Any member of an LLP may be subject to a Disqualification Order – not just those on the Management Committee
06 April 2021
Pursuant to the Company Directors Disqualification Act 1986 (CDDA) the court may, in certain circumstances, make a ‘Disqualification Order’ preventing an individual from being a company director for a period of up to 15 years.
Disqualification Orders are made to protect the public from the actions of individuals who enjoy the protection of limited personal liability by conducting business through a limited company, but who manage the company with such poor standards of care and responsibility that third parties are exposed to a risk of loss and damage when they deal with the company.
The rationale for Disqualification Orders is that the individual directors are the directing minds of the company and manage how the company conducts business with third parties. Employees, no matter how senior, do not have the same management power and responsibility and are, therefore, not subject to Disqualification Orders under the CDDA (unless they give direction and instructions to the board of directors and are therefore shadow directors).
The protection of third parties who deal with businesses which afford their ‘managers’ the significant benefit of limited personal liability has led the provisions of the CDDA to be applied to Limited Liability Partnerships (LLPs) and their members. Regulation 4(2) of the Limited Liability Partnership Regulations 2001 (LLP Regulations) states the CDDA shall apply to LLPs, modified such that reference to a “company” shall include a reference to an LLP and reference to a “director” shall include a reference to a “member” of an LLP.
However, is every member of an LLP the equivalent of a director of a company who sits on the Board of Directors and manages the business of that company?
A significant number of modern businesses operating as LLPs (and virtually all such businesses in professional services sectors), have detailed ‘Member’s Agreements’ which stipulate: how the business will be managed; who has the power to make decisions; limitations on the powers of individual members to make decisions on behalf of (and as agent for) the LLP.
It is common for modern Member’s Agreements to provide that the power of day to day management and decision making is delegated by the members to an elected ‘Management Committee’ and that the individuals who make up the general member community are prohibited from making certain decisions (for example, dismissing employees, entering into certain contracts, incurring liabilities for the LLP etc).
So if management power in an LLP is delegated to a Management Committee, isn’t that committee the equivalent of the Board of Directors of a company, and shouldn’t it only be the individuals that are members of that Management Committee that are subject to the CDDA and Disqualification Orders?
The question was considered in March 2021 by the High Court. It arose in an application by two (former) members of the PR Agency, Bell Pottinger LLP (Pottinger) which went into liquidation in September 2019. The Secretary of State for Business, Energy and Industrial Strategy (Secretary of State) sought Disqualification Orders against three members of Pottinger on the ground that they were all unfit to be concerned in the management of a company or an LLP. However, only one of the three had been a member of the management committee of Pottinger.
The two members that had not been on the management committee were subject to allegations of misconduct in relation to a marketing campaign in South Africa conducted by Pottinger for one of its clients. That campaign contributed in part to the failure of Pottinger following the termination of Pottinger’s membership of the Public Relations and Communications Association (such termination being due to conduct which brought the public relations and communications industry into disrepute).
Notwithstanding the allegations of misconduct, the two individuals sought to strike out the Secretary of State’s application for Disqualification Orders against them on the ground that the CDDA did not apply to them because they were not members of the management committee of Pottinger and were not concerned in its management.
Although the Court had some sympathy for the position of the two individuals, it concluded that because Parliament had not seen fit to differentiate between different categories of member (i.e. those individuals that were involved in management and those that were not), the CDDA and the Regulations were to be strictly construed. Accordingly, the decision of the Court was that:
- All members of an LLP are potentially liable to face disqualification proceedings;
- There is no qualification to the jurisdiction over all members …. that the member has to be on the management board or at a level equivalent to a director in a company;
- The conduct that can be relied on [for disqualification] is anything that is done in the capacity of a member of the LLP.
It may be thought by some that this is harsh on LLP members who do not sit on the Management Committee of the LLP and do not have the power to make decisions in the name of the LLP.
However, it is worth remembering the rationale for a power to disqualify. If individuals wish to be members of an LLP and enjoy the significant benefit of limited personal liability for loss and damage caused to third parties by the LLP businesses which they own and to a greater or lesser extent control, they must expect to be held to high standards of conduct and behaviour and that they are subject to the terms of the CDDA.