England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		25th April 2007

MR JUSTICE MORGAN:

The Issue

1. This case involves a question of construction of a settlement agreement contained in two or possibly three letters. The letters in question are dated 20th May, 17th June and 20th June 2005 and were written between solicitors for the claimant and solicitors for the defendants.

The Background

2. There are four individuals involved in this dispute. The first is Mr Hailes, the claimant; the other three are the defendants Messrs Hood, Reader and Westbrook. Those four persons, it seems, had previously been engaged in the business of equity broking and in around April or May 2004 the four of them formed a limited liability partnership. The incorporation documents are in the court documents but I need not refer to them.
3. The limited liability partnership was incorporated under the name RHWH Securities Limited and the certificate of incorporation was issued on 1st May 2004. The letters RHWH are obviously the initial letters of the surnames of the four participants. There was no limited liability partnership agreement to support the incorporation of the LLP and so the relevant provisions which govern the relations of the members of the LLP between themselves are contained in the statutory provisions and the regulations which are made in support of those statutory provisions.

The Capital of the LLP

4. The four members of the LLP did not introduce capital for the purpose of incorporating the LLP. That is a fact which is described in the evidence before the court and it also appears very clearly from some management accounts or draft management accounts which have been prepared after the issue between the parties first arose. Nonetheless, those management accounts show the position at the outset which would have been known to all of the members of the LLP.
5. The same management accounts contain some information about the assets of the LLP. Again, the management accounts were prepared after the issue arose, but what they reveal is something that would have been understood at the outset. The draft balance sheet which forms part of the draft management accounts identifies as current assets the debtors and the cash at bank and in hand. It appears from the evidence that the LLP did not have other assets that one could readily identify, with the possible exception of goodwill about which this case is concerned. In particular, the LLP did not seem to have any premises in which it could be said to have something of value. Indeed, it does not appear to have had any equipment in any premises because it appears to have made arrangements with a third party under which the third party made available service facilities to the LLP and that explains the fact they did not have assets of a conventional kind.
6. I have referred already to the question of goodwill. There is no agreement between the parties for today's purposes as to whether the LLP built up an asset in the form of goodwill and there is no agreement as to what value one might place upon any goodwill which may have been acquired by the LLP.

April 2005

7. The LLP commenced trading in around June 2004 and matters continued so far as the court is concerned until an event which occurred on 5th April 2005. There was on 5th April 2005 a meeting between the four persons involved in these proceedings. There are strongly differing accounts of what happened at the meeting on 5th April 2005. It is not necessary for the purposes of this judgment to resolve the differences between the parties as to what occurred. However, it is relevant to identify the positions or stances taken by the parties following the events of 5th April 2005.
8. So far as the claimant's version of the facts is concerned, I can take this from the witness statement of Mr Moore, the claimant's solicitor. In that witness statement at paragraphs 12, 14, 15 and 16, Mr Moore gives the claimant's instructions as to what occurred on 5th April 2005. He says it is the claimant's case that the claimant was unlawfully expelled from the LLP on or about 5th April 2005. Mr Moore says that at the meeting on 5th April 2005 the claimant was informed by the defendants that the claimant was no longer a member of the LLP. The claimant was informed that everything was perfectly "legal" and the defendants had undertaken a majority vote on the question. Mr Moore adds that after the meeting the claimant maintained that he did not accept that he had resigned as a member of the LLP.
9. That reference to resignation comes about because it is the defendants' case that the claimant did indeed resign from the LLP on 5th April 2005. I ought to refer for that purpose briefly to the witness statement put in on behalf of the defendants. That is a witness statement of Mr Seprat(?), a solicitor acting for the defendants, and at paragraph 4 of that witness statement Mr Seprat explains that he does not intend to rehearse the background to the dispute, other than to say that the claimant was not unlawfully expelled from the LLP, but that the claimant resigned on 5th April 2005. There is a little more information about the initial dispute between the parties contained in the letter dated 10th May 2005 written by the defendants' solicitors to the claimant's solicitors. In the third paragraph of that letter there are matters referred to in support of the contention that the claimant resigned at the meeting on 5th April and other events are referred to.
10. So the battle lines which were drawn shortly after the meeting of 5th April 2005 took the form of the defendants saying that the claimant had effectively left the LLP and the claimant asserting that he had not voluntarily done any such thing, but that he had been the victim of an attempt to oust him from the LLP.

The Initial Correspondence

11. I have been shown some correspondence following the meeting of 5th April 2005 and before the first of the letters which is now relied upon as forming a part of the settlement agreement which is in issue. I will refer to this correspondence briefly, although the correspondence itself goes into matters in considerable detail. I start with the letter from the claimant's solicitors of 25th April 2005. That refers to what is called "unlawful expulsion" and refers to the Limited Liability Partnerships Act 2000 and to the Limited Liability Partnership Regulations 2001 and in particular Regulations 7 and 8 to which I will refer in due course.
12. Miss Marnham, counsel for the defendants, draws my attention to a number of places in that letter where the claimant's solicitors refer to Regulation 7 and sub-regulations being put forward as material to the claimant's case.

