Hilton v D IV LLP & Ors

The court considered a Part 8 claim by which members sought a declaration entitling them to inspect and copy documents held by a firm of solicitors (D5) either as of right under the partnership deeds or by operation of regulation 7(8) of the Limited Liability Partnership Regulations 2001, and alternatively sought Norwich Pharmacal relief against D5. The judge construed the deeds in their statutory and factual context and held that clause 5.4 (relating to provision of information for the administration of members' personal tax affairs) did not entitle the claimants to the documents sought because its scope is limited to information necessary to enable members to submit tax returns or pay tax.

The judge held that clauses 12/13 (the accounting / books and records clauses) created an express unqualified right for members and their authorised representatives to inspect the LLP's books and records. The correct test for what constitutes books and records is the functional test applied in Inversiones: materials necessary or advantageous to establish the partnership's rights against third parties or to determine partners' rights inter se, and documents paid for by the partnership. Applying that test, the claimants were entitled to inspect the Documents to the extent they are such books and records. The Norwich Pharmacal application against D5 failed: D5 was not shown to be sufficiently 'mixed up' in the alleged wrongdoing and the information could, at least in principle, be sought from other parties.

This was a first instance hearing of a Part 8 claim brought by representative members of four LLPs that had operated film investment schemes. The LLPs were run by designated members controlled by the schemes' promoters; the schemes had failed and HMRC disallowed claimed tax reliefs. Some investors suspected the schemes had been used to divert funds and facilitate fraud. Many relevant documents were held by a solicitors' firm (D5) which had acted for the LLPs in a tax appeal.

The claimants sought (i) a declaration that they were entitled to inspect and copy the documents held by D5 either by construction of the partnership deeds (clause 5.4, clauses 12/13 and paragraph 2.6 of schedule 3) or by operation of regulation 7(8) of the Limited Liability Partnership Regulations 2001; and (ii) alternatively, Norwich Pharmacal relief against D5 to obtain documents needed to plead a claim in relation to alleged fraud.

Issues framed by the court included: the proper construction of clause 5.4 (the obligation to supply "relevant information" for members' personal tax affairs); the meaning and scope of clauses 12/13 concerning "books and records" (and their interaction with Reg.7(7)); whether paragraph 2.6 of schedule 3 or Reg.7(8) provided independent rights to inspect/copy; and whether Norwich Pharmacal relief was available against D5.

The judge reasoned that clause 5.4 must be read in the statutory context created by s.10 of the Limited Liability Partnerships Act 2000 (which treats LLP tax items as personal to members) and therefore is limited to information necessary for submitting tax returns or paying tax. The claimants' stated purpose — investigating possible fraud and deciding whether to sue — did not bring them within clause 5.4. By contrast, clauses 12/13 were held to implement the default position in Reg.7(7): taken as a whole they give members and their authorised representatives an express, unqualified right to inspect the LLP's books and records at reasonable times; the second sentence of the clause merely permits the designated members to decide what additional books and statements to maintain or provide, but those records, once maintained, fall within the inspection right. The judgment applied the functional test from Inversiones to identify which documents are "books and records". The court exercised its discretion to permit inspection notwithstanding that the applicants sought documents to investigate potential litigation: motive was, in general, irrelevant unless the use was manifestly improper.

On Norwich Pharmacal relief the judge concluded D5 was not sufficiently "mixed up" in the alleged wrongdoing, had acted as solicitors in later tax appeal work and held documents innocently, that the information could in principle be obtained by other routes (for example disclosure against parties likely to be defendants), and that making an order against solicitors raised significant policy and practicality concerns. Accordingly Norwich Pharmacal relief was refused.

The court declared that the claimants are entitled to inspect the Documents to the extent they qualify as books and records under clauses 12/13, but refused the Norwich Pharmacal application. The court left open ancillary issues (express copying right, precise documents covered) for determination at handdown/directions.

At first instance the court ordered that the claimants are entitled to inspect the Documents in D5's possession to the extent those Documents fall within the meaning of "books and records" under clauses 12/13 of the partnership deeds, applying the functional test derived from Inversiones. Clause 5.4 did not entitle the claimants to the Documents because it is limited to information necessary for members to submit tax returns or pay tax. The Norwich Pharmacal application against D5 failed because D5 was not shown to be "mixed up" in the alleged wrongdoing and the information could be sought by other means; orders against solicitors raised particular policy concerns. Ancillary issues (express right to copy, identification of specific documents) were left for handdown and directions.