England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		14th November 2003

Judge Weeks QC:

1. I have to decide an application to stay a petition to wind up a limited liability partnership. Such partnerships are subject to the same rules for winding up as limited companies, and it is accepted that under the Limited Liability Partnership Act 2000 and the Limited Liability Partnerships Regulations 2001 the partnership is equivalent to a limited company in law in that it is a separate entity and it is subject to winding up in the same way as a company.PRIVATE 
2. The partnership in question is called Magi Capital Partners LLP and it was incorporated under the Act on 15th August 2002. There are four partners, three individuals and a company. The individuals are Mr. Hall and Mr. Burke, who are the Petitioners on the present petition; the third partner is Mr. Banerjee, who is applying to stay the petition; and the fourth partner is a company called BHALLB Ltd., which is a company in which the three have shares and Mr. Hall and Mr. Burke have the majority of the shares. The partnership was formed for the purpose of giving investment advice and initially it was successful in that it formed a relationship with a comparatively large fund and traded happily with the approval of the Financial Services Authority up till June 2003.
3. The relationship between the partners was governed by a formal agreement, as required by the Act, which contains provisions dealing with the details of the partners and their capital contributions: a clause common in partnerships, that "each partner will be just and faithful to the firm and will devote the whole of his or her time and attention to the business of the firm.": a provision not found in partnerships, to exclude section 459 of the Companies Act: importantly, a provision for arbitration, which I shall have to read in detail later: provisions for retirement by notice or voluntary exit and for expulsion if any partner commits a substantial breach of the Agreement or commits any of another number of misdemeanours, including becoming bankrupt, being convicted of an offence involving fraud or being guilty of any conduct that would be a ground for winding up the firm by the court. There are provisions for payment on retirement, exit and expulsion, which I need not read, and provisions restricting competition after leaving the firm. But no one partner or majority of partners is entitled unilaterally to terminate the relationship. That can be done only by the court making a winding up order.
4. In June of this year calamity hit the firm in that a major investor in the fund gave notice to withdraw its money from the fund, which had an immediate and significant effect upon the partners and the firm's trading. That occurred on 24th June 2003 and is not in dispute. What is in dispute is what happened later that month. Mr. Banerjee's account is that on 25th June his co-partners had the locks at the office changed to deny him access, the passwords on the computers changed to deny him access to the computer, and that they prepared a notice intended to lead to his expulsion. That notice was delivered by hand to his home address on the following day, 26th June 2003, and purported to call a Board meeting of the Company to decide how the Company would vote on a proposed resolution for Mr. Banerjee's expulsion. Mr. Banerjee replied the next day, denying the allegations against him, saying that they had never been discussed and expressing his outrage at the partners initiating the procedure for expulsion without giving him any hearing, and on what he said were spurious grounds.
5. The other two partners then backed down to some extent. They, in effect, withdrew their proposal to expel him, but Mr. Banerjee then decided to go on the attack and himself initiated expulsion proceedings against the other two partners. At the end of the day it seems to me that these proceedings were unlikely to succeed because to carry out the expulsion Mr. Banerjee would have needed the concurrence of the company to expel the other two partners, and, given the voting structure in the company, he was unlikely to achieve that.
6. The parties then agreed to operate the provision in the Partnership Agreement for arbitration. The clause also deals with mediation but both sides thought that mediation was a non-starter, and they went straight to arbitration, agreeing the identity of an arbitrator by 28th July, and the arbitrator chosen accepted his appointment provisionally on 1st September. The first meeting before the arbitrator was scheduled for 8th September, but at the request of Mr. Burke and Mr. Hall this was put off until 12th September. On 10th September Mr. Burke and Mr. Hall, through a different firm of solicitors, presented a petition to wind up the partnership. On 12th September the parties attended before Mr. Banks, the arbitrator, but his appointment was not confirmed and the petitioners, according to Mr. Banerjee, refused to co-operate in the process. So he invoked a provision in the arbitration clause for appointment by the President of the Law Society, and on 23rd October 2003 the President appointed a different arbitrator, Mr. Marcus Rutherford. Mr. Rutherford called the parties to a hearing on 6th November and has scheduled a further hearing for a date in December.
7. In the meantime Mr. Banerjee applied by notice dated 7th October 2003 for an order that the winding up petition of Mr. Hall and Mr. Burke be stayed or adjourned pending an arbitration pursuant to clause 11.8 of the Partnership Agreement. The position of Mr. Burke and Mr. Hall is that they would prefer not to have the arbitration hearing. They contend that, if the order is made winding up the company, the arbitration will be purely academic and will serve no useful purpose. The submission through counsel today is that the arbitration is academic in any event because there is so much certainty on the facts as known at the moment that the winding up order will be made, that the findings of the arbitration could have no significant effect on the result.
8. I now turn to the arbitration provision in question, which is in clause 11 of the Partnership Agreement. 11.1 provides that:

"Save as otherwise provided in this Agreement, all disputes and questions whatsoever which may arise between the Partners or between any Partners or Partner in the firm relating to this agreement or the construction or application of this agreement or any account, valuation or division of assets, debts or liabilities to be made or as to any act, deed or omission of any Partner or as to any other matter in any way relating to the Firm or to the affairs of the Firm or the rights, duties or liabilities of any person under this Agreement will be dealt with in accordance with this clause."

9. There is then provision for mediation, which I need not read. I can go straight to 11.8 which provides that:

"If the dispute is not resolved through the use of alternative dispute resolution, then it will be referred to a single arbitrator, who will be appointed by the Partners involved in the dispute if they can agree upon one, or, failing agreement, by the President for the time being of the Law Society on the application of any partner, in either case in accordance with and subject to the provisions of the Arbitration Act 1996. Such decision will be binding on the parties and the arbitrator will decide upon costs."

10. It seems to me probable that if this had been an ordinary partnership and not a limited liability partnership, the Applicant, Mr. Banerjee, would have had an absolute right under the Arbitration Act to have the present winding up petition or the issues in it resolved by arbitration and that the arbitrator would probably have had jurisdiction conferred on him by agreement between the parties under section 35 of the Partnership Act 1890 to wind up the Partnership. But that is not the present case. This is not an ordinary partnership. It is a limited liability partnership. It is accepted that that creates a different entity, which is a creature of statute, and that it is not possible to exclude the statutory right to apply to have the statutory entity wound up by the court.
11. That is the case on the present petition. The petition seeks an order that Magi Capital Partners LLP be wound up by the court under the provisions of the Insolvency Act 1986 as modified by paragraph 5 of the Regulations. The immediately preceding allegation is that it is just and equitable that the firm should be wound up. That is the ground which is set out in section 122(1)(g) of the Insolvency Act, which by the Regulations is made to apply to limited liability partnerships Section 122(1)(g) provides:

"A company may be wound up by the court if -- ...

(g) the court is of the opinion that it is just and equitable that the company should be wound up."

