LLPs – compulsory insolvency proceedings

Part 5 LLPs – compulsory insolvency proceedings

February 2013  

53A.84 Insolvency proceedings – general

The corporate insolvency parts of the Insolvency Act 1986 apply, with some modifications, to LLPs [Note 1]. The modifications accommodate the obvious difference in names, for example substituting LLP for company, substituting member for director, and taking into account the differences between the internal management structure of a company and an LLP, for example a more informal management of the business.

 

53A.85 Insolvency provisions unique to LLPs

The Limited Liability Partnerships Regulations 2001 introduced two new provisions. A member can be required to return property to the LLP in certain circumstances (see paragraph 53A.96 and paragraph 53A.98). Secondly, past or present members may be liable to contribute to the assets of an LLP on winding up [Note 2].

 

53A.86 The official receiver

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

 

53A.87 On the making of a winding-up order

On the making of a winding-up order the official receiver becomes liquidator of the LLP [Note 3] and has a duty to investigate its affairs [Note 4].

 

53A.88 Winding-up order to be filed at Companies House

The official receiver should check the winding-up order (see paragraph 3.18) and, additionally, ensure the registration number begins with “OC” (abbreviation of “other company”). Without this pre-fix the document will not be accepted by the registrar of companies. If the pre-fix “OC” is missing the winding-up order should be amended using the “slip rule” (see paragraph 3.19).

 

53A.89 Duty of members to attend upon the official receiver

The official receiver may require designated members (see paragraph 53A.38), or any other person, to prepare and submit a statement of affairs [Note 5]. The official receiver should usually make an appointment for a designated member or member to attend for interview and arrange for the completion of the questionnaire booklet. The official receiver should follow the guidance given in Chapter 3 regarding the action to be taken in the initial stages of the winding-up.

 

53A.90 Non co-operation by members

Designated members and members of an LLP have a duty to co-operate with the official receiver, the same as the duty placed on company directors [Note 6]. For further information on dealing with non co-operative designated members and/or members see Chapter 13.

 

53A.91 Information held by Companies House

The information held by Companies House on an LLP is very similar to that held on a company. The LLP has a unique registration number with the prefix “OC” (see paragraphs 53A.32 and 53A.88) to show it is different from a company registration number. It is unlikely that the Companies House file will contain a copy of the partnership agreement (see paragraph 53A.44) as an LLP is not required to file one with the registrar of companies (see paragraph 53A.92) for details of how to obtain a copy. The official receiver should follow the guidance given in part 3 of Chapter 4 when obtaining information from Companies House.

 

53A.92 Obtaining the partnership agreement

The official receiver should obtain a copy of the partnership agreement as a matter of urgency from the members of the LLP, ideally before completing the preliminary examination. The partnership agreement will explain, for example,  where the management responsibility within the LLP lies.  Also it may contain a clause whereby the members contribute to the assets of the LLP in the event of winding-up (see paragraph 53A.101).

 

53A.93 Meetings of creditors and members

The official receiver has discretion to call meetings of the LLP’s creditors and members to appoint another person as liquidator [Note 7]. Further information on the calling and conduct of meetings of creditors and members (called contributories in company cases) can be found in Chapter 16.

 

53A.94 Secretary of State appointments

The official receiver may, at any time, make an application to the Secretary of State for the appointment of a liquidator in his/her place [Note 8]. For further information on the appointment of liquidators by the Secretary of State see Chapter 17.

 

53A.95 Duties of the liquidator

The liquidator must secure, take in, realise and distribute the assets of an LLP for the benefit of its creditors and, if there is a surplus, to the other people who are so entitled [Note 9]. 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.96 Antecedent recoveries – preferences, transactions at an undervalue and other recoveries

The provisions of the Insolvency Act 2006 with regard to preferences, transactions at an undervalue and other types of recovery are applied to LLPs via the Limited Liability Partnerships Regulations 2001. Further information on these types of antecedent recoveries can be found in Chapters 31.4A and 31.4B.

 

53A.97 Antecedent recoveries – “adjustment of withdrawals”

In addition to the antecedent recoveries mention in paragraph 53A.96 schedule 3 of the Limited Liability Partnerships Regulations 2001 introduces a new section of the Insolvency Act 1986 allowing for the recovery of property from members of an LLP in certain circumstances, referred to as “adjustment of withdrawals” (also known as a “claw-back” provision)  [Note 12]. A liquidator in a winding-up can seek to recover “withdrawals” made within two years of the commencement of winding-up from any person who has been a member during that period. The commencement of the winding up is either, the date of the presentation of the petition, the date a determination for voluntary liquidation was made, or  the date of the winding-up order if the LLP was previously in administration [Note 13].  “Withdrawals” are widely defined and include, but are not exclusively, a share of the profits, salary, repayment of, or payment of interest on a loan to the LLP or any other withdrawal of property [Note 14]. The term “withdrawal” is so widely defined it can include anything from normal monthly drawings to any other form of withdrawal. It includes transactions within normal commercial practice.

