Lord McIntosh of Haringey: My Lords, I beg to move that the House do
now resolve itself into
Committee on this Bill.
Moved, That the House do now resolve itself into Committee.--(Lord McIntosh of Haringey.)
On Question, Motion agreed to.
House in Committee accordingly.
[The DEPUTY CHAIRMAN OF COMMITTEES (Lord Brougham and Vaux) in the Chair.]
Clause 1 [Limited liability partnerships]:
Lord McIntosh of Haringey moved Amendment No. 1:
Page 1, line 8, after ("is") insert ("a body corporate
(with legal personality separate from that of its members) which
The noble Lord said: In moving Amendment No. 1, I should like to speak
also to Amendments
Nos. 2, 3 and 4. I know that the amendments appear complicated. However, strictly speaking,
they are drafting amendments in the sense that, with them, the drafting of Clause 1 is, we hope,
very much clearer than it would have been without them. I hasten to say that these amendments
were not proposed by the department but by parliamentary counsel in the interests of clarity.
For the benefit of those noble Lords who took part at Second Reading,
this morning I have sent
to them--I hope that they will find it helpful--a copy of the Bill marked with the government
amendments in their place. I do not recall this having been done before but it seemed sensible. If
the noble Baroness, Lady Buscombe, does not have one, I am sorry. A copy will be whisked
across the Chamber to her from the Box via the Doorkeepers so that she has it in front of her. I
believe that noble Lords on the Liberal Democrat Benches have had copies, as has my noble
friend Lord Goldsmith, who is not in his place.
If we look at the marked copy, we find that the wording is simply moved
around so that the clause
starts with reference to the,
"body corporate (with legal personality separate
from that of its members)", which is the key to the understanding
of Clause 1. In all other respects, the meaning of Clause 1 is not affected by the amendments. I beg to move.
Baroness Buscombe: First, I thank the Minister for giving me and Mr
Nicolas Gibb MP, the
opportunity to discuss a number of key issues which we and other Members of this House raised
at Second Reading.
I thank the noble Lord for a most helpful meeting, for the accompanying
notes, and for giving
them to me now. However, on behalf of so many people with whom we and, I understand, the
Government have consulted, I feel that it is my responsibility to make a plea with regard to Clause
1. Our concerns relate to a general application of partnership law. We are
24 Jan 2000 : Column 1353
interested in retaining the partnership ethos. With that wish, we begin
to question the value of a
limited liability partnership. Without a partnership ethos which is clear on the face of the Bill, it
becomes in a sense something of a hybrid without the culture of a partnership; that is, neither a
partnership nor a company. I question whether that is what the Government intend.
Yes, an LLP can enter into contracts and it can hold property. It is
a body corporate, separate
from its members. I am grateful to the Minister that the amendments help to clarify that point.
However, without express application to partnership law on the face of the Bill, I am still unsure of
its worth. That is why I have tabled an amendment to Clause 5 relating to the members of an LLP.
That amendment tries to re-establish the relationship of members to differentiate them, if not the
body corporate itself, for example, from employers, subject to company and employment law. In
a sense, that is intended to demonstrate the existence of the partnership ethos.
Lord McIntosh of Haringey: I am most grateful to the noble Baroness
for what she says. I
repeat my apologies that the marked Bill did not reach her in time for her to consider it at greater
leisure. I am grateful for what she says in the particular sense that it enables me to set out what
became clear to me in the course of the discussions which we had last week with a number of
noble Lords. It became clear that the principle on which we must insist all through the Bill is that
we are changing as little other law as possible. We are responding to pressure, particularly from
professionals, that there should be some way for them to achieve the goal of limited liability. We
are considering the price at which that achievement should be made. Everybody except the noble
Lord, Lord Phillips of Sudbury, agreed with the validity of that goal. However, I may not have
expressed as clearly as I would want the way in which we seek to achieve that.
We seek to achieve that by creating a new entity--the limited liability
partnership--which falls under
company law as far as possible and changes company law as little as possible except in respect of
taxation. It falls under partnership law as little as possible and changes partnership law as little as
possible except in respect of those matters which are the concern of company law.
The taxation of limited liability partnerships will be on the partnership
analogy; every other aspect
of the limited liability partnership will be on the companies analogy. The bulk of the text of the Bill
consists of amendments to company law which are absolutely necessary in order for limited
liability partnerships to be established and no further than that.
Similarly, we do not seek in any way to change the law or practice in
respect of professional
liability. That is a matter for the law and for the professions themselves. We do not want to
diminish or increase it in any way. We do not seek to change the law except in so far as it is
absolutely necessary in relation to insolvency. We are doing as little as possible in order to achieve
this new entity. If we look at all the
24 Jan 2000 : Column 1354
amendments in the light of those pillars of the temple, perhaps, which
are built around that small
change in the law, I believe that we shall understand it, as I have come to understand it, rather
better than we did at the beginning.
I am grateful for what the noble Baroness said about the amendments
to Clause 1. I commend
Amendment No. 1 to the Committee.
On Question, amendment agreed to.
Lord McIntosh of Haringey moved Amendments Nos. 2 to 4:
Page 1, line 10, after first ("in") insert ("the
following provisions of").
Page 1, line 14, leave out ("a limited liability
partnership so incorporated") and insert ("such a body corporate").
Page 1, line 16, leave out from ("partnership") to
first ("to") in line 18 and insert ("has unlimited capacity.
( ) The members of a limited liability partnership have such liability").
On Question, amendments agreed to.
Clause 1, as amended, agreed to.
Clause 2 [Incorporation document etc.]:
Lord McIntosh of Haringey moved Amendment No. 5:
Page 1, line 27, after ("persons") insert ("associated for carrying on a lawful business with a view to profit").
The noble Lord said: In moving this amendment, I shall speak also to
Amendments Nos. 6, 8, 9,
10, 11, 48, 50 and 51. These amendments follow on the consultation document which was
published originally in 1997 and which said that to secure incorporation as a limited liability
partnership, founding members would have to submit to the registrar a document which included a
statement in prescribed form that the business was being formed with a view to profit. That
follows the scheme of partnerships. Again, as I said a few moments ago, we do not intend to alter
Partnership law refers to,
"carrying on a business in common with a view of profit".
Instead of "in common" we have used the word "associated" and instead
of "a view of profit" we
have used the phrase "with a view to profit". That is the change between 1890 and 2000. I do not
believe that it has any other impact. I am always reminded of the sign which appears in some
company offices which says, "This is a non-profit company. It wasn't intended that way but that's
the way it's worked out". That is why we must use the words "with a view to profit" instead of
The wording did not appear in the intervening draft since 1997, but
we believe that it is necessary
to restore those words. We do so for two reasons. First, we want to make it clear that, in our
view, limited liability partnerships are unsuitable for charitable organisations. In view of the
expertise of the noble Lord, Lord Phillips, in that area, I have written to him on that subject. I
hope that he will agree that that is the right course to take. Again, it does not extend the
24 Jan 2000 : Column 1355
scope of partnerships, but seeks merely to make available this business
entity for partnerships
under the existing scope. Secondly, we want to discourage not-for-profit organisations--for
example, members' clubs--from using the limited liability partnership vehicle.
There was no intention in the genesis and evolution of limited liability
partnerships to provide for
their use by organisations which were not operating with a view to profit and we do not see the
entity as appropriate for that purpose. No interest has been expressed in limited liability
partnerships by such entities in any of the consultations.
