Flanagan v Liontrust Investment Partners LLP and Others (main judgment)

This is a first instance Chancery judgment on liability issues in an unfair prejudice petition under section 994 Companies Act 2006 as applied to a limited liability partnership (LLP). The court decided key contractual and statutory questions concerning (a) the validity of three notices purporting to compel the petitioner to retire from membership of the LLP, (b) the lawfulness of the respondent LLP’s decision to place the petitioner on garden leave and exclude him from the business, and (c) the consequences of any repudiatory breach of the LLP agreement.

The court held that the first termination letter (20 August 2012) was invalid because the Side Letter stipulated a six month notice period which could not validly be made to run so as to expire before the end of the two year compulsory initial term; the attempt to place the petitioner on immediate garden leave was also invalid because that power lay with the Management Committee and no valid Management Committee meeting took place. The court found that the LLP’s exclusion of the petitioner from active participation in the business did amount to a contractual breach and, on the facts, was repudiatory in character, but nonetheless concluded that the common law doctrine of accepted repudiation does not operate so as to displace an exhaustive multi‑party section 5 LLP agreement and substitute the default rules (Regulations 7 and 8) in respect of a multi‑member LLP. The court therefore refused the petitioner’s claim to convert his contractual position into the default equal‑share regime; collateral contract and misrepresentation claims arising from a meeting in Christopher’s Bar were dismissed.

This judgment resolves contested issues arising from an unfair prejudice petition under section 994 of the Companies Act 2006 (as applied to LLPs) brought by Eoghan Flanagan against Liontrust entities and other LLP members. The dispute followed Flanagan’s transfer to Liontrust Investment Partners LLP (the LLP) after Liontrust acquired Occam’s business in October 2011, and subsequent closure of the Emerging Markets Absolute Return Fund in August 2012.

• Parties and factual background: Mr Flanagan was an experienced fund manager who joined the LLP on 4 October 2011 under an LLP Agreement (dated versions relevantly 11 April 2011 and 19 July 2012) and a Side Letter which provided a compulsory initial two year term and specified a six month notice period for compulsory retirement under clause 18.1.3. The Fund suffered poor performance and heavy outflows. Liontrust decided to close the Fund and to require Flanagan to retire; a termination letter was handed to him on 20 August 2012 and he was placed on garden leave.
• Nature of the claim / relief sought: the petition combined declaratory relief on contractual construction (validity of notices; whether repudiation had occurred and its consequences), damages for breach of contract, and relief under section 994 (unfairly prejudicial conduct), including a buy‑out order. The petitioner sought, as an alternative, declarations that on acceptance of repudiation the LLP Regulations 2001 default provisions governed his membership (a pro rata share of capital and profits and participation rights).
• Issues framed:
  1. Was the 20 August 2012 notice valid and could it be treated as giving valid six months’ notice or as requiring Management Committee approval?
  2. Did the LLP’s exclusion of Flanagan and the garden‑leave directions breach the LLP Agreement and, if so, were the breaches repudiatory?
  3. If repudiatory breach occurred and was accepted by Flanagan, did that acceptance operate to displace the section 5 agreement and bring the default rules (Regulations 7 and 8) into force?
  4. Were there enforceable collateral contractual promises or actionable representations made at a meeting on 3 October 2011?
• Court’s reasoning and conclusions:
  • Construction: The Side Letter’s wording required a six month notice period that could not validly be given to expire before the end of the two year compulsory initial term; the 20 August 2012 letter therefore attempted to give an excessive period of notice and was invalid. The court rejected the notion that the premature letter could be treated as a post‑dated notice becoming effective on the earliest permissible date because the letter was intended to have immediate effect (including garden leave) and a valid notice was a condition precedent to that power.
  • Management Committee: Clause 21 garden leave powers were exercisable by the Management Committee; as no valid Committee meeting was convened the purported garden‑leave decision was invalid and the fabrication of Management Committee minutes reinforced the LLP’s repudiatory conduct.
  • Breach and repudiation: The petitioner’s forced exclusion from active participation in the LLP breached the LLP Agreement. On the facts the conduct was such as to evince renunciation/repudiation. The court found the LLP’s behaviour was not an honest innocuous mistake; fabricating minutes and excluding the petitioner from Committee participation supported the conclusion that the conduct was repudiatory.
  • Common law doctrine and LLPs: The court held that, although repudiatory breach may in principle operate between parties to a contract, the statutory scheme for LLPs (section 5 agreements and the default rules) should be construed so that a multi‑party section 5 agreement cannot be displaced by unilateral acceptance of repudiation by one member in a way that produces concurrent and inconsistent governance regimes. Accordingly, in a multi‑member LLP the common law doctrine will not operate to convert the contractual regime into the default regime; the judge left open the two‑member LLP question.
  • Collateral contract/misrepresentation: No enforceable collateral contract or actionable misrepresentation was established from the Christopher’s Bar meeting; the discussion was not intended to have legal effect.
• Practical outcome and implications: The court declared the first (and, on the judge’s construction, likely the subsequent) termination notices ineffective to end membership or to authorise garden leave; it found breach and repudiatory conduct by the LLP but held that the petitioner cannot, by accepting repudiation, convert his contractual position into the LLP Regulations 2001 default equal‑share regime in a multi‑member LLP. The petitioner therefore remains a member and may pursue contractual remedies (damages), but the dramatic result he sought under the default rules was rejected. The judgment emphasises limits of the repudiation doctrine in multi‑party LLP agreements and highlights practical difficulties of invoking default rules in that context.

First instance: The court held the first termination letter (20 August 2012) and the associated garden‑leave directions invalid because the Side Letter required a six‑month notice period expiring no earlier than the end of the two‑year compulsory initial term and the garden‑leave power lay with the Management Committee which had not validly met. The LLP’s exclusion of the petitioner from active participation was a breach of the LLP Agreement and, on the facts, repudiatory; however the common law doctrine of accepted repudiation cannot, in the context of an exhaustive multi‑party section 5 LLP agreement, displace that agreement and invoke the LLP Regulations 2001 default regime. No collateral contract or actionable misrepresentation was made at the Christopher’s Bar meeting. The petitioner remains a member and may have contractual remedies (damages) but not the conversion to default equal‑share membership he sought.