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Cite as: [2014] EWHC 2744 (Ch)

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Neutral Citation Number: [2014] EWHC 2744 (Ch)
No. HC14C00030

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

The Rolls Building
22nd July 2014

B e f o r e :

HIS HONOUR JUDGE HODGE QC
sitting as a Judge of the High Court

____________________

STEVEN CHARLES FENNELL Claimant
- and -
HALLIWELLS LLP
(In Liquidation) Defendant

____________________

MR. JONATHAN ADKIN QC (instructed by Irwin Mitchell LLP) appeared on behalf of the Claimant.
MISS LEXA HILLIARD QC (instructed by Addleshaw Goddard LLP) appeared on behalf of the Defendant.

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    JUDGE HODGE QC:

  1. This is the trial of a Part 8 claim issued on 8th January 2014. Mr. Steven Charles Fennell, the claimant, is a practising solicitor and licensed insolvency practitioner, and he was formerly a Fixed Share Member (or FSM) in the solicitors' practice of Halliwells LLP. Halliwells entered into administration on 20th July 2010 by an order made by Kitchin J, and Mr. Dermot Justin Power and Mr.†Shay Bannon (of BDO LLP) were appointed to act as the joint administrators. Halliwells entered into compulsory liquidation on 12th January 2012, and Mr.†Power and Mr. Bannon were appointed to act as the joint liquidators.
  2. Since Halliwells was in liquidation, Mr. Fennell required the court's permission to commence and proceed with this action pursuant to section 130(2) of the Insolvency Act 1986. Such permission was granted by an order made by Mr.†Nicholas Strauss QC, sitting as a Deputy Judge of the Chancery Division, by an order dated 10th December 2013. That order was made following a hearing on 20th June 2013; and the Deputy Judge's reasons for giving permission were set out in a judgment he delivered on 18th September 2013. Part of the background to the application is set out at paragraphs 6 through to 13 of that judgment, which I†can paraphrase as follows.
  3. Before it went into administration, on 20th July 2010, Halliwells was a well-known limited liability partnership with a practice in Manchester, Sheffield, Liverpool and London, and with more than 100 Members and 600 employees. The relationship between Halliwells and its Members was governed by the terms of a Limited Liability Partnership Deed (or Members Agreement) dated 1st July 2004. There were Full Members with voting rights, who were entitled to a small notional salary and a share of profits; and there were Fixed Share Members who were remunerated mainly by a fixed share of profits. In late 2009 and early 2010, the claimant and eight other Fixed Share Members resigned from the partnership, having agreed to join another firm, Kennedys Law LLP. Negotiations ensued and these resulted in a Retirement Deed being entered into on 31st March 2010 in the same, or substantially the same, form between Halliwells and all nine of the Fixed Share Members who had agreed to join Kennedys.
  4. As already stated, Halliwells went into administration in July 2010, and into compulsory winding up on 12th January 2012. The Royal Bank of Scotland is a secured creditor with a debt of some £17.7 million. There is an estimated deficiency as regards unsecured creditors of £203 million. The principal assets of Halliwells are claims (or possible claims) against Former Members, including: (a) claims for overdrawn current accounts and tax reserve accounts against 150 Members; (b) claims against 32 former Members (not including the claimant) for recovery of a substantial reverse premium; and (c) possible liquidators' claims against approximately 150 Members pursuant to sections 214, 214A, 238 and 239 of the Insolvency Act 1986. Amongst the first category of claims is a claim against the claimant, notified on 22nd June 2011, in respect of an overdrawn current account. The claim was for £101,238.74, resulting from drawings having been made on account of profits which were never made in the periods covered by the accounts for the period 1st May 2009 up to the making of the administration order. Brief details were set out in a schedule. The claim is now put at £125,000.
  5. There was some correspondence between the claimant and Addleshaw Goddard, the liquidators' solicitors, in September 2011. The claimant then wrote to Addleshaw Goddard on 3rd February 2012 on his own behalf, and on behalf of the other Members of Halliwells who had joined Kennedys, setting out the reasons why they said that all overdrawing claims by Halliwells had been released by the terms of clause 10.3 of the Retirement Deed into which they had all entered. Addleshaw Goddard replied to this on 29th February 2012 stating that in their view the claims were unaffected by the Retirement Deed and that there should be mediation in accordance with the terms of the Partnership Deed. They also referred to the liquidators' claims under the Insolvency Act.
  6. It was a condition of permission being given to bring this claim that the other eight Fixed Share Members affected by the Retirement Deed issue should agree to be bound by the result of this claim; and such agreement was duly obtained from each of them. This is therefore, effectively, a test case as to the true meaning and effect of the Retirement Deed. The claim form seeks, by paragraph 7(a), a declaration that by the Retirement Deed the LLP released and/or waived and/or is barred from pursuing claims against the claimant to recover monies paid on account of profits and monies paid by the LLP to HMRC, as set out in the letter from the solicitors of the administrators of the LLP dated 22nd June 2011.
  7. The evidence in support of the claim is contained in Mr. Fennell's first witness statement dated 7th January 2014 and its accompanying exhibit, SCF1. Mr.†Fennell sets out the background at paragraphs 4 through to 8. Mr. Fennell states that Halliwells LLP commenced trading on 1st July 2004 on the transfer to it of the previously unincorporated practice known as Halliwell Landau. The constitution of the LLP was governed by an LLP Deed, originally dated 1st July 2004 and subsequently amended. The version of the LLP Deed current as at 26th January 2010 is at pages1 to 51 of exhibit SCF1. Halliwells initially had four, and finally five, classes of Member. The two principal classes were Full Members and Fixed Share Members. Full Members were, in effect, the equity partners, with full voting rights and the most extensive rights to receive financial and management information under the LLP Deed. Full Members were remunerated by a small notional salary and a share of the profits made by the LLP. Mr.†Fennell was a Fixed Share Member of the LLP, based in its Sheffield office. In the absence of any contrary agreement, Fixed Share Members were remunerated primarily by a fixed share of the LLP's profits. In addition, each Fixed Share Member had 0.05% of one equity point, and would receive a profit share based on this equity. Prior to mid-2009 Fixed Share Members contributed capital of £1,000. In mid-2009 they were asked to agree to contribute between £10,000 and £30,000 each, depending on the level of their fixed share of drawings. Mr. Fennell contributed £20,000. Fixed Share Members had virtually no voting rights and limited rights to receive information under the LLP Deed. When a Fixed Share Member joined the LLP, he or she would enter into a separate deed (the FSM Deed) which set out the principal terms of his or her remuneration, notice period, restrictive covenants, and similar matters (which are not relevant to this application). There were three other classes of Member: Senior Members, who were former Full Members in the process of retiring; Senior Fixed Share Members; and Salaried Members or employees. These categories are not relevant to this action.
  8. The management of the LLP was undertaken by a management board pursuant to the terms of the LLP Deed. At the time that the LLP went into administration in July 2010, this comprised Ian Austin (managing partner until late 2009, then "executive chairman"), Alec Craig (senior partner), Jonathan Brown (managing partner from late 2009), Iain Cadman (a chartered accountant who acted as finance director), and three other Full Members - Kevin Finnegan, Rod Waldie and Damian Ward. The management board comprised designated Members of the LLP.
  9. Mr. Fennell deals with his resignation from Halliwells at paragraphs 9 to 12. In December 2009 the following Full and Fixed Share Members of the LLP's Sheffield office gave notice of their resignation: Judith Bloor, Cameron Clarke, Niall Edwards, David Fearon, Suzanne Liversidge, Helen Snowball, Heidi Swales and Gregor Woods. They had all agreed to join Kennedys Law LLP to set up an office in Sheffield. Mr. Fennell resigned from the LLP on 27th January 2010 in order to join Kennedys. Earlier in January 2010 two other Fixed Share Members - Diarmuid Deeney and Andrew MacCuish - also gave notice of resignation from Halliwells to join Kennedys.
  10. Mr. Fennell's decision to leave Halliwells was motivated by a variety of reasons, although a common factor with those others who left was dissatisfaction at the way in which the LLP was being managed, and what Kennedys had to offer. The LLP and Mr. Fennell entered into the Retirement Deed (which appears at pages 52 to 65 of exhibit SCF1). The other Fixed Share Members entered into Retirement Deeds which are in substantially the same terms. The Retirement Deed was negotiated at arm's length by the LLP's management on the one hand (principally Jonathan Brown, the managing partner) and by Lewis Silkin, who were instructed to act for all of the Members who had resigned to join Kennedys. The principal terms of the overall settlement involving all the Members leaving to join Kennedys (excluding remuneration) were as follows:
  11. (1) Colleagues who specialised in insurance litigation agreed to remain at Halliwells until the end of July 2010, which was a period in excess of their notice period (which ran for six months and would have expired in June 2010). This was at the request of the LLP, which wanted the fee income from their practice for the first three months of the 2010 to 2011 financial year.

    (2) Ms. Liversidge and Mr. Fearon were to be released from their notice periods earlier than the 12 months which was required for Full Members.

    (3) Mr. Fennell and others were in general terms to cease to be Members of Halliwells on or about the expiry of their notice period, be it three or six months.

    (4) They were all to be released from all restrictive covenants.

    In addition, the Retirement Deed contained detailed provisions in relation to remuneration and the release of claims (which Mr. Fennell describes later in his witness statement), and which form the subject matter of this action.

  12. Mr. Fennell deals with the overdrawing claim at paragraphs 13 to 16. On 22nd June 2011 Addleshaw Goddard, on behalf of the then administrators, wrote to Mr.†Fennell to make a claim for the recovery of what they described as drawings and payments to HMRC on account of profits. A copy of the letter addressed to Mr. Fennell is at pages 74 to 86 of exhibit SCF1. The relevant passages from the letter of claim read as follows:
  13. "During the period from May 2009 to the date of the appointment of the Administrators, you took drawings on account of profits.
    The Administrators' team have undertaken work to finalise the accounts for the period from the year ended 30 April 2010 to the date of the administration order of 20 July 2010, and for the period from 1 May 2009 to 30 April 2010, and copies of these draft accounts are enclosed (together 'the Accounts').
    The Accounts indicate that in both periods Halliwells incurred no profit and indeed substantial losses.
    We are instructed to write to you in respect of certain claims that Halliwells has against you and which the Administrators are instructed to bring against you for the benefit of the creditors of Halliwells, with the express instructions of the creditors' committee.
    It is the intention of the Administrators to follow the intention of clause 35 of the Halliwells [LLP] Deed dated 1 July 2014 (as amended) wherever possible which provides for a dispute resolution procedure to resolve disputes relating to the LLP Deed.
    1 Claim regarding overdrawn account
    The investigations undertaken to date by the Administrators' team indicate that you have an overdrawn current account.
    An amount of £101,283.74 is repayable by you to Halliwells which is the balance of your overdrawn current account as at 20 July 2010. This sum is payable as a result of drawings having been made on account of profits that were never in fact made in the periods covered by the Accounts. A breakdown of the amount claimed is attached in schedule 1 part 1 to this letter.
    2 Claim regarding overpaid tax account
    The investigations undertaken to date by the Administrators' team indicate that Halliwells has overpaid tax for you in excess of tax that you as a Member had set aside (or which had been set aside for you) in any tax provision account held for you.
    Claims in respect of overpaid tax are debt claims for the Administrators to bring on behalf of Halliwells.
    Details of the amount due to Halliwells from you are set out in schedule 1 part 2, to this letter."

