Stephen Ilott v 1. Richard Williams and Others
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Kitchin,Sir David Keene |
| Judgment Date | 07 June 2013 |
| Neutral Citation | [2013] EWCA Civ 645 |
| Date | 07 June 2013 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2012/2663 |
[2013] EWCA Civ 645
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
ANTHONY ELLERAY QC,
SITTING AS A DEPUTY HIGH COURT JUDGE
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Kitchin
and
Sir David Keene
Case No: A3/2012/2663
Mr Robin Knowles QC & Ms Charlotte Cooke (instructed by Ferguson Solicitors LLP) for the Appellant
Mr Michael King (instructed by McDermott Will & Emery UK LLP) for the 1st-3rd Respondents
Mr Robert Miles QC & Mr Andrew Thompson (instructed by Simmons & Simmons LLP) for the 4 th-5 th Respondents
Approved Judgment
Hearing dates : 15-16 May 2013
This appeal arises out of arrangements which the appellant, Mr Stephen Ilott, made with the respondents to give him a share of the profits of a new asset management business which he and the respondents established. There were numerous issues raised on this appeal but the answer to the appeal seems to me to be clear and therefore it will not be necessary to deal with them all. However the submissions of Mr Robin Knowles CBE QC, for Mr Ilott, and Mr Michael King, for the first three respondents (Mr Williams, Dr Cooper and Mr McCaffery respectively) demonstrate that there are certain aspects of the law on the formation of partnerships that could usefully be clarified.
Mr Ilott is experienced in the field of asset management. In 2008, he and the first three respondents, whom I shall call collectively "the Four", developed a new concept of absolute return asset management with a view to establishing and running a new business together. However, while they could provide the expertise, they would need to join forces with another organisation in order to obtain finance for the business and financial services regulatory approval. They made presentations to potential investors. Finally they entered negotiations with the fourth respondent ("BlueCrest LP"), a limited partnership. On 28 July 2008, the general partner of BlueCrest LP, namely BlueCrest Management Ltd ("BCML") issued a letter, known in these proceedings as "the Side Letter", recording the agreed division of profits, promising to secure that the Four became limited partners of BlueCrest LP and scheduling outline terms about the new business and the calculation of profits. (BCML subsequently changed its name but nothing turns on that). The new business was to be run as a division of BlueCrest LP. The Four were to receive 40% of its profits and BlueCrest LP the remaining 60%.
In July and August 2008, the Four executed employment agreements with BCML. On 1 November 2008 they executed deeds of adherence to the partnership deed constituting the BlueCrest LP partnership. The terms of the Side Letter were not replicated in these documents.
The investment funds which the Four were to manage were incorporated in Luxembourg with BlueCrest LP providing the seed capital.
On 1 December 2008, BlueCrest LP's business was restructured. BlueCrest LP transferred its assets and liabilities to BlueCrest LLP, a limited liability partnership formed under the Limited Liability Partnerships Act 2000. BCML became a designated member of BlueCrest LLP, and the Four became members of BlueCrest LLP.
The Four's new business was very profitable. The profits for the three financial years ending 30 November 2011 totalled £19m. However, in late 2009, differences of approach emerged between Mr Ilott and the other members of the Four. Mr Platt, one of the founders of the BlueCrest group, decided that Mr Ilott should be removed as a member of BlueCrest LLP. Mr Ilott received notice to this effect on 26 November 2009, four clear days before the end of the financial year. No distribution of profits has been made to Mr Ilott for the financial year ended 30 November 2009 or any of the two subsequent years when the other members of the Four were conducting the business.
At the trial before Anthony Elleray QC, sitting as a deputy judge of the High Court of Justice, Chancery Division, Mr Ilott advanced alternative claims for his share of the profits for these three financial years (1) against the other members of the Four on the grounds that the Four were in partnership with each other; (2) against BlueCrest LP on the basis that it was liable under the Side Letter to pay these profits to him; and (3) against BlueCrest LLP on the basis that the liabilities under the Side Letter had been novated to it.
The first question is whether Mr Ilott can establish that he and the other members of the Four entered into a partnership in April 2008. The judge approached this question by listing what the Four had done both before and after this date. They were all by then or shortly thereafter free from previous employment restrictions. Two of them had specifically left earlier employment in order to join the other two in an investment management business. The Four had identified the basic concept for the new business and decided on their respective roles and so on.
Nevertheless, the judge found that they had not become partners. He held that they had made their presentations on the basis that they were willing to go into investment business. They had not decided on the business vehicle which they would use. On the judge's findings, none of the Four contemplated carrying on business without limited liability. The ultimate form of their business vehicle, and the acquisition of assets and incurring of liabilities would depend on the agreement reached with the outside investor. The judge agreed with the submission of Mr King that "creating Powerpoint slides, planning pitch meetings and thereafter attending pitch meetings is not a business."
Mr Knowles' primary submission is that the judge did not ask himself the right question. He submits that the judge wrongly thought the Four had actually to have established the business in order to be in partnership. The partnership on Mr Knowles' submission was about establishing as well as running an investment business. He relies on the speech of Lord Millett in Khan v Miah [2000] 1 WLR 2123, with which the other members of the House of Lords agreed. That meant that, once the arrangements with BlueCrest LP were established, the partnership's business was that of receiving the distributions under the Side Letter. The partnership therefore continued to exist in parallel with the membership of BlueCrest LP. On Mr Knowles' submission, the Side Letter represented the fruits of the partnership.
Mr Knowles submits that the presentations which the Four made to prospective investors in their business were consistent with their embarking on a joint venture, all other things being equal. Contrary to what the judge held in paragraph 99 of his judgment, it was not essential that they should have established some vehicle for this purpose. It is correct that the partners did not want the unlimited liabilities of a partnership business. However, Mr Knowles submits that that does not prevent the activity of establishing the business from being a business in itself. All it meant was that if they did not find an appropriate limited liability vehicle, the partnership did not succeed. There was no need for the Four to acquire any asset because they were exploiting their own ingenuity and creativity and investment skills. Only a small amount of expenditure was involved.
Mr Michael King, for the first three respondents, submits that there was no partnership in advance of the Side Letter because there was no carrying on of business and no acquisition of property of the alleged partners. There were a number of discussions, as the judge pointed out in paragraphs 96 and 97 of his judgment. There was a list of things which had not been done. What happened in this case was that, once the Four joined BlueCrest LP, their business became that of BlueCrest LP. The mere receipt of distributions from BlueCrest LP would not in itself be a partnership business. Furthermore, the question whether there was a partnership in the period April to July 2008 was supremely a matter for the judge. The fact that the Four were not authorised by the Financial Services Authority to carry on investment business was an indication that they were not in a partnership at this stage.
In my judgment, the judge was correct to hold that there was no partnership between the Four. Nothing turns on the fact that there was no formal partnership deed since the relation of partnership can be formed by conduct and without any need for a written contract. However, there must be a carrying on of business. Section 1(1) of the Partnership Act 1890 makes it clear that it is not the mere agreement to establish a partnership or the setting up of a partnership that renders the parties partners: there must also be an actual carrying on of business with a view of profit. Partnership is there defined as:
"the relation which subsists between persons carrying on business in common with a view of profit."
In Khan v Miah [1998] 1 WLR 477, this court held that persons who had acquired premises to be fitted out as a restaurant but had not opened the restaurant for business were not in partnership. The House of Lords allowed the appeal: [2000] 1 WLR 2123. It was not necessary to find actual trading. What was required was a carrying on of business. Lord Millett, with whom the other members of the House agreed, held:
"There is no rule of law...
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