As a result of requiring the founding members to associate for the carrying
on of a lawful business
with a view to profit, it will be necessary on registration for them to present a statement that they
have complied with the requirements for incorporation. There will be a penalty for making a false
statement, and the registrar may accept the statement as sufficient evidence of their compliance.
That follows the treatment of companies.
I could say more about charities and not-for-profit organisations. Indeed,
if any Member of the
Committee has any questions about that, I shall be happy to respond. But on the basis of what I
have said, I hope that it will be recognised that those amendments do go back to the original
intention of the exercise which was first consulted on in 1997. They make it explicit, as perhaps it
will be said it always should have been, and I hope that the amendments will find favour with the
Committee. I beg to move.
Lord Phillips of Sudbury: I thank the noble Lord, Lord McIntosh, for
the remarks that he has
made vis-a-vis the amendment to exclude charities from the purview of the Bill. Perhaps I may say
that his thinking is impeccable. Although charitable status in this country does not attach to a
particular format, which sets us apart entirely from the Napoleonic code countries, I believe that it
is absolutely right to exclude charities from the provisions of this Bill.
I should like to raise a rather boring point on Amendment No. 6. Perhaps
the Minister will
consider whether the wording in the proposed paragraph (c) does not give a slightly wrong idea of
what is intended. At present the amendment refers to,
"either a solicitor engaged in the formation of the
limited liability partnership or anyone named in the incorporation
document as a person who is to be a member", and then it goes on. That gives a futuristic intention or meaning
which is not intended. What is intended is that,
"either a solicitor engaged in the formation of the limited liability partnership",
or anyone who subscribes to the incorporation document is capable of
signing that statement. I
draw that to the Minister's intention and hope that it will be dealt with in due course.
Lord McIntosh of Haringey: There are two possible answers to that. The
first is that the
24 Jan 2000 : Column 1356
from other legislation and is therefore sanctioned by precedent. Indeed,
that is the answer. It
follows the wording in Section 12 of the Companies Act.
However, that does not absolve me from giving my second answer, which
is that I shall look at it
again to see whether anything further needs to be done. I commend Amendment No. 5 to the
On Question, amendment agreed to.
Lord McIntosh of Haringey moved Amendment No. 6:
Page 2, line 3, at end insert (", and
(c) there must have been so delivered a statement in the form prescribed
by regulations, made by either a solicitor
engaged in the formation of the limited liability partnership or anyone named in the incorporation document as a person
who is to be a member, that the requirement imposed by paragraph (a) has been complied with").
On Question, amendment agreed to.
Lord Phillips of Sudbury moved Amendment No. 7:
Page 2, line 11, after ("and") insert ("home address and business").
The noble Lord said: In moving this amendment, I shall speak also to
Amendment No. 31. I do
not wish to inflict on the Committee a repetition of what I said on Second Reading, although it is
quite true, as the Minister said a few moments ago, that apparently I am the only Member of this
House who finds the whole of this measure superfluous and, indeed, contrary to the public
It is interesting that only last week, I was sitting round a board table
of one of the very large firms
of chartered accountants which are, of course, the main progenitors of this matter. At that
meeting, the directors were required to sign to a limitation of their liability in respect of any claim
arising out of their services. Indeed, that is what they do--and what they could and should
continue to do. I shall not burden the House with the background to the matter. It would be
improper to do so. These two amendments are small, but disproportionately effective if, like me,
the House seeks to discourage anyone from abusing the limited liability privilege that the Bill will
bestow upon partners. The same point is raised in Amendment No. 31 to Clause 9.
As a long-practising solicitor who has been engaged in commercial and
partnership work all his
practising life, I know that there is a peculiar sensitivity about declaring home addresses on the
part of those who sign up as partners. I believe it is because people want to retain a separation
between their business lives and the rest of their lives.
The simple requirement that any partner under a limited liability partnership
should have on record
his or her business address and his or her home address would be desirable and proper and
would act as a minor but significant incentive to the partners concerned to run the partnerships
properly. More importantly, I believe that it would give members of the public who had claims
against any such person a better prospect of seeing such claims met.
24 Jan 2000 : Column 1357
Although it has been said that large solicitors' and accountancy partnerships
are the main
promoters of this Bill, when passed the Bill will apply to a vast number of small and very small
businesses. My expectation is that accountants will advise small businesses--for example, small
building businesses--to utilise the LLP precisely because, as the Explanatory Notes indicate,
"The essential feature of an LLP is that it combines
the organisational flexibility and tax status of a partnership with
limited liability for its members".
That organisational flexibility will be of tremendous appeal to small
businesses, some of which are
recklessly and incompetently run, to take that part rather than the full limited liability part which is
infinitely more onerous in its regulatory requirements.
We already have the slackest limited liability regime in the world.
Only in this country can one walk
into a law stationers and purchase a limited liability company "off-the-shelf", and undoubtedly,
that will be the case with these LLPs. In Germany, it takes at least 13 weeks to get through the
paperwork and quite a considerable effort is required to ensure that everything is done properly
and with due solemnity.
I believe that those two requirements, and a couple of others to which
I shall speak later, will act
as minor but significant deterrents to those who inevitably will abuse the new limited liability
arrangements. I beg to move.
Lord McIntosh of Haringey: I am interested in what the noble Lord says.
The complaint that I
heard about our provisions was that they were too draconian, rather than not draconian enough.
There has always been a trickle, rather than a flood, of complaints by company directors that their
security is put at risk by having to give their home addresses in legal documents. However, I do
not hear that from the noble Lord, Lord Phillips.
This is a perfect example of what I said in relation to Amendment No.
1. We are making as few
amendments to company legislation as possible, not least because the company law review, which
started in 1998, is under way. We shall go out to full consultation within the next few months and
we shall consider all these matters in great detail.
Here we have required that the incorporation document gives the names
and addresses of all
members of a limited liability company and that the registrar is notified of any changes in a
member's address. That mirrors exactly the provisions of the Companies Act 1985, which in
Section 289 requires directors to disclose their "usual residential address". That will be the case
for members of a limited liability partnership because Clause 17 of the Bill says,
"'address', in relation to a member of a limited liability partnership, means ... his usual residential address".
We do not think that there is a case for members of a limited liability
partnership to be treated any
differently from a company director by requiring them to give both their home address and their
24 Jan 2000 : Column 1358
I know that the objections of the noble Lord, Lord Phillips, go further
and that he describes our
regime as the slackest limited company regime in the world. However, I am not tempted by his
example of Germany where he said that it takes a minimum of 13 weeks to set up a limited
company. That does not seem to me to be a desirable objective. If parts of our company
legislation are slack and, therefore, damaging, and if there are problems about giving addresses,
they can be dealt with in the company law review. In the mean time, it seems right for us to mirror
company legislation in this Bill. I ask the noble Lord not to press his amendment.
Lord Phillips of Sudbury : Before the Minister sits down, can he give
me a positive reason why
it would not be a good idea to require the business address and the residential address? We are
not talking about precisely the same animal as a limited liability company. This is an extension of
state privilege to a class of business that hitherto has never been thought to be entitled to
Lord McIntosh of Haringey: This refers to the relationship with a body
corporate which has not
existed before. If the noble Lord relies on the analogy with partnerships, a person carrying out
business with a partner in a partnership clearly carries out business directly with one person. It is
common sense to seek a proper co-ordinate so in order to track down that person if there is a
problem. Here a body corporate is being created, which is exactly analogous to a limited company
and it seems proper that we should mirror the requirements of company legislation.
The noble Lord asked for a positive reason. I suppose it is true to
say that already there is a
certain amount of work for the Registrar of Companies in recording changes of residential
address. That work would increase substantially if he had to record changes of business address
as well. Such changes cost money; they would cost the taxpayers money. However, I do not
advance those arguments as overwhelming reasons.