At the end of the letter the claimant's solicitors say this:

"Needless to say Mr Hailes expects to receive his drawing from the LLP as and when they fall due. We must also insist that your clients notify Mr Hailes of all material developments in the LLP's business in accordance with their statutory and fiduciary duties and treat him in the manner to which he is entitled as a member of the LLP". [quotation unchecked]

That plainly is on the basis that the claimant was continuing as a member of the LLP.

13. On 27th April 2005 the solicitors for the defendants replied to that letter and on the last page of their reply under the heading "Future Action", they said:

"As can be seen from the above, it is our client's position that your client has resigned from the LLP. It is not in dispute that he is entitled to receive his share of drawings and any other sums that are properly due to him up to the date of his resignation. This is of course an accounting matter and the appropriate accounts can be prepared in early course." [quotation unchecked]

That statement makes it clear that the defendants were proceeding on the basis that the claimant had indeed ceased to be a member of the LLP and the consequence was that he would be entitled to his share of drawings and any other sums that had accrued due to him up to the date of cessation of membership.

14. Matters did not, however, rest there. On 29th April 2005 the claimant's solicitors wrote a long letter to the defendant's solicitors. In the second or third paragraph of that letter they said:

"Whilst we can agree that the best way forward in dealing with this dispute is for both sides to agree the amounts due to Mr Hailes concerning his drawings, the value of his share in the LLP and any other sums due to him, such as monies deposited in the tax reserve account, we must also deal with the contentious points raised in your letter."

That paragraph is significant because it takes the matter further than had been described by the defendants' solicitors in the letter of 27th April 2005 and introduces the phrase "the value of his share in the LLP".

In the same letter there are two further paragraphs which should be noted. The claimant's solicitors wrote:

"We also believe that the way forward is for your clients as members of the LLP to pay Mr Hailes 'his share of drawings and any other sums that are properly due to him' to use your phrase ...

Accordingly the monies owed to Mr Hailes comprise of three elements: (a) outstanding drawings; (b) the value of his share in the LLP; and, (c) additional monies owing to him such as his tax reserve account monies."

Again, it is clear that although the defendant's solicitors had referred to two specific matters, namely the share of drawings and any other sums, the claimant's solicitors had introduced in clear terms a third matter, namely "the value of his share in the LLP".

15. On 10th May 2005 the defendant's solicitors wrote to the claimant's solicitors. They said:

"We note that you accept that the best way forward is to agree the amounts properly due to Mr Hailes. We are also pleased to note ... [and they deal with another matter which I need not refer to]."

16. Towards the end of that letter the defendants' solicitors attached a statement of sums which they said were "properly due to your client up to 5th April 2005". They also said that "as Mr Hailes would be aware the LLP had no further assets since all tangible assets used by the LLP were owned by a third party who charged the LLP a charge for the use of those assets".
17. Accompanying that letter were three pages of calculations. The first page has been explained to me as showing Mr Hailes' entitlement to a one quarter share of the profits of the LLP up to 5th April 2005. The second page is not a calculation of a share of profits, but is rather some form of remuneration, possibly by way of commission, for services rendered by Mr Hailes from the period 6th April 2005 to 25th April 2005. The third page begins with a reference to a certain reserve account maintained by the LLP in which Mr Hailes was entitled to participate to the extent of one third. I need not describe that matter any further. The summary on the third page has three elements. The first is salary, the second is tax monies, which is the reserve account I have referred to, and the third was said to be a modest sum of monies owed by Mr Hailes to the LLP.
18. Lastly, before we get to the critical correspondence, there is a letter from the claimant's solicitors to the defendants' solicitors of 11th May 2005. I will read the last paragraph:

"We would again refer you to the closing paragraphs of our letter dated 29th April 2005 in relation to the monies due to Mr Hailes. Your clients have failed to provide any consideration for the purchase of Mr Hailes' share in the LLP. Mr Hailes' position in the LLP remains unchanged." [quotation unchecked]

19. It can be seen from those passages in the correspondence that both parties were moving towards a position whereby for the future Mr Hailes would cease to be a member of the LLP and would receive payment. The claimant's solicitors had unquestionably raised the issue of his entitlement to a sum for the purchase of his share in the LLP and the defendants' solicitors had referred to a share of drawings and other balancing items by way of sums due one way or the other. It could not be said that the parties had reached a consensus as to the character of the payments which would be due to Mr Hailes.

The Letter of 20th May 2005

20. Against the background of the dispute of the earlier correspondence the defendants' solicitors wrote an important letter to the claimant's solicitors on 20th May 2005. The letter stated that the defendants had the benefit of counsel's advice in relation to the dispute. The first page of the letter is principally taken up with describing the defendants' stance in relation to the underlying dispute, but the greater part of the letter comes under the heading "The Way Forward". Despite its length it is necessary for me to read substantial parts of this letter into this judgment as follows:

"For the reasons set out in this letter however we would prefer to concentrate on a more constructive approach to this dispute than has perhaps been evident in correspondence thus far.

