that this point cannot be pressed too far, because the articles of a company have a constitutional and public significance which means that many aspects of the ordinary law of contract cannot apply to them: see Bratton Seymour Service Co Ltd v Oxborough [1992] BCC 471 (CA). By contrast, a section 5 agreement will in many cases be more analogous to a shareholders’ agreement, where there will usually be nothing to prevent the doctrine from applying.

Finally, Mr Machell relied on the jurisdiction of the court to wind up an LLP on the just and equitable ground. He submitted that one of the circumstances in which such a petition might be presented by a member would be where the LLP was in serious breach of its contractual obligations. To that extent, therefore, there is an analogy with section 35(d) of the Partnership Act 1890, which was the factor which weighed most heavily with Lord Millett in Hurst v Bryk when he provisionally decided that the doctrine could not apply to partnership agreements. In my judgment, however, this point is too tenuous to be of any real assistance. It is true that the jurisdiction to wind up an LLP on just and equitable grounds is a discretionary one, which could in principle be invoked in a case of comprehensive breaches of contract by the LLP; but the authorities on the use of this remedy in the context of limited companies suggest that it is to be regarded as very much a last resort, and in any event the jurisdiction is not tied specifically to breaches of contract in the same way that section 35(d) of the 1890 Act is. The legislative intention to exclude operation of the doctrine in relation to section 5 agreements must therefore be found in a consideration of the statutory scheme as a whole, not in the availability of this particular remedy for a dissatisfied member who wishes to wind up the LLP to which he belongs.

To conclude, I am satisfied for the reasons which I have given that the doctrine is implicitly excluded in relation to multi-party section 5 agreements. Whether the doctrine would also be excluded in the simple case where an LLP has only two members is not a question which arises in the present case, and I therefore leave it open. For present purposes, the important point is that Mr Flanagan’s attempt to claim the benefit of the default rules fails at this stage. In particular, I can see no proper basis in law upon which he might be entitled to claim any pro rata share in the profits of the LLP.

The position which I have now reached may be summarised as follows:

My findings about the meeting on 3 October 2011 remove the principal grounds upon which Mr Flanagan seeks to hold the LLP and/or LIS liable in some way for what he alleges to have been their culpable failure to promote and market the Fund with sufficient energy and commitment after he joined Liontrust. I should, however, briefly mention the other ways in which Mr Flanagan has tried to get a claim of this general nature off the ground.

The first way is by pleading an implied term of the LLP Agreement and/or the Side Letter, to the effect that:

“Liontrust would make all reasonable efforts to market and promote the Fund (and any other products of the Business) to their own client base and generally, so as to give [Mr Flanagan] a fair opportunity to increase or maintain the level of investment in the Fund (and any other products of the Business).”

(Paragraph 28 of the re-re-amended petition).

I can see no proper basis for implying such a term into either the LLP Agreement or the Side Letter. The LLP Agreement makes detailed provision for how the business is to be run, and vests the management of the general business and affairs of the LLP (including marketing) in the Management Committee. It would in my view be inconsistent with this general scheme to imply a further special term relating to marketing in favour of Mr Flanagan or any other individual members of the LLP. So far as the Side Letter is concerned, the parties to it (the LLP and Mr Flanagan) shared a common incentive to make their relationship profitable for at least the initial two year fixed term, and I would be inclined to accept that they owed each other a mutual duty of co-operation to that end. I do not consider it necessary, however, to imply a term in the specific form pleaded by Mr Flanagan in order to give business efficacy to the Side Letter. Nor is it explained how the proposed term was intended to operate in practice, or by what criteria the “reasonable” efforts of Liontrust were to be judged. It is revealing that the pleaded term seeks to impose the obligation on “Liontrust”, but the only Liontrust entity which was a party to the Side Letter was the LLP, and it needs to be remembered that those primarily involved in sales and marketing were not members of the LLP, but of Liontrust Fund Partners LLP (or, in the case of employees, employed by LAM Plc). In short, I am satisfied that the circumstances fall well short of those required for implication of an implied term: see Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988, at [16] to [27] per Lord Hoffmann, and the discussion of the relevant principles by the Court of Appeal in Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc [2009] EWCA Civ 531, [2009] 2 Lloyd’s Rep 639.