Lord Phillips of Sudbury: I am not surprised by the Minister's reply,
but I am disappointed. I
believe that the Minister underestimates the degree of reckless incompetence and fraud at the
bottom end of the business market behind limited liability. I do not accept his argument that too
much expense would be involved. Too many people try to get away with secreting their business
addresses as well as their residential addresses.
Lord McIntosh of Haringey: I do not want to prejudge what the noble
Lord wants to do with
his amendment, but is it not true that a lot of business addresses are concealed as box numbers?
People can give a business address and they would still be covered legitimately by the amendment
and it still would not do any good.
Lord Phillips of Sudbury: With respect, that is not the case. As a result
of this amendment, they
24 Jan 2000 : Column 1359
have to give their real business address and not some fictitious business
address. However, I
withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McIntosh of Haringey moved Amendment No. 8:
Page 2, line 15, at end insert--
("(3) If a person makes a false statement under subsection (1)(c) which
(a) knows to be false, or
(b) does not believe to be true,
he commits an offence.
(4) A person guilty of an offence under subsection (3) is liable--
(a) on summary conviction, to imprisonment for a period not exceeding six months or a fine not exceeding the statutory
maximum, or to both, or
(b) on conviction on indictment, to imprisonment for a period not exceeding two years or a fine, or to both.").
On Question, amendment agreed to.
Clause 2, as amended, agreed to.
Clause 3 [Incorporation by registration]:
Lord McIntosh of Haringey moved Amendment No. 9:
Page 2, line 16, leave out ("requirement imposed
by paragraph (b) of subsection (1) of section 2 has") and insert
("requirements imposed by paragraphs (b) and (c) of subsection (1) of section 2 have").
The noble Lord said: Amendment No. 9 was spoken to with Amendment No. 5. I beg to move.
On Question, amendment agreed to.
Lord McIntosh of Haringey moved Amendments Nos. 10 and 11:
Page 2, line 18, leave out from ("unless") to end
of line 19 and insert ("the requirement imposed by paragraph (a) of
that subsection has not").
Page 2, line 23, at end insert--
("( ) The registrar may accept the statement delivered under paragraph
(c) of subsection (1) of section 2 as sufficient
evidence that the requirement imposed by paragraph (a) of that subsection has been complied with.").
The noble Lord said: With the leave of the House, I shall move Amendments
Nos. 10 and 11 en
bloc. I beg to move.
On Question, amendments agreed to.
Clause 3, as amended, agreed to.
Clause 4 [Members]:
Lord McIntosh of Haringey moved Amendment No. 12:
Page 2, line 38, at end insert--
("(4) A member of a limited liability partnership shall not be regarded
for any purpose as employed by the limited liability
partnership unless, if he and the other members were partners in a partnership (rather than members of a limited liability
partnership), he would be regarded for that purpose as employed by the partnership.").
The noble Lord said: The noble Baroness, Lady Buscombe, raised at Second
Reading the need to
have an express clause in the Bill to ensure that members are
24 Jan 2000 : Column 1360
not employees of the limited liability partnership; indeed, she was
reflecting views expressed
during the public consultation exercise that a member would be an employee and thus be entitled
to protection under employment law. I am happy, therefore, to bring forward an amendment
which makes it clear on the face of the Bill that a member is not an employee of the limited liability
partnership. I beg to move.
Baroness Buscombe: I thank the Minister for that explanation and for
bringing forward this
amendment. However, notwithstanding that I am a lawyer, I find it difficult to understand this
clause. I have read it more than half a dozen times and wonder whether we can improve on the
wording, if I may be so blunt.
Is the clause saying that members can be employed so partners can be
employed? What about
designated members? I confess that I prefer--although I know the Minister will not warm to
this--Amendment No. 17 wherein it becomes clear that the members are as partners and therefore
subject to partnership law unless both the incorporation document makes it clear to the contrary
together with the provisions of any agreement express or implied between the members of the
LLP. As I have heard the Minister say in relation to Clause 1 that there is a move to exclude
partnership law as far as possible in preference to company law, I therefore feel that I shall not get
far with that amendment either.
However, I suggest that we look again at the wording, wherever possible,
to simplify the
legislation so that people in the community who want to take part in, and establish, a vehicle such
as an LLP can understand with relative ease the parameters of a limited liability partnership and
what it really stands for.
Lord Phillips of Sudbury: I identify myself with the remarks of the
noble Baroness, Lady
Buscombe. Amendment No. 12 is work for lawyers, however well intentioned.
Lord McIntosh of Haringey: Two issues arise here. The first is where
the amendment should be
placed in the Bill. The noble Baroness rightly identified our wish to have it placed here rather than
where it can be seen as an amendment to partnership law more generally.
On the issue of the wording, I only wish it were possible to have a
simple definition of an
"employee". The noble Baroness did not have the misfortune of sitting through as much of the
Employment Relations Bill last summer as I did. We spent many happy hours discussing the
definition of "employee" and I fear that this is not the legislation to resolve those questions which
could not be resolved at that time.
There is not a single test to determine whether or not a person is an
employee. Many factors are
taken into account. Sharing profits, for example, is prima facie evidence that a person is a partner.
If the losses as well as the profits are shared, the presumption is even stronger. But when a person
receives both a salary and
24 Jan 2000 : Column 1361
a share of the profits, there is strong evidence that he is an employee.
That was an important
consideration when we dealt with employment relations legislation.
There have been requests that any statutory provision should state that
members are not
employees unless there is an express agreement to the contrary. I believe that is what the noble
Baroness is getting at in Amendment No. 17. We feel that that is going too far. If a person
receives a salary, does not share profits and exhibits all the characteristics of an employee, it is
inappropriate for the LLP to exclude the employee's rights in relation to that person. In addition,
such an approach would be inconsistent with the employment law approach under which the
description which the parties apply to the relationship--again coming back to Amendment No.
17--is not conclusive.
The noble Baroness referred to designated members. A designated member
is a member and is
therefore covered by the clause. The intention is not to put a member of an LLP in a different
position from that of a partner in a partnership. I found the wording difficult and I promise to look
at it again to see whether it can be made clearer. However, I insist on the thinking behind the
amendment which is that much different from Amendment No. 17.
On Question, amendment agreed to.
Lord Goodhart moved Amendment No. 13:
Page 2, line 38, at end insert--
("( ) Subject to any agreement with the other members to the contrary,
a member of a limited liability partnership may
cease to be a member on giving not less than 28 days notice to the limited liability partnership.").
The noble Lord said: Since this is the first amendment to which I have
spoken, I should like to
make it clear that, speaking for my party as a corporate body although clearly not for all the
individual members of it, we regard this as a good Bill--
Lord McIntosh of Haringey: I would not even describe the Liberal Democratic
Party as a
"partnership", let alone a "corporate body".
Lord Goodhart: Despite the words of the Minister, we regard this as
a good Bill, but a Bill
capable of improvement and that is why we tabled a series of amendments to it.
Amendment No. 13 is concerned with the right of an individual member
of an LLP to retire from
an LLP on giving notice. At present the position under partnership law is that any partner can
retire from the firm on giving notice unless the partnership agreement specifies otherwise. Clause
4(3) of this Bill provides that,
"A person may cease to be a member of a limited liability
partnership (as well as by death or dissolution) in
accordance with an agreement with the other members".
