Mike Hilton & Ors v D IV LLP & Ors (2015)
The court construed clauses in limited liability partnership agreements to determine the extent of the designated member's obligation to disclose tax documents to members who were seeking to establish that the partnerships had engaged in fraud. A clause requiring disclosure of "relevant information ... necessary for the administration of members' personal tax affairs" was too narrow to assist the members, but they were entitled to disclosure under a clause which had been intended to give effect to the Limited Liability Partnerships Regulations 2001 reg.7(7).
The claimant investors sought a declaration that they were entitled to inspect and copy documents held by the fifth defendant firm of solicitors. Alternatively, the claimants sought Norwich Pharmacal relief against the solicitors.
The solicitors were a neutral party in the proceedings. They were involved purely because they had documents which the claimants wanted to see. The claimants' substantive claim was against the first to fourth defendants, which were limited liability partnerships operating unregulated collective investment schemes supposedly as tax saving vehicles. The claimants had invested in the schemes and suffered loss when the Revenue characterised them as illegitimate. The documents had been acquired by the solicitors when acting for the partnerships in a tax appeal some years previously. The claimants considered that the documents would show that the schemes had been fraudulent. They asserted an entitlement to the documents under specific clauses in the defendants' partnership deeds. The first was cl.5.4, which required the partnership's designated member to supply "relevant information in their possession ... or control ... concerning the LLP and which [was] necessary for the administration of members' personal tax affairs". The second was a clause which they maintained gave effect to the Limited Liability Partnerships Regulations 2001 reg.7(7). It required the designated member to maintain the "books and records of the LLP" and make them available to members. The second sentence of the clause stated that the LLP "may maintain such other books and records, and may provide such financial and other statements as the Designated Members in their sole discretion deem necessary or appropriate".
(1) The claimants were not entitled to access the documents in reliance on cl.5(4). That provision had to be read in the context of the Limited Liability Partnerships Act 2000 s.10, whose effect was to make members personally liable to tax for profits and benefits received from the partnership. The clause made clear that a limited liability partnership was only obliged to pay the tax due by the partnership itself, not that due by its members. The clause was, therefore, only directed at the designated member providing information enabling the members to declare their profits and gains. "Relevant information" was qualified by specific dates, and the phrase "necessary for the administration of members' personal tax affairs" was qualified by a reference to "the payment of taxes or the submission of tax returns". The claimants were not seeking the documents for either of those purposes (see paras 25-30 of judgment). (2) The claimants were entitled to access the documents under the second clause upon which they relied. The phrase "books and records", which appeared in that clause as well as in reg.7(7), had a wide meaning. It referred to all books and records kept by the partnership. Regulation 7(7) was intended to create in limited liability partnerships the same default position as applied to other partnerships. There was no reason to interpret the phrase in reg.7(7) differently than the phrase "books of the firm" in the Limited Partnerships Act 1907 s.6(1), Inversiones Frieira SL v Colyzeo Investors II LP  EWHC 1762 (Ch),  Bus. L.R. 1136 applied. The second clause on which the claimants relied in the partnership deeds had been intended to give effect to reg.7(7) but the wording was not ideal. There was a mandatory obligation on limited liability partnerships under the Companies Act 1985 s.222(1) to make accounting records open to inspection by members, and the reference to "books and records" in the first sentence of the clause was a reference to that obligation. The reference to "such other books and records" in the second sentence of the clause meant books and records other than those within s.222(1). Overall, the meaning of the second clause was that books and records falling outside s.222(1) could be maintained at the discretion of the partnership's designated member, but whatever books and records they chose to maintain became subject to an express and unqualified entitlement of members to inspect. The documents sought by the claimants were caught by the clause and it would be an impermissible exercise of discretion to refuse their application (paras 31-35, 37-43, 46-50). (3) It was not necessary to determine the application for Norwich Pharmacal relief, but the court outlined the approach it would have taken had the outcome on the declaration application been different (paras 56-64).
Declaration granted in favour of claimants
LTL 19/2/2015 :  EWHC 2 (Ch)