Quite clearly, whatever the rights and wrongs of the present situation, our clients cannot work together in the future. That being so, it is counsel's view that the way to advance the present impasse is (as we state in our letter of 27th April and you appear to agree on 29th) for our client to buy your client's interest in the LLP in the manner of a dispute between shareholders in a limited company.

Entirely without prejudice to our clients' contention that your client resigned on 5th April, they are prepared to offer to buy your client's share based on a proper valuation of this share at a later date, being 31st May 2005. This valuation would be carried out by an independent expert whose identity is to be agreed by the parties, or in default of agreement nominated by the president of the ICA. We envisage that the expert would carry out the valuation on the basis of a management account drawn up by the LLP's accountants.

The purchase price is to take into account the valuation thus arrived at and all sums owed to your client by the LLP and vice versa. We do not understand there to be any dispute about these sums. While it is again acknowledged that your client is entitled to a share of the tax money, this is not strictly an LLP asset but a private arrangement entered into between three of its four members. The valuation therefore will not take this into account.

Because of the date we have suggested, the valuation will also be based on profit share for April and May which were lucrative months for the LLP. There is, in counsel's view, a good argument that this should not be brought into account; like the other provisions of Regulation 7, the entitlement to profit share is subject to the general law, and that general law prevents a displaced minority from benefiting from the labour of others - see, for example, re London School of Electronics [1986] Ch 211, 225, as approved in Profinance Capital SA v Gladstone [2002] 1WLR 1024. Nevertheless, in order to achieve a swift resolution to this dispute, our clients are prepared to forego any such argument at the present time.

Once the valuation has been carried out, our clients will undertake to pay your client's entitlement within 28 days. Your client will accept that sum in full and final settlement of any dispute with the LLP or the remaining members. This will of course leave him free, so far as the LLP is concerned, to pursue competitive work without being under any obligation to account for its profits from that work (as Regulation 7(9) requires him to do while his membership continues).

This is an open offer which will lapse on 31st May 2005. It is a condition of acceptance that your client confirms his resignation from the LLP."

21. The letter then went on, under the heading "The Alternative", to refer to other matters which are of some importance when construing the offer which I have just read out. The alternative referred to is in these terms:

"While we would not presume to do your job for you, we do not, with respect, see what alternative your client has other than to accept this. Specifically, he is not entitled to compensation for unlawful ejection from the LLP as your most recent offer seems to contemplate. As you pointed out, if his membership has not been lawfully terminated, he simply remains a member.

If he refuses this offer, the only remedy open to him as we see it is under s.459 of the Companies Act [and the year is wrongly stated but what is meant is 1985] under which his best prospect is to recover exactly what he is now being offered. If we are wrong, perhaps you would set out what the alternative or further remedies to which you think he is entitled. We cannot see that a court will grant an injunction requiring our clients to continue working with him, nor can we see that he will be prevented unilaterally to wind up under the LLP in circumstances where your clients have offered to buy him out at a fair value."

22. There is then a discussion, which I will not read, about the ability of one or other side to apply to the court to wind up the LLP and there is a reference to the textbook which is described as "Whittaker on Limited Liability Partnerships 2004" and a reference to paragraphs 27.20 to 27.25. The letter then went on to deal with other matters.

The Letter at 17th June 2005

23. There was an extension of time given to the claimant's solicitors to consider the offer contained in the letter of 20th May 2005. Within the permitted time the claimant's solicitors wrote on 17th June 2005 and I ought to read some of the content of that letter. It begins:

"We refer to your letter dated 20th May 2005 and confirm that Mr Hailes accepts your client's offer to buy his share of the LLP based upon on a proper valuation of his share on 31st May 2005. This valuation will be carried out by an independent expert whose identity is to be agreed by the parties or in default of agreement nominated by the president of the ICA.

The purchase price is to take into account the valuation that is arrived at and all sums owed to Mr Hailes by the LLP and vice versa. The valuation will not take into account monies owed to Mr Hailes in respect of the tax reserve account. You have indicated that the valuation will also be based on profit shares from April and May 2005 which is accepted.

The valuation is to be on the basis that Mr Hailes' interest in the LLP will be calculated in the same manner as the dispute between shareholders in a limited company." [quotation unchecked]

The letter then goes on to deal with payment of the sum found to be due and the question of resignation from the LLP.

The Letter of 20th June 2005

24. On 20th June 2005 the defendant's solicitors responded to the letter I have just read (17th June 2005), the critical sentence is the first, which reads as follows:

"Thank you for your letter dated 17th June 2005. We are pleased to note that our client's offer has been accepted."

