May 2008

53A.50 Scope of this Part of the Chapter

Though all the corporate parts of the Act have been applied to LLPs, this Part of the Technical Manual does not cover in detail those alternative corporate procedures with which the official receiver does not deal (i.e., all those procedures that are not compulsory winding up) and reference may be made to Chapter 56 for further information on those other proceedings. 

53A.51 Insolvency proceedings – general

The LLR2001 [note 1] applied, with modification, the corporate insolvency parts of the Insolvency Act 1986 to LLPs.  Essentially, the modifications were to accommodate the differences between the internal structure of a company and that of an LLP – in that an LLP is owned and managed by the members, in a style agreed by them (including decisions relating to the entering of formal insolvency proceedings), whereas a company’s internal structure is prescribed by statute [note 2] (see paragraph 53A.24 for more detail on this).

53A.52 Insolvency provisions unique to LLPs

There are two provisions unique to LLPs which represent a significant departure from the company position.  These are to provide for a member to be required to return property to the partnership in certain circumstances (see paragraphs 53A.59 and 53A.60), and to allow for the possibility of making past or present members liable to contribute to the assets of the LLP on winding up (see paragraph 53A.61).

53A.53 Official Receiver’s role in the winding-up of an LLP

Generally, the official receiver has the same responsibilities and duties in respect of an LLP subject to a compulsory winding-up order as he/she has for a company in the same position.

On the making of a winding-up order the official receiver becomes liquidator of the LLP [note 3] and has a duty to investigate the affairs of the LLP [note 4]. The official receiver may require designated members (see paragraph 53A.22), or other persons, to prepare and submit a statement of affairs [note 5].  In practice, the official receiver will usually make an appointment for a designated member to attend for interview and arrange for the completion of the questionnaire booklet (see Chapter 3 for further information regarding the action to be taken by the official receiver in the initial stages of the winding-up of an LLP).

53A.54 Information held by Companies House

Companies House holds much the same information on an LLP and its members, as it does for companies and their officers.  An LLP is identifiable by a unique registration number.  This is the equivalent of a company registration (CRO) number, but will have the appendage “LLP” to identify the different status.

The guidance and information given in Chapter 3 Part 2 may be followed in respect of the actions to be taken by the official receiver to obtain information on an LLP from Companies House.

53A.55 Obtaining the partnership agreement

Companies House will not have a copy of the LLP’s partnership agreement (see paragraph 53A.24) and, therefore, this should be obtained from the members of the LLP.  Ideally, this will be obtained prior to the preliminary interview with the member(s) of the LLP as it will provide important information setting out where management responsibility lies in the LLP, and may contain an agreement by members to contribute to the assets of the partnership in the event of winding-up (see paragraph 53A.61).  The standard initial letter [note 6] to the designated member(s) makes the request that the partnership agreement is delivered to the official receiver.

53A.56 Meetings of creditors and members 

The official receiver may, at his/her discretion, summon meetings of the LLP’s creditors and members for the appointment of some other person as liquidator [note 7].  See Chapter 16 for further information relating to meetings of creditors and contributories (members).

53A.57 Secretary of State appointments

As with the winding-up of a company, the official receiver may, at any time, make application to the Secretary of State for the appointment of a liquidator in his/her place [note 8].  See Chapter 17 for further information on the appointment of liquidators by the Secretary of State.

53A.58 Duties of the liquidator

The liquidator of an LLP must secure, take in, realise and distribute the partnership’s assets for the benefit of its creditors and, if there is a surplus, other persons entitled [note 9].  Additionally, the liquidator may disclaim any onerous property or unprofitable contracts [note 10] and provide such assistance to the official receiver as may reasonably be required [note 11]. 

53A.59 Antecedent recoveries – adjustment of withdrawals

In addition to applying the provisions relating to antecedent recoveries such as preferences and transactions at undervalue (see Chapter 31.4) to LLPs, the LLPR2001 creates new provisions to allow for the recovery of property from members in certain circumstances (referred to as “adjustment of withdrawals”) [note 12].  Under these provisions, a liquidator in a winding-up can seek to recover withdrawals made during the relevant period.  Relevant withdrawals include, but are not exclusive to, a share of profits, salary or repayment of, or payment of interest on, a loan to the LLP, or any other withdrawal of property [note 13]. As the term ‘withdrawal’ is so widely defined it can include anything from normal monthly drawings to any form of withdrawal and it does not need to be anything outside normal commercial practice.  The relevant period is two years from the commencement of winding-up, and a member, or any person who has been a member within the period is potentially liable.

53A.60 Recovering monies withdrawn from a LLP (an adjustment of withdrawal)

In order to effect a successful recovery of monies withdrawn from an LLP (see paragraph 53A.59) a liquidator must show to the court that the member knew, or ought to have known:

• That when the withdrawal took place the LLP was unable to pay its debts within the meaning of section 123, or
• The LLP would become unable to pay its debts after the assets of the LLP had been depleted by that withdrawal taken together with all other withdrawals (if any) made by any members contemporaneously with that withdrawal, or in contemplation when that withdrawal was made.

[note 14]

Where the court is satisfied that the conditions are met in relation to any person it may declare that that person is to be liable to make such contribution (if any) to the LLP’s assets as the court thinks proper.

For the purposes of this provision, member can be taken to include “shadow” members [note 15].

It is important to note that the adjustment of withdrawals provision [note 16] is not alternative to the similar provisions relating to wrongful trading [note 17], and members may be pursued under either or both provisions [note 18].