Presumably that agreement can either be a membership agreement which
circumstances in which a member can retire, or it could
24 Jan 2000 : Column 1362
be an ad hoc agreement when one member wishes to go and the other members
consent to his or
her going. But what is the situation if there is no agreement which allows a member to retire and
the other members do not consent to that specific member going? That member will be locked
into a business, perhaps for life, in which he or she no longer wishes to participate. That cannot
The Government's answer in the otherwise helpful letter which the Minister
sent to the noble
Baroness, Lady Buscombe, and copied to me, was that regulations would be made incorporating
certain provisions of partnership law including, in the absence of an agreement to the contrary, the
right to withdraw from a firm on notice.
I shall look at the whole question of fall-back provisions when we come
to Amendment No. 16.
But Amendment No. 13 is essential in any case. The right to withdraw on notice in the absence of
a partnership agreement specifying otherwise is a basic principle of partnership law and there is no
reason why that should be changed in the case of LLPs. Being locked in for an indefinite period
may be all right in the case of a Companies Act company where many shareholders are often just
investors, but it is not appropriate in the type of corporation such as an LLP where members are
expected to be working members. The right to withdraw should not be left to be dealt with in
consequence of regulations and should be brought on to the face of the Bill.
Further, it appears to be possible to read Clause 4(3) as an exhaustive
list of the ways in which a
person may cease to be a member. If that is so, regulations which authorise someone to retire in
the absence of an agreement might themselves be ultra vires. I hope that the Minister will be
prepared to look at the issue again. I beg to move.
Baroness Buscombe: I very much took on board the Minister's response
to my suggestion on
Second Reading that, in the event of a member wishing to retire, notice should be given to the
LLP rather than to the other members. I appreciate that it does not make good sense to allow an
individual to opt out of his or her responsibilities. In the event, say, of there being fundamental
problems with the partnership, that could be avoided simply by a member tendering his or her
resignation by notice to the body corporate.
There are concerns in this respect. I hope that the Minister will be
able to give us some
reassurance that there is a way round the problem by, on the one hand, making sure that people
respond to their responsibilities and liabilities and, on the other hand, ensuring that they are not
locked in against their will ad infinitum.
Lord McIntosh of Haringey: I certainly recognise that there are concerns,
and I am very
sympathetic to them. Indeed, I want to see the same result as noble Lords opposite. We want to
be sure that we deal with the case where a member wishes to cease to be a member of an LLP but
where, due to a disagreement
24 Jan 2000 : Column 1363
within the firm, the other members fail to give their agreement. That
is the problem that the noble
Lord has identified.
When the agreement is drawn up the terms and conditions for ceasing
to be a member are very
likely to be dealt with at that time. Therefore, if there were to be a disagreement, the agreement
would come into force. However, I recognise that that is not good enough. There must be some
mechanism that comes into play if the LLP fails to have an agreement or has an agreement that
does not adequately deal with the departure of a member.
Therefore, we shall be including a default provision, along the lines
of Section 24 of the
Partnership Act 1890, which will deal with the problem. We shall be including such provision in
regulations. This was not published with the draft regulations in July of last year, but our
suggestions for that were published on the website in October or November of last year. Such
proposals are subject to consultation and are still being consulted upon. We are considering
whether something along the lines of Section 24 of that Act would be appropriate for a default,
following Section 26, to cover retirement.
If necessary, we can deal with this when we reach Clause 5. However,
perhaps I may indicate the
areas that we propose to include in default provisions: the right to share equally in capital and
profits; the right to be indemnified by the LLP for activities in the course of business; the right to
take part in the management of the firm; no entitlement for remuneration; the right to have access
to books and records; expulsion and retirement of members; decisions by majority vote; and the
application of Section 459 of the Companies Act--protections against unfair prejudice. Members
of the Committee should take note that retirement of members is included in that list.
In simple terms, "default provision" means that if the agreement does
not contain provision for
retirement and for all the other matters to which I referred, the default provisions that will be
provided will come into force under the regulations and the member seeking to retire will be
protected by them. I hope that the noble Lord will agree that that is a better way to do it than
putting the provision on the face of the Bill, as proposed by his amendment. However, it will have
the same effect.
Lord Howie of Troon: Before my noble friend the Minister sits down,
perhaps he can clear up a
slight problem that I have. We are discussing an important amendment and my noble friend said
that certain information relating to the matter was published last October or November on the
website. However, can he tell the Committee whether it was published anywhere else?
24 Jan 2000 : Column 1364
Lord McIntosh of Haringey: No, not to my knowledge. However, I shall
check on the position
and write to my noble friend.
Lord Goodhart: I recognise the Minister's goodwill and good intentions
in the matter. At this
point I shall deal only with the question of retirement because the other rather wider questions
regarding Section 24 of the Partnership Act can be dealt with when we discuss Amendments Nos.
16 and 17.
As far as concerns retirement, it seems to me that this is in a rather
special position as it is of
particular importance. Unless the partnership agreement provides for the contrary, someone going
into an LLP needs to be quite certain that he can get out of it. I wonder whether the Minister will
agree to look again at the question of possible difficulties with vires because of the likely
interpretation of Clause 4(3) as being an exhaustive list of the circumstances in which it is possible
to cease being a member of the partnership. However, subject to that, I am happy to beg leave to
withdraw my amendment.
Amendment, by leave, withdrawn.
Lord Lucas moved Amendment No. 14:
Page 2, line 38, at end insert--
("( ) A limited liability partnership shall maintain at its registered
office a current list of the members of the partnership
which shall include an explicit description of any limitations on the authority of each member to act for the limited liability
partnership in any matter.").
The noble Lord said: In these amendments I am seeking to explore the
way in which a third party
who wishes to deal with a member of a limited liability partnership, or someone he believes to be a
Lord McIntosh of Haringey: The noble Lord referred to "these amendments".
We had not
proposed to group this with any other amendments, but I am happy to do so if the noble Lord so
wishes. Without trying to put any pressure on him, and unless he is thinking of pressing his
amendment to a Division, I wonder whether it might be easier if we dealt with this amendment and
Amendment No. 25 when we reach Clause 6?
Lord Lucas: I apologise to the Committee. I should have said at the
beginning that I intended to
speak to Amendment No. 25 when moving this amendment. That is what is on my grouping list. I
apologise for arriving here in some haste, almost late, and therefore not being as clear as I might
The two amendments certainly go together because they both bear on the
substance of Clause 6
and the question of how a third party dealing with a member of an LLP is able to treat that person
and, indeed, what assumptions he is allowed to make about the powers that that person has to
bind the partnership. As the Bill stands--and we shall deal later with some proposed government
amendments--Clause 6 falls into two principal sections; namely, subsections (2) and (3).
24 Jan 2000 : Column 1365
Under Clause 6 (2), which relates to the ordinary circumstances of dealing
with a member of an
LLP, "the person" who is dealing with someone has the right to treat him as an "agent" in all
respects of the limited liability partnership if he believes him,
"to be a member of the limited liability partnership".
There will be legal precedents that I do not pretend to be expert in
as to what substance lies
behind "belief", and that is what I am addressing in Amendment No. 14.
How does a person establish that someone is a member of a limited liability
will be a list at the registrar's office, but those concerned are not being asked in this subsection to
look at that list. Indeed, they are allowed a more generous interpretation; namely, a belief.
However, when we turn to subsection (3), which is where a partner has ceased to be a partner, the
third party is supposed to consult the registrar to make sure that the person with whom he is
dealing, and whose word he is about to rely on, is still a member of the partnership.