The Settlement Agreement

25. All the parties are agreed that this correspondence resulted in a settlement of the dispute which formerly prevailed between these parties. All parties are agreed that there is a contractually binding settlement and the issue is as to what it means.
26. My analysis of the three letters is as follows. The letter of 20th May 2005 was an offer from the defendants' solicitors. The letter of 17th June 2005 was either an acceptance of that offer which conformed to the offer, thereby bringing into existence a binding settlement agreement, alternatively if, and it may be an issue I do not have to resolve, if the letter of 17th June 2005 differed from the terms of the offer in any respect, then the letter of 17th June 2005 should be considered to be a counter-offer which was to accept the offer of 20th May 2005 subject only to any additional matters that might be detected as existing in the letter of 17th June 2005. If the letter of 17th June 2005 was a counter-offer then that counter-offer was itself accepted by the defendant's solicitors by their letter of 20th June 2005. It does not matter in my judgment whether the first two letters formed an offer and acceptance or whether the second and third letters formed a counter-offer and acceptance because whichever way one approaches it it seems to me to be permissible to regard the terms of the settlement agreement as contained within the two letters of 20th May 2005 and 17th June 2005. In other words, I would not leave out of account the description of the matter as set out in the letter of 17th June 2005. It seems to me that the description of the matter on 17th June 2005 is part of the terms of the agreement which the parties reached. I also hold that it is not necessary for there to be any amendment to any court document so as to permit the parties to argue their cases on the basis of these alternative analyses.

The Rival Cases

27. The claimant's case can shortly be taken from the form of relief which the claimant seeks. The prayer for relief claims a declaration that on the true construction of the settlement the valuation is to be undertaken on the basis that the claimant's share in the LLP is to be valued as an equivalent interest in a private limited company, subject to a dispute under section 459 of the Companies Act 1985, so as to comprise a proportionate share of the full net asset value of the LLP, including goodwill. The defendant's position can be taken from paragraph 13 of Mr Seprat's witness statement:

"In the circumstances it is denied that the claimant is entitled to the declaration sought. The appropriate declaration is that 'on the true construction of the agreement the valuation of the claimant's share is to be valued in accordance with Regulation 7.1 of the 2001 Regulation, namely a 25 per cent share of the capital and profits as at 31st May 2005 and all sums owed to the claimant by the LLP and all monies owed by the claimant to the LLP excluding goodwill'."

The Claimant's Submissions

28. The claimant began his submissions through Mr Edwards, his counsel, by taking me on a tour of the legal background in a case such as this and in particular in relation to the statutory provisions and the regulations which govern limited liability partnerships. That tour was of considerable value and it seemed to me to be essential that one had an understanding of the legal landscape before one attempted to construe the settlement agreement, given that the settlement agreement was made between solicitors acting for the parties and given further that the correspondence between the parties had debated in some detail the legal position against which the arguments were put forward. I will refer to that legal background myself later in this judgment.
29. Turning then to the more specific terms of the settlement letters, Mr Edwards drew attention to a large number of phrases and features of the letter of 20th May 2005. Starting with the second page of that letter he referred to the phrase "our clients buy your client's interest in the LLP". He also referred to the phrase "in the manner of the dispute between shareholders and a limited company". He drew attention to the other parts of that page of the letter where there is reference to buying the claimant's share and the question of valuation. He further drew attention to the third paragraph of the second page where the purchase price was to take into account two elements, the first being a valuation thus arrived at and the second being sums owed to the claimant by the LLP and vice versa. Mr Edwards argued that sums owed to the claimant by the LLP would include the claimant's share of profits up to the cessation of membership date, which meant that the first part of the price (a reference to a valuation) must be something else. He also drew attention in the same paragraph to the treatment of the tax monies which were said not strictly to be an LLP asset, from which one might deduce that the other assets of the LLP were being dealt with in the valuation which had been referred to.
30. The next paragraph of the letter made it clear that the valuation would be based on profit share for April and May. In other words, the letter did not say the claimant's entitlement was to a profit share, but rather to a valuation which would be based on facts which would reveal the profits for April and May. The reference in the same paragraph is to the two cases: re London School of Electronics and the Profinance case. When one examines those cases, one sees they are dealing with a capital valuation of an interest rather than a right to share in revenue.
31. Mr Edwards also relies heavily on the third page of the letter where the solicitors for the defendant refer to the position under section 459 of the Companies Act 1985, inferentially as adapted to deal with an LLP, and they refer to the claimant's "best prospect" and they say that what they are offering is exactly that best prospect.
32. Mr Edwards also draws attention to the response in the letter of 17th June 2005, which again refers to Mr Hailes' share being bought which refers to the valuation of the share. It refers to the purchase price taking into account two elements, namely the valuation and the sums owed to Mr Hailes by the LLP. Then the fourth paragraph of the letter which I have read which refers to what would happen in the case of a dispute between shareholders in a limited company.