  14. Addleshaw Goddard have subsequently confirmed in correspondence (in a letter dated 24th October 2011) that the claims set out in the letter of claim are based on contractual provisions of the LLP Deed, in particular clause 7.2 which reads as follows:
  15. "At any time after the Accounts have been approved by the LLP in respect of an Accounting Period under clause 8, any Member who is shown in the Accounts to have drawn any amount in excess of his share of Profits for that period, after provision of tax liabilities under clause 9, will refund that excess to the LLP as soon as is reasonably practicable but in any event within 30 days of having received a written request from the Board asking him to do so together with interest on that amount at the rate of 2.5 per cent per annum above the base rate for the time being of the LLP Bank..."

  16. Mr. Fennell believes that these threatened claims are precluded by the terms of the Retirement Deed. As set out in more detail later in his witness statement, he has raised this issue with the administrators (and subsequently liquidators) through correspondence. They have refused to accept Mr. Fennell's position. He therefore seeks a declaration that the terms of the Retirement Deed preclude the claims threatened by the liquidators. Mr. Fennell addresses the terms of the Retirement Deed at paragraphs 17 to 22 of his witness statement. The Retirement Deed provides that:
  17. (1) The Retirement Deed, the FSM Deed and the Members Deed constitute the whole of the agreement between the parties as to the cessation of the Retiring Member's participation in Halliwells: see clause 13.1.

    (2) The provisions of the Retirement Deed are binding on, amongst others, any liquidator and administrator: see clause 13.4.

    (3) In the event of a conflict between the provisions of the Members Agreement, the FSM Deed and the Retirement Deed, the Retirement Deed prevails: see clause 13.9.

    (4) The Courts of England have exclusive jurisdiction to settle any dispute that arises out of or in connection with the Retirement Deed: see clause 14.4.

    (5) In general terms, except for liabilities and obligations expressly created or acknowledged by the Retirement Deed, the Retirement Deed is in full and final settlement of claims concerning the applicant's retirement from the LLP: see clause 10.2.

  18. Clause 10 of the Retirement Deed provides as follows:
  19. "10.1 Save in relation to liabilities and obligations expressly created or acknowledged in this Deed and on condition that the provisions of this Deed are fulfilled and complied with in full by the LLP, the Retiring Member accepts the fulfilment of the terms of this Deed in settlement of all claims, costs, expenses or rights or causes of action of any kind whether contractual, tortious, statutory or otherwise he has, or may have, against the LLP at the date of execution of this Deed.
    10.2. Save in relation to liabilities and obligations expressly created or acknowledged in this Deed, the LLP accepts the terms of this Deed in full and final settlement of all and any claims, costs, expenses or rights or causes of action of any kind, whether contractual, tortious, statutory or otherwise against the Retiring Member arising from the Retiring Member's or the Excluded Members' retirement from the LLP.
    10.3. For the avoidance of all and any doubt, the LLP waives all and any rights and claims in respect of the obligations imposed on the Retiring Member in respect of restrictive covenants pursuant to the FSM Deed, and further the LLP will not seek to claim, reduce, extinguish or delay the payment of any sums paid or payable to or for the benefit of the Retiring Member pursuant to the terms of this Deed or the Members Agreement or the FSM Deed and will make all payments to and on behalf of the Retiring Member in accordance with the terms of this Deed and the Members Agreement and the FSM Deed without set-off, deduction or delay."

  20. Mr. Fennell believes that any threatened claim by Halliwells has been released by the following words in clause 10.3:
  21. "... the LLP will not seek to reclaim... any sums paid... to or for the benefit of the Retiring Member pursuant to the terms of... the Members Agreement or the FSM Deed..."

  22. That wording is said to cover the drawings on account of profits (including the Notional Salary) paid by the LLP to Mr. Fennell by way of drawings, and to prevent Halliwells from seeking to reclaim monies pursuant to, amongst other things, clause 7.2 of the LLP Deed. Further, Mr. Fennell believes that this clause inhibits any claim against him for repayment of tax paid on his behalf to HMRC.
  23. It is contended that the possibility of overdrawing claims was contemplated before the Retirement Deed was concluded, and forms part of the factual matrix against which it is to be interpreted. In an email from the then managing partner of the LLP (Mr.†Brown) to Mr. Nick Thomas (of Kennedys) dated 21st February 2010, Mr. Brown states:
  24. "There will be no overdrawings as we discussed and we are willing to give comfort on that. Please note that whether the tax reserves are sufficient or not will depend on the individual's tax position."

  25. It is said that Clause 3 of the Retirement Deed also prevents any overdrawing claim of the sort set out in the letter of claim. The relevant provisions of clause 3 provide as follows:
  26. "Profit Share Drawings and Current Account.

    3.1. It is confirmed, for the avoidance of doubt, that:
    (a) The Retiring Member is at the date of this Deed, and will be up to and including the Cessation Date, entitled to 1/20th (one twentieth) of one Point of the Profits of the LLP;
    (b) The Retiring Member is at the date of this Deed, and will be up to and including the Cessation Date, also entitled to a Notional Salary as referred to in the Members Agreement and the FSM Deed at the level noted in clause 1.1 hereto;

    3.2. The LLP guarantees to pay the Retiring Member monthly Drawings at the same rate and on the same date that such were paid prior to the service of a Notice of Retirement by the Retiring Member apportioned, as appropriate, on a time basis up to the Cessation Date and undertake not to reduce, reclaim, claw back, or set-off against any Drawings which shall be paid in full without deduction. The LLP shall, in addition, credit to the Retiring Member's Tax Reserve Account amounts equal to the Board's reasonable estimate of the Tax and class 4 national insurance contributions payable by the Retiring Member in respect of the Accounting Periods in which the Retiring Member was a Member of the LLP prior to the Cessation Date. ...

    3.4. For the avoidance of doubt, the Drawings, the amounts credited or to be credited to the share of Profit referred to at 3.1(a) above and the Notional Salary shall constitute the guaranteed minimum profit allocation of the Retiring Member up to the Cessation Date and the nominated partner of the LLP shall record no lesser sum as the Retiring Member's profit share derived from the LLP in respect of the Accounting Periods up to the Cessation Date and for the avoidance of doubt the amount in the Retiring Member's Tax Reserve Account will be relevant for the purposes of this clause."

  27. Mr. Fennell believes that clauses 3.1(a) and (b) confirmed his entitlement to a guaranteed payment of drawings up to the Cessation Date. It is said that there is no qualification or reservation made to the clear and unambiguous statements in clause 3.1 as to the entitlement to a defined sum.
  28. Mr. Fennell concludes his witness statement by referring to his correspondence with the liquidators' solicitors, Addleshaw Goddard.
  29. The liquidators' position is set out in the first witness statement of Mr. Power, dated 13th February 2014, to which are exhibited various documents as exhibit DJP1. He deals with the background to the claim at paragraphs 5 through to 13. There Mr. Power explains that his knowledge of the background to the administration of Halliwells, and the departure of certain Members from it (including Mr. Fennell), is derived from his consideration of the books and records of Halliwells, a review of emails, and from interviews with a number of former Members of the LLP.
  30. Immediately upon taking office, the then administrators, with the permission of the court, sold substantially the whole of Halliwells' business and assets to four purchasers ( BLG Claims LLP, Hill Dickinson LLP, HBJ Gateley Wareing (Manchester) LLP, and Kennedys Law LLP), each being another firm of solicitors. A few Members from the London office of Halliwells also went to various other firms. The sales to the purchasers had been agreed prior to the appointment of the administrators as part of a "pre-pack" administration sale. Broadly, different purchasers took control of different offices/teams of solicitors from Halliwells, along with the various work streams that those teams were working on at the date of the administration. Based on estimated future realisations, excluding any potential recoveries from the further claims, the amount of the deficiency as regards unsecured creditors will be approximately £203 million. If the further claims are successful, the Halliwells estate would still be insolvent, but the deficiency would be reduced. The Royal Bank of Scotland is the only secured creditor of Halliwells. It holds a debenture containing fixed and floating charges over Halliwells' assets. At the date of Halliwells entering into administration, RBS was owed approximately £17.7 million, (excluding interest, charges and termination costs) in respect of two loan facilities. To the date of Mr. Power's witness statement, a total of £2 million had been paid to RBS from realisations.
  31. At paragraph 15 it is said that it is important to remember that Halliwells was an LLP, not a limited liability company. Directors and employees of a limited liability company are entitled to be paid for work performed, irrespective of whether the company has made any profits. The Members of an LLP have rights to share only in profits made by the partnership; they have no rights to be paid out of capital. If a limited liability partnership makes no profits, there is nothing to share. In the case of Halliwells, the Members' rights to share in the profits of the LLP (as between themselves) were governed by the provisions of the LLP Deed.
  32. At paragraph 19 Mr. Power explains the distribution of profits as addressed in clause 6 of the LLP Deed. Clause 6.12 provides:
  33. "Subject to clause 6.13, the Profits shall be allocated after the Accounts for the relevant period have been approved by the Members..."

  34. Clause 6.13 provided that the Board could allocate profits on the basis of management accounts on account of any Member's share of the profits in the relevant accounting period. Accordingly, Members could take drawings during the year on account of their likely profit share, and this was described as their "notional salary". In the case of FSMs, of course, it was always a fixed share of the profits, and therefore drawings were taken on account of a fixed share of the Profits. Members did not become entitled to their share of the Profits, fixed or otherwise, until the accounts for the relevant period had been approved by the Members, and Profits were available to pay them. If a Member was subsequently shown in Accounts approved by the LLP to have drawn an amount in excess of his share of the profits for that year, clause 7.2 of the LLP Deed required him (or her) to repay the excess.
  35. Clause 6.1 provides:
  36. "The Profits are to be shared by the Members in accordance with clauses 6.10 to 6.18 (inclusive)."

  37. Clause 6.10 sets out the order of priority in respect of which Members are to be paid (as between themselves) "the Profits of each Accounting Period."
  38. Pursuant to clause 6.10.1, senior FSMs and FSMs are paid first, up to their notional salary, with Full Members and Senior Members being paid next, up to their notional salary, pursuant to clause 6.10.2. Only after these sums have been paid is there a provision in clause 6.10.4 for any balance of Profits to be paid to Members in their due proportions.
  39. Clause 6.11 provides that if there are insufficient Profits, amounts payable then abate in reverse order as between Members rateably according to the amounts payable. It is said that this latter clause (together with clause 7.2) underlines the fact that Members of a limited liability partnership can only be paid out of profits. If there are insufficient profits, then Members have to be paid less and, in some cases, nothing at all. It is also clear from this clause that where there are insufficient profits, FSMs are to be paid in priority to Full Members.
  40. At paragraphs 21 through to 23, Mr. Power addresses the payment of tax by Members. He explains that a limited liability partnership is a tax-transparent vehicle. Unlike in the case of a limited company, the tax payable on profits is paid by the Members individually, and not the limited liability partnership. There is no such thing as corporation tax for limited liability partnerships. To assist Members with their tax liabilities, typically a limited liability partnership will retain a proportion of each monthly drawing and any further share of profits paid to each Member, and then make payment to HMRC on behalf of the individual Member at the time that payments on account and balancing payments are due to HMRC, in January and July of each year. Halliwells was no different in that regard.
  41. The position regarding tax in relation to Halliwells is addressed in clause 9.1 of the LLP Deed, which states:
  42. "Except as otherwise determined by the Board the LLP will retain such proportion of each Member's share of the Profits in any Accounting Period as the Financial Director recommends is appropriate to meet that Member's individual tax liability (if any) in respect of those Profits... to meet such Member's individual tax liability in respect of that income..."

