Martin Tiffin

Tiffin v Lester Aldridge LLP
Case No. 2010/2938
Court of Appeal
Hearing 8 November 2011
Appellant’s comments on the Judgement handed down on the 1 February 2012. This document to be read in conjunction with the Court of Appeal Judgement dated 1 February 2012.
Facts which were brought to the Court’s attention but not recorded in the Judgement.
On incorporation of the LLP on the 1 May 2007 there were thirty (30) members .The 30 members signed an agreement dated 30 April 2007 (” the LLP Members Agreement”)
Nineteen (19) members fell within the definition “Full Equity Partners” each having between 100 and 250 Points profit share points. Eleven(11) members fell with the definition of ” Fixed Share Partners”. Nine Fixed Share Partners had 5 points each and two had 10 points each. There were no members who fell within the definition of “salaried partners”.
Eight of the firms associates became members of the LLP in October 2007. They fell within the defined term “salaried partner”.
The 19 full Equity Partners contributed £150,000 each to the LLP’s capital. 9 Fixed Share Partners contributed £6,250 each and 2 contributed £12,500. The Full Equity partners held 96.7% of the capital and the fixed share partners held 3.3% of the capital. Voting was based on the number of points. Each Full Equity Partner had 100 voting points whilst 9 fixed share partners had 5 points and 2 had 10 points. The Fixed share partners held 3.3% of the vote. There were 52 business resolutions of which the Fixed Share Partners could only vote on 23 of them.
The fixed share partners under an earlier partnership deed were called salaried partners. The change of name and nominal capital contribution , voting rights and profit share were designed to avoid employer NIC.


Paragraph 1
Mr. Tiffin’s claims were advanced on the premise that Mr. Tiffin had been an employee and/or a worker of the LLP.
Although the ET found that Mr. Tiffin was not an employee for the purpose of the ERA 1996, it did accept that he was a worker under the ERA 1996 and as a result he was able to bring claims for unlawful deduction from wages and holiday pay which is available to both employees and workers.

Paragraph 22
A LLP is defined under the LLP Act 2000 as a “two or more persons associated for carrying on a lawful business with a view to profit ”
A partnership is defined under the Partnership Act 1890 as “persons carrying on a business in common with a view of profit”

Hughes LJ Judgment in Zahid, makes it clear that an essential element of partnership is the carrying on of a business in common, that is to say in such manner to make each the agent of the other for all acts done in the course of business.
Under a LLP structure there is no agency principle between members and the so called definition of a LLP does not include the words” in common” which is a Hughes LJ stated was an essential element of a partnership relationship.
At paragraph 42 the Court appears to acknowledge this essential element of partnership. It is unclear how the Court has reconciled the lack of this essential element in a LLP.
Paragraph 32
The Court having recognised that s4(4) read literally results in a legal absurdity and that it is possible for a member of a LLP to also be an employee of the LLP, the Court interprets s4(4) as follows;
1. You assume that the “business of the LLP has been carried on in partnership by two or more of its members as partners”
2. Based on that assumption, the court is required to undertake an inquiry as to whether or not the person whose status is in question would have been one of such partners”
3. The inquiry thus requires a consideration of the circumstances in a which a person may become a partner in a partnership under the Partnership Act 1890”
4. If the answer to that inquiry is that he would have been a partner, then he could not have been an employee and so will not be , nor have been an employee of the LLP.
It is the very assumption that the LLP is a partnership that some might say contravenes the principle laid down by the Supreme Court in Autoclenz. In Autoclenz the Supreme Court made it clear that the task for the Court is to determine what is the true nature of the relationship between parties.
As soon as the Court makes the assumption that the LLP is a partnership, it could be argued the Court commits an error in law and fails to address the very question which Autoclenz requires the Court to address. i.e. what is the true relationship between the members of the LLP.
ss 1(5) of the LLP Act 2000 is quite clear when it states that partnership law does not apply to an LLP. The qualification within that sub section is a reference to ss15(c) which allows for the incorporation of certain parts of partnership law to apply to LLP’s. By assuming the LLP is a partnership, it is arguable the Court fails to determine the true nature of the relationship between the members of the LLP.