The Defendants' Submissions

33. The defendants' submissions can conveniently be taken from paragraph 13 of the helpful skeleton argument prepared by counsel for the defendants. I will not read out the entirety of paragraph 13, but I will attempt to paraphrase it in a way which I hope is fair to the original draft.
34. Paragraph 13.1 focuses upon the opening part of the relevant part of the letter of 20th May 2005. It said that the offer explains the mechanics for calculation of the share by reference to the management account which was to be prepared and draws attention to the fact that there is no express reference to goodwill anywhere to be found in the letter.
35. Paragraph 13.2 of the submission focuses on the words "in the manner of a dispute between shareholders and a limited company" and two points are made. First, it is said that this is not part of the offer; it is merely counsel's views as recorded by the defendants' solicitors. In any case the words refer to the mechanism for the valuation of the share and do not identify the basis of the valuation of the share. Reference is then made to the decision of the House of Lords in O'Neill v Phillips [1999] 1WLR 1092, which was a case concerning section 459 of the Companies Act 1985, as it applies to a company and in particular a quasi partnership company rather than to an LLP as such. Essentially the point being made is that in the same way as O'Neill v Phillips commended the making of offers to buy out a disaffected minority, what was being said in the letter of 20th May 2005, it is submitted, was that simply there would be a buy out. It does not say anything, it is submitted, as to the price which would be paid for the buy out.
36. The next submission made by the defendants is that the reference to management accounts is revealing because the management accounts would not show the goodwill of the LLP, and nowhere in the letter is there a reference to goodwill.
37. The next submission focuses on the words "a proper valuation", where it is submitted there would not be a proper valuation to treat the LLP as if it were a limited liability company.
38. The next submission is that the acceptance letter of 17th June 2005 does not add anything. It repeats the words of the offer letter and again there is no reference to goodwill.
39. Finally, the submission considers what is the extent of the entitlement under Regulation 7.1 of the Limited Liability Partnership Regulations 2001 and I will turn to those regulations in time. The submission which is made is that the reference to capital and profits in Regulation 7.1 does not extend to goodwill. It is then said that it is unlikely, if not inconceivable, that the defendants would offer the claimant something that as a matter of law he was not entitled to, and reference is made to Whittaker and Machell on Limited Liability Partnerships, and in particular paragraph 17.4.1, again a paragraph to which I will later refer.
40. The battle lines were drawn thus, but before I comment on the rival submissions I need to say something about the relevant legal background.

The Relevant Legal Background

41. The relevant legal background seems to me to comprise the Limited Liability Partnership Act 2000, the Regulations made thereunder in 2001 and some further material. I will attempt to deal with this material as briefly as possible. I will not read out in extenso the wording of the statute or the wording of the Regulations but I will attempt to make a useful paraphrase of it, but I do not mean by the paraphrase to depart in any way from the statutory and regulatory wording itself.
42. Under section 1 of the 2000 Act there was to be a new form of legal entity known as a limited liability partnership. This limited liability partnership is to be a body corporate with legal personality separate from that of its members and accordingly, unless this is provided somewhere else in the Act or in another enactment, the law of partnership does not apply to a limited liability partnership.
43. Section 4 of the 2000 Act deals with the membership of an LLP. Section 4(3) provides that a member may cease to be a member of the limited liability partnership, as well as by death or dissolution, in accordance with an agreement of the other members, or in the absence of agreement with the other members as to cessation of membership, by giving reasonable notice to the other members. A member of an LLP is not regarded for any purpose as employed by the LLP unless he would be regarded for that purpose as employed by the partnership if he and the other members were actual members in an actual partnership.
44. The relationship of members between themselves is referred to in section 5 of the 2000 Act. It is stated that except as otherwise provided by the Act or any other enactment the mutual rights and duties of the members of an LLP and the mutual rights and duties of an LLP and its members shall be governed (a) by agreement to deal with those matters, or (b) in the absence of agreement of any matter by any provision made in relation to that matter by Regulations under section 15(c) of the 2000 Act.
45. Section 7 contemplates the possibility that a member of a limited liability partnership may assign the whole or any part of his share in the limited liability partnership, either by way of an absolute assignment or by way of a charge or security. Section 7(2) provides that in such a case the assignee may not interfere with the management or administration of any business or affairs of the LLP and that prohibition is not to affect the right to receive an amount from the LLP in that event.
46. Section 14 contemplates Regulations which will apply, with modifications, other legislation dealing with insolvency and winding up. Section 15 contemplates the making of Regulations which will apply, with modifications, certain statutory provisions as to company law. Section 15(c) refers in particular to the possibility of Regulations applying or incorporating, with such modifications as appear appropriate, any law relating to partnerships.