12. In support of that allegation the Petitioners maintain that the management of the firm is deadlocked and the purposes for which the firm was formed no longer pertain and there is no purpose in the firm's continued existence. Certainly, those two features are classic instances or examples of situations in which the court has in the past been persuaded to exercise its discretion under the Insolvency Act or its predecessors on a just and equitable ground. But that I think is not the end of the matter. The court does not simply make the winding up order because the management of the firm is deadlocked or because the substratum of the firm has gone. The court has to be of opinion that in all the circumstances it is just and equitable to make the order.
13. The reason given in the application for a stay is that the petition has been issued as a device to frustrate the arbitration and to avoid a good faith resolution of the dispute, and as such is an abuse. That, I think, comes very close to, or is tantamount to, an allegation of bad faith on behalf of the Petitioners, that they are presenting the petition with a collateral purpose, not genuinely wanting a winding up but desiring to frustrate the arbitration, and the allegation of an abuse can, I think, only be justified if the Petitioners were in bad faith. It seems to me that faced with a conflict of evidence on this -- Mr. Banerjee asserting that the Petitioners are in bad faith and both Mr. Hall and Mr. Burke putting in witness statements saying that they genuinely desire the relief sought; they would prefer not to have an arbitration, but that is not their object in presenting the petition -- I am quite unable to decide which party is correct on that and I could not possibly reach, in the circumstances without any cross-examination of the witnesses, a finding that the Petitioners are in bad faith.
14. Miss Williamson before me has, however, relied on an alternative ground and no objection, I think, has been taken on the basis that this takes the Respondents by surprise or that the alternative ground cannot be put forward without an amendment to the application notice. That is, put shortly, this, that the allegations made by Mr. Banerjee which are the subject matter of the arbitration are allegations which are material to the petition. The court, so runs the submission, has to decide whether it is just and equitable whether the firm should be wound up and must take into account all the circumstances including the behaviour of the parties in the period running up to the presentation of the petition. The submission then goes on to say that, given that those allegations are material, it is better as a matter of case management to have the allegations decided in the arbitration rather than by the court on the hearing of the petition. In my judgment that is a submission which I ought to accept in both its parts. Despite Miss Hilliard's submissions to me that it is inevitable, whatever the conduct of her clients, that a court would make a winding up petition because this company is not trading and the parties have irrevocably fallen out, I am unable to reach the conclusion that a winding up order is inevitable. The court has to be of opinion that it is just and equitable to make the order. In cases starting with Re: Yenidje Tobacco Company Ltd. [1916] 2 Ch. 426 and continuing through Westbourne Galleries v. Ebrahimi [1973] A.C. 360 to Vujnovich v. Vujnovich [1990] BCLC 227 the courts have emphasised that conduct may be material and that the conduct of the petitioner may be such -- not necessarily will be but may be such -- as to disentitle it from the order sought. Miss Hilliard relied on Vujnovich for an example of a case where conduct was held at the end of the day not to be decisive of a matter. But that was a case where the conduct was not causative of the breakdown and it does seem to me that if the allegations of Mr. Banerjee are found to be true, either by the Companies Court or by the arbitrator, then he has an arguable case, not necessarily one that might succeed, but an arguable case -- even if the company is not trading, even if his co-partners are not prepared to work with him -- that the court should not make an order because it would not be just and equitable in all the circumstances to do so.
15. Miss Williamson has referred me to Root v. Head [1996] 20 ACSR 160, an Australian case, where the learned judge in the Equity Division of the Supreme Court of New South Wales refused to wind up a partnership because of the conduct of the applicant in causing the breakdown in relationships between the partners. She has also referred me to Re: A Company, a decision of Vinelott J. [1983] 1 WLR 927 where Vinelott J. refused to make a winding up order because the petitioner had rejected offers to purchase him out. Neither case is exactly in point, but they do lead me to the conclusion that there may be circumstances in which the court might conclude that it is not right for a majority of partners simply to say relationships have broken down. We are unwilling to go on trading. We are not trading now. Please wind up the partnership. So it does seem to me that the allegations which are before the arbitrator are material or could be material to the decision which the Companies Court will have to make on the hearing of this petition.
16. In those circumstances is it better for the Companies Court to decide the allegations or for the arbitrator? In my judgment it is better for the arbitrator for, I think, three reasons: first, because he is already seized of the matter. I am told he can have a hearing probably in December, certainly in January, and given that a four day estimate has been advanced to me, that seems to me to be likely to be quicker and more efficient than a hearing in the Companies Court. The second advantage to the parties is that there will be no publicity in the arbitration and, although the allegations and the findings may well come out eventually at the trial, they will not be exposed, at least at the earlier stage before the arbitrator. The third reason for preferring a hearing before the arbitrator is that is what really the parties are contractually bound to. When they entered into the Partnership Agreement they provided for arbitration and for better or worse that I think is the appropriate forum for the ventilation of these allegations.
17. I have therefore reached the conclusion that it would be appropriate to order a stay. That carries with an incidental advantage in that any possible buy-out by either side can be further investigated while the arbitration is carrying on. That in itself would not, I think, have been a sufficient reason for delaying matters and imposing a stay. It is something that happens fortuitously together with the arbitration. It also has the benefit for Mr. Banerjee that he has the opportunity to clear his name, something which he values very much and which has been at the forefront of his counsel's submissions. Again, that seems to me to be an incidental matter, and the fundamental reason for granting a stay in the present case is that in my judgment the allegations are material to the hearing of the petition or at least potentially material, and that the arbitrator is a more appropriate forum for the hearing of those matters. I do not propose to order an open-ended stay or a stay without time limit. It seems to me that I ought to decide on a date when the matter should come back before the court, ideally with the findings of the arbitrator, which will be binding on both sides and if, unfortunately, it has not been possible to hold the arbitration within that time then the question of the stay and its continuance will have to be reconsidered in the light of the position at that time. But I do propose to accede to a short stay. Miss Hilliard has pointed out to me that the firm is not trading, is incurring liabilities in the meantime for which her clients cannot hope for compensation at the end of the day if they do achieve a winding up order, and that in the meantime by the terms of the Partnership they are restrained in their professional activities. That, I think, is unfortunate. Mr. Banerjee is similarly restrained in his activities, and it does seem to me that the remedy for the problem does lie to some extent in the parties' own hands, in that it is of course quite open to them to resume trading, if only to a limited extent, within the old firm so as to eliminate or at least to minimise their losses. The amount of those losses is not I think a significantly large amount in the context of the time scale of these proceedings to justify a refusal of a stay, which as I said I am otherwise minded to grant. But I am conscious that if the stay were for a longer period than until a date in January, which I am contemplating for the moment, then the equation might look rather different.
18. In all the circumstances I will order a stay of these proceedings.
(following submissions)