Paragraph 37

Mr Tiffin’s admission as a fixed share partner in LA was conditional on Mr Tiffin signing a deed of adherence to the LA Partnership Agreement and introducing £5,000 of capital ( as recorded in the Court of Appeal Judgement dated 13 September 2011).
Extract from Court of Appeal Judgement dated 13 September 2011( Paragraph 13)
13 The witness statement sets out, apparently by way of fresh evidence, Mr Tiffin’s account of his progress from being an employee of the former partnership to becoming a member of the LLP, although it focuses centrally on whether he actually became a fixed share partner of the true partnership that preceded the LLP. He describes his perception of various documents and events. He refers to being given in late 2005 (when he was still a salaried partner) a copy of LA’s former partnership agreement dated 1 November 2004. He refers to a discussion he had with Mr Woolley, the managing partner, as to the absence of any reference in the partnership agreement to the salaried partners and says that he was told that they were now called ‘fixed share partners’. He refers to a letter of 30 May 2006 that Mr Woolley wrote to him after he is said to have become a fixed share partner on 1 May 2006. That letter described his appointment as a fixed share partner as “conditional on your returning the executed deed of adherence to me and your introducing your partner’s capital of £5,000“. He refers to an arrangement for a £5,000 loan being made for him, although he does not say whether he used it to pay up his share of capital. He says he became concerned that he might be facing an exposure in respect of the firm’s then overdraft, which he says Richard Gray told him was some £5 million. He explains how he was then asked by Mr Woolley and Mr Gray to sign the deed of adherence, and he then says this:

“At this point I was now starting to become concerned about my potential exposure to the five million pound bank overdraft, partnership losses generally and the protection of my employment rights. Initially I sought an indemnity from the Full Equity Partners but was told that the partnership agreement was non negotiable and that the full equity partners were not prepared to give an indemnity. It was against this backdrop that I declined to sign the deed of adherence to the 2004 partnership agreement.”
End of the extract of the Court of Appeal Judgement dated 13 September 2011.

The Court acknowledges that Mr. Tiffin did not sign the deed of adherence and that the ET finding that he signed the 2004 Partnership Agreement was erroneous. However despite this the Court appears to rely on the ET finding that, the LA Partnership Agreement reflected the intentions of the parties.


Paragraph 43
By clause 9 of the LLP Member Agreement ( “LLP Agreement”), the equity partners acknowledge the fixed charge provisions of Schedule 2 to the LLP Agreement. Schedule 2 provides that the fixed share partners have a first charge for any unpaid fixed shares from earlier accounting periods and a second fixed charge for their profit shares, against the net profits of the LLP.
The Court appears to accept that such fixed shares were guaranteed in a similar way to a salary. The LLP Members agreement did not allow for the repayment of the fixed share which was paid monthly in advance of the profits of the LLP being known. This points to the fixed share partners taking a substantially lower risk than the full equity partners who had to repay their monthly drawings if the LLP’s profits did not meet the projected level.

Paragraph 48

In October 2007, following the establishment of the LLP, Mr Tiffin along with the other eight fixed share partners with “5 Points” made an the increased contribution to the LLP’s capital of £1,250. The two fixed share partners with 10 points made an increased capital contribution of 2.5K. What the Court does not mention however, was that the 19 Full Equity Partners made an increased capital contribution of £50,000 each.
This brought the Full Equity Partner’s capital contribution in the LLP up to 19 x150K = £2,850,000 and the Fixed Share Partners capital contribution up to 9 x £6,250 plus 2 x £12,500= £81,250. The19 Full Equity Partners held 96.7% of the capital and the 11 Fixed share partners 3.3% of the capital.
What the court does not mention is that because the LLP is a separate legal entity from its members, the treatment of capital in a LLP is different to that of a capital in a partnership. The accounting standards require an assessment of whether the capital in a LLP is to be classified as equity or whether it is a debt( liability) . This impacts on the LLP’s balance sheet. If the LLP has an unfettered right to withhold the repayment of capital from the member who contributed it, then it is classed as equity. If the LLP has no such right then it is a debt ( liability) due to the member. In the case of the Respondent , the members capital was treated as a debt( liability ). Under the LA partnership structure( prior to the conversion to a LLP) the partner’s capital was classified as equity. The impact on the Respondent’s balance sheet from conversion from a partnership to a LLP was dramatic.

Paragraph 49
The Court relies on the ET finding at paragraph 21, that Mr Tiffin entered in a fixed share partnership with others in the LA partnership. For reasons stated above there is some question mark over this.


Paragraph 50

The Court also appears to rely on the ET finding at paragraph 28
”[Mr Tiffin] intended to become a partner and accepted the changed status, new obligations and responsibilities this involved”
As stated above, the court was made aware of and has acknowledged that Mr Tiffin did not sign the deed of adherence to the LA Partnership Agreement, which was a condition of his admission, as set out in the LA letter dated 30 May 2006 [ Court Bundle page 75-76.1] and a specific term of the LA Partnership Deed [clause 36 Court Bundle page 76.2]

Also the Court appears to rely on the ET finding” it has not been suggested that they do not reflect the intentions of the parties or that they were not intended to govern the relationship between the parties to the Partnership[LA}.....

