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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Charit-Email Technology Partnership Llp v Vermillion International Investments Ltd. [2009] EWHC 388 (Ch) (13 February 2009) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2009/388.html Cite as: [2009] EWHC 388 (Ch), [2009] BPIR 762

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		13 February 2009

THE CHANCELLOR:

1. This is the appeal of 94 individuals, who deny being contributories of a limited liability partnership (LLP) called Charit-Email Technology Partnership LLP, brought with the leave of the judge from the order of Chief Registrar Baister made on 22 October 2008, to the effect that they are not entitled to appear on the hearing of the petition to wind up the LLP presented by the respondent, Vermillion International Investments Limited on 4 March 2008 and to oppose the order sought.
2. The LLP was incorporated on 30 September 2003 in the name of Charit E-mail (with a hyphen between the "E" and the "Mail" as opposed to between "Charit" and "Email) Technology Partnership LLP. The partnership deed of the same date provided that the term of the partnership was to be ten years and no party might seek to wind it up earlier; the partnership would borrow money on terms that the members guaranteed its repayment in proportion to their investments and both the loan and those investments would be used to buy certain computer software. It provided that the agency of a member was restricted to transactions to a value of £1,000 and that losses were to be shared pro rata to each member's investment. It provided also that the members might be called on to make loans to the LLP in proportion to their investment and that on dissolution the member would remain liable to contribute to the assets of the partnership up to, but not more than, five times the original investment.
3. The partnership agreement envisaged a sale and purchase agreement, which was made on 13 October 2003, between the LLP and Vermillion under which the web mail system (operated under that name by Vermillion) was sold to LLP for £35 million. That was followed, in May 2004, by a loan facility to LLP granted by MFC Merchant Bank SA (MFC) in the sum of £28 million. That loan was guaranteed and/or secured by Vermillion by means of a pledge of its credit balance for £28 million with MFC Merchant Bank SA. The LLP changed its name on 2 July 2004 by moving the hyphen from after to in front of the "E" in "Email". In August 2004, MFC assigned its rights under the loan facility to MFC Financial Services GmbH.
4. The evidence before me includes the accounts for the LLP for the years ended 5 April 2004, 2005 and 2006. Those for 2006 show a deficiency regarding members of £27,999,999. On 27 April 2007, MFC demanded repayment from LLP, on or before 27 May 2007. Failing that repayment it demanded payment of the like sum from Vermillion on 31 May 2007. It was paid by Vermillion and, on 5 February 2008, Vermillion served a statutory demand on the LLP requiring it to pay the £28 million which it claimed to be due by way of subrogation to the rights of MFC Financial Services GmbH. The petition with which I am now concerned was presented by Vermillion on 4 March 2008. The ground for winding up, it is alleged, is that of insolvency and failure to comply with the statutory demand.
5. On 2 June 2008, Mr Michael Green (the solicitor acting on behalf of the appellants) made a witness statement. In that statement he asserted that the appellants are not, and never have been, members of LLP. He indicated that they are concerned that Vermillion might seek to recover its debts from each of them, up to the limit of their respective liability, and, he added, civil proceedings on behalf of some 550 investors are expected shortly to challenge the operation and legitimacy of the schemes under which the investments were made. He pointed out that the liability of the members of LLP is some five times his or her initial investment. He submitted that the petition had been presented by the wrong person, as a claim by way of subrogation should be made in the name of the original creditor, and he asserted that in any event there was confusion as to which company is the debtor, due to the change of name, both of Vermillion and of LLP. Finally, he contended that LLP is a collective investment scheme, the consequence of the provisions upon which Vermillion relies have no application.The first hearing of the petition was on 4 June 2008. The Registrar gave directions for evidence and adjourned the petition to 7 October 2008.
6. Mr Green made a second witness statement on 18 July (adding little to the first) and on 22 September a witness statement was made by a Mr Robert Spears, on behalf of Vermillion, in which he contended that the appellants were investors in the LLP and, therefore, contributories. The petition returned to Chief Registrar Baister on 7 October 2008. Counsel for Vermillion objected to the appearance of counsel for the appellants on the ground that they had not been identified by name; no notice of their opposition had been given as required by Insolvency Rule 4.16; and that they had failed to demonstrate a contingent surplus of assets in the winding up available to them for distribution if an order was made on the petition to wind up LLP.
7. The following day, 8 October 2008, the list required by Insolvency Rule 4.16 was put in. It is in an unusual form. It states:

"Take notice that the individuals listed in Schedule 1 attached hereto, each listed as a member of the above named LLP at Companies House and alleged to be a contributory thereof, intend to appear on the hearing of the abovementioned petition to oppose it."