JUDGE WEEKS: Stay until 19th January. Case management conference to be held by the Registrar on first available date after 19th January.

(following submissions) J U D G M E N T on COSTS

JUDGE WEEKS: I have to decide the question of costs on a successful application to stay the proceedings for a short time while arbitration takes place in respect of allegations made by the individual partners against each other. The starting point I think is that the applicant for a stay has succeeded and prima facie ought to have the costs of what is a discrete application. Nevertheless in the circumstances of the present case I think there are some grounds for postponing the decision until the hearing of the petition. My decision was on the basis that Mr. Banerjee's allegations ought to be ventilated before the arbitrator. It may be, however, that the arbitrator will decide that there is nothing in his allegations and that Mr. Burke and Mr. Hall are entirely correct in initiating steps to expel him, as they have done. Even if Mr. Banerjee does succeed in persuading the arbitrator that his allegations are true in substance or in whole, then there is a further hurdle for him. He will have to persuade the judge hearing the petition that they are material and possibly even decisive in forming a view as to whether or not it is just and equitable to wind up the company. The judge in that situation will be in possession of the full facts of the matter. I have only been able to decide that the allegations are potentially material. The judge hearing the petition may well decide that they are of little weight or insufficient weight to reach a conclusion that the petition ought not to succeed.

I think in the unusual circumstances of the present case I ought to depart from the usual rule post the introduction of the Civil Procedure Rules, that individual interim applications should attract individual interim awards of costs. I think in the present case justice can only be done if the costs are reserved to the judge hearing the petition. I am reluctant to do so because it does happen occasionally that costs are lost sight of in the course of a trial, but it seems to me unlikely that these costs would be lost sight of and that only the judge hearing the petition could properly reach a fair result as to the costs of this application.

So the costs will be reserved to the judge hearing the petition.