This is a very odd dichotomy of systems to find within one clause of
the Bill: we have the
ordinary circumstances under which a person can act on the basis of reasonable belief; but if the
person with whom he is dealing happens to have retired as a partner and he does not know, he will
not be able to act on the basis of reasonable belief because a notice has been delivered to the
registrar which he is supposed to have seen. I find that an odd combination. I think that it ought to
be made consistent by requiring that a limited liability partnership has at its offices a list of
members which includes any restrictions on the ability of those members to bind the partnership. I
hope that that is what these two amendments achieve, but I should not be at all surprised to be
told that they do not achieve that effect.
Amendment No. 14 requires the list to be kept and for data to be held
as to how each member
may be able to bind the partnership. In a big accountancy partnership, this is likely to be quite
fluid and quite detailed. Different members will have different capacities. It is not something which
would easily be held by a registrar. My view is that it is quite sufficient if it is held at the
partnership. It also then becomes something which is easily and commonly available to anyone
dealing with that partnership and something which under Clause 6(2)(b) he might reasonably be
supposed to have consulted in coming to the belief that a person was entitled to act for the
partnership on the particular matter that he was discussing with that person.
Amendment No. 25 constitutes another way of looking at this matter.
If we are to have Clause 6(3)
as it is at present, it should not be possible for this third party access, which relies on dealing with
someone, to be cut off at a moment's notice just because a document has been delivered to some
remote registrar. There must be a time delay. If someone is to have the whole basis of his or her
dealings with a firm regulated by what has been filed with a registrar, he must be sure that if he
looked at the information the registrar had a
24 Jan 2000 : Column 1366
week ago that is still valid, and that he does not have to check with
the registrar every waking
moment to see whether or not the person he is dealing with has retired.
Therefore, the proposal in Amendment No. 25 is that if the Government
insist on this dichotomy,
there must at least be some protection for third parties so that they do not continually have to go
back and forwards to the registrar. As I say, I have difficulties with that concept. A list at the
limited liability partnership's offices would be commonly available to people to use under
subsections (2) and (3) of Clause 6. We would then have just one method of establishing whether
a person was entitled to bind the partnership. However, I do not lay any great store by the
wording that I have chosen to achieve either of the aims I have mentioned.
The noble Lord, Lord McIntosh, will know that my particular interest
in this clause comes from a
wish to see this Bill in a form which can be used to fund venture capital funds, which are
commonly made up of a group of institutions or rich individuals and a single managing partner.
We need to find a practical way of informing a member of the public who is about to deal with
someone who is a member of such a limited liability partnership that an individual may not be
entitled to bind the partnership in all respects. That member will have an active role in the
management of the partnership but it will not be the universal role that the managing partner would
take. He or she would not, for instance, be authorised to make investments on behalf of the
As I said, the big accountancy partnerships commonly have great variations
in what an individual
partner can do. From my discussions with them it would appear that if there is an easy way in
which they can make that information available in a standard form that does not involve having to
do it through a registrar, they would feel happy with such a change to the Bill. I look forward to
what the Minister may say on these points. I beg to move.
Lord McIntosh of Haringey: I hope that there is less difference between
us on this matter than I
had originally suspected. I am grateful to the noble Lord for discussing Amendment No. 25 with
Amendment No. 14. I had not recorded that provision in the groupings. I hope that he will forgive
me if I say that there is a difficulty here in that he keeps referring to Clause 6 of the Bill as it
stands; I have tabled amendments which seek to make substantial changes to Clause 6. I have sent
the noble Lord a marked copy of the Bill showing the effect of those changes. I believe, and hope,
that the changes that we seek to make to Clause 6 of the Bill--which, of course, we cannot debate
yet--will address some of the points that the noble Lord makes.
My understanding has been that the intention behind Amendment No. 14
is to make it easier to
allow for "passive" members of a firm, who will not bind the
24 Jan 2000 : Column 1367
limited liability partnership with their actions. I believe that that
has been confirmed by what the
noble Lord said about venture capital funds.
Clause 6--this is absolutely fundamental to the Bill--determines that
all members are agents of the
entity. I understand the concern that a passive member may, inadvertently or otherwise, bind the
limited liability partnership when it may not wish to be bound. However, the amendments that we
are discussing would provide poorer protection for the third party than we intend.
As I said, agency is fundamental to the principles of a limited liability
partnership. It is a necessary
protection for creditors that their position should not vary depending on which member they deal
with, unless they know that a member does not have authority to act in a particular matter, which
is, of course, what our proposed new drafting of Clause 6 allows for. We do not believe that this
is an unreasonable requirement--the third party should not be expected to be pro-active; in other
words, to go and search the register in order to establish the authority or otherwise of a member.
It would, in any case, be possible for the members of an LLP to safeguard their position further
by contractually agreeing that a fellow member will not take any action which would bind the firm,
and so provide that a member would be contractually liable to the firm if he breached that
I believe that Amendment No. 25 expresses a concern that a passive member
or otherwise, bind the limited liability partnership when it may not wish to be bound. However, as
I said, agency is fundamental to the principles of a limited liability partnership. We think that it is
far more important that the member should have the responsibility of saying to the person with
whom he is dealing that he is a member of the partnership, rather than requiring the person outside
to refer to the list in the registered office.
The noble Lord said that although third parties are not expected to
be pro-active in establishing
the authority or otherwise of a member, they are expected to be pro-active in discovering whether
someone is an ex-member. We believe the need for this apparent disparity to be clear when one
imagines the situation in which a third party may be dealing with an ex-member of a limited liability
partnership. If the ex-member was purporting to the third party that he was still a member of the
firm, he would be being dishonest, presumably for his own gain. The question here is whether it is
right that a limited liability partnership should be bound by the ex-member's actions in such
circumstances. We concluded that the limited liability partnership should not be so bound. It
would create a risk that any ex-member purporting still to be a member of an LLP could bind that
firm by his actions. However, in the situation where a third party is dealing with a bona fide
member of an LLP, it is right that the firm should be bound by its member's actions unless the
third party is told the extent, or otherwise, of that member's authority.
24 Jan 2000 : Column 1368
The noble Lord proposes a "cooling-off" period of 21 days during which
an ex-member may still
be treated as a member by a third party if he so claims himself to be. I think that that is unfair. The
firm can have no control over a person once that person has ceased to be a member and any
"cooling-off" period would, in practice, give carte blanche to an ex-member to undertake any act
in the name of his old firm. I still hope and believe that we are not that far apart on this issue
provided it is understood that the fundamental principle of the Bill is agency; in other words,
interaction between the members of the limited liability partnership.
Lord Lucas: The noble Lord, Lord McIntosh, was kind enough to allow
me a meeting with him
before Committee stage. He made plain then that agency was not to be challenged; hence the way
in which I have phrased the amendments. I do not intend to challenge agency. What I sought to
get at here is how a member of the public comes to be in a position where he can reasonably
believe a person who is a member of a partnership to have any particular level of authority. There
are ways of doing so. If there are only a limited number of partners in the firm, it could put
something on its letterhead. But suppose it is one of the big accountancy firms, with 1,000 or
2,000 partners scattered around the UK. How do the Government envisage that the limitations on
an individual member's powers will be brought to the notice of a third party dealing with that
My proposal in Amendment No. 14 seeks to place a requirement on a limited
to have a public record which would be easily available and to which it might be assumed a third
party would have recourse. If not, presumably something must be stated on a business card or a
letterhead which indicates the limitation of a particular partner--otherwise there is no limitation. I
should be grateful for the noble Lord's thoughts on that issue.