As Mr. Tiffin did not sign the deed of adherence it is unclear the basis upon which the Court was able to state that the LA Partnership Agreement reflected the intentions of the parties and governed the relationship between the parties.

It appears that the Court endorsed the ET findings at paragraph 29, that the LA partnership Agreement and the LLP Members Agreement are substantially the same, as are the obligations and arrangements that govern the relationships between the partners in the partnership and members of the LLP.

As a matter of law, partners in a partnership have very different obligations to those of members of a LLP.
Partners have unlimited liability, owe a duty of utmost good faith to one another and act as agents for one another. Partners can also bind other partners.
Members have limited liability, do not owe a duty of utmost good faith to one another and do not act as agents for one another. Members act as agents for the LLP and not as agent for each other. Members also have the benefit of minority member protection by virtue of s959 of the companies act, which partners in a partnership do not.

Despite accepting that Mr Tiffin did not sign the LA partnership deed, the Court once again seems to accept the ET finding ” There has never been any ambiguity as to Mr Tiffin’s position in…. the Partnership[LA]
The ET at paragraph 30 refers to the relevant common law tests. Is the so called partnership test a common law test? Is it not better described as a statutory test?
The Court has in the main endorsed the Kovats approach, which essentially displaces the so called common law tests in favour of the so called partnership test.
In the Kovats case, the ET found that Mr Kovats was a partner. Having found that he was a partner, the ET then went on to undertake the common law tests and decided that he was not an employee for the purpose of the ERA 1996.
At paragraph 34 of the Judgement, the Court acknowledges that it disagreed with that approach, in that there was no need to undertake the common law tests if a person is found to meet the statutory definition of ” persons carrying on a business in common with a view to profit”. In other words, a partner in a partnership.
It is surprising that the Court did not make any comment about the ET finding at paragraph 30. A number of legal commentators have indicated that paragraph 30 does not make sense, a view shared by Lord Justice Pill at the hearing on the 1 April 2011, when refusing Mr Tiffin’s earlier application to the Court of Appeal for permission to appeal the ET decision on the basis that partnership and employment are no longer, as a matter of principle to be considered as mutually exclusive. There is no policy reason why a person can not meet both the test for partnership and also the test for employment. Lord Justice Pill agreed with Mr. Tiffin ,but refused his application on the basis that this particular argument had not been raised at the ET.
Extract from the Judgement of LJ Pill dated 1 April 2011
11.  Mr Tiffin has referred me to parts of his skeleton argument where the point is set out. He states at paragraph 25:

“Researchers at Matrix Chambers have been unable to identify any significant policy reasons for creating or maintaining an absolute distinction between partnership within the 1890 Act and employment under the ERA 1996.“

12.  It does not mean the point could never be argued, but it cannot, in my judgment, be fair to both parties for it to be argued in this case.

13.  Sedley LJ said that it “cannot possibly be right in law“. Section 4(4) does, on the face of it, state the opposite proposition, that a member of a limited liability partnership is not an employee of that partnership. There is a proviso which leaves open the possibility in all partnerships — not simply limited liability partnerships — that a partner may be an employee. With respect, I see the force of the way Sedley LJ has put it; this is a point which, if it is to be argued, must be argued, and appropriate evidence and submissions made, at a stage earlier than this one.
End of extract from the Judgement of LJ Pill dated 1 April 2011.
Employment Lawyers will note that the statutory definition of employee in the 1889 Cowell case is now different from that in the ERA 1996 and therefore there is a legal argument that the distinction between employee and partner can be challenged on that basis alone.

Paragraph 51

The Claim to the EAT was advanced on the basis that it was either an error of law and/or the decision was perverse. As Lord Justice Sedley pointed out when granting permission to appeal by an order dated 3 February 2011 ” I accept that the correct answer is a matter of law, but based on such facts as the ET found and as the EAT set out at paragraph 2”

Paragraph 53

Having acknowledged that as a fixed share partner in the LLP, Mr Tiffin could not attend the monthly Full Equity Partners meetings, at which a number important resolutions were discussed and approved such as profit sharing arrangements and increases in capital contributions , it is not factually correct to say that Mr Tiffin could attend and make representations at such meetings. Mr Tiffin was entitled to attend what were termed “Equity Partners Meetings” of which three were held through out the year. In practice there were only one/two such meeting in any given year.