On the same day, the Chief Registrar heard argument in respect of the locus standi of the appellants to appear as opposing contributories on the hearing of the petition in due course. He reserved his judgment and handed it down on 22 October. So far as relevant for present purposes, he concluded that the evidence showed that the LLP had been formed as the vehicle for a complex tax avoidance scheme which had failed; that the scheme had been sold to a number of individuals, including the appellants, and that the appellants intended to bring proceedings alleging fraud against a number of persons in relation to their investment in the LLP. He noted that it was now contended that the appellants were contributories within the meaning of section 79 of the Insolvency Act 1986, but he found that there was an established practice from which the court should not depart (save in exceptional circumstances) that a contributory may not appear unless he can demonstrate a contingent surplus available for distribution to him in the event of a winding up. The Registrar considered that the same approach should be taken in the winding up of an LLP, and determined that any discretion the court might have should be exercised against the appellants. Therefore, he concluded, the appellants had no standing to appear on the hearing of the petition and to oppose the making of the order sought, but in any event their arguments carried so little weight that the case could be listed as unopposed and heard as soon as possible.

8. Before considering the arguments for the parties before me, it is convenient to note the provisions which relate to the winding up of limited liability partnerships. Such partnerships are creatures of the Limited Liability Partnership Act 2000. This provides that an LLP is a body corporate separate from its members. Their liability to contribute to its assets, in the event of a winding up, is to be as provided in that Act. Section 14 enables regulations to be made concerning the winding up of an LLP by applying (with or without modification) specified parts of the Insolvency Act 1986. The Limited Liability Partnership Regulations 2001, SI. 2001/1090, regulation 5, applies the parts of the Insolvency Act 1986 regulating the winding up of companies and regulation 10(1)(b) applies the Insolvency Rules, in each case with such modifications as may be specified in the schedules to those regulations. The only relevant modifications relate to sections 74, 79 and 122 of the Insolvency Act 1986. The amendment to section 122 is such as to provide that an LLP may be wound up by the court, in the like circumstances as it may wind up a registered company except those which could not apply to an LLP, such as section 122(1)(b) and (c).
9. Section 74, as modified, provides in the schedule to the regulation:

"For section 74 there shall be substituted the following. '74. When a limited liability partnership is wound up every present and past member of the limited liability partnership who has agreed with the other members or with the limited liability partnership that he will, in circumstances which have arisen, be liable to contribute to the assets of the limited liability partnership in the event that the limited liability partnership goes into liquidation is liable, to the extent that he has so agreed, to contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributories among themselves.

However, a past member shall only be liable if the obligation arising from such agreement survived his ceasing to be a member of the limited liability partnership."

The same passage in the regulation specifies the modification of section 79. That provides that:

"Section 79 (meaning of 'contributory') subsection 1: In subsection (1) for 'every person' substitute (a) every present member of the limited liability partnership and (b) every past member of the limited liability partnership."

Reading those words into section 79 would provide that it is in these terms in relation to a limited liability partnership:

"In this Act and the Companies Act the expression 'contributory' means (a) every present member of the limited liability partnership and (b) every past member of the limited liability partnership liable to contribute to the assets of the company in the event of its being wound up, and for the purposes of all proceedings for determining and for all proceedings prior to the final determination of the persons who are to be deemed contributories includes any person alleged to be a contributory."

