A Deed of Retirement doesn’t always protect a retiring partner

While it is possible for an LLP to waive the liability of an outgoing partner, a decision of the Insolvency and Companies Court 1 is a timely reminder that if insufficient care is taken when drafting the Deed of Retirement, an outgoing partner may still be on the hook for debts owed to the LLP.

The case 

Mr Riches and Mr Sawyer were the only partners of A&C Restoration LLP (“ACLLP”).  There was a written membership agreement dated 2 June 2008 which included relatively standard provisions to the effect that drawings on account of profits would be paid monthly, any excess drawings for an accounting year would have to be repaid immediately by the partner and partners would not be required to contribute additional capital in the event of an insolvency. 

The accounts of ACLLP for the year ended 29 June 2017 recorded that Mr Riches owed ACLLP £126,871 and Mr Sawyer owed it £63,509. The accounts were not challenged and the court accepted that these were debts the partners owed to ACLLP.

The court was told by Mr Riches that on Easter Sunday 2017 he and Mr Sawyer concluded an oral agreement pursuant to which Mr Riches was to retire as a partner of ACLLP, Mr Sawyer would take over the business and debts and Mr Riches would become an employee and continue to work to help pay off the debt he owed to ACLLP.  

On 10 October 2017 Mr Riches entered into a Deed of Retirement.  The relevant terms were that Mr Riches would retire on 30 June 2017, his capital (of £100) would be transferred to Mr Sawyer (and a newly appointed partner), he would not receive any payment for his transfer of capital and Mr Sawyer and the new partner would “agree to procure that [ACLLP] will waive any balance of the monies owed by [Mr Riches] to the LLP as shown in the leaving accounts”. 

It was clear that Mr Riches believed that (1) the LLP had released him from his debt and (2) Mr Sawyer was to be liable for Mr Riches debt.  There were, however, two problems with this position:

• the partners did not take proper account of the duties they owed to ACLLP in circumstances where ACLLP was insolvent at the date of the Deed of Retirement; and

• ACLLP was not party to the oral agreement of Easter Sunday 2017 regarding the transfer of ACLLP assets (the debt owed by Mr Riches) from Mr Riches to Mr Sawyer.

The court found that because ACLLP was not a party to the oral agreement of Easter Sunday 2017, Mr Riches continued to be indebted to ACLLP (he may have had a separate claim against Mr Sawyer, but that did not have any impact on the debt Mr Riches owed to ACLLP).

More significantly, the court found that ACLLP was insolvent at the date of the Deed of Retirement and that Mr Riches (and Mr Sawyer) were in breach of the duties they owed to ACLLP in their capacity as partners by purporting to include a waiver and release provision in the Deed of Retirement.   

The fundamental problem was that Mr Riches and Mr Sawyer had overlooked the fact that as partners in ACLLP, they owed duties to the LLP.  Insolvency and Companies Court Judge Jones said:

“The fact that [ACLLP] was insolvent means that the designated members when deciding whether to agree to a waiver clause on behalf of [ACLLP], had to consider the interests of creditors.  The decision to cause [ACLLP] to be party to a retirement agreement which released the debt cannot have been in the interests of creditors.  Plainly it was a breach of duty, a misfeasance, to cause [ACLLP] to agree to the waiver in circumstances of insolvency.” ₂

ACLLP was insolvent at the date of the Deed of Retirement and Mr Riches and Mr Sawyer could not waive the debt owed to the LLP by Mr Riches when doing so would be detrimental to the interests of the creditors of ACLLP. 

The court concluded that Mr Riches and Mr Sawyer breached their duties to ACLLP in seeking to waiver the debt and that Mr Riches could not claim the benefit of the waiver and release provision of the Deed of Retirement which had been created by his own breach of duty. 

The debt owed by Mr Riches to ACLLP had, after the commencement of liquidation, been assigned by the ACLLP and the liquidator to Manolete Partners Plc (the claimant in the proceedings).  Accordingly, judgement was given in favour of Manolete Partners Plc for the sum owed by Mr Riches to ACLLP as if the Deed of Retirement did not contain the waiver and release provision.   

Conclusion and comment 

There is nothing improper or unlawful in executing a Deed of Retirement which prevents an LLP from waiving claims against an outgoing partner.  However, the Deed of Retirement must take account of all relevant circumstances if it is to resist a future challenge by the LLP or, as is more likely, a liquidator appointed to collect all the assets of the LLP (including the LLP’s debts) for the benefit of the creditors. 

A Deed of Retirement in which the author was involved was challenged by a liquidator after the LLP had become insolvent, but the retired partners were not liable because the waiver and release was found to be effective.  His Honour Judge Hodge QC denied that retired partners were liable to the liquidators of an LLP and said: 

“The fact is that I am satisfied, for the reasons supplied by [Claimant’s Counsel] (which I accept), and contrary to the submissions of [Defendant’s Counsel] (which I reject), that the terms of the Retirement Deed are clear. The LLP thereby waived and released any claim to pursue [the retired partner] (and other departing Fixed Share Members) for any overpaid drawings and any overpaid tax (which, on the view that I take, does not arise).” ₃ 

Deeds of Retirement may appear straightforward documents to prepare, but as Mr Riches found to his cost, they do require careful drafting and must take account of all the prevailing circumstances and the law.  When properly drafted they give certainty to all – but when poorly drafted the consequences can be disastrous.

_{1 Manolete Partners PLC -v- Andrew Michael Riches [2020] EWHC 1404 (CH)}

_{2 Paragraph 25}

_{3 Steven Charles Fennell -v- Halliwells LLP (In Liquidation) [2014] EWHC 2744(Ch) at paragraph 106.}