  43. Clause 9.3 states:
  44. "Sums retained in respect of each Member for the purposes of meeting that Member's individual tax liability (if any) will be paid or released to him only when and to the extent considered by the Financial Director to be in excess of that Member's actual individual tax liability (if any)."

  45. Mr. Power deals with the financial position of the LLP for its last full accounting period to 30th April 2010 and for the final trading period to 20th July 2010 at paragraphs 24 through to 27. The loss in the financial statements for the period to 30th April 2010 was £89,300,000. The loss in the final period financial statements was £11,321,000. Together, these financial statements show very significant losses for both periods, in total in excess of £100 million.
  46. The effect of these losses is that any drawings made by Members in the period from 1st May 2009 to 30th April 2010 and in the period from 1st May 2010 to 20th July 2010 were not made out of profits. Accordingly, it is said that the sums paid to Members, including FSMs, must be repaid. As previously explained, Members of a limited liability partnership can only be paid out of profits; and if there are no profits, no payments can be made to them as those funds should be made available to pay creditors.
  47. The fact that the LLP made losses during the above periods also has the consequence that any tax paid by the LLP on behalf of the Members in respect of profits that were not made will be repaid to each Member individually as there was no tax to pay.
  48. Mr. Power then addresses a claim by former Members of the LLP for terminal loss tax relief at paragraphs 28 through to 30. The likely share of Mr. Fennell of the terminal loss relief claim is said to be approximately £115,830.31. The likely share of the Kennedys' FSMs of the terminal loss relief claim is approximately £555,847.34. Mr. Fennell and the Kennedys FSMs stand to benefit substantially from the failure of the LLP by the receipt of a significant tax rebate in relation to losses which have been caused, in part, by the payments to Mr. Fennell and the Kennedys FSMs which they claim to be entitled to retain.
  49. Mr. Power deals with the claims regarding Mr. Fennell's overdrawn current and tax accounts at paragraphs 31 through to 39. The books and records disclosed that Mr.†Fennell had taken drawings of £101,283.74 on his current account and £24,165.32 on his tax account in relation to payments made to him, or on his behalf, from 30th April 2009 until the date that he formally ceased to be a Member of the LLP on 26th July 2010, six days after the LLP collapsed into administration.
  50. On 22nd June 2011 Addleshaw Goddard wrote to Mr. Fennell asking for his proposals to repay those amounts, in light of the fact that there were no profits for the year ending 30th April 2010 and for the period 1st May 2010 to 20th July 2010. Those sums had been paid on account of Profits that were never made, and on account of tax that never became due. If Mr. Fennell is correct in his contentions, the result, it is said by Mr. Power, would be remarkable because it will mean that the LLP had agreed to pay Mr. Fennell (and the Kennedys FSMs) for the remaining months in which he remained a Member of the LLP on an entirely different basis from the basis that he had been paid before. It also means that the LLP agreed that Mr. Fennell (and the Kennedys FSMs) would be paid in full, irrespective of whether the LLP made Profits, and in priority to the LLP's creditors, despite the fact that under the LLP Deed it is said to be absolutely clear that Members and FSMs are only to be paid out of Profits. There was no reason for the LLP to enter into such an arrangement with Mr. Fennell that was more generous to him than other Members for the remaining months he remained an FSM. The LLP was not trying to get rid of Mr. Fennell or trying to "pay him off"; it was Mr. Fennell who wanted to leave. It is also said to be quite clear from clause 3 of the Retirement Deed that the intention of the parties was that Mr.†Fennell would continue to be paid (as under the LLP Deed) out of Profits. It follows that if the LLP did not make any profit, Mr. Fennell was not entitled to be paid.
  51. The liquidators' position, in essence, is that the payments made to Mr. Fennell were not made pursuant to the Retirement Deed because they were not made out of Profits. Alternatively, the payments were made by mistake, in the belief that there were Profits when there were none. Mr. Fennell has, by the payments, been unjustly enriched; and therefore he should repay the amounts paid.
  52. The combined value of the claims regarding overdrawn current accounts and overdrawn tax accounts of Mr. Fennell and the other Kennedys FSMs is said to be £603,485. In substance, it is being argued that these former FSMs should be entitled to retain these sums at the expense of the LLP's creditors, despite the fact that there is nothing in the Retirement Deed to suggest that during the period up to the date when these FSMs ceased to be Members of the LLP, they were to receive payments irrespective of whether the LLP made profits.
  53. Mr. Power proceeds to address the point made by Mr. Fennell at paragraph 20 of his first witness statement (referring to the statement in the email dated 21st February 2010 from Halliwells' then managing partner that "there will be no overdrawings") at paragraphs 37 through to 39 of his first witness statement. Mr.†Power's first witness statement concludes with a statement about the liquidators' position with respect to the Part 8 claim at paragraphs 40 through to 42:
  54. "40. The Liquidators' position regarding the Part 8 claim is that on its proper construction the amounts paid to Mr. Fennell are repayable to the LLP because they were not paid pursuant to the terms of the LLP Deed or they were paid by mistake.

    41. If the Liquidators are wrong, I believe that the LLP entered into a transaction at an undervalue with Mr. Fennell. If the effect of the Retirement Deed is that the LLP agreed to pay Mr. Fennell and to make payments to HMRC on his behalf irrespective of whether the LLP made Profits, the consideration given by Mr. Fennell in return for that agreement was worth significantly less than the consideration provided by the LLP. Mr. Fennell, in fact, gave no consideration at all for such promise by the LLP. Mr. Fennell was obliged to give six months' notice if he wished to retire from the LLP. He gave that notice and ordinarily he would be entitled to a fixed share of Profits as he had always been down to the date when he ceased to be a Member. Mr.†Fennell's construction of the Retirement Deed is that the LLP agreed to pay him even if the LLP made no Profits at all and the LLP would have no right to claw back any overpayments. Mr. Fennell gave nothing at all in return for that promise which was made at a time when the LLP was heavily insolvent. Also as a result of the LLP paying tax to HMRC on behalf of Mr. Fennell, which was not in fact due, Mr. Fennell can now reclaim or set-off the amount paid from HMRC as overpaid tax. He can also claim for his share of the tax loss relief claim, those losses having in part been contributed to by the payments that were made to him by the LLP when it was making losses, not Profits."

  55. By agreement between the parties, the section 238 application is not before me.
  56. Mr. Fennell made a second witness statement in response, dated 27th February 2014. It is sufficient for me to refer only to paragraphs 5 to 7. Mr. Power's statement refers to the total losses which he says the LLP has incurred. Mr. Fennell makes no comment on these figures, and he has not seen any of the material to support the calculation of these figures; and Mr. Power has previously refused to allow former Members, including Mr. Fennell, to have access to the workings behind the figures which his firm prepared for the purpose of filing the LLP's final tax return. Mr. Power also refers to the filings with HMRC made by former Members in relation to the losses incurred by the LLP, which have been referred to as "terminal loss relief claims". As far as Mr. Fennell is aware, HMRC is still considering the claims which have been filed by Mr. Fennell and by other former Members, and have not agreed (1) the amount of the LLP's losses for the purposes of tax, and (2) the manner in which the losses have been allocated between the Members, both as a matter of general principle and on the facts of this particular case.
  57. All that Mr. Fennell is able to say about the terminal loss relief claim in his case is that he does not know if he will receive anything at all and, if so, how much; and there is certainly no indication of when HMRC will make its decision. In any event, it is said that the availability of a tax refund from HMRC is clearly irrelevant to the interpretation of Mr. Fennell's Retirement Deed.
  58. At the first directions hearing before Master Bowles, on 31st March 2014, the parties agreed that the application that the liquidators, and the defendant, had issued against Mr. Fennell in the Companies Court under section 238 of the Insolvency Act 1986 should be stayed until after the present claim had been determined. Paragraph 3 of the order provided that at the final hearing of the claim (but without prejudice to contentions that might be made by the parties in any other proceedings): (a) the defendant should not be entitled to rely on any evidence to the alleged effect that the payments made to the claimant of which the defendant has claimed repayment were made under a mistake of fact, and (b) the claimant should not be entitled to rely on matters contained in paragraphs 10 and 11 of his second witness statement. Those paragraphs have been redacted from the version of the second witness statement of Mr. Fennell which is before me.
  59. Pursuant to paragraphs 1 and 2 of Master Bowles's order, Mr. Power made a second witness statement, dated 30th April 2014, simply exhibiting (as exhibit DJP2) copies of: (1) Mr. Fennell's email of 27th January 2010, resigning from the LLP; (2) Mr.†Fennell's original Salaried Members Agreement dated 31st July 2006; and (3) Mr. Fennell's later Fixed Share Membership Deed dated 4th December 2006.
  60. The hearing took place yesterday, Monday 21st July 2014, from about 10.30 until about 4.15, with the usual one hour's adjournment for lunch. Mr. Fennell was represented by Mr. Jonathan Adkin QC; and Halliwells (in liquidation) was represented by Ms. Lexa Hilliard QC. Both counsel had prepared detailed written submissions dated 18th July 2014 which I had had the opportunity of pre-reading, together with the witness evidence. There was no oral evidence adduced before me, and no cross-examination of either Mr. Fennell or Mr.†Power. Mr. Adkin addressed me in opening for about an hour and 10 minutes. Miss Hilliard responded for about three hours, either side of the short adjournment. Mr. Adkin then replied for about 30 minutes. At 4.15 I adjourned until two o'clock today, Tuesday 22nd July, to deliver this extemporary judgment.
  61. In his written skeleton argument Mr. Adkin observes (at paragraphs 7 and 8) that the liquidators have recently suggested that if the Retirement Deed has the meaning for which Mr. Fennell contends, they should be entitled to set it aside as a transaction at an undervalue under section 238 of the Insolvency Act 1986; and they have issued an application to that effect. The parties have agreed that that application should be stayed until after the determination of the present claim, so that the only matter presently for determination is whether the liquidators' threatened claims to recover monies paid to each of the nine former FSMs on account of profits which were not made, and to recover monies paid to HMRC for their benefit in respect of their tax liabilities for such non-existent profits, are barred by the terms of the Retirement Deed. That is said to require a consideration of the basis on which those claims are advanced, and the basis on which it is said on behalf of Mr. Fennell that the Retirement Deed precludes them.
  62. Mr. Adkin's submissions are set out in his written submissions at paragraphs 9 and following. It is necessary to reproduce those submissions in full in order fully to understand them. Prior to the execution of the Retirement Deed the terms upon which the FSMs were to be remunerated by the LLP were contained in a combination of the LLP Deed and the individual FSM Deed entered into by each FSM. All Members, including FSMs, were to be paid a share of the LLP's profits in accordance with clause 6 of the LLP Deed. By clause 6.10.1 of the LLP Deed, the FSMs were to be paid a notional salary, which was an annual sum set out in the FSM Deed for the relevant FSM. After the FSMs were paid, the Full Members, who are said to be akin to equity partners, were to be paid a much smaller notional salary pursuant to clause 6.10.2. What remained was to be divided amongst the Members according to their equity entitlement, which was calculated on the basis of a points system. The FSMs had a very small equity entitlement, and Mr. Fennell and his Kennedys' colleagues each held only one twentieth of an equity point. In substance, their remuneration was to be by way of their notional salary.
  63. Mr. Fennell's FSM Deed provided that his notional salary was to be determined by the Board, but that it was to start at £130,000 per annum gross and would be reviewed annually, and would not subsequently be reduced unless a reduction in working hours was also agreed.
  64. Both the LLP Deed and the FSM Deed also made provision for monthly drawings to be made by Members. Clause 7.1 of the LLP Deed provided that, subject to certain irrelevant provisos, "each Member may make monthly drawings of such amounts as may from time to time be determined by the Board". This was further reflected in a clause of the FSM Deed (under the heading 'Drawings') which provided that Mr. Fennell was "entitled to such monthly drawings as the Board may reasonably determine". The drawings were recorded in the books of the LLP in each Member's current account. The FSMs drew their notional salary each month.
  65. The LLP Deed also provided (at clause 9.1) that Halliwells would retain, in respect of each Member's share of the profits, an amount appropriate to meet that Member's tax liability for each accounting period. By clause 9.2, these retentions were to comprise a debt from Halliwells to the Member, which would be discharged by payment of the retention on his behalf to the relevant tax authority to the extent necessary to meet that Member's tax liability.
  66. The LLP Deed provided (at clauses 8.1 and 8.2) for the accounts of Halliwells to be made up to 30th April in each year, and a profit and loss account and balance sheet were to be prepared. Once the accounts had been approved by the LLP, the provisions of clause 7.2 of the LLP Deed (which I have already recited) were engaged.
  67. It is clause 7.2 which is understood by Mr. Adkin to be relied upon as the foundation of the liquidators' overdrawing claim. The liquidators argue that because Halliwells' accounts show no profit for the year to 30 April 2010, or for the further short period to its administration on 20 July 2010, drawings of notional salary paid to Mr. Fennell in that period fall to be repaid by him to the LLP under clause 7.2. The liquidators also say that Mr. Fennell is liable to pay Halliwells an amount equivalent to the tax which was paid to HMRC on his behalf pursuant to clause 9.1 during those periods, though they have not identified any particular provision of the LLP Deed under which this can be reclaimed.
  68. Mr. Adkin deals with the provisions of the Retirement Deed at paragraphs 15 and following. The Retirement Deed was signed on 31st March 2010, some time after Mr. Fennell gave notice of retirement (on 27th January) but before the six months' notice period provided for at clause 26.2 of the LLP Deed expired on 26th July 2010. (I interpose to observe that it is apparent from numbered paragraph 7 of Mr. Brown's email of 21st February 2010 that a draft of the Retirement Deed was already in existence as early as 4th February 2010.) Returning to Mr.†Adkin's written submissions, following a series of definitions, set out in clause 1.1, the Retirement Deed:
  69. (1) sets out the date for Mr. Fennell's retirement on 26th July 2010;