10. Before me, the appellants have made the following broad submissions: first that there is no such established practice as the Registrar thought, even in respect of limited companies; but second, in the case of an LLP, there is no reason why there should be because by definition a member of a LLP has a real and tangible interest in its winding up; and thirdly, that there are good reasons in this case to allow the appellants to appear on the hearing of the petition. Each of those submissions has been developed (both in writing and orally) along the following lines: in relation to the alleged settled practice, counsel submits that In re Camburn Petroleum Products Ltd [1980] 1 WLR 86 the contributory was allowed to appear, even though the company was insolvent on a cash flow basis. In Bradford Navigation [1875] CA 600, it is shown that originally only contributors were entitled to appear on the winding up petition by analogy with a normal partnership dispute. Counsel comments how and when was that changed? He submits that the limitations on those who may present a petition should not be transposed to the different question of who may be heard in support or opposition to it. In addition, he submits that a limited liability partnership is different to those cases dealing with limited liability companies. In the case of a winding up of an ordinary partnership, any member may appear as a matter of course. In the case of a limited liability partnership the practice should be, he submits, the same because of the differences from a limited company with paid-up shares, namely they are limited liability partnership, the members remain liable for the debts of the company and are (for certain purposes) its agents. He submits that a distinction should be recognised in this case because the members of the limited liability partnership seek to assert that the debt on which Vermillion relies, without which the limited liability partnership would be solvent, is disputed.
11. Counsel for Vermillion opposes the appeal. He submits that the opposition to the petition of the appellants is for a collateral purpose and for that reason alone should not be admitted, but he points out and relies strongly on the fact that the appellants deny (and continue to deny) that they are members of LLP. These points are developed by reference to a number of specific considerations: first, that given their denials the appellants are not contributories within the meaning of section 79 as amended; they have not complied with rule 7.53; and they can have no sufficient interest because there could be no surplus and their own liability to contribute is not triggered by the making of a winding up order.
12. I can express my conclusions quite shortly. It has been the established practice for many years under successive Companies and Insolvency Acts for the court in all matters relating to the winding up of companies to have regard to the wishes of the creditors and contributories (see section 195, Insolvency Act 1986).In the case of a petition for the winding up of a company limited by shares, all of which are paid up, it is the established practice of the court to require a contributory to show that he has a tangible interest, in the sense that if wound up there would be surplus assets available for distribution to the members (see In re Rica Gold Washing Company (1879) 11 ChD 36, and In re Chesterfield Catering Co Ltd [1977] Ch 373 at pages 379-381). In the case of a creditor's petition, it is unlikely that a contributory could show any such interest but (exceptionally and for good reason) the court has been prepared to hear what he had to say (see, for example, Re Bradford Navigation [1875] CA 600 and In re Camburn Petroleum Products Ltd [1980] 1 WLR 86. A similar practice has prevailed in the case of public interest petitions (see Re Rodencroft Ltd [2004] EWHC 862 (Ch) at paragraph 20).
13. I would accept that the different interests and liabilities of a member of an LLP may lead to some changes in practice, so far as petitions to wind them up are concerned. Depending on the terms of the partnership deed, the members are liable to contribute to the assets of the LLP in order that its debts may be paid. They are agents for the LLP and have a closer interest (in every sense of the word) in its business than members of a limited liability company holding fully paid shares. But, be that as it may, a person seeking to exercise a right to appear and be heard in court proceedings (whether as creditor or contributory) should at least claim to be a member of the class on whom that right is conferred. Such an obvious proposition is exemplified by the reports of the hearings of Re Continental Bank Corporation [1867] Weekly Notes pages 114 and 178, Re The Eastern Counties Junction and Southend Railway Company (1850) 14 LT 369; and Re Queen's Benefit Building Society [1871] 6 CA 815. In each of them, the person seeking to appear was required to admit that he was a contributory before the court was prepared to hear his counsel. Were it otherwise, the winding up proceedings would take longer and cost more due to the interventions of those who claim not to be either a creditor or a contributory.
14. One of the more remarkable features of this case is that the appellants consistently maintain that they are not contributories because of some unspecified events occurring at the time they made their investments. They claim, nevertheless, to be entitled to appear and oppose the petition, on the ground that Vermillion alleges that they are contributories and may sue them as contributories to recover the debt. Seemingly, the ability of the appellants to defend those proceedings, on whatever grounds they claim not to be contributories, is not enough.
15. Their claim to be entitled to appear on the hearing of the winding up petition is based on section 79 of the Insolvency Act 1986, as amended by the Limited Liability Partnership Regulations, to which I have referred and from which I have quoted. Counsel for the appellants maintains that because Vermillion asserts that his clients are contributories they are entitled to be treated as such, notwithstanding, that they vehemently deny the allegation.
16. As and when a winding up order has been made, it is necessary for the liquidator to draw up a list of contributories (see section 148 of the Insolvency Act). If shares are partly paid it is not uncommon for a person to be put on the list by the liquidator in the teeth of opposition from that person. In such a case, he is clearly an alleged contributory for the purposes of section 79 and entitled to the rights and subject to the liabilities imposed on contributories, unless and until he succeeds in having his name taken off the list.
17. Counsel for Vermillion contends (and I accept) that section 79 applies in the event of and following the winding up of the company by the court. In no sense can it be said that proceeding by petition for an order to wind up the company is for the purpose of determining who are the contributories. Similarly, there must be some limit on the proceedings prior to the final determination, notwithstanding the use in the subsection of the word "all". That limit must, in my view, be the making of the order which gives rise to the requirement on the liquidator to draw up the list of contributories.
18. In my judgment, it would be absurd to recognise a locus standi to appear on a winding up petition as a contributory one who steadfastly denies that he is. I will dismiss this appeal from the Chief Registrar on this short, straightforward ground. I would leave to a case in which an avowed member of a LLP seeks to appear on the petition to wind it up, the extent to which (if at all) the established practice of the court in relation to companies limited by shares should be modified.