Where a member of an LLP breaches his ‘fiduciary’ duties to his partners, can he be required to forfeit his profit share? Yes, says the Court of Appeal in Hosking v Marathon Asset Management LLP, thus providing a powerful disincentive on partners to misbehave and an extraordinary potential remedy for their fellow partners.

It is not often we see LLPs airing their dirty linen in public as most LLPs (including Marathon Asset Management LLP) have arbitration agreements, requiring partners to resolve their disputes behind closed doors. For this same reason, there are few published decisions about the law relating to LLPs. Thankfully for us, Mr Hosking decided to appeal the decision of the arbitrator on a point of law to the public forum of the Court of Appeal.

Jeremy Hosking was a co-founder of Marathon but, when he decided to leave, he had discussions with four employees about the prospect of setting up a new business (behaviour which, I suspect, happens pretty frequently when partners decide to leave LLPs). The arbitrator found that, by having these discussions while still a member of Marathon, Mr Hosking was in breach of his fiduciary duties –  but what was to be the penalty?

Founding members of Marathon were designated either ‘Executive Members’ if they worked in the LLP or ‘Non-Executive Members’ if they had retired from executive duties. Executive Members received double the profit share of Non-Executive Members. Not unreasonably, the arbitrator concluded that the difference was remuneration for work. He then held that Mr Hosking should repay just over £10 million, being 50% of his profit share received from the date of the breach until he retired and became a Non-Executive Member (ie the proportion which was remuneration for work rather than being referable solely to his continuing ownership).

Hosking appealed. Although it has long been established that agents and other fiduciaries may be deprived of some or all of their entitlement to pay if they betray the trust of those to whom they have duties, his legal team argued that this did not extend to profit share in LLPs.  The Partnership Act 1890 makes no mention of forfeiture and nor does the LLP Act 2000, they pointed out. Furthermore, the LLP agreement of Marathon did not provide for forfeiture. Moreover, Hosking’s profit share was just that – a share of profits and was not really remuneration for work done. The Court of Appeal was unpersuaded.

Members of LLPs are fiduciaries (and agents) and thus are liable to forfeiture of their fees if they betray the trust of their principal. In the case of Imageview Management Ltd -v- Jack (where the agent of Trinidad & Tobago goalkeeper, Kelvin Jack, made a secret profit from his transfer to Dundee Utd) the Court of Appeal stressed that, in cases of betrayal of trust, the courts were not concerned ‘merely’ with the measure of damages but imposing ‘a real deterrent to betrayal’.

The next time a partner has a chat with other partners or employees about a team move, he may be relinquishing his rights to any further profit share…