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'Harsh' result in hedge fund dismissal case



United Kingdom

In a recent hedge fund case (Ilott v Williams [2013] EWCA Civ 645), the Court of Appeal delivered a judgement which it admitted entailed "harsh results" for the Appellant.

In a recent hedge fund case (Ilott v Williams [2013] EWCA Civ 645), the Court of Appeal delivered a judgement which it admitted entailed "harsh results" for the Appellant.

Mr Ilott, was appealing against a decision to dismiss his claim for a share of the profits in an asset management business following his dismissal.

Mt Ilott and three others had decided to establish a new asset management business together. They eventually joined BlueCrest LP. BlueCrest's general partner issued a Side Letter, recording the agreed division of profits, promising to secure that Mr Ilott and his colleagues would become limited partners in BlueCrest and scheduling outline terms for the new business and the calculation of profits.

On 26 November 2009, four days before the end of the business's financial year, Mr Ilott was served with notice of removal as a member of BlueCrest. He received no distribution of profits for that financial year. Mr Ilott brought a claim for his share of the profits. The High Court had initially found that, amongst other things, BlueCrest was not liable to Mr Ilott under the terms of the Side Letter.

Mr Ilott appealed. The Court of Appeal considered a number of important issues, including whether Mr Ilott could recover his share of the profit from BlueCrest on the basis of the Side Letter. However the Side Letter contained the following Proviso:

Provided that each of you remains a limited partner (and has not served the Partnership with notice of your resignation nor received a Notice of Removal) at all relevant times and subject to sufficient profits being available in the Partnership and the terms of this letter…” (underlining added)

Mr Ilott received notice of his removal as a partner four days before the end of the partnership's financial year. The court considered whether the “relevant times” for the purposes of this Proviso included either the last day of the current financial year, or the date on which the profits for that year were allocated to the individual partners. Mr Ilott argued that neither date was relevant, and that where notice of removal is served mid-year the profits of that year must be time-apportioned so that the exiting partner receives his share of profits up to the date when he receives notice of his removal.  

The court found against Mr Ilott. It found that there was no provision for computing profits for an exiting partner in the Side Letter. It would not be simply a question of extracting the relevant figures from the accounting records because losses that had not yet been paid and profits that had not been received might have to be taken into account, and expenditure made during the period might have to be time-apportioned. The accounts for the broken period would therefore clearly involve extra effort and expense. In those circumstances, the parties would have to have made express provision for those accounts to be drawn up.

The court acknowledged that this outcome entailed harsh results for Mr Ilott. However, the court noted that it could not re-write the partnership agreement to accord with what it might think fair.

It is always very important to be careful to spell out in a partnership agreement the precise terms on which an exiting partner will receive any exit payments. This will mean being clear about whether an exiting partner will take any share of profits arising during the financial year in which he or she leaves and, if so, how and when those profits will be calculated, allocated and distributed.

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