    (2) sets out provisions as to how the profit share, drawings and current account are to operate in relation to Mr. Fennell pending his retirement (at clause 3);

    (3) makes provision for the operation of the capital account (at clause 4);

    (4) similarly makes provision for the operation of Mr. Fennell's tax reserve account (at clause 5);

    (5) imposes certain restrictions on what Mr. Fennell can do after his retirement from Halliwells (at clause 7);

    (6) sets out certain waivers, releases and indemnities between Mr. Fennell and the LLP (at clause 10); and

    (7) is to be governed by, and construed in accordance with, English law: see clause 14.1.

  70. The Retirement Deed expressly contemplates (at Recital (B)) that its terms may vary or suspend the terms of the LLP and FSM Deeds, recording that "The LLP consents to the Retiring Member [i.e. Mr. Fennell] ceasing to be a Member of the LLP on the terms contained in this Deed, the terms of the Members Agreement [i.e. the LLP Deed] and the FSM Deed, to the extent that such terms are not varied or suspended by the terms of this Deed". This recital is reflected in clause 13.9 of the Retirement Deed, which provides that "In the event of any conflict between any of the provisions of the Members Agreement, the FSM Deed and the provisions of this Deed, the provisions of this Deed shall prevail".
  71. The Retirement Deed also expressly provides (at clause 13.4) that its terms "shall enure for the benefit of, and shall bind... any liquidator, receiver or administrator of the LLP".
  72. The critical provisions relied on by Mr. Fennell in answer to the Overdrawing Claims are contained in clauses 3 and 10 of the Deed. I have already set out clauses 3.1(a) and (b). Clause 3.1(c) provided that:
  73. "the Retiring Member shall not, and shall not be entitled to, receive any share of the profits of the LLP generated after the Cessation Date."

    Clause 3.1(d) provides that:

    "the LLP shall not, and shall not be obliged to, prepare any accounts to the Cessation Date or as a consequence of the retirement of the Retiring Member and shall prepare Accounts at the Accounts Dates in respect of the Accounting Periods."

    The relevant Accounts Date in each year was 30th April. I have already set out the provisions of clause 3.2.

  74. Clause 10 provided for certain releases, waivers and indemnities. I have already set out the provisions of those clauses.
  75. Mr. Fennell contends that the provision in clause 10.3 that "further the LLP will not seek to reclaim, reduce, extinguish or delay the payment of any sums paid or payable to or for the benefit of the Retiring Member [i.e. Mr. Fennell] pursuant to the terms of this Deed or the Members Agreement [i.e. the LLP Deed] or the FSM Deed" precludes the overpayment claims in their entirety; and that in any event the provisions of clause 3.2 preclude the overdrawing claims, at least insofar as they seek to reclaim drawings paid to Mr. Fennell between the date of the Retirement Deed and the date of his retirement on 26th July 2010.
  76. Mr. Adkin submits that the proper construction of clauses 10.3 and 3.2 of the Retirement Deed involves ascertaining the meaning which the Retirement Deed would convey to a reasonable person, having the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. He has referred me to two passages in the seminal judgment of Lord Hoffmann in the case of Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896. The first passage is at page 912H:
  77. "Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

    Mr. Adkin also relies upon the statement at page 913D:

    "The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had."

    In ascertaining that, where the words have an unambiguous and sensible meaning as a matter of ordinary language, that is the meaning they should be given.

  78. In addition to the statement from Lord Justice Saville in the case of National Bank of Sharjah v. Dellborg, decided on 9th July 1997, Mr. Adkin also relies upon a dictum of Lord Clarke in the case of Rainy Sky v. Kookmin Bank, [2011] UKSC 50, [2011] 1 WLR 2900 at paragraph 23:
  79. "Where the parties have used unambiguous language, the court must apply it."

  80. Mr. Adkin submits that on their plain and sensible meaning clauses 3.2 and 10.3 of the Retirement Deed preclude the threatened overdrawing claims; and that this conclusion is strongly supported by the relevant factual matrix against which they fall to be construed.
  81. By clause 10.3 Halliwells agreed that it would "not seek to reclaim... the payment of any sums paid... to or for the benefit of the Retiring Member pursuant to the terms of this Deed, the Members Agreement, or the FSM Deed". That is said to be precisely what the overdrawing claims now seek to do:
  82. (1) Those claims are said to involve an attempt by the LLP, through its liquidators, to reclaim the sums that were paid to Mr. Fennell, namely the notional salary he was paid by way of drawings made between May 2009 and 20th July 2010, and sums paid for his benefit, namely the tax paid to HMRC over the same period.

    (2) There is said to be some ambiguity in the second part of the clause as to whether the words "pursuant to the terms of this Deed, the Members Agreement, or the FSM Deed" are intended to refer (i) to the claims that the LLP is precluded from making (i.e. the precluded claims are claims "pursuant to the terms of this Deed" etc), or (ii) to the sums paid to or for the benefit of Mr. Fennell (i.e. the claims precluded are for sums paid to Mr. Fennell "pursuant to the terms of the Deed" etc). It is said by Mr. Adkin that the resolution of that ambiguity does not matter much because the consequence is the same however the clause is viewed:

    (i) The overdrawing and overpayment claims are made pursuant to clause 7.2 of the LLP Deed and so are precluded on the first of those two readings;

    (ii) The payments made to Mr. Fennell were made pursuant to the drawings provisions of clause 7.1 of the LLP Deed and clause 2 (at the top of the third page) of the FSM Deed, and the payments to HMRC on his behalf were made pursuant to clause 9.2 of the LLP Deed, so the claims to reclaim those payments are thus precluded on the second of the above two readings. As Mr. Adkin rhetorically asks: "If the payments to Mr. Fennell and to HMRC were not made pursuant to the terms of the LLP Deed, under what authority, or upon what basis, were they made at all?"

  83. Insofar as it is necessary, it seems to me that it is the second of the two possible constructions that is the correct one because of the positioning of the words. The words "pursuant to the terms of this Deed, the Members Agreement, or the FSM Deed" seem to me clearly to qualify the phrase "paid or payable to or for the benefitÖ", rather than the concept of reclaiming or reducing the payment. But it seems to me, for the reasons that Mr. Adkin gives, that it does not matter which of the two possible meanings is the correct one.
  84. The effect, therefore, of clause 10.3 of the Retirement Deed is said by Mr. Adkin to preclude all of the overdrawing and overpayment claims now threatened. On the natural language of clause 10.3, the liquidators' case is said to be unsustainable. Mr. Adkin acknowledges that clause 3.2 of the Retirement Deed is more limited in scope than clause 10.3, since it refers only to drawings that are to be made in the period between the signing of the deed and the date of retirement, rather than payments made before the deed was signed. Mr. Adkin points to the fact the term "Drawings" is defined at clause 1.1 of the Retirement Deed as follows:
  85. "'Drawings' means sums paid monthly by the LLP to a Member up to and including the Cessation Date [i.e. 26th July 2010] (excluding sums credited to the Tax Reserve Account) which for the Retiring Member [i.e. Mr. Fennell] amounts to £7,353.00 per month."

    Those words are said to be plain and unambiguous and to admit of no gloss on the concept of "Drawings".

  86. The effect of clause 3.2 is said to be that Halliwells:
  87. "... guarantees to pay the Retiring Member monthly Drawings at the same rate and on the same date that such were paid prior to the service of a Notice of Retirement by the Retiring Member... and undertake not to reduce, reclaim, claw back or set-off against any Drawings which shall be paid in full without deduction."

    It is said that that clause makes it very clear that Halliwells agrees not to reclaim or claw back any of the monthly drawings which it has guaranteed to pay. That is plainly, it is said, the effect of the threatened overdrawing claims, by which Halliwells seek to reclaim the monthly drawings that were paid to Mr. Fennell between the date of the Retirement Deed and the date of his retirement.

  88. It is said by Mr. Adkin that those conclusions accord entirely with the relevant context in which the clauses fall to be read:
  89. (1) The Retirement Deed was drafted by lawyers for lawyers, all of whom will have been well aware of the terms of the LLP Deed. It is to be assumed that care was taken to ensure that the language used reflected what was intended to be agreed; and, given that context, it is said that it would be quite wrong to conclude that the inclusion of the word "reclaim" in clauses 10.3 and 3.2 (and the word "claw back" in clause 3.2) was unintended, or that those words were mere verbiage.

    (2) The agreement made in clause 10.3 that Halliwells will not seek to reclaim monies paid to or for the benefit of Mr. Fennell under the terms of the Retirement Deed, the FSM Deed or the LLP Deed is unequivocal and unqualified. So is the guarantee given in clause 3.2, that drawings to be paid prior to retirement would not be reclaimed. Had the parties wished to qualify these provisions in the way the liquidators now suggest that they should be read (so as to permit monies to be reclaimed under clause 7.2 of the LLP Deed in the event that insufficient profits were made), it would have been easy for the parties to have said so. They did not; and that omission should be taken as deliberate.

    (3) Such a qualification makes little sense in the relevant commercial context. It is plain from its terms that the object of the Retirement Deed was to effect a clean break between the LLP and the retiring FSMs, with wide-ranging mutual releases being given in clauses 10.1 to 10.3. The construction contended for by the liquidators involves the opposite of a clean break, since it contemplates ex post facto adjustments to what the departing FSMs were to get, and accompanying disputes as to what those adjustments should be; matters the parties can reasonably be taken to have wished to put firmly behind them.