 

53A.98 Recovering an “adjustment of withdrawal”

To successfully make a recovery under the “adjustment of withdrawal” provisions the liquidator must show to the court that the member knew, or should have known: 

  • that when the withdrawal took place the LLP was unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986, or
  • the LLP would become unable to pay its debts after taking into account that withdrawal, and/or actual or contemplated withdrawals by other members [Note 15].

 

53A.99 Court order re “adjustment of withdrawal”

Where the court is satisfied that the “adjustment of withdrawal” conditions are met in relation to any member it may order that the member makes such contribution, if any, to the LLP’s assets as it thinks proper [Note 16]. For the purposes of this provision member includes “shadow” members (see paragraph 53A.42) [Note 17].

 

53A.100 “Adjustment of withdrawals” and wrongful trading

It is important to note that “adjustment of withdrawal” provision is in addition to potential action regarding wrongful trading (see paragraphs 31.4B. 80 to 31.4B. 81) [Note 18]. The official receiver may make a claim against members under either or both provisions [Note 19].

 

53A.101 Member's liability to contribute in a winding-up

There is no statutory provision for a member having to contribute to the assets  of an LLP in a winding-up. However members can agree amongst themselves to contribute. Such an agreement would normally form part of the partnership agreement (see paragraph 53A.44). It is important that the official receiver obtains a copy to establish whether any contribution by the members should be made. It is more likely that the partnership agreement will include a clause excluding any contribution to the LLP's assets in the event of a winding-up. A past member will only be liable if the obligation to contribute survives their resignation as a member of the LLP [Note 20]. A member or past member would still be liable to make the contribution even where the LLP has been dissolved.

 

53A.102 Dealing with a surplus in an LLP winding-up

Where sufficient assets are realised to enable the creditors to be paid in full any surplus should be distributed to the members. The official receiver should check the partnership agreement as to whether there is a provision dealing with the distribution of any surplus in such circumstances. If there is no partnership agreement or it is silent the amounts outstanding on the capital accounts should form the basis of the distribution made to members (see paragraph 36A.128).

 

53A.103 Dissolution and LLPs

Companies House provides information on LLPs and dissolution which can be found here. The official receiver should follow the general guidance in Chapter 38 regarding the dissolution of LLPs, including dissolution after completion of his/her administration of the liquidation, substituting the words company and director with LLP and member.

 

53A.104 Disqualification proceedings in an LLP winding-up

Where the official receiver in the course of his/her enquiries discovers misconduct by a member or members of an LLP disqualification proceedings may be issued [Note 21]. For further information on directors disqualification see paragraph 53A.51.

 

53A.105 Criminal conduct in an LLP winding-up

Where the official receiver in the course of his/her enquiries discovers criminal conduct by a member or members of an LLP he/she should submit a statement of facts to Investigations and Enforcement Services. Chapter 12 of the Enforcement Investigation Guide provides information on the preparation and submission of a statement of facts. It is also a criminal offence to re-use the LLP's name, or a similar name, without the agreement of the court [Note 22]. 

 

53A.106 Other modifications to the Insolvency Act 1986

In addition to the modifications concerning compulsory liquidation there are a number of other modifications to the Insolvency Act 1986. The modifications concern the difference in structure between an LLP and a company. The modifications do not result in any material difference in the treatment of LLPs and do not affect the action to be taken by an official receiver.

The most significant modifications are shown below: 

  • Decision to pass a resolution for winding-up – whilst a company must pass a special resolution to voluntarily wind-up its affairs  [Note 23] an LLP can do the same by ordinary resolution, or any other method it chooses [Note 24],
  • Circumstances in which an LLP may be wound up – an LLP may be wound-up by the court in the same way as a limited company [Note 25]. In addition an LLP may be wound-up if its members falls below 2 [Note 26],
  • Duty of designated members to file documents – In an LLP it is the responsibility of designated members to file documents with the registrar of companies (see paragraphs 53A.38 and Part 4),
  • Quorum requirements for meetings of an LLP – once the members made the decision to wind-up the LLP it may be required to hold a meeting to make a decision about the insolvency process or to receive information from the office holder. The legislation provides for a default quorum of two members for a meeting unless the quorum is set by a partnership agreement  (see paragraph 53A.44) [Note 27].

 

53A.107 Other insolvency proceedings

The following insolvency proceedings are available to LLPs:

  • Voluntary liquidation – an LLP may be wound-up voluntarily in the same way as a limited company (see paragraph 53A.106).
  • Company Voluntary Arrangement (CVA) – an LLP may use the CVA procedure with a number of modifications to take into account, amongst other things, that there is no equivalent of a meeting of the company to consider the CVA proposal [Note 28].
  • Administration order – an LLP may apply to the court for an administration order on the same grounds as a limited company [Note 29]. The administrative receivership provisions of the Act apply to LLPs in the same way as they apply to limited companies [Note 30].

Further information on other insolvency proceedings can be found in Chapter 56.

 

 

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