When a shareholder charges shares it owns in a private company, the charged asset is easily identifiable and the legal process is relatively straightforward: an equitable charge supported by the share certificate(s) and stock transfer form. However, difficulties can arise when a member of a limited liability partnership (LLP) wishes to charge its share in that LLP as a member is both the business owner and manager. A member’s interest includes both a right to capital and income and also the obligation to manage the business.
The law is clear that non-members can have an interest in an LLP and so a member of an LLP can charge his membership interest. Conversely, a lender will not want to be responsible for running the LLP. A lender would want to ensure that the member remains responsible for day to day administration and management of the LLP business.
To assign all or part of the income stream or capital interest of a member’s share in an LLP to a non-member, the assignment must be done in accordance with the LLP agreement. If no agreement exists, then the unanimous agreement of all other LLP members is required. If the interest is being charged by way of security, the member must continue as a member of the LLP to exercise the management and administrative rights as, for example, it wouldn’t be practical for a lender to attend and vote at meetings.
- good drafting is needed to ensure that the member assigning its interest remains responsible for its obligations as a member;
- obtain the consent of all LLP members or the proportion required under the LLP agreement or by statute;
- identify what the member’s specific financial interest is and only charge that interest; and
- ensure the member isn’t a sole member of the LLP because if the lender wanted to enforce its security, it may become responsible for performing management duties!
A lender will want protections to preserve the value of its interest, which may include restricting the financial activities or consenting to key issues impacting the LLP. If a lender’s rights are extensive, it risks being considered a ‘shadow member’ of the LLP.
As an assignee, a lender would only take an equitable assignment in the same way as with a company and the lender does not become a full member of the LLP. Therefore any lender taking such security should also consider:
- the credit risk of the borrower which must be considered alongside the limitations of taking equitable security;
- the value of the underlying collateral (such as property owned by the LLP and the health of the business etc); and
- taking other security such as a guarantee or third party security.
If the lender wanted enhanced security and considered taking a legal assignment, it would become a member of the LLP and take on the associated liabilities. Not something that is practical, or commercially viable, for most institutional lenders.
This blog post was written by paralegal Neelam Kaur. For further information, please contact:
Carol Betts, partner, Banking & Finance
T: 0121 234 0234
 Section 7 Limited Liability Partnerships Act 2000