    (4) The parties used the word "reclaim" in clauses 10.3 and 3.2 of the Retirement Deed with full knowledge of the provisions of clause 7.2 of the LLP Deed. If the word "reclaim" in clauses 10.3 and 3.2 (and the further words "claw back" in clause 3.2) are not read so as to preclude a claim under clause 7.2 of the LLP Deed to recover drawings paid to Mr. Fennell and tax paid on his behalf, it is said that it is difficult to see what else the use of that language could have been intended to cover. There is said to be no other provision of the LLP, or the FSM, Deeds, apart from clause 7.2, which would permit the LLP to reclaim monies paid out to Mr. Fennell or any other FSM. So, if the use of the word "reclaim" in clauses 10.3 and 3.2 does not preclude such claims, what does it preclude? It is said that the liquidators are unable to proffer any answer.

    (5) Similarly, if the phrase "for the benefit of" in clause 10.3 is not to be read as referring to payments made by Halliwells to HMRC for the benefit of an FSM, it is difficult to know what else it might mean. There would appear to be no other form of payments contemplated by the LLP or the FSM Deeds which could be described as being "for the benefit of" an FSM (aside of course from payments made directly to them, which are already covered by the language of the clause).

    (6) Further, there is every reason to believe that the Board would have been aware of the possibility that overdrawing claims might arise under clause 7.2 of the LLP Deed at the time they entered into the Retirement Deed on the terms that they did: (a) Halliwells went into administration less than four months after the Retirement Deed was signed, and it is difficult to believe that the Board did not at least have some inkling that profits might not hold up at the time they signed the Deed at the end of March 2010; (b) indeed, it is the liquidators' position, as set out in Addleshaw Goddard's letter of 24th October 2011, that by early April 2010 "it was abundantly clear to the Board... that Halliwells was making losses and facing serious financial problems"; (c) the pre-contractual correspondence discloses that the issue of overdrawings was expressly in the contemplation of the parties. It further discloses that Halliwells were willing to give comfort on this.

    (7) There were sound commercial reasons, so it is said, why the parties would wish to make a contract on the terms that Mr. Fennell says they did. The benefits to the departing FSMs of obtaining a clean break, and not having to concern themselves with the future possibility of overdrawing claims, are said to be quite obvious. The Retirement Deed also contains substantial benefits for Halliwells: (a) it obtained the benefit of the very broad releases conferred by Mr. Fennell (and the other departing FSMs who signed substantially similar deeds) at clause 10.1, which can be found only in the Retirement Deed; (b) it obtained the significant benefit of the non-disparagement provisions contained at clause 7.1, under which Mr. Fennell (and the other retiring FSMs) agreed not knowingly to say "anything that might reasonably be expected to be derogatory concerning or relating to the LLP or the Business [i.e. the practice carried on by Halliwells]"; (c) the terms of the Retirement Deed were negotiated collectively by the retiring FSMs, several of whom agreed, as part of that negotiation, to serve out longer than their notice periods at the request of Halliwells.

  90. In the course of his oral submissions, Mr. Adkin identified the following factors as forming part of the factual matrix:
  91. (1) A reasonable person in the position of the parties would have been well aware of the terms of the LLP Deed, including clause 7.2.

    (2) The Retirement Deed was to modify the LLP Deed and, in the event of any conflict, it was the provisions of the Retirement Deed which were to prevail.

    (3) A reasonable person would appreciate that profits might have gone down since the last accounts had been prepared, so that clause 7.2 might be invoked. Indeed, in their letter of 24th October 2011, the liquidators' solicitors asserted that, as at 7th April 2010 (when a resolution was signed purporting to allocate profits in accordance with the LLP Deed), it was abundantly clear to the Board that Halliwells was making losses and facing serious financial problems, and was insolvent or likely to become insolvent. Although Mr. Adkin made it clear, in the course of his reply, that it was no part of Mr. Fennell's case that the Board knew that Halliwells was insolvent at the time of the Retirement Deed, Mr.†Adkin nevertheless drew attention to that submission on the part of the liquidators.

    (4) The parties deliberately chose to use the phrase in clause 10.3 of the Retirement Deed "any sums paid or payable to or for the benefit of the Retiring Member". They would have known that it could only possibly refer to claims under clause 7.2 of the LLP Deed. It is said that there is no other explanation for the meaning of that phrase.

    (5) Clause 10.3 precludes Halliwells from reclaiming sums paid "to or for the benefit of" Mr. Fennell. There is no express provision in the LLP Deed enabling the LLP to recover back sums overpaid to the relevant tax authority, and no obvious reason why, if it is the tax authority that has been overpaid by the LLP, it is Mr. Fennell, rather than the tax authority, who should effect repayment to the LLP.

    (6) The result for which Mr. Fennell contends is said to make perfect commercial sense. The merits of a clean break between the parties are said to be obvious; and without a guarantee of Mr. Fennell's drawings, a clean break would be impossible, especially since Mr. Fennell was to retire on 26th July 2010 and that year's accounts would not be available until some time after 30th April 2011. There are said to be obvious sound and commercial reasons for the LLP to confer upon Mr. Fennell the degree of comfort which he says it did. The LLP also received the benefit of a clean break in clause 10.1, and of the non-disparagement provisions in clause 7.1. It also received an extension of the notice period for certain of the other departing FSMs. It is said that Mr.†Fennell's construction does not result in a commercial nonsense.

  92. Mr. Adkin addresses the liquidators' position, as stated in correspondence, at paragraphs 27 and 28 of his written skeleton argument. He submits that the reasoning in Addleshaw Goddard's letter of 29th February 2012 is difficult to follow. The apparent premise - that the overdrawing claims involve a claim to recover the property of the LLP - is said to be plainly wrong, since the LLP retained no proprietary interest in the drawings paid to Mr.†Fennell. It is said that it is in any event irrelevant since clause 10.3 of the Retirement Deed precludes any right to reclaim the sums paid to Mr.†Fennell, proprietary or otherwise.
  93. Mr. Adkin also makes the point that the LLP Deed makes express provision for the payment of monthly drawings at clause 7.1. The payments received by Mr.†Fennell were paid pursuant to that provision (and, as regards those received after the Retirement Deed was signed, pursuant to clause 3.2 of the Retirement Deed). The fact that, after the accounts were later produced, it turned out that no profits had been made in the relevant accounting period, or periods, does not alter the fact that those payments had been made pursuant to the terms of those two deeds; it simply means that under clause 7.2 the LLP would otherwise have been permitted to seek to reclaim those drawings; but that was a right which, Mr.†Adkin says, was released by the terms of the Retirement Deed.
  94. In his oral address, Mr. Adkin submitted that this was not a case where the court had to decide between two unnatural meanings. Nor was it a case where the natural and ordinary meaning of the words flies in the face of commercial realities. The natural and ordinary meaning of the Retirement Deed is said to cause no problems at all. It accords perfectly with the factual matrix, the understanding of the parties, and the sensible commercial realities.
  95. The liquidators' submissions are summarised at paragraph 3 of Miss Hilliard's skeleton argument. In summary, the LLP contends:
  96. (1) That the Retirement Deed only bars recovery of (a) payments made to Mr.†Fennell by the LLP if the payment is made out of profits, and (b) payments made by the LLP to HMRC on the defendant's behalf in respect of tax properly due on profits actually made.

    (2) Mr. Fennell's construction should be rejected. It would mean that when Mr.†Fennell gave notice of retirement in order to join a rival firm, the parties intended, for no obvious commercial reason, for Mr. Fennell to acquire substantially greater rights as a Member down to his actual date of retirement than he had enjoyed prior to serving notice of retirement.

    (3) Under the terms of the LLP Deed and Mr. Fennell's FSM Deed, as a Member of the LLP, Mr. Fennell was entitled to be paid only out of profits.

    (4) If Mr. Fennell's construction of the Retirement Deed is correct, it means that the parties agreed, from 31st March 2010 down to Mr. Fennell's date of retirement as a Member on 26th July 2010, that he would be entitled to keep all payments made to him by the LLP even if (as was the case) the LLP made no profits during that period. There is said to be no obvious commercial reason for the parties to so radically change the basis of Mr. Fennell's remuneration in his last few months of Membership. More importantly, there was no obvious commercial reason for the parties to have agreed that Mr. Fennell should be paid, and be entitled to keep those payments, in preference to the LLP's very substantial creditors.

    (5) The commercial absurdity, alternatively improbability, of Mr. Fennell's construction compels its rejection in favour of one which is said to accord with the commercial reality against which the Retirement Deed was executed. That commercial reality was that the LLP was losing a fee-earning Member to a rival firm. There was no commercial imperative for the LLP to place Mr. Fennell in a substantially better position, qua Member, in the last few months of his Membership under the terms of a deed that was seeking merely to regulate the relationship as a result of Mr. Fennell's resignation to join another firm.

  97. Miss Hilliard addresses the principles of construction in paragraph 5 of her written skeleton argument, in terms which were not the subject of any challenge from Mr. Adkin. She submits that the principles of construction are well established, and are set out in Lord Clarke's speech in the Rainy Sky case (previously cited) at paragraphs 14 through to 30:
  98. (1) The ultimate aim of interpreting a provision in a contract is to determine what the parties meant by the language used: see paragraph 14.

    (2) This task involves ascertaining what a reasonable person would have understood the parties to have meant and, in so doing, the court must have regard to all the relevant surrounding circumstances: see paragraphs 14 and 21.

    (3) The relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: see paragraph 14.

    (4) Where the parties have used unambiguous language, the court must apply it: see paragraph 23.

    (5) If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense, and to reject the other, even if the other is the more natural one: see paragraph 21.

    (6) The more natural meaning will not be rejected only where the commercial consequences produce an absurd result, but also where the less natural meaning produces a more commercially sensible result: see paragraphs 20 and 29.

    (7) The commercial purpose of the contract is more important than the niceties of language. In the event of doubt, the working assumption will be that a fair construction best matches the reasonable expectations of the parties: see paragraph 25.

  99. Additionally, Miss Hilliard says (at paragraph 6 of her skeleton argument):
  100. (1) That the contract must be construed as a whole, and particular clauses must be interpreted "in the landscape of the instrument as a whole". Further, first impressions are not always a reliable guide. She quotes Lewison LJ in Napier Park European Credit Opportunities Fund Ltd. v. Harbourmaster Pro-Rata Clo 2 BV [2014] EWCA Civ 984 at paragraph 24 (referring, with apparent approval, to the submissions of counsel):

    "It is important for the interpreter not to be beguiled by his or her initial impression or to limit the process of interpretation to purely linguistic points, but to delve deeper into the landscape of the transaction as a whole."

    Whilst I acknowledge that a contract must be construed as a whole, and that particular clauses must be interpreted in the landscape of the instrument as a whole, nevertheless it seems to me that the landscape must not be allowed to obscure, or blur, the clarity of the characters which are in the foreground of the picture being viewed.

    (2) That principle is said to apply as much to deeds as to contracts.

    (3) If there is a relevant statutory landscape within which the contract is to operate, then that statutory context can be a legitimate aid to construction.

