A recent case, Flohr v Frontiers Capital, has provided additional guidance on limited partnership dissolution. In this case, the Court of Appeal considered the scope of the statutory power of a partnership to do what is necessary to complete the winding up of an English limited partnership.
We have summarised the key impacts and set out a more detailed analysis below.
Brief Summary
- This case affirms that a partnership retains the ability to pursue claims as necessary to complete the winding up of the partnership, even after it was believed to have been wound up (e.g. where a new claim arises after it was believed to have been wound up).
- What is necessary to complete the winding up of a partnership is fact-specific. The court considered that a claim that is highly speculative or highly complex might not be necessary to pursue to complete the winding up of a partnership.
- In our view this case re-confirms the existing position that neither the registrar of companies nor a general partner (GP) can ever be completely certain that the winding-up of a limited partnership is complete (in that there may be a possibility that a partnership asset remains outstanding).
- This position will not change as a result of the reforms to limited partnership law under the Economic Crime and Corporate Transparency Act – although the reforms have other wide-reaching implications on dissolution.
- This case confirms that a GP need not be overly concerned about inadvertently losing future rights by taking steps to complete the winding-up of a limited partnership, as if a new right arises after that point it may still have a right to pursue that claim, depending on the facts.
Summary of Limited Partnership Law on Dissolution
Neither the Partnership Act 1890 (1890 Act) nor the Limited Partnerships Act 1907 (1907 Act) is explicit on the status of a UK limited partnership (UKLP) post-dissolution. However, the widely-cited legal argument is that UKLPs continue to exist post-dissolution until they are fully wound-up, albeit they continue to exist solely for the purposes of winding up the partnership. This is based on section 38 of the 1890 Act (which also applies to UKLPs), that provides that after the dissolution of a partnership the authority of each partner to bind the firm , and the other rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution. Importantly, the limited partners’ liability remains limited during the post-dissolution winding up period (when the GP has continued but limited authority to bind the UKLP).
Case Summary
This case examined the extent of a GP’s continuing authority for the purposes of winding up an English limited partnership (ELP) in respect of a partnership claim that arose after final accounts had been drawn up, capital returned to the limited partners and the ELP’s winding up apparently completed. Although in most cases a UKLP’s debts and obligations would be identified, settled or otherwise addressed during the winding-up period, in this case the partnership asset was not known until much later; therefore the GP (a Guernsey company) was restored to the Guernsey register of companies so that it could issue proceedings on behalf of the ELP against Mr Flohr. The claim related to alleged breaches of contract and fiduciary duty, including claims in deceit relating to losses suffered by the partnership from a joint venture entered into between the parties.
Case Analysis
There were two key issues before the Court of Appeal, as set out below.
Did The GP Have Authority to Bring a Claim After the ELP Had Been Wound Up?
The Court of Appeal agreed with the High Court’s reasoning that “a cause of action against a third party which accrued to the partnership before dissolution, which is not pursued or realised or dealt with by assignment, and which does not become time barred, remains a partnership asset. Realising that asset is one of the affairs of the partnership. In such circumstances, the winding up is not complete even if the person carrying out the winding up mistakenly believes that it has been completed. Accordingly, section 38 continues to operate for the purposes of getting in the asset and completing the winding up.”
Was it “Necessary” To Commence Litigation with The Meaning of Section 38 of the 1890 Act and The Limited Partnership Agreement?
The court found that section 38 permits doing what is “reasonably required” in the circumstances. The conclusion being: “Had the legislature intended to restrict the powers, rights and obligations continued by section 38 to situations in which they were absolutely or strictly necessary to wind up the affairs of the partnership and complete unfinished transactions, it would have used different language.” This will be fact-sensitive; therefore a GP may not be justified in pursuing a claim on the partnership’s behalf where there is little prospect of success and/or where it is not cost effective to do so. The context of the claim (i.e. whether or not there is deliberate concealment or fraud) may also be a factor to consider.
What Did the Case Not Consider?
This case did not consider which specific activities may be carried out to complete transactions begun but unfinished at the time of dissolution; neither does it relate to the treatment of a third-party claim that may arise against a limited partnership following its winding up. Note that many UKLP structures which fall outside the definition of being an ‘alternative investment fund’ will still be ‘collective investment schemes’, in which case where they are operated in the UK, they will need to comply with the Financial Services and Markets Act, including the requirement to appoint an FCA-authorised operator to establish, operate and wind-up the partnership. This was not relevant to this case, where the ELP was operated outside the UK by the Guernsey GP.
There is a possibility that permission to appeal is sought, and we will be monitoring any developments.
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