So far as concerns Amendment No. 25, that is certainly not challenging
agency. I understand
everything that the noble Lord has said, but he understands what I mean about the third party
being in two very different positions under the two subsections. The fact that the Government
have conceded Clause 6(3) should allow some flexibility under Clause 6(2) for provision to be
made as to what a third party should ordinarily expect to do to arrive at the belief that he is
required, presumably reasonably, to reach under Clause 6(2).
Lord McIntosh of Haringey: I am in some difficulty. I think that our
rewording of Clause 6 in
Amendments Nos. 18 to 24 and Amendment No. 26 covers the points made. I shall deal with the
points in detail when I come to the amendments but it is not easy for me to do so now. Perhaps
the noble Lord and I can agree that if he is not satisfied he can still come back to the
24 Jan 2000 : Column 1369
substance of Amendment No. 14 on Report. We should then be able to make
progress by having
a single debate rather than two.
Lord Lucas: My Lords, I may well come back to it when the noble Lord
deals with his
amendments to Clause 6, but I shall I wait until I have listened to him on those. In the meantime, I
beg leave to withdraw Amendment No. 14.
Amendment, by leave, withdrawn.
Clause 4 agreed to.
Clause 5 [Relationship of members etc.]:
Lord Phillips of Sudbury moved Amendment No. 15:
Page 2, line 39, leave out subsection (1).
The noble Lord said: Perhaps I may remedy a defect. Before I spoke first
this afternoon I failed to
thank the noble Lord, Lord McIntosh of Haringey, for letting us have a marked copy of the Bill
showing the Government's amendments. It was extremely helpful and we are grateful for that. It
would be nice to think that it could be a precedent for future Bills.
The amendment is a probing one which seeks to get to the root of what
Clause 5(1) of the Bill
achieves. In the Explanatory Notes it says that,
"Subsection (1) deals with the relationship between members".
On these Benches we do not understand why the subsection is necessary
if that is all that it does.
Incidentally, nowhere does it make clear that, whatever the members decide to do among
themselves or as between themselves and the limited liability partnership, it cannot affect the rights
of third parties.
Finally--again as part of the probe--the end of Clause 5(1) stipulates
that it shall,
"have effect subject to the provisions of the incorporation document".
We do not see why this should be drawn in. If it is, surely it should
be "the provisions of the
incorporation document as may be amended and registered". I beg to move.
Lord McIntosh of Haringey: I am sorry. I am not sure that I understand
the noble Lord. I
thought that Amendments Nos. 15 and 16 had to go together in the sense that Amendment No. 15
seeks to take out subsection (1) and Amendment No. 16 seeks to put something in its place. I
have clearly misunderstood.
Lord Phillips of Sudbury: I am dealing with the list as it has been marshalled.
Lord Goodhart: I should explain that I asked for the Marshalled List
to be changed this morning.
The two amendments are not dependent on each other. As my noble friend explained,
Amendment No. 15 is a probing amendment to find out what the subsection means. Amendment
No. 16 is much wider.
Lord McIntosh of Haringey: I am grateful. A limited liability partnership
allows its members to
have the freedom to regulate the internal affairs of a limited
24 Jan 2000 : Column 1370
liability partnership with the agreement of the other members. One of
the key differences between
a limited liability partnership and a company is that by allowing the members the freedom to agree
how the internal affairs will work, it will be free of the bureaucratic structure of a company. The
agreement will remain private between the members.
However, it has never been our intention to allow the agreement between
the members to be able
to alter what goes into the incorporation document. This is because the incorporation document is
published and sets out the public face of the LLP; that is, its name, its address, its initial members
and its designated members. So Clause 5(1) imposes a limitation on the freedom of the members
to regulate their rights and duties. It does not impose a limitation on their rights to have at any time
agreements between themselves about the way in which the business should be conducted.
As I said to the noble Lord, Lord Goodhart, in response to an earlier
amendment, we recognise
that that does not in itself necessarily provide adequate protection for the outside world; that is,
for the people doing business with the LLP. That is why I talked about the default provisions for
an agreement which will be established to ensure that not only the interests of members on
retirement are protected but, perhaps more importantly, the interests of the outside world are also
protected. That is the distinction we seek to make in Clause 5(1).
Lord Phillips of Sudbury: I am grateful to the Minister for that explanation.
I should be grateful if
he would read what I said in Hansard and consider whether it might not be of advantage to all to
make clear in Clause 5(1) that, whatever is done under its provisions, it cannot affect the rights of
third parties. That is not explicitly stated.
The incorporation document is changeable. If one looks at the provisions
of Clause 2(2), there are
various aspects of the incorporation document which will be subject to change. Again, I am not
sure that Clause 5(1) as drafted takes that into account.
These are all very technical matters and at the moment I am happy to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Goodhart moved Amendment No. 16:
Page 2, line 44, at end insert--
("( ) Subject to this Act and to the provisions of the incorporation
document and of any such agreement as is mentioned in
subsection (1), the mutual rights and duties of the members of a limited liability partnership shall be governed by the rules
and principles which would apply if the law relating to partnerships applied to them and the property of the limited liability
partnership were partnership property.").
The noble Lord said: This is an important amendment--one of the most
important that have been
tabled to this Bill.
Up until now, partnership law has been made in part by the Partnership
Act 1890 and in part by
decisions of the courts. The 1890 Act is a classic of parliamentary draftsmanship: it is clear,
simple and concise. Would that modern statutes were as effectively and briefly
24 Jan 2000 : Column 1371
drafted as that. It has worked with almost no amendments and to general
satisfaction for 110
years. It is showing some signs of age but it has still been the effective foundation on which
partnership law has been based.
As has been pointed out, it contains a number of important default provisions--rules
to partnerships if the partnership agreement does not cover a particular issue. This Bill, however,
is completely lacking in default rules--and it needs them, especially because many existing
partnerships will convert into LLPs and they will need to know whether or not, and how far, the
laws which have governed them as partnerships will continue to govern them as LLPs.
If one wants to look at the default rules, one has to look primarily
at Section 24 of the Partnership
Act. That provides default rules which are subject to agreement to the contrary. Those include the
fact that members are entitled to equal shares in the capital and profits of the partnership; that they
are entitled to indemnity for liabilities personally incurred in the course of conducting the firm's
business; and all members are entitled to take part in the management of its business. No person
may become a member of the firm without the consent of all the other partners. Business
decisions shall be taken by a majority of the partners, but any change in the nature of the business
must have the consent of all the partners. Lastly, all members have the right to inspect the firm's
Other important default provisions are provided for. Section 25 provides
that there is no power to
expel a member unless the agreement so provides. Section 26, which has already been discussed,
provides for a right to retire from the firm on notice where no other provision has been made in
the agreement. Section 30 provides that members are under a duty not to compete with the firm.
There are also important rules of common law and equity that apply to partnerships, in particular
the duty of partners to act in good faith towards each other. I should like to refer to a quotation
from what I believe is the best known textbook on the subject, first published in the name of the
famous judge, Lord Lindley. It states that:
"Perhaps the most fundamental obligation which the
law imposes on a partner is the duty to display complete good
faith towards his co-partners in all partnership dealings and transactions".
That is an important principle. It is vital that default rules for the
conduct of LLPs should be
provided, especially because LLPs will be used as a simple and informal way of incorporating
small businesses where it is likely that members' agreements will be defective and incomplete in a
way that the agreements of substantial accountancy firms or solicitors' practices will not be
The wording of Amendment No. 16 is based on an earlier text in a draft
government Bill. I believe
that Amendment No. 17 is intended to achieve the same purpose but with different wording.