  101. Miss Hilliard submits that the court should avoid a construction which results in a retiring Member of an LLP being paid a sum which he would never have been paid if he had remained a Member of the LLP, and if the creditors would thereby suffer a disadvantage. Miss Hilliard addresses the surrounding circumstances, and the background knowledge of the parties, at paragraphs 7 and 8 of her written skeleton argument. Applying the above principles to this case, she submits that the Retirement Deed must be construed as a whole, taking into account all the relevant circumstances, and all the background knowledge that would have been available to Mr. Fennell and the LLP at the time of the execution of the Retirement Deed. She says that relevant surrounding circumstances and background knowledge were that:
  102. (a) the LLP was a relatively new form of incorporated entity with limited liability;

    (b) that limited liability is a privilege and not a right. It protects the participants in the entity from the unlimited liability that would ordinarily apply from being a participant in an unincorporated entity, such as a traditional partnership;

    (c) a limited liability partnership is a tax-transparent vehicle. For tax purposes its business is treated as though carried on in partnership by its Members. Thus, the tax liability arising on the income of a limited liability partnership is the liability of the individual Member and not of the LLP;

    (d) typically, unless salaried, Members of limited liability partnerships are remunerated by a share of the profits of a limited liability partnership. Halliwells is said to have been typical in that respect;

    (e) Mr. Fennell joined the LLP on 31st July 2006 as a Salaried Member, or employee, at a salary of £130,000;

    (f) on 4th December 2006 Mr. Fennell elected to become a Fixed Share Member of the LLP pursuant to the terms of his FSM Deed, which expressly provided that it was supplemental to the LLP Deed. Thereafter, Mr. Fennell ceased to be a salaried employee and became a Member with an entitlement to a fixed share in the profits of the LLP;

    (g) Mr. Fennell's legal relationship with the LLP, until the execution of the Retirement Deed, was governed by his FSM Deed and the LLP Deed;

    (h) at or around the date that Mr. Fennell served notice of resignation as a Member on 27th January 2010, the LLP had over 100 Members and 600 employees;

    (i) the Retirement Deed addressed the circumstances of Mr. Fennell ceasing to be a Member of the LLP, and not his Membership of the LLP;

    (j) the LLP did not want Mr. Fennell to leave the LLP: according to the email dated 27th January 2010 (in which Mr. Fennell gave notice of his resignation), Andrew Buchanan of the LLP "did everything possible to change Mr. Fennell's mind";

    (k) the email that was addressed to Mr. Brown, the LLP's managing partner, went on to say that Mr. Fennell had not found it an easy decision to leave the LLP. He was said to have "enjoyed working at Halliwells, and have great respect and affection for many of the people there". His reason for leaving was his "conclusion that there is no long-term future for me at Halliwells";

    (l) Mr. Fennell wished to cease being a Member of the LLP in order that he could join a rival firm.

    (m) at around the same time as Mr. Fennell served notice of resignation, eight other Fixed Share Members of the LLP also served notice in order to join Kennedys;

    (n) Mr. Fennell and the Kennedys' FSMs instructed Lewis Silkin to act in connection with their retirement from the LLP. The Retirement Deeds for Mr.†Fennell and the Kennedys' FSMs are in substantially the same terms;

    (o) the LLP, as a limited liability partnership in the business of providing commercial and insurance legal services, and Mr. Fennell, as a Member, solicitor, and licensed insolvency practitioner, would have been mindful of any risk of elevating the interests of profit sharing Members above those of creditors, including salaried employees, so that a Member's, or Members', interests were preferred over the interests of creditors.

  103. Miss Hilliard considers her construction of the Retirement Deed at paragraphs 9 through to 26 of her skeleton argument. Recital B to the Retirement Deed and clauses 13.1 and 13.9 are said to make it clear that the FSM Deed and the LLP Deed are to continue to govern the relationship between Mr. Fennell and the LLP, save that in the event of any conflict the provisions of the Retirement Deed are to prevail. Accordingly, the FSM and LLP Deeds are said to remain highly relevant to the LLP's rights under the Retirement Deed.
  104. The starting point in any examination as to whether Mr. Fennell is obliged to repay the sums paid to him, or on his behalf, is to consider precisely what sums Mr. Fennell was entitled to be paid under the Retirement Deed. They are set out in clause 3.1 (previously cited). Pursuant to the Retirement Deed, Mr. Fennell was entitled to two sums for the period between 31st March 2010 and the cessation date on 26th July 2010. Those sums were a share of the profits (represented by one twentieth of one point) and a notional salary. The definition of "Profits" in the Retirement Deed is imported from the definition in the LLP Deed as being "the revenue and capital profits of the LLP before Members' remuneration and profit shares (including interest on Members' funds) as shown in the profit and loss account comprised in the Accounts". "Notional salary" is defined by the LLP Deed and the FSM Deed. Clause 6.10.1 of the LLP Deed and clause 2.1.1 of the FSM Deed make it clear that the notional salary payable to Members, including Mr. Fennell, was an additional profit share payable out of profits.
  105. The one twentieth of one point is imported from clause 2 of the FSM Deed. The notional salary profit share of £137,225 (the amount found in clause 1 of the Retirement Deed) is an increase from the notional salary profit share provided in the original FSM Deed of £130,000; but that is said to be readily explicable by reference to clause 2.1.1 of the FSM Deed, which had provided for yearly discretionary increases.
  106. As the introductory words of clause 3.1 are said to make clear, the amounts to which Mr. Fennell was entitled under the Retirement Deed were not new. The clause simply "confirms" those amounts "for the avoidance of doubt". Accordingly, in the period up to the date when Mr. Fennell ceased to be a Member on the Cessation Date, the Retirement Deed provided that his financial entitlements, and their source (it is said out of profits), would remain the same as they were prior to the execution of the Retirement Deed.
  107. Predictably, clause 3.1(c) goes on to make it clear that Mr. Fennell has no entitlement to profits generated after the Cessation Date.
  108. It is said by Miss Hilliard to be clear from clause 7.1 of the LLP Deed (and echoed in clause 2 of the FSM Deed) that in the ordinary course monthly drawings were payable to Members "as may from time to time be determined by the Board". "Drawings" in the case of Mr. Fennell was further defined by the Retirement Deed to mean "sums paid monthly by the LLP to a Member up to and including the Cessation Date (excluding sums credited to the Tax Reserve Account) which for the Retiring Member amounts to £7,353". Accordingly, it is said that instead of Mr. Fennell's drawings being subject to the determination of the Board from time to time (as provided in the LLP and FSM Deeds), from 31st March 2010 to the date of cessation the Retirement Deed sets a precise amount which Mr. Fennell can draw down.
  109. It is said that drawings are nothing more than payments on account of profits that are anticipated to be made. Reference was made to clause 7.2 of the LLP Deed (previously cited). By virtue of that clause, where the LLP has made profits, and the Member has drawn an amount "in excess of his share of the profits", the Board can require the Member to repay the excess.
  110. Miss Hilliard refers to Mr. Fennell's argument that the reference in clause 3.2 of the Retirement Deed to "guarantee", and the undertaking "not to reduce, reclaim, claw back or set-off against any Drawings", and the reference to the drawings being "paid in full without deduction", all mean that even if the LLP paid monies to Mr. Fennell which were not drawings (because they were not payments on account of profits as profits were never made), the LLP cannot now seek to recover those payments. Miss Hilliard submits that that argument is wrong:
  111. (1) The term "Drawings" is used in the same sense as it is used in the LLP Deed and the FSM Deed. It is said that there is nothing in the Retirement Deed to suggest that "Drawings" was intended to have any other meaning.

    (2) The reference to not reducing, reclaiming etc. is said to be temporal. What it means is that the LLP was obliged to pay drawings down to the Cessation Date. During the period down to the Cessation Date, the LLP could not reduce the drawings, reclaim them, etc. In other words, the words were designed to prevent the LLP from refusing to make payments on account of anticipated profits in the period to the Cessation Date by deploying delaying tactics. Mr.†Fennell was leaving. A limited liability partnership does not have the same incentive to allow a leaving Member to draw down on account of profits as in the case of a continuing Member. The provision avoids the risk that Mr. Fennell would suddenly be denied the regular payments he had been used to in the period while he was waiting to join Kennedys.

    (3) It is said that the clause was only intended to deal with the situation where profits were in fact generated which were at least equal to the drawings. It was not intended to deal with the situation where there were no profits at all over the period.

    (4) It is said that the fact that clause 3.2 was concerned with the situation only where profits were in fact generated is underlined by clause 3.4 of the Retirement Deed (previously cited).

    (5) It is said that what the Retirement Deed did was accordingly to provide that: (a) Mr. Fennell's share of profits (one twentieth of one point and his Notional Salary) would remain the same to the Cessation Date; (b) Mr. Fennell was not entitled to any profits generated after the Cessation Date; (c) if the LLP's profits exceeded the Drawings, he was to be paid his share of any excess; (d) Mr. Fennell could continue to make Drawings on account of his share of profits that were anticipated to be made down to the Cessation Date; (e) the LLP would not, during the period when Mr. Fennell made drawings down to the Cessation Date, prevent him from doing so by seeking to delay making payment of, or reclaiming them, etc; (f) the Drawings were guaranteed in the sense that the LLP could not unilaterally change the amount that would be paid down to the Cessation Date; (g) however, that guarantee did not mean that the amounts paid would not be repayable if, as was the case, there were no profits out of which to make them. If there had been some profits, albeit insufficient to meet all Members' agreed profit shares, Mr. Fennell had an argument that his profit share (and therefore the payments that were made on account of his profit share, i.e. his drawings) should have priority, and that the profit shares of continuing Members would have to abate: see clause 6.10 of the LLP Deed. It is said that the insuperable difficulty for Mr. Fennell in the present case, however, is that no profits at all were generated in the period down to the Cessation Date.

    (6) Crucially, the payment provisions in the Retirement Deed were predicated, and conditional, upon the LLP generating sufficient profits to cover them. It is said that there is nothing to suggest that the parties intended that Mr. Fennell should be remunerated on any basis other than that on which he had been remunerated under the FSM Deed, when he had agreed to be remunerated out of profits rather than by way of salary.

    (7) Accordingly, it is said that the payments made to Mr.†Fennell were not in fact Drawings. Alternatively, if they were Drawings, the bar on reclaiming etc. them only applied whilst they were being paid down to the Cessation Date.

  112. Miss Hilliard also refers to Mr. Fennell's contention that clauses 10.2 and 10.3 of the Retirement Deed are bars to recovery by the LLP. It is said that they are not:
  113. (1) Clause 10.2 is a full and final settlement clause of all claims "arising out of the Retiring Member's... retirement from the LLP". The LLP's claim to recover sums paid to Mr. Fennell on account of profits that were never made does not arise out of Mr. Fennell's retirement, but rather from the fact that, whilst Mr.†Fennell remained a Member of the LLP, the LLP made no profit out of which Mr. Fennell (or any other Member) could properly be paid. During the course of oral argument, Mr. Adkin accepted that Mr. Fennell places no reliance upon clause 10.2 of the Retirement Deed for the very reasons given by Miss Hilliard.

    (2) The introduction to clause 10.3 is not relevant as it merely waives rights in respect of restrictive covenants. The second part of clause 10.3 is said to mean that provided that sums are paid pursuant to the terms of, for example, the Retirement Deed, they must be made without set-off, deduction or delay. It is not suggested that there was any attempt to set-off, reduce or delay Drawings which were payable down to the Cessation Date. It is said that clause 10.3 does not, however, preclude recovery where, having paid the Drawings, it transpires that there were no profits pursuant to which the Drawings on account could properly be made.