Paragraph 55
The Court notes that the question of capital contribution and profit share is a matter of fact. The Court seemed to take the view as to whether a person was a partner or not is also a question of fact. This on the face of it seems at odds with the view expressed by Lord Justice Sedley when he granted permission to appeal and Lord Hoffman’s Judgement in Carmichael?

Paragraph 58

Once again there is a reference to the partnership agreement reflecting the intentions of the parties. The same comment applies here as before.


Paragraph 59
The Court states that it is tolerably obvious that the members of the LLP were intending to create an 1890 Act partnership relationship.
This seems odd, as members of a LLP have limited liability, do not act as agents for one another, do not owe each other duties of utmost good faith and there is no requirement that they are conducting the business “in common”.
Paragraph 61
The passage quoted from Autoclenz provides
“it was necessary to determine the parties’ actual agreement by examining all the circumstances, of which the written agreement was only a part, and identifying the parties’ actual legal obligations:…

By looking at the parties relationship, analysed through the prism of law relating to partnership under the partnership Act 1890, it is arguable the Court is failing to determine the parties actual agreement and disregarding their intention to conduct the business through the LLP structure and all of the rights and obligations that entails.
The legal rights and obligations members have under a LLP structure is very different to that which partners have under a partnership structure.

Paragraph 62

Reference is made to the unqualified findings the ET made in paragraphs 28. For reasons indicated above some of the findings in paragraph 28 are based on an acknowledged erroneous fact that Mr Tiffin signed the LA Partnership Agreement.

Paragraph 65
Once again there is a reference to the ET finding “Mr Tiffin intended to become a partner and accepted the changed status , new obligations and responsibilities this involved”

As pointed out above this statement is based on the erroneous ET finding that Mr Tiffin signed the LA partnership agreement.

Paragraph 67

It appears that the court considered Mr Tiffin’s status as a matter of fact rather than one of law.
Conclusion

The legal test to determine whether a member of a LLP is an employee of the LLP for the purposes of the ERA 1996 , involves a four stage approach.
1. You assume that “business of the LLP has been carried on in partnership by two or more of its members as partners”. No guidance is given if there are only two members of a LLP.
2. Based on that assumption, you undertake an inquiry as to whether or not the person whose status is in question would have been one of such partners”
3. The inquiry requires a consideration of the circumstances in a which a person may become a partner in a partnership under the Partnership Act 1890”
4. If the answer to that inquiry is that he would have been a partner, then he could not have been an employee and so will not be an employee of the LLP for the purpose of the ERA 1996.

It is the very assumption that the LLP is a partnership that some might say contravenes the principle laid down by the Supreme Court in Autoclenz. In Autoclenz the Supreme Court made it clear that the task for the Court is to determine what is the true nature of the relationship between parties in this case between the members of the LLP.
As soon as the Court makes the assumption that the LLP is a partnership, it could be argued the Court commits an error in law and fails to address the very question which Autoclenz requires the Court to address.
ss 1(5) of the LLP ACT 2000 is quite clear when it states that partnership law does not in the main apply to an LLP. By assuming the LLP is a partnership it is arguable the Court fails to determine the true nature of the relationship between the members of the LLP.

When undertaking this analysis the fact that members of LLP pay national insurance as self employed does not have a bearing. HMRC acknowledges that all members of a LLP are treated as self employed even if the members had been employees in a partnership before the partnership converted to a LLP.
There is no minimum level of profit a person needs receive as a member of a LLP or to meet the s4(4) hypothetical test of being a partner in a partnership
There is no minimum level of capital a person needs to inject as a member of a LLP or to meet the s4(4) hypothetical test of being a partner in a partnership
There is no minimum level of voting rights a person needs to have to be a member of a LLP or to meet the s4(4) hypothetical test of being a partner in a partnership
There is no requirement for a member of a LLP to have the ability to bind other members of the LLP in order for that person to meet the s4(4) hypothetical test of being a partner in a partnership. This is in contrast to the test of partnership which regards the ability to bind other partners and act as agents for one another as an essential ingredient of a partnership.
Control, the key feature of an employment relationship plays not part of the analysis. It is therefore perfectly acceptable for one set of members to control another set of members.
What the court will focus on is whether the person concerned has the partnership hallmarks listed above. The fact that they may in practical terms be merely tokens appears to be of no relevance. However what seems to be clear is whether or not the members of the LLP intended to become 1890 Act partners.

Prepared by the Appellant
Martin Tiffin
1 February 2012.