Limited partnerships: litigation following dissolution and winding up

The case in question, Frontiers Capital I Limited Partnership (acting by Frontiers Capital General Partner Limited) v Thomas Flohr [2023] EWHC 2723 (Ch), concerned Frontiers Capital I Limited Partnership (the “Limited Partnership”), which was a limited partnership governed by the Limited Partnerships Act 1907 (the “1907 Act”).

Types of partnership

It is worth highlighting here some key differences between the different types of partnership. Partnerships under the 1907 Act are similar to general partnerships under the Partnership Act 1890 (the “1890 Act”). However, a crucial difference is that limited partnerships have two types of partner:

• A general partner - a person or entity which runs the business of the limited partnership and has unlimited liability for all debts and obligations of the limited partnership (section 4(2), 1907 Act); and
• Limited partner(s) - a person or entity not actively involved in the management of the business of the limited partnership, but who invests capital and has liability limited to the amount of their capital contribution, provided that person/entity does not participate in management of the business (section 6(1), 1907 Act).

The 1890 Act governs Limited Partnerships, to the extent that its provisions are not specifically overridden by the 1907 Act.

Limited liability partnerships ("LLPs"), governed by the Limited Liability Partnership Act 2000, are again different - unlike limited partnerships and general partnerships, an LLP is a distinct legal entity, separate from its members.

The case

The general partner of the Limited Partnership in the present case was Frontiers Capital General Partner Limited (the “General Partner”). The General Partner was a Guernsey company, which was dissolved in November 2010, with the business of the Limited Partnership said to have ceased on 5 April 2010, apparently without knowledge that there was a cause of action against a third party. However, the General Partner was restored to the register of companies in February 2021. The Limited Partnership, acting by the General Partner, then issued proceedings against the Defendant in December 2021. It was alleged that the Defendant concealed key elements of the potential claim such that it was not time barred - the alleged breaches took place between 2002 to 2005.

The Defendant filed an application, seeking orders striking out the claim (CPR 3.4 applies) or granting summary judgment in his favour (CPR 24 applies). The Defendant also sought an order dismissing the claim on the basis that the General Partner had no authority or standing to bring the claim on behalf of the Limited Partnership. It was argued that the General Partner did not have standing to bring an action against the Defendant after the dissolution and apparent winding up of the Limited Partnership in respect of a cause of action which accrued prior to dissolution, either as a matter of construction of the limited partnership agreement in place (the “LPA”) or under section 38 of the 1890 Act, which 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 … but not otherwise”.

It was argued that the section did not apply because the claim was not necessary to wind up the affairs of the Limited Partnership and because the claim could have been brought before the Limited Partnership was wound up, but was not. The Defendant submitted that the proceedings were speculative and were not akin to, for example, a straightforward debt claim: “The starting point is that a piece of speculative litigation never falls within the necessity test”. Further, it was contended that, on a proper construction of the LPA and in light of the Claimant's evidence, the dissolution of the Limited Partnership took place because of the withdrawal of the General Partner, which meant that the General Partner accordingly had no authority to act as a matter of contract.

The decision

The High Court considered the provisions of the LPA and the manner in which the Limited Partnership was dissolved and declined to grant the application to strike out the claim or to grant summary judgment in favour of the Defendant.

As to whether the proceedings were “necessary” or not in the winding up of the Limited Partnership, the Court considered section 38 of the 1890 Act and the fact that the Limited Partnership had already been fully wound up by the return of the limited partners' capital. It was noted by the Court that, “There would appear to be no English authority concerned with whether the bringing of proceedings after the date of dissolution is necessary”; the Court therefore considered obiter comments in an Australian authority as to the meaning of “necessary”. The Court concluded that the Defendant's proposed test was impractical and concluded, “If there is a partnership asset being a claim with some merit, and that claim is capable of being realised, then I consider that the power given by section 38 of the 1890 Act permits the claim to be brought.”

There was also said to be no apparent case law on the point of the authority of the General Partner in circumstances where, even if proceedings had been necessary, the limited partners' capital had been returned and years had passed. The Court found that a cause of action which accrued pre-dissolution, but which had not otherwise been dealt with or become time-barred, remained a partnership asset and remained to be dealt with.

Comment

This decision is of interest due to the Court's consideration of several issues arising in the context of the dissolution of a limited partnership which have not previously received judicial attention. The Court has adopted (albeit on an interim basis) a broad interpretation of section 38 of the 1890 Act, which facilitates a general partner pursuing litigation for the purpose of winding up a limited partnership in order to maximise recovery of partnership assets.

The claim will now proceed and, unless settlement is reached, the issue of the standing of the General Partner to bring the claim on behalf of the Limited Partnership will be determined by the Court in the future. The Court indicated to the parties that the determination of this point should not wait until trial.

Our expertise

Our highly regarded Partnerships and LLPs practice advises on all aspects affecting LLPs, partnerships, limited partnerships and the individuals who work within them. For further information or for a discussion on topics raised in this article please contact Clive Greenwood.