These provisions, which are known as “claw-back” provisions, are applicable only to LLPs, and not limited companies.

53A.61 Liability to contribute to winding-up

There are provisions in the Act setting out the extent to which contributories (shareholders) must contribute in the event of the winding-up of a company [note 19].  As LLPs do not have shareholders, and the members make all capital contributions, it has been necessary to make significant changes to the section.

A member will not normally be liable to contribute to the assets of an LLP in a winding-up, but members may agree among themselves to contribute.  Unless a member has specifically agreed to contribute, he/she will not generally be liable (though see paragraph 53A.61 above for a possible exception).  It would be expected that an agreement to this effect would normally form part of the partnership agreement (see paragraph 53A.24) and, for this reason, an inspection of the document by the official receiver should be carried out to establish if any contribution should be made (see also paragraph 53A.61).  It should be noted, however, that it is likely that any mention in the partnership agreement of a member contributing in the event of winding-up will be to specifically exclude such an idea [note 20].

A past member shall only be liable if the obligation arising from any agreement to contribute in the event of winding up survived his/her ceasing to be a member of the LLP.

53A.62 Striking off a defunct LLP by the registrar

Dissolution does not affect the potential personal liability of any member of the LLP, in circumstances where they would have been liable had the LLP continued to exist.

53A.63 Distribution

In the unlikely event that there is a surplus available from assets realised in the liquidation proceedings, after payment of all creditors claims, the surplus should be distributed to the partnership members. In such circumstances any partnership agreement should be referred to in an attempt to establish if it includes provision as to the distribution of any surplus in such circumstances. In the absence of any such agreement amounts outstanding on the capital account should form the basis of any distribution made to members. 

53A.64 Disqualification of members of an LLP

The LLR2001 applies the Company Directors Disqualification Act 1986 to members of an LLP [note 21].  A member of a partnership who is disqualified will also be barred from becoming a director of a limited company.  Similarly, a disqualified director is barred from being a member of an LLP.

[CDDA 1986 s8A].

53A.65 Criminal conduct in relation to an LLP

The official receiver will be expected to submit a statement of facts to Enforcement Directorate, in the usual way, where his/her enquiries indicate that there may have been some criminal conduct in relation to the LLP, who will refer cases to Legal Services where appropriate.

The provisions relating to re-use of a company or, in this case, LLP name may be applied in the usual way [note 22].

See Chapter 12 of the Enforcement Investigation Guide (http://intranet/Enforcement/EnforcementTopLevel/EIGuide/homepage.htm) for more information on the preparation and submission of a statement of fact to Enforcement Directorate.

53A.66 Bankruptcy order or BRO/BRU against a member or prospective member of an LLP

The LLPR2001 applies the Company Directors Disqualification Act 1986 to LLPs and provides that all references to a company are to include an LLP and all references to a director include a member of an LLP.  Therefore, an individual subject to a BRO/IBRO/BRU cannot be a member of an LLP [note 23].

Similarly, an individual subject to a bankruptcy order cannot be a member of an LLP [note 24].

53A.67 Other modifications to the Insolvency Act 1986

In addition to the modifications to the Insolvency Act 1986 relating to compulsory liquidation, there are a number of modifications to other parts of the Act, which take into account the difference in structure between an LLP and a company.  These modifications do not result in any material difference in the treatment of LLPs, and do not have any effect on the action to be taken by, or processes and procedures of, official receivers.

The most significant modifications are outlined below:

• Decision to pass a resolution for winding-up – a company wishing to wind up voluntarily must pass a resolution in a meeting of the company [note 25].  An LLP is not subject to the same meetings requirements as a company, including those required under insolvency law.  Instead, an LLP may design its own decision making process, including that required to decide whether it will enter any insolvency procedures [note 26].
• Circumstances in which an LLP can be wound up – the provisions of the modified section of the Act [note 27] are similar those applied to companies, with the key addition being to set out that an LLP can be wound up if the number of members is reduced below two [note 28].
• Duty of designated members to file documents – the Act makes many references to the duty of directors to file documents during, or to commence, insolvency proceedings.  In the case of an LLP, the responsibility falls on the designated members (see paragraph 53A.22) and there are modifications to a number of sections to take account of this [note 29].
• Quorum requirements of meetings of an LLP – within company insolvency procedures, a company may be required to meet to make decisions concerning the insolvency process, or to receive information from the office holder.  Once an LLP has made its determination to wind up (see above), it has to comply with the prescribed meeting requirements.  These provisions have been modified to ensure there is a default quorum of two members (that is, where the partnership agreement (see paragraph 53A.24) does not set a quorum for members’ meetings) [note 30].  

53A.68 Company Voluntary Liquidation

An LLP may be wound-up voluntarily [note 31] in the same way as a limited company.  See, though, paragraph 53A.67 some LLP specific differences.

53A.69 Company voluntary arrangements

The Company Voluntary Arrangement (CVA) procedure is available to LLPs in much the same way as it is to companies.  There have been a number of modifications to the provisions of the Act, the key ones being to take account of the fact that there is no equivalent of the meeting of the company (i.e. the shareholders) to consider the director’s proposal for the CVA [note 32].

53A.70 Administration

The administration procedure is available to LLPs in the same way as it is to companies.  An LLP may apply to court for an administration order on the same grounds as a company [note 33].

53A.71 Administrative receivership

The administrative receivership provisions of the Act apply to LLPs in the same way as they apply to companies [note 34].