The Relevant Regulations

47. The relevant regulations are the Limited Liability Partnership Regulations 2001. Again, I will attempt to summarise these rather detailed provisions. Regulation 4 of the Regulations incorporates, with modifications, certain provisions of the Companies Act 1985. Regulation 5 incorporates, with modifications, certain provisions of the Insolvency Act 1986. I will go briefly to those provisions and then return to the Regulations themselves.
48. Starting with the Companies Act 1985, section 459 of the Companies Act 1985 is applied, with modifications, to a limited liability partnership. The same applies to section 461 of the Companies Act 1985. I have been provided with a form of words which gives effect to those two sections, 459 and 461, with the modifications pursuant to the Regulations. Under the modified section 459 a member of an LLP may petition the court on the ground the LLP's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members including the petitioner, or that any actual or proposed act or omission of the LLP is or would be so prejudicial.
49. Section 459(1A), introduced by the Regulations, states that the members of a limited liability partnership may by unanimous agreement exclude the right contained in subsection 459(1) for such period as may be agreed. The textbook to which reference has been made, Whittaker and Machell on Limited Liability Partnerships, suggests that in many cases such an agreement may be highly desirable. No such agreement was made in the present case.
50. Section 461 of the Companies Act 1985, as amended, deals with the form of relief which a court may grant if it finds that the threshold requirements of section 459 are made out. The general provision is that the court may make such order as it thinks fit for giving relief in respect of the matters complained of. That general provision is taken further perhaps by section 461(2)(d) which expressly states that the court's order may provide for the purchase of the shares of any members of the limited liability partnership by other members or by the limited liability partnership itself. That is, if I may say so, a somewhat revealing statutory power in the present case as it contemplates that a member of a limited liability partnership has a share and that it may be purchased, the purchaser referred to being the other members of the LLP or the LLP itself.
51. Dealing with the other modified statutory provisions that it is relevant to refer to, the appropriate schedule of the Regulations applies the winding up provision in section 122 of the Insolvency Act 1986, again with modifications, and one of the grounds on which the court may wind up a limited liability partnership is contained in what is in modified form section 122(1)(e). That is where the court is of the opinion that it is just and equitable that the limited liability partnership should be wound up.
52. I can leave those incorporations of other statutory provisions there and go to what is plainly an important pair of provisions in the Regulations, namely Regulations 7 and 8. Regulation 7 is headed "Default Provision for Limited Liability Partnerships". These default provisions apply in the present case because, as I indicated earlier, the members of the limited liability partnership did not make an agreement which covered these matters.
53. Regulation 7(1) states that all the members of the limited liability partnership are entitled to share equally in the capital and profits of the limited liability partnership. It was submitted to me by the claimant's counsel, and it was not dissented from by counsel for the defendants, that the reference to capital in Regulation 7(1) has the same meaning as under section 24 of the Partnership Act 1890 as explained by the Court of Appeal in Popat v Shonchhatra [1997] 1WLR 1367. That seems to me to be the right interpretation. In the present case there was no capital introduced and the words "the capital" in Regulation 7(1) do not extend to the assets of the LLP from time to time.
54. Regulation 7(3) states that every member may take part in the management of the LLP. Regulation 7(4) deals with remuneration. Regulation 7(5) states:

"No person may be introduced as a member or voluntarily assign an interest in the limited liability partnership without the consent of all existing members."

55. Regulation 7(6) deals with majority decision on certain matters. Regulation 7(9) deals with a member carrying on a competing business and the resulting liability to account. Regulation 7(10) also deals with a liability to account in certain circumstances. Regulation 8 provides:

"No majority of the members can expel any member unless the power to do so has been conferred by express agreement between the members."

Further Material

56. Both sides referred me to the textbook "The Law of Limited Liability Partnership" 2nd Edition, written by Whittaker and Machell. The parties, as I understood their submissions, were content to proceed on the basis that the statements of opinion expressed by the authors were sound as to matters of law. Perhaps I should indicate that I find this textbook to be very helpful and valuable as a guide to the statutory and regulatory provisions which apply in the present case. I am not going to read into this judgment large chunks of the textbook, but I will refer to one or two passages. At paragraph 8-17 the authors discuss the nature of a member's share in an LLP and I will read that paragraph:

"The legislation proceeds on the basis that a member of an LLP has a 'share' and 'interests' in the LLP; and it contemplates that the share, or an interest, of a member is (potentially) transferable. There is, however, no definition of a 'share' or 'interest'; nor is there any explicit guidance given as to what a share or interest comprises. Broadly speaking, a member of an LLP will have financial rights and obligations (for instance, a right to share in the profits, and an obligation to contribute capital), and governance rights and obligations (for instance, the right to vote on various LLP business and administrative affairs, and the obligation to comply with certain contractual and statutory duties). Put another way, a member will have an economic interest and a management interest in the LLP. The nature and extent of these rights and interests for any one member may well vary, depending on the point in time at which, and the context in which, they are being considered. The authors suggest, however, that the 'share' of a member is the totality of the contractual or statutory rights and obligations of that member which attach to his membership; and that an 'interest' of a member is one or more of the components of his share."

57. In Chapter 16 of the textbook the authors deal with cessation of membership and its consequences. There is a lengthy and helpful discussion of those matters and I will refer only in brief terms to some of that discussion. At paragraph 16.16 the authors say:

"The legislation does not, however, even in the default rules make any express provision for the financial consequences of cessation of membership."