Powers are provided to include default provisions by regulations under Clause 14. The
Government have stated their
24 Jan 2000 : Column 1372
intention to do so in so far as that is appropriate. However, in spite
of their intention, I have tabled
the amendment for three reasons.
First, proper default provisions are of central importance to the working
of LLPs and I believe
that they should be set down on the face of the Bill, as was done in the case of the Partnership
Act 1890. Secondly, although it may be easy to provide default provisions where they are based
on existing statutes, they will be much more difficult to formulate where they are based on
common law. The duty to act in good faith to fellow members is central to a partnership and
should remain central to LLPs. The Government have objected to this in the letter to which I
referred earlier. It is said that there may be a potential conflict between duties to fellow members
and duties to the LLP. I do not believe that to be a real problem. The courts created the duty of
good faith and I believe they are entirely able to apply that concept to a new context. For example,
the suggestion that members might be held liable to account for a private profit to both the LLP
and the members of the LLP is, in my view, simply fanciful.
Thirdly, we have not yet had sight of the draft regulations that will
apply the partnership principles.
I hope that we shall do so before the Bill is enacted, in the same way as we have seen the effective
draft regulations the Government propose to introduce as regards winding up and insolvency. I
beg to move.
Baroness Buscombe: I wish to speak briefly to Amendment No. 16 and then
move on to speak
to Amendment No. 17. The noble Lord, Lord Goodhart, and I are seeking to achieve similar
results here, albeit using different wording. In that sense I concur with much of what the noble
Lord has already said as regards Clause 5 of the Bill. However, I shall repeat what I said during
the Second Reading debate on the Bill; namely, as presently worded, the members of a limited
liability partnership will be subject to company law or employment law if no specific provision is
made in this clause to the contrary. That would radically alter the nature of the limited liability
I appreciate that the Government have sought to clarify this in part,
certainly with Amendment No.
12. However, I believe that Amendment No. 17 deflects any possible confusion between whether
members are employees or partners while enunciating, by reference to the Partnership Act 1890
and the rules of equity in common law applicable to partnerships, the partnership ethos we are
endeavouring to maintain on the face of the Bill. Furthermore, as the noble Lord, Lord Goodhart,
has already said, we wish to recognise those areas that should be expressed in terms of default
provisions modelled on Section 24 of the Partnership Act 1890; or, if not, we would appreciate
the opportunity to review the draft regulations setting out those default provisions.
I shall refer briefly to the Minister's letter to me of 10th January
2000. He kindly clarified a number
of issues, in particular in relation to Clause 5 of the Bill. He made it clear that there are a number of
areas where the Government, through secondary legislation, would like to ensure that the
relationship of the
24 Jan 2000 : Column 1373
members of an LLP is clarified: the right to share equally in capital
and profits; the right to be
indemnified by the LLP for activities in the course of business; the right to take part in the
management of the firm; no entitlement for remuneration for acting in the business of the LLP; the
right to have access to books and records and decisions by a majority vote. In essence, we would
appreciate some reassurance in relation to Clause 5 that such provisions will be set out in
regulations. To that end, we would be grateful to have sight of those draft regulations before final
decisions are made.
Lord Phillips of Sudbury: I should like to make one simple point. The
Title of the Bill is
thoroughly misleading unless the purport of one of these two amendments is accepted by the
Government. The issue of ethos, as the noble Baroness, Lady Buscombe, called it, is crucial. I
have been a member of a partnership for over 30 years and I must say to the House that the spirit
of a partnership can in fact be far stronger and more effective than the dry, technical provisions of
a limited company. For that reason I do not think that this is a minor matter and I agree entirely
with my noble friend Lord Goodhart that the amendments are fundamentally important. I hope
very much that the Government will listen to the point being made here.
Lord McIntosh of Haringey: I thought that we had covered the point of
the Short Title of the
Bill during the Second Reading debate. I believe that there are two ways in which the Title may be
read. The first is that limited liability with the word "partnerships" tacitly held in brackets provides
for limited liability to be applied to partnerships. The second is actual limited liability partnerships;
namely, the entity that will be created by the Bill before us. That is a completely new entity
embodying elements of a partnership and of a limited company.
However, I appreciate the force of the points that have been made from
both of the Opposition
Benches and I do not wish in any way to underestimate their importance. However, I must return
to what I said in response to amendments tabled much earlier this afternoon. The point of the
creation of a limited liability partnership is that it is a body corporate which is treated as a
partnership only for tax purposes. In other words, in every other respect it is not a partnership. If
the noble Lord, Lord Phillips, who told the Committee that he has been a partner for over 30
years, wishes to continue being a partner with unlimited liability, he is entirely free to do so. It is
only because members of many partnerships have expressed a wish for limited liability that we
have gone to the extent of putting the Bill forward. The only basis on which we can put the Bill
forward is to say that, in return for the benefit of limited liability, a price has to be paid.
The price that has to be paid is the price of transparency and, in general,
of the application of as
many as possible of the rules applying to limited companies. If a director of a company or a
24 Jan 2000 : Column 1374
a partnership does not like it, they are free not to do it. We are not
imposing limited liability
partnerships on anyone. We are trying to respond to a legitimate request and, at the same time, to
protect the public who deal with these new business entities.
The attempt to provide a default provision that applies partnership
law seems to go against the
principles that I set out earlier today, and set out, perhaps not entirely clearly, at Second Reading.
If we look at the matter in terms of the professional advisers who will be relevant, I take it that it
will be tax lawyers with experience of partnerships who will be advising LLPs, and in all other
respects corporate lawyers will deal with the issues which LLPs raise. However, as these
amendments are drafted, they would create substantial uncertainties in seeking to apply partnership
law by default to a corporate body. We are applying the Companies Act provisions by regulations
made under the Bill and the application of partnership law in general would lead to confusion as to
how they would interact. For example, the rules for winding-up and insolvency for a company are
entirely different from those for a partnership. That is why we have decided not to apply
partnership law as a default.
After very considerable thought and after the steps that I described
in relation to earlier
amendments, we have decided that the most practical option is to have this set of default
provisions in the regulations which would apply subject to any agreement, express or implied,
between the members. In other words, they would come into effect if an agreement did not cover
the point. The noble Baroness, Lady Buscombe, read out the list of areas which we propose to
include; as indeed I did in response to an earlier amendment. I said that they are available on the
website. They are. I shall take them off the website and send them in hard copy to everyone taking
part in this debate, and by e-mail to the noble Lord, Lord Lucas, who does not like to see things
in hard copy. He has proper concern for the forests of Scandinavia. Whether we can go further
right now in providing drafts of the regulations, I do not know. We will certainly have them
available before Royal Assent. But we are in the middle of consultation on them and it might be
misleading to send draft regulations now. I will do my best. If we can get draft regulations to
noble Lords before Report stage we will certainly do so. I can confirm that they cover the points
made. I can confirm that we intend that they should be applied and that they should be available to
be debated by Parliament as early as possible. I cannot agree with the noble Lord, Lord
Goodhart, that they should be on the face of the Bill. Indeed, the noble Baroness, Lady
Buscombe, recognised that she might not be able to persuade us of that. We think it is better to
provide flexibility for the amendments in case they need to be amended after the Bill has been
enacted. A limited liability partnership is not a partnership, and it would be wrong to restrict its
I want to say a few words about good faith, as the noble Lord, Lord
Goodhart, quite legitimately
referred to that. Although he described what I said at Second Reading as "fanciful", nevertheless I
am going to have to repeat it. Even though no express duty of
24 Jan 2000 : Column 1375
good faith is included in the Bill, we believe that as a LLP is a body
corporate and the members
are agents, the courts would find that a fiduciary duty existed between members and the LLP. If
the rules and principles of the Partnership Act were applied to LLPs and the courts were to find
that a fiduciary duty existed between members and the LLP, it would mean that an individual
member was faced with parallel fiduciary duties: duties that were owed to the LLP and duties
owed to fellow members. In such an event the Bill would not be able to provide a mechanism to
decide which duty would prevail, even when there was a conflict.