  114. Miss Hilliard submits that if Mr. Fennell is right, it means that by the Retirement Deed the LLP agreed that if, as in fact happened, the LLP made no profits in the period, the LLP would be gifting its capital to Mr. Fennell (and the other departing FSMs) at the potential expense of the LLP's creditors. There is no commercial justification for the LLP to do so. The LLP had not wanted Mr.†Fennell to leave; on the contrary, it had tried to persuade him to remain. It therefore does not make sense that the LLP should agree to improve Mr.†Fennell's position (and the positions of the other departing FSMs) in the last few months that he remained a Member. Further, from an objective standpoint, it is extremely unlikely that the LLP, as a legal services provider, and Mr.†Fennell, as a solicitor and licensed insolvency practitioner, would have entered into an agreement which had the effect for which he contends.
  115. That is even more so in circumstances where, if Mr. Fennell is right, it is said that it would mean that he could keep the payments that were made to him out of the LLP's capital, rather than out of profits, and also set off against future tax liabilities his share of the losses sustained by the LLP.
  116. Miss Hilliard considerably expanded upon, and to some extent modified, her written submissions during the course of her three-hour address to the court. I†shall not attempt to summarise her oral submissions in full; but underlying them was the constant theme that drawings are nothing more than payments on account of anticipated profits, and that they can only lawfully be retained to the extent that there are profits to support them. By contrast with his position when he was a Salaried Member, when Mr. Fennell became a Fixed Share Member of the LLP, his only entitlement to remuneration was to a share of the profits; and if there were no profits, there was no entitlement to retain drawings previously received as a payment on account of profits. All the Retirement Deed was designed to do was to provide the vehicle for Mr. Fennell to cease to be a Member of Halliwells; it was not intended to give him anything more by way of remuneration than he had been entitled to before he had given notice to the LLP. Indeed, it is said that there was no incentive for the LLP, who had not wanted Mr. Fennell to leave, to give him any more. The Retirement Deed uses the term "Drawings". If there were no profits, it could not have been intended that sums paid to Mr. Fennell by way of drawings to which he was not entitled should not be repayable. That was said to be clear from clause 3.1, which expressly confirmed, for the avoidance of doubt, what the position already was. It could not be said that the Retirement Deed effected a clean break because Mr. Fennell remained entitled to his one twentieth of one point of the profits of the LLP - a sum which could not possibly be determined until more than nine months after the cessation date. It is said that there was simply no incentive for the LLP to gift money to any of the nine individuals who were leaving the LLP when it did not want them to leave. The Retirement Deed used the term "Drawings" in the same sense as in the LLP Deed, that is to say in the sense of sums received on account of profits. Why should the parties objectively have agreed, on 31st March 2010, that Mr.†Fennell should be paid as if he were an employee of the LLP? The wording of the Retirement Deed is said clearly to support the liquidators' construction. But if there were any ambiguity, the court should construe the Retirement Deed in accordance with the parties' reasonable expectations, which were said to be that drawings should only be paid out of profits. That was said by Miss Hilliard to be the only construction that made any commercial sense. It made no commercial sense to give Mr. Fennell (or the other departing Members) priority over all the remaining Members of the LLP, still less its creditors. Miss Hilliard did not seek to say that the Board of the LLP knew, as at the date of the Retirement Deed, that the LLP was insolvent; but it must have had some inkling that there might be insufficient profits to make these payments to Mr. Fennell and the other departing Members. After all, the sale of substantially all of Halliwells' business and assets to four separate firms of solicitors had all been agreed prior to the appointment of the administrators as part of a pre-packaged sale. Such sales, at least in relation to a solicitors' practice, with four offices in four different cities, with over 100 Members, and with over 600 employees, is not something that is effected overnight. What possible commercial motivation did the LLP have to change the basis on which Mr. Fennell and the other departing Members were being paid, with the potential for them to receive monies which should have been preserved for the benefit of creditors? Why should the LLP have sought to elevate their interests over those of its general creditors?
  117. Miss Hilliard suggested that there were three possible constructions of the Retirement Deed which would achieve a sensible commercial result:
  118. (1) As suggested in her skeleton argument, the reference to "not reducing or reclaiming" etc, merely had a temporal effect, so that Mr. Fennell and the other Fixed Share Members would receive their agreed drawings in full up to the Cessation Date, but subject to any appropriate repayment under clause 7.2 of the LLP Deed thereafter.

    (2) The provisions of clauses 3.2 and 10.3 of the Retirement Deed were intended to affect, and adjust, the payment provisions in clause 6.11 of the LLP Deed, so as to promote the position of the departing Fixed Share Members in relation to the other Members of the LLP. Provided there were sufficient profits to pay for the drawings of the departing FSMs in full, the LLP would not seek to recover back their drawings, any such recovery being directed, and limited, only to the remaining Members, who would bear the burden of any reduction in profits to the exclusion of the departing FSMs.

    (3) Clauses 3.2 and 10.3 of the Retirement Deed are predicated on there being profits out of which drawings can be made. If there are no profits, the provisions do not apply. That was said to be Miss Hilliard's favoured construction.

  119. As to clause 10.3, Miss Hilliard submitted that the sums paid to Mr. Fennell and the other departing FSMs by way of drawings have not been paid "pursuant to the terms of" the LLP Deed or the Retirement Deed, in the sense that they were irrecoverable for all time. If construed in the manner contended for by the liquidators, clause 10.3 still had some content, because it would preclude recovery from Mr. Fennell and the other departing FSMs of any part of the practising certificate fee, and the professional indemnity premium, paid in respect of each of them pursuant to the first clause 2 on page 5 of Mr. Fennell's FSM Deed. Miss Hilliard submitted that her suggested construction of the Retirement Deed was clear. The reference to drawings, and the unambiguous meaning of drawings by reference to the LLP and FSM Deeds, made it clear that if profits were not made, the LLP was to be entitled to recover them back from the former Fixed Share Members. Insofar as the matter was unclear, the liquidators' construction was the most consistent with business and commercial common sense. The reasonable expectation of the parties was that Mr. Fennell should be paid on the same basis he had always been, out of profits made by the LLP and not otherwise. Mr. Fennell would never have expected to have been paid on any better basis, particularly given the waiver of his post-cessation restrictive covenants, and the acknowledgement contained within clause 7.2 of the Retirement Deed. Given that it was Mr.†Fennell who wanted to leave the LLP, why should he have been protected over the remaining Members of the LLP, and its creditors, in the event of the LLP's insolvency? If a third party had inquired if the Retirement Deed had been intended to have the effect that, if no profits were made, Mr. Fennell could not be compelled to repay his excessive drawings, Miss Hilliard submitted that both the LLP and Mr.†Fennell would have replied: "Of course not". Miss Hilliard emphasised that the court does not need to find that Mr. Fennell's construction of the Retirement Deed is absurd; it is sufficient to find that, in the business context, it was improbable. Miss Hilliard submitted that it was inconceivable that the parties to an LLP Deed would agree that an insider should be in any better position than the LLP's creditors. In the event of the LLP's insolvency, Mr.†Fennell would be entitled to hold on to monies which would otherwise enure to the benefit of the creditors. If Mr. Fennell and the other departing Fixed Share Members are right in their approach to the construction of the Retirement Deed, the creditors will be some £600,000 worse off than if the liquidators' construction is upheld. Miss Hilliard referred me to the statement at paragraph 7.11 of Lewison: Interpretation of Contracts (5th edition, 2011) that where the words of a contract are capable of two meanings, one of which is lawful and the other unlawful, the former construction should be preferred. She also referred me to the underlying Privy Council authority of Rodger v. Comptoir D'Escompte de Paris (1869) LR 2 PC 393 at pages 405 to 407. Absent clear words, where there is ambiguity, Miss Hilliard submitted, the court should prefer the construction which is less likely to do a wrong. The Retirement Deed should not be construed so as to prefer an insider at the expense of outside creditors.
  120. I have no hesitation in rejecting this latter submission. I can see nothing unlawful in effectively converting the status of a Fixed Share Member of an LLP into that of a Salaried Member, as Mr. Fennell formerly had been. In such a case, the interests of creditors are sufficiently protected, where appropriate, by (1) a challenge to the relevant arrangement effecting the conversion as a transaction at an undervalue under section 238 of the Insolvency Act 1986, or (2) by way of a misfeasance claim against the relevant decision makers of the LLP - here the Board - for breach of duty.
  121. Miss Hilliard addressed the issue of the recovery of the tax overpayment. Whilst acknowledging that this was not expressly addressed in the LLP Deed, she made the point that the payment to the tax authorities had been made on Mr.†Fennell's behalf, and had been credited to his personal tax account; and unless he were to authorise the LLP to apply to recover any overpayment, the LLP would not have the necessary standing to recover it back from HMRC. In the course of her submissions, Miss Hilliard accepted, in answer to questions from the Bench, that if the Retirement Deed effectively operates as a bar to the recovery of payments made to Mr. Fennell (and the other departing Fixed Share Members) by way of drawings, then there would be no scope for any recovery of payments made to the tax authorities on his (or their) behalf because such payments would have been correctly made on account of tax properly due on those drawings. Miss Hilliard can therefore derive no assistance from the argument that if the Retirement Deed bars any claim by the LLP against Mr. Fennell for repayment of the amount paid by the LLP to HMRC, Mr. Fennell can use that amount to reduce his ongoing and future tax liabilities to HMRC as a Member of Kennedys. The argument is entirely circular. If the Retirement Deed, on its true construction, bars recovery of the allegedly overpaid drawings, the tax was rightly paid, there was no overpayment of tax on the drawings, and there is no basis for any tax reclaim.
  122. In his reply, Mr. Adkin contended that this underscored his reading of clause 10.3. The bar on reclaiming drawings went hand in hand with the bar on reclaiming the tax paid by reference to them; and it explains the words "paid... to or for the benefit of the Retiring Member".
  123. Miss Hilliard concluded her skeleton argument by inviting the court to decline to make the declaration sought. Rather, she said that the court should make a declaration that the amounts claimed in the letter of 22nd June 2011 are recoverable by the LLP, and should be paid by Mr. Fennell forthwith.
  124. In his oral submissions, Mr. Adkin indicated that this was the first time that such a suggestion had been made. He submitted that this was a wholly inappropriate course to take. The liquidator had not issued any claim of his own. Not only was there no proper procedural foundation for such relief, but it would be unfair to Mr. Fennell to contemplate making such a declaration. Even if Mr. Fennell's claim were to fail, it does not follow that the liquidators' claim should succeed. I†accept Mr. Adkin's submission on this point. If Mr. Fennell's claim fails, I†should do no more than grant a declaration in terms which are the opposite to those which Mr. Fennell has claimed. In paragraph 24 of his first witness statement, Mr. Fennell had asserted that he has other defences to the overdrawing claim. In his second witness statement, he has made it clear that he can make no comment on the total losses which the liquidators say the LLP has made. In my judgment, it would be wrong to shut Mr. Fennell out from defending the liquidators' claims on their merits when there has been no advance notice to Mr. Fennell that the court would be invited to adopt this course.
  125. In his reply, Mr. Adkin submitted that the parties to the Retirement Deed did not know (1) that the profits of the LLP would be nil, or (2) that in due course the LLP would go into administration, and then go into insolvent liquidation. How did they deal with the risks? By clause 10.1, the Fixed Share Members were willing to take the risk of waiving all their rights against, and providing a general release to, the LLP. They did not have to do that. Had they known the true facts, they would have been unlikely to have been willing to continue to work for the LLP for nothing. They agreed not to disparage Halliwells. There was simply no reason to suppose that the parties did not intend to give, and to receive, the waiver of claims against the Fixed Share Members in the terms agreed. The question of the commerciality of the arrangement only arises if the relevant clauses of the Retirement Deed are open to competing constructions. It is said that it simply defies both logic and language to think that the parties simply intended by clause 3.2 to carry on as before. It defies logic because why would there be any need to provide for things simply to carry on as before? It defies language because, contrary to Miss Hilliard's submissions, "Drawings" does not mean payments on account of profits. The word "Drawings" is defined in the Retirement Deed, and in terms which make no reference to profits, and impose no qualification to the effect that it is on account of profits.
  126. The definition of "Drawings" is in the following terms:
  127. "... sums paid monthly by the LLP to a Member up to and including the Cessation Date (excluding sums credited to the Tax Reserve Account) which for the Retiring Member amounts to £7,353.00 per month."

  128. Mr. Adkin then turned to Miss Hilliard's three suggested constructions:
  129. (1) The suggestion that clause 3.2 is limited in time to the period before the Cessation Date is not acceptable because that is not what the clause says. It is also said to be conceptually incoherent. If the concern of the Fixed Share Members was to ensure that they received their drawings in full, why should they be prepared to pay them back at a later date?

    (2) There is nothing in clause 3.2 that comes remotely close to effecting any adjustment to the normal abatement provisions in the LLP Deed.

    (3) The suggestion that clause 3.2 is predicated on the existence of profits is said to collapse in the light of the definition of "Drawings".

  130. Mr. Adkin rejected the suggestion that clause 10.3 was simply directed to barring the recovery of any part of the practising certificate fee, or personal indemnity premium, which was the only example of the application of the relevant part of this clause which Miss Hilliard had been able to come up with. Had this been the intention, one would have expected it to have been more clearly articulated. But, in any event, these were sums paid "for the benefit of" Mr. Fennell and so could not explain the use of the language "any sums paid or payable to" him. There was no obvious reason to depart from the obvious meaning of the clause.
  131. Mr. Adkin accepted that evidence of negotiations was not part of the relevant admissible background; but the parties' knowledge that there would be no overdrawings was. He pointed to the fact that Mr. Brown's email of 21st February 2010 had been forwarded by Nick Thomas at Kennedys to Mr.†Fennell, and apparently all the other departing Members, and had been copied to Clive Greenwood of Lewis Silkin, so that it was part of the background known to all parties. Mr. Adkin also made the point, again by reference to Mr.†Brown's email, that the broader context involved the transfer of a number of other employees to Kennedys. There was clearly a larger commercial picture behind the Retirement Deed, the details of which are not before the court. The language, and meaning, of the Retirement Deed were said to be plain; and none of Miss Hilliard's suggested constructions were said to be sustainable as a matter of language.
  132. Those were the submissions. I unhesitatingly prefer, and accept, the submissions, the analysis and the reasoning of Mr. Adkin in preference to those of Miss Hilliard. In my judgment, Mr. Fennell is entitled to a declaration in the terms claimed. Despite its length, it seems to me that the LLP Deed is deficient in certain respects. Unlike the Retirement Deed, it contains no definition of "Drawings". Miss Hilliard made much of clause 7, headed "Drawings" (although I note that the headings to clauses are for reference only, and do not affect the interpretation of the LLP Deed: see clause 1.2.4.) A more serious omission from the LLP Deed is the failure to include any provision, corresponding to clause 7.2, expressly addressing the recovery of any overpayment of tax made on behalf of a Member of the LLP.
  133. The Retirement Deed is not always expressed in language which conforms to the rules of English grammar - an example being the first sentence of clause 3.2 which - apart from its ambivalence about whether the term "LLP" is plural ("guarantees") or singular ("undertake") - does not, in its second clause, make strict grammatical sense. Miss Hilliard acknowledged that neither the LLP Deed nor the Retirement Deed were "happily-drafted documents".
  134. As for Miss Hilliard's submission that there was no clean break, I accept Mr.†Adkin's submission that the points allocation is both minuscule and de minimis. What really mattered was that the Fixed Share Members should continue to receive their previous salaries without fear of challenge. Although Mr. Adkin had not expressed it in these terms, the points allocation, if it resulted in a further payment more than nine months down the line, was merely "the cream on the top". Mr.†Adkin accepted that there had been no comprehensive, and perfect, clean break; but I accept his submission that, on a practical level, the Retirement Deed had brought about a clean break between the parties.
  135. Despite my reservations about the deficiencies in the drafting of both the LLP and the Retirement Deeds, in my judgment the wording of the Retirement Deed, and its effect, are clear. I accept Mr. Adkin's submission that the language and meaning of the Retirement Deed are plain, and that none of Miss Hilliard's suggested constructions is sustainable as a matter of language. Clause 3.2 does not state, as it could, that the guaranteed monthly drawings would be paid "on the same basis" as such were paid prior to the notice of retirement. The undertaking and agreement in clauses 3.2 and 10.3 not to "reduce or reclaim", etc, are not expressed, as they could have been, to be "subject to" or "without prejudice to" clause 7.2 of the Members Agreement. These subclauses are not expressed, as they could have been, to be subject to any temporal limitation, even though I note that clause 3.2 expressly recognises the concept of apportionment of the monthly drawings, as appropriate, on a time basis "up to the Cessation Date".
  136. In my judgment, the court should not readily accept that professional draftsmen and parties, all solicitors - Halliwells, Lewis Silkin and Kennedys - have all made linguistic mistakes, particularly in a series of formal documents in common form, all intended to regulate, and to govern, the departure of Fixed Share Members from a solicitors' LLP. I accept Mr. Adkin's submission that there was clearly a larger commercial picture behind the Retirement Deed, the details of which are not before this court. The court should not seek to subvert the clear language of a professionally-drafted deed so as to give effect to some suggested overarching commercial purpose when it does not know the full background facts. Notwithstanding the modern commercial, not overly literal, approach to the construction of formal documents, the court should not seek to distort, or subvert, the language of the parties without good reason. As Lord Clarke observed in Rainy Sky at paragraph 23, where (as, in my judgment, is the case with clauses 3.2 and 10.3 of the Retirement Deed) parties have used unambiguous language, the court must apply it. It is unnecessary, and inappropriate, for the court to speculate on the motives of the parties for agreeing the terms of the Retirement Deed. Either the Board of the LLP had an inkling of the fate awaiting Halliwells, or it did not. If it did not, there is no reason to assume that the Board thought that (to paraphrase Miss Hilliard) they were making a "gift" to the departing Fixed Share Members by effectively guaranteeing them drawings at the rate previously applicable. If they did have such an inkling, the Board may not have wished to do anything that might alert the departing Fixed Share Members, and the Members remaining with Halliwells, to their concerns, or to raise any fear that the departing Fixed Share Members might be working through (and in some cases slightly extending) their periods of notice for possibly no financial return.
  137. The fact is that I am satisfied, for the reasons supplied by Mr. Adkin (which I†accept), and contrary to the submissions of Miss Hilliard (which I reject), that the terms of the Retirement Deed are clear. The LLP thereby waived and released any claim to pursue Mr. Fennell (and the other departing Fixed Share Members) for any overpaid drawings and any overpaid tax (which, on the view that I†take, does not arise). It is, in my judgment, inappropriate, as Miss Hilliard seeks to do, to seek to shoehorn some ulterior meaning upon the clauses of a professionally-drafted document, so as to give effect to some perceived commercial objective, unless there is clear evidence (which is not the case here) that that objective was both entertained, and shared, by both (or all) the parties to the relevant document.
  138. LATER (AFTER ARGUMENT):

  139. This is my extemporary judgment on the issue of costs in this case. I have delivered a substantive extemporary judgment which has resulted in the claimant, Mr. Fennell, being granted the declaratory relief which he seeks. I now have to deal with the question of costs.
  140. The principles of the award of costs are well known. Under CPR 44.2 the court has a general discretion as to costs; but the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, although the court may make a different order. Here there can be no doubt but that the successful party is the claimant.
  141. Miss Hilliard, for the defendant, invites me to stay either the award of costs, or any detailed assessment of costs and any consequent payment on account of costs, to await the outcome of the pending section 238 application by the defendant liquidators. She submits that the defendant liquidators had to proceed in these proceedings to obtain a determination as to the true meaning and effect of the Retirement Deed before they could proceed with their section 238 application. She also makes the point that the liquidators would have liked to have had all matters dealt with first but, by agreement, that was not effected.
  142. I cannot accept the submission that the defendant liquidators had to await the outcome of this case before they could proceed with their section 238 application. They could have conceded the claimant's construction of the Retirement Deed and thereby avoided this claim and this trial. They chose not to do so; and, in my judgment, they must bear the consequences of that. It would not be an appropriate exercise of the court's discretion, having decided this issue in favour of the claimant, to deny him his costs until after the quite discrete application under section 238 of the Insolvency Act has been determined. Those separate proceedings will generate, no doubt, their own order for costs.
  143. Thus, on the issue of costs, I will order the defendant to pay the claimant's costs, to be the subject of a detailed assessment on the standard basis in the usual way, with no bar to that assessment proceeding in advance of final determination of the section 238 proceedings.
  144. Mr. Adkins does not seek a summary assessment of the costs; but he does seek a payment on account of costs. He relies upon the new CPR 44.2(8) which provides:
  145. "Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so."

  146. Miss Hilliard says that there is good reason here. She points to the fact that on 15th July those instructing her enclosed the defendant's statement of costs with a view to summary assessment. Irwin Mitchell's response, on 17th July, was to indicate that they did not consider this matter to be appropriate for summary assessment of costs. They indicated that, should their client be successful in these proceedings, they would be seeking an order for detailed assessment of the claimant's costs. They gave no indication that they would be seeking an order for a payment on account of those costs pending detailed assessment. Miss Hilliard says that it is unfair now for Mr. Adkin to seek such an order.
  147. Again, I do not agree. The terms of CPR 44.2(8) are clear. The court will, if it makes an order for costs subject to detailed assessment, order the paying party to pay a reasonable sum on account of costs unless there is good reason not to do so. So I reject the submission that there should be no payment on account of costs. I can see no good reason for not making an order for such an interim payment.
  148. But Miss Hilliard is on stronger ground when she says that there was no indication of what the level of costs might be until her instructing solicitors were handed Irwin Mitchell's letter, setting out what their costs were, on coming into court for judgment this afternoon. That letter is itself dated 22nd July, i.e. today. I have to take that into account when deciding what payment on account of costs to make.
  149. A summary assessment is of course something which should proceed on a rough and ready basis. An interim payment on account is even rougher and readier, if that is possible. On an interim payment on account, I should not award any sum in excess of that which I consider the receiving party is likely to be awarded on a detailed assessment of costs. It is accepted that I should not deal with the success fee now. Miss Hilliard says that the profits costs are greater than those claimed by her solicitors, even though her solicitors are London-based, whereas Irwin's Mitchell's office is in Manchester. Mr. Adkin seeks to explain that difference on the footing that it is his client who is the claimant; and, as is notorious, the claimant has to do the running in any litigation. Miss Hilliard also points to the discrepancy between her fees and those of Mr. Adkin. Mr.†Adkin says that his fees include fees for legal advice as well as his appearance at court. But I must bear in mind that Mr. Adkin is junior in silk to Miss Hilliard.
  150. In my judgment, adopting a very rough and ready approach, and bearing in mind the strictures I have already identified, the appropriate interim payment on account in this case should be £20,000 for the solicitors' profit costs, and £20,000 for counsel, plus (in each case) VAT, making an interim payment on account of £48,000 in total.
  151. LATER STILL (AFTER FURTHER ARGUMENT):

  152. I refuse permission to appeal. I am not satisfied that an appeal has any real prospect of success; and the mere fact that this is a test case does not, in my judgment, mean that there is any other compelling reason why the appeal should be heard if there is no real prospect of success. So I refuse permission to appeal.


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