The only other basis upon which the alleged duty might arguably arise, it seems to me, is as a component of further implied terms which Mr Flanagan pleads in paragraph 29 of his re-re-amended petition. Those alleged terms, again to be implied into the LLP Agreement and/or the Side Letter, are that:

“(a)

Each of the LLP and/or LIS would not without reasonable and proper cause engage in conduct calculated or likely to destroy or seriously damage the trust and confidence between the members and/or between the LLP and the members and each of them.

(b)

Each of the LLP and/or LIS would at all times act in good faith towards the other members and each of them.”

In my judgment, however, these alleged implied terms add nothing in the present context, because they do not relate specifically to marketing and promotion, and no specific breaches of them are alleged which would add anything to Mr Flanagan’s case. Quite apart from that, I cannot see any proper basis for implying a duty of trust and confidence into either the LLP Agreement or the Side Letter. The detailed terms of the LLP Agreement provide for an express duty of good faith to be owed by each individual member to the LLP (in clause 8.2), but no such duty is imposed on either the LLP or LIS. In the absence of express provision, the test of necessity for implication of a duty of good faith, or a duty of trust and confidence, is not satisfied: see the reasoning of Sales J in the F & C case at [207] to [220].

I therefore conclude that there is no plausible basis upon which Mr Flanagan can claim that either the LLP or LIS was in breach of a contractual obligation owed to him relating to the marketing and promotion of the Fund. It follows that it is unnecessary for me to review and make detailed findings of fact on the evidence relating to the marketing and promotion of the Fund between October 2011 and its closure in August 2012. A considerable amount of Liontrust’s written and oral evidence was necessarily devoted to this subject, since Mr Flanagan had chosen to make an issue of it. The result was that a complex case was made more complex still, the trial lasted for substantially longer than would otherwise have been necessary, and the costs on each side were correspondingly increased. Having now heard the evidence, I will only say that I am unconvinced that Liontrust’s conduct in relation to the marketing and promotion of the Fund fell short of a reasonable standard in all the circumstances. Furthermore, even if the pleaded terms were somehow to be implied into the LLP Agreement and/or the Side Letter, I am satisfied that any breaches of them by Liontrust were (at worst) relatively minor, and fell far short of being repudiatory in nature.

I believe I have now covered all the main contractual aspects of Mr Flanagan’s claim, and all matters relating to liability in respect of which he could in principle have sought declaratory relief in proceedings under Part 7 of the CPR. It remains to consider what, if anything, is left of his section 994 petition. The answer, in my judgment, is very little. Mr Flanagan remains a member of the LLP, so he had locus standi to present the petition, and he has not lost his standing subsequently. I would also accept that the LLP’s conduct in excluding him from the business from 20 August 2012 onwards was unfairly prejudicial to his interests as a member of the LLP. But the relief to which Mr Flanagan is entitled, on the basis of my findings of fact and conclusions of law, could all be awarded to him in a Part 7 claim, and his continuing membership of the LLP is at best precarious: even if he does not resign his membership voluntarily, he can be removed by a valid notice under clause 18.1.3 of the LLP Agreement. He does not need a buy-out order to sever his relationship with the LLP, and his membership interest has no continuing value, as far as I can see, beyond the right which it confers to his fixed allocation of profits. Nobody suggests that it would now be either practicable, or desirable in principle, for Mr Flanagan to play any active role in the future management of the LLP.

In these circumstances, I hope that the parties will now be able to reach agreement on the orders which should be made in order to give effect to this judgment. It only remains for me to express my gratitude to counsel on both sides for their comprehensive and able submissions.