58. At 16.18 under the heading "Potential Financial Interests" the authors refer to various classes of interest which they then go on to discuss and one of the classes of interest is described as "a share of the excess of the true value of the assets over their balance sheet value, ie unrealised capital profits".
59. At 16.24 the authors discuss the treatment of unrealised capital profits on the cessation of membership and they identify two questions which arise. First, whether the outgoing member is entitled to a share of surplus value and, secondly, if he is so entitled whether he is entitled to take that on leaving and it is said that default rule 1 does neither of these things and it deals with neither of these things. By default rule 1 the authors are referring to 7.1 of the 2001 Regulations.
60. At 16.32, after a lengthy discussion of the position of the member who leaves an LLP, the authors say:

"The view of the authors is that on a proper construction of the LLP legislation if a member exercises his right to cease to be a member whether under the LLP agreement or under section 4(3) without reaching an agreement as to the financial consequences with the continuing members he has no automatic right to payment for the value of his share, and specifically he has no automatic right to payment of his capital or a share in the surplus value of the LLP's assets. The position would be the same ... (Reading to the words)... ceases to be a member by reason of death." [quotation unchecked]

Of course applying that to the present case, this is a case where there is a settlement agreement. Some agreement has been made and the issue is what is the meaning of the agreement which the parties reached.

61. In paragraph 16.4.1 under the heading "Conclusion", the authors say:

"It is our view that if a member leaves without any agreement as to the financial consequences his capital will accrue to the other members and that the surplus value of the assets will remain with the LLP until appropriated to members."

62. Chapter 27 of the textbook is a lengthy discussion of unfair prejudice applications under section 459 of the Companies Act, as modified, and also winding up on the just and equitable ground under section 122 of the Insolvency Act as modified. A great deal of the chapter dealing with section 459 is taken up with the approach a court should adopt to a member who wishes to leave an LLP, either on a voluntary basis or because he is in some way being forced out. The circumstances which give rise to the departure of the member plainly affect the approach of the court to the application. However, what is material for present purposes, in my judgment, is what the authors say will happen if a section 459 petition succeeds. If the grounds for success have been established, the court would then consider the order which ought to be made. In paragraph 27.5 the authors say:

"The normal order, particularly where the unfairly prejudicial conduct has caused an irretrievable breakdown in relations, is likely to be that the respondents or the LLP acquire the petitioner's share or interest in the LLP at a valuation to be determined by an independent expert." [quotation unchecked]

63. I ought to refer, briefly and lastly in this survey of the relevant material, to the decision of the House of Lords in O'Neill v Phillips. This was referred to in the argument to which I have already referred. I need not describe the facts or the issues which arose in O'Neill v Phillips, it is a well-known case in relation to quasi-partnership companies and section 459 of the Companies Act 1985. At page 1102C-D Lord Hoffman refers to the quasi-partnership type of case where one partner is excluded from the management of the company and his treatment of that subject refers to various matters which require that the party, who is excluded, should be able to remove his capital upon reasonable terms.
64. At 1104D-F Lord Hoffmann, considers whether section 459 could be invoked successfully in a case where a party wishes to withdraw, not because the majority are acting unfairly, but because the relationship between the participants has broken down, and at 1104A Lord Hoffmann states that he did not think there was any support in the authorities for such a stark right of unilateral withdrawal.
65. At 1107, Lord Hoffmann considers in an obiter passage the appropriate response from a majority shareholder faced with a threatened section 459 petition and he goes on to consider what might and what might not be considered a reasonable offer for someone in the majority to make. No doubt if a reasonable offer is made there is a chance it will be accepted. If the reasonable offer is not accepted but the offer is maintained and not withdrawn, that may enable the majority shareholder to persuade the court that the continuation of the petition is an abuse of process. I will read one passage at 1107D-E:

"In the first place the offer must be to purchase the shares at a fair value. This will ordinarily be a value representing an equivalent proportion of the total issued share capital. That is the value discount for its being a minority holding. The Law Commission has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies the fair value of the share should be determined on a pro rata basis. This too reflects the existing practice. This is not to say that there may not be cases which it would be fair to take a discounted value, but such cases would be based upon special circumstances and it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable so that the petition should be struck out." [quotation unchecked]

66. I was also reminded of the well-known decision of Nourse J and the Court of Appeal in re Bird Precision Bellows Limited [1984] Ch 419 and [1986] Ch 658. I was also taken to the re London School of Electronics case [1986] Ch 211 and I also reminded myself of the Profinance decision [2002] 1WLR 1024.

Conclusions

67. It is apparent from the narrative above that before the settlement agreement was reached there was a significant dispute between the parties. The defendants said that the claimant had ceased to be a member of the limited liability partnership by effectively resigning from it on 5th April 2005. The consequence, if the defendants were right about that, would be that the claimant would be entitled to be paid his share of profits up to 5th April 2005. He would not be entitled to withdraw any capital for the very good reason he did not put any capital in and as explained in the textbook, when his membership of the LLP came to an end he would not be able to share in any value of the assets which would continue, as before, to be owned by the corporate body, namely, the LLP.
68. So far as the claimant's version of the matter was concerned, the claimant had not ceased to be a member of the LLP. He was entitled to continue to enjoy his share of the revenue profits of the LLP. As a member it would be open to the claimant to bring a petition under section 459 of the Companies Act 1985, as modified in the case of an LLP. He would be able, he would say, to mount a case that the threshold conditions of section 459 were made out. He would say that he was excluded from management or it had been attempted to exclude him from management; he was therefore entitled to withdraw and in particular to have the benefit of an order under section 461 of the Companies Act 1985, as modified, whereby the other members of the LLP or the LLP itself would buy his share. He would say, in accordance with the practice recognised by their Lordships in O'Neill v Phillips, that his share should be valued as one quarter of the share of the assets of the limited liability partnership at the relevant valuation date. Although the assets of the LLP were as I have described them, there are no identifiable assets apart from possibly the question of goodwill, the claimant would say that is the very asset which should be valued and in relation to which he should take his one quarter share.
69. Having identified these as the possible positions the parties were able to take, one then must attend closely to the two key letters of 20th May 2005 and 17th June 2005. I have read both of these letters in extenso. When describing Mr Edwards' submissions I have identified key phrases in the letters. The choice essentially for the court is whether what the parties are saying is that the claimant should be able to sell his interest for a capital value which is a part of the total value of the thing being valued, or whether this agreement is essentially a statement that the defendant should have a share of revenue profits up to the agreed cessation date.
70. On the defendants' case the cessation date was 5th April 2005. On any view the defendants' solicitors offer did involve a concession to the claimant in that it was agreeing that the cessation date should be treated as 31st May 2005, which would give the claimant a right to receive a share of the profits up to 31st May 2005, some seven or eight weeks after the difficult meeting of 5th April.
71. I have no hesitation whatever in saying that the claimant's interpretation of this letter is much more soundly based than the alternative reading. The letter refers to the defendants buying the claimant's interest. The letter refers to a valuation of the claimant's share. The position of a limited company is referred to both in the letter of 20th May 2005, where there is some scope for argument as to what is being described, but also in the letter of 17th June 2005 where, in my judgment, there really is not any longer any scope for argument as to what is being described. Taking that last point a little further, the letter of 17th June 2005 talks about the valuation being calculated in the same manner as in the case of a dispute between shareholders in a limited company, in other words, this is not simply a statement that the defendants will buy out the claimant, it is also stating that the valuation would proceed on the basis which involves a calculation in the same way as would be the case with shareholders in a limited company. The position where one has shareholders in a limited company is in my judgment established. The existing practice, as Lord Hoffmann called it, was described in O'Neill v Phillips. The textbook in my judgment, correctly states that a similar approach is available to be adopted and will ordinarily be adopted when the remedy given by the court is purchase of the share of the member of the limited liability partnership.
72. The concept of valuing an asset, valuing something which has a capital value, runs all the way through the letters of 20th May 2005 and 17th June 2005. The letter of 20th May 2005 discusses the detailed point about the date at which the valuation is to be done and the point as to the change in the date of valuation (where one party has made a contribution to profits which the other party has not itself contributed to: the London School of Electronics case and so on). Those cases are on the basis not of sharing revenue profits between profit sharers, but are on the basis of a capital valuation approach.
73. In my judgment, it is also very telling indeed that on the third page of the letter of 20th May 2005 the solicitors for the defendants describe their offer as Mr Hailes' best prospect under section 459 of the Companies Act 1985. Based on my review of the legal principles earlier in this judgment Mr Hailes' best prospect was to have an order to buy out his share in the limited liability partnership, such share to be valued as a pro rata share (that is a one quarter share) in the assets, if any, of the limited liability partnership. The defendant's offer was made by solicitors; it was made after there had been some detailed legal debate in the earlier correspondence. The offer was based on counsel's advice. The offer referred to a number of decided cases. The offer also referred to Chapter 27 in the textbook to which I have referred. In my judgment, against that background, there does not remain any doubt but that the claimant's interpretation of that letter is to be preferred to that of the defendant.
74. There is just one further point. If the parties had been attempting to say that what the claimant should take away should be a share of the revenue profits up to 31st May 2005, it would have been a very simple matter indeed to say that and the language used does not hint at that being the basis for the settlement between the parties. One would also question the need for introducing an independent expert if the process was simply one of computing profits up to a date. I do not base my judgment on that last point exclusively because Miss Marnham has submitted there might still be a reason for an independent element in the appraisal, even if all one was doing was computing profits up to an agreed cessation date.

The Result

75. The result in my judgment is that the claimant is entitled to one quarter of the value of the assets, if any, including goodwill, if any, of the LLP as at 31st May 2005.

The Relief

76. I have already read the first paragraph of the prayer for relief. I would suggest a shorter declaration from that which is pleaded, which is in a sense an indirect way of saying what can be said more directly. The declaration that I am prepared to make ought to give greater clarity, to the effect that the claimant is entitled on the true construction of the settlement to one quarter of the value of the assets, if any, including goodwill, if any, of the limited liability partnership as at 31st May 2005.
77. Following this judgment, I will consider what further relief is appropriate.