That could result in particular difficulties with regard to the duty
contained in the Partnership Act
to account for private profits. To whom should the account be made; to the LLP or other
members? There would be the potential for double jeopardy and the need to prioritise between the
rights of the members and the rights of the LLP.
I know that I have not convinced Lord Goodhart on that point. Perhaps
it is a subject that we can
discuss between now and Report stage. But that is the considered view of the Government. It is
also our considered view that we can best deal with these matters by regulation, as I suggested,
rather than on the face of the Bill. I invite the noble Lord not to press his amendment.
Lord Goodhart: I have to say that I find the Minister's response somewhat
unsatisfactory. I am
concerned particularly that the Government have approached this matter on the footing that a LLP
is essentially a company similar to the Companies Act companies rather than anything which is in
the nature of what we now know as a partnership. It seems to me that it would have been much
better to approach the issue from the other direction, and to say that there are partnerships which
need protection in the form of limited liability, and that that limited liability should be given to them
in a way that does as little damage as possible to existing partnership law.
I accept that the provisions for the winding-up of partnerships are
fundamentally inconsistent with
the idea of limited liability and that one needs to incorporate the provisions from the Insolvency
Act relating to winding-up. I accept also that, given the existence of limited liability, there has to be
a great deal more transparency in connection with the financial information about the firm. But it
does seem to me that there are a great many principles in partnership law which can, and should,
be applied to relations, particularly to the relations between the members of an LLP. I think it is
important to preserve what both the noble Baroness, Lady Buscombe, and my noble friend Lord
Phillips said about the ethos of the partnership system. I fear very much that that will be lost when
we come to LLPs.
I should say that the argument that flexibility is necessary in this
case is not correct. It seems to
me that what we are looking at is principles of partnership law
24 Jan 2000 : Column 1376
that have been established, at least since the Partnership Act 1890,
and in many cases earlier.
Those principles are well-established. It is easy to identify those which are appropriate to LLPs
and to weed out those which are not. Certainly I would not expect to see the regulations which
apply to parts of partnership law have any need of change. In that case it would have been
appropriate for the Government to have introduced these default provisions on the face of the Bill
rather than by way of regulation. There is of course a problem with timing. I can understand that it
is not easy for the Government, having reached where they are, to go back and have a different
approach. It would certainly be much easier for us if we were at least able to see what the
Government are actually proposing and not merely what they are consulting about. That is why I
regret that it is suggested that the draft regulations will not be available until possibly Royal
Having said that, at this stage I shall certainly ask leave to withdraw
the amendment. We shall have
to consider whether, either in this or another form, the amendment should be brought back on
Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 17 not moved.]
Clause 6 [Members as agents]:
Lord McIntosh of Haringey moved Amendment No. 18:
Page 3, line 7, leave out from beginning to ("member")
in line 8 and insert ("But a limited liability partnership is not
bound by anything done by a member in dealing with a person if--
The noble Lord said: In moving Amendment No. 18, I should like to speak
also to Amendments
Nos. 19 to 24. These are amendments to Clause 6 to which I referred in discussing earlier
amendments. They seem complicated on the Marshalled List, but I hope that the marked copy of
the Bill which I supplied makes it possible for me to say that these are largely technical or drafting
amendments. However, there is an issue of substance here which I want to set out.
Concerns were expressed, particularly by the professional consultees,
that the effect of the
drafting of Clause 6(2) goes further than was intended by removing the agency of the member in
the circumstances described at Clause 6(2)(a) and (b). Paragraph (a) refers to where the member
has no authority to act and paragraph (b) refers to where the person with whom he is dealing
believes that he has no authority to act or does not know or believe him to be a member of a
limited liability partnership. The amendments respond to those concerns and ensure that the Bill
meets the agreed intention. It is important that the member should continue to be an agent of the
limited liability partnership for all purposes, even if his acts do not, in certain circumstances, bind
the LLP. The agent--the member--owes fiduciary duties to the principal--the LLP. Those should
apply even if, in a particular case, his acts do not bind the firm.
24 Jan 2000 : Column 1377
Amendment No. 20 provides that third parties--the outsiders, if one
likes--who have knowledge
which bears on a member's status cannot rely on the member being an agent of the LLP. The
circumstances in which that would apply would be where, first, the third party knew or believed
that the individual with whom he was dealing was not a member of the LLP; and, secondly, the
third party knew or believed that the member with whom he was dealing had no authority.
We have gone further in the second provision than was originally the
case in the Bill by saying that
a third party cannot rely on the member being an agent where he believed that the member had no
authority. The specific change is intended to cover the situation where a member of an LLP does
something wholly unconnected with the LLP; for example, a member of an LLP of solicitors who
goes into the business of selling second-hand cars. It would not require absolute knowledge;
belief would be a sufficient test.
I believe that Clause 6, as amended by Amendments Nos. 18 to 24, is
not only clearer than it was
originally but also more precisely reflects our intentions. I beg to move.
Baroness Buscombe: I rise to speak in support of this group of amendments.
For my part, the
amendments help to clarify the meaning of Clause 6. Having cast aspersions on previous
amendments in relation to the drafting of the Bill, it is only fair that I say that the drafting in this
instance has helped to clarify the parameters of the agent. The Minister is already aware that, in
relation to Clause 6 as a whole, we regret the dropping of subsection(1)(c), as it appears in the
earlier draft of the Bill. That made specific reference to the law relating to partnerships. Following
all that has been said today, it is clear that since the earlier drafting of the Bill the Government have
very much moved on in terms of the accent on company law as opposed to partnership law.
Lord Goldsmith: I agree that the wording of the clause is much improved,
but I want to raise one
issue in relation to it. It relates to the particular words to which my noble friend the Minister
referred--that the person knows or believes that the member has no authority. It is right to contrast
that with Section 5 of the 1890 Act, which uses the expression,
"and the person with whom he is dealing either knows
that he has no authority or does not know or believe him to
be a partner".
The concept of belief in relation to "partner" makes a good deal of
sense. If one does not believe
someone to be a partner, one has no business believing that he has authority to act on behalf of
anyone else. But the more I look at it, the more I am troubled by the watering down of knowledge
in relation to paragraph (a)--in relation to the question of whether the person who otherwise ought
to be able to assume that the member has authority is to be deprived of the benefit of that; that is
to say, not to be able to hold the limited liability partnership to account.
24 Jan 2000 : Column 1378
If he knows that the person does not have authority, I have no difficulty
with the provision at all.
That is what the Partnership Act 1890 provided. My question concerns belief. What is it that
would justify saying that someone cannot rely on the member binding the firm because he does
not know that he does not have authority--yet he believes that to be so? I am worried that that
expression should not be taken in any way as amounting to, for example, simply suspicion. I
wonder whether it is worth further considering precisely what the expression adds to the wording
which otherwise I entirely endorse.
Lord Lucas: I should be grateful if the Minister could help me by clarifying
one or two points on
this revised wording. First, under Clause 6(1)(b), the important thing for a partnership to do if a
partnership has such a member--for instance, my accountancy partnership has a member who is
not entitled to sign audit reports--is to ensure that third parties dealing with that partner know