Company shareholders in partnership - Train v DTE

The notion of the shareholders in a limited company being in partnership is one which has found favour with the courts, most typically in the context of shareholder disputes. 

A partnership can be found where a personal relationship exists between the shareholders, there is mutual trust and an understanding that the shareholders will particpate in the company management.  The leading cases are Re Bird Precision Bellows [1986], Virdi v Abbey Leisure [1990], O'Neill v Phillips [1999], Strahan v Wilcock [2006] and Irvine v Irvine [2006].

It is most likely, in my experience, that an argument for  partnership treatment will be found when seeking a buy-out of an oppressed minority or in a fiscal valuation of a shareholding which would, otherwise, fall to be discounted for lack of control.

Applying the same, or similar, line of argument in other areas  must, one supposes, have happened on occasion but not, as best I know, in an employment law context. Which makes Train v DTE [2009] All ER (D) 134 interesting.

In Train a professional partnership had incorporated its business in 2002, with the erstwhile partners becoming  directors and shareholders in the new company.  The principals had a shareholders' agreement, declared expressly not to represent a partnership agreement,  but there were no written contracts of employment with the company. 

Under the shareholders' agreement, Mr Train was entitled to receive a variable  salary dependent on the company's profitability. He was entitled to annual leave, benefits and expenses., and was seen as an integral part of the company's business  Mr Train resigned his position and brough a claim for unfair constructive dismissal under the Employment Rights Act 1996.

The EAT found that the shareholders' agreement represented a partnership and that Mr Train, as an equity partner could not, therefore, be an employee of the company, per Cowell v Quilter Goodison and others [1989].

With there being tens of thousands of limited companies being used, for all intents and purposes, as partnership trading vehicles, one has to wonder whether we might now begin to see further inroads made into challenging the form of limited company arrangements; be it from an employment perspective, as in Train, a tax planning or compliance angle (should, for instance, Mr Train, have been subjected to PAYE and Class 1 NIC on his earnings ?), or, and especailly in the current economic climate, the piercing of the corporate veil by unpaid creditors of a faled business.