The High Court has ruled that a
profit share payable to a member of an LLP was capable of being
subject to forfeiture where the member was found to have breached
his fiduciary duties to the LLP.
The Claimant, Jeremy Hosking, was a
founding member of the Respondent, Marathon Asset Management (the
"LLP"), and entered into an LLP deed with the other
founding members. The LLP deed provided that profits payable to
Founding Members are shared equally, save that if any of the
Founding Members became a Non-Executive Member (i.e. they no longer
worked in the business) their entitlement was reduced by 50%.
Mr Hosking retired in December
2012, becoming a Non-Executive Member. In the same month the LLP
commenced arbitration proceedings against him, for breach of his
contractual and fiduciary duties to the LLP, having held
discussions with four of the LLP's employees in July 2012 about
the possibility of starting a competing business.
The Arbitrator upheld the LLP's
claim and awarded forfeiture of 50% of the profit share payments
received by the LLP between July 2012 and December 2012, in
addition to equitable compensation. The rationale for the
application of forfeiture to only 50% of the profit share payments
was that this sum represented remuneration, since it was only
received by Executive Members involved in the day to day running of
the business. The remaining 50%, received by both Executive and
Non-Executive Members, reflected the members' ownership
interest in the LLP, and was thus not subject to forfeiture.
Mr Hosking appealed to the High
Court on the basis that none of his share of profits in the LLP
should be subject to forfeiture.
The High Court dismissed the
appeal. It held that while the forfeiture rule had traditionally
been invoked in relation to agents and the fees payable in respect
of the provision of their services, the rationale for it (being the
need to deter fiduciaries from betraying the trust placed in them)
extends more widely, and requiring payment of damages may not
represent adequate compensation. The court went on to say that in
unusual cases where a profit share can be identified as a reward
for undertaking specific services, there is no good reason to treat
it differently from any other form of remuneration (i.e. the law
should be concerned with substance over form). Finally, the court
held that while the forfeiture principle can be specifically
excluded by parties, it may be implied where the contract is
Implications of the Judgment
It is important to bear in mind
that this decision only applies to a situation where partnership
profits are analogous to remuneration.
This case highlights the need for
LLP agreements to be drafted clearly and comprehensively. Parties
should explicitly spell out in the agreement whether any profit
share payable to the members is intended to be remuneration for
performance of their fiduciary duties or other specific duties and
if so, whether that profit share should be subject to forfeiture if
the members breach those duties.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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