PETER JOHN TRIBE v ELBORNE MITCHELL LLP

This case concerned the appropriate accounting treatment of an overdrawn current account of a fixed share partner ("F") in the LLP's financial statements for the year ended 30 April 2016. The court applied the impairment principles in FRS 102 (including the rules on post-balance-sheet events) to decide whether there was objective evidence of impairment as at the reporting date and, if so, the appropriate quantum of provision in the Statutory Accounts.

The judge held that as at 30 April 2016 there was objective evidence of impairment of F's debt but that a 100% provision was not justified for the Statutory Accounts; a 50% provision was appropriate on those accounts. The judge further explained the legal and contractual distinction between Statutory Accounts and the Partners' Accounts (and the defined concept of "Distributable Profits" in the Members' Agreement) and concluded that the partners were entitled as a matter of commercial judgment to prepare Partners' Accounts that effectively reflected a full provision by the time the Distributable Profits were resolved and the Partners' Accounts approved.

Background and parties. The claimant, Mr Peter Tribe, a retired equity partner, sued his former LLP, Elborne Mitchell LLP, for sums said to be due on retirement. The dispute concerned the accounting treatment of a debt owed by a fixed share partner ("F") at the financial year end 30 April 2016 and the effect of any provision on amounts shown in the Partners' Accounts and so payable to departing partners.

Procedural posture and the issue for trial. The claim comprised several elements; earlier hearings determined two of them, leaving a single directed issue for trial: whether the LLP profits figure for the purposes of the Partners' Accounts for 2015/2016 should take account of a provision against the debt of £128,554 due from F at the year end date. That question was tried before Deputy High Court Judge James Pickering QC.

Evidence and legal framework. The court heard factual evidence and competing expert accountancy evidence. Both experts accepted FRS 102 impairment principles: an entity must assess at the reporting date whether objective evidence of impairment exists (FRS 102, section 11) and may consider post-balance-sheet events only to the extent they provide evidence about conditions existing at the reporting date (section 32). The experts disagreed on application: the LLP's expert supported a 100% provision, the claimant's expert supported a 50% provision.

Court's reasoning on Statutory Accounts. The judge found objective evidence of impairment as at 30 April 2016 but, on a broad-brush assessment of the contemporaneous position and adjusting post-balance-sheet matters, concluded that a 50% provision was appropriate in the Statutory Accounts. The judgement relied on contemporaneous partner correspondence and the fact that the LLP continued to entertain the prospect that F might generate fee income or that recovery from his assets might be possible.

Court's reasoning on Partners' Accounts and Distributable Profits. The court emphasised that the Members' Agreement distinguished Statutory Accounts (for the LLP as a whole) from Partners' Accounts and expressly defined "Distributable Profits" as the profits shown in the Partners' Accounts, which may differ from profits in the Statutory Accounts. The Partners' Accounts involve an element of discretion and commercial judgment when determining distributable sums. By the time the members resolved the Distributable Profits (31 October 2016) and later approved the Partners' Accounts (18 April 2018), the partners' commercial assessment that F's debt would not be recovered had become justified. The court therefore held that, although the Statutory Accounts should have reflected only a 50% provision as at 30 April 2016, the Partners' Accounts could properly be prepared on the basis of a full provision and that the profits figure for Partners' Accounts should take account of that provision.

At first instance the court held that while the LLP erred in making a 100% provision for F's debt in the Statutory Accounts as at 30 April 2016 (a 50% provision was appropriate), the Partners' Accounts and the Distributable Profits resolution taken later could properly reflect a full provision. The LLP's decision to have the Partners' Accounts take account of a full provision could not be criticised given the partners' commercial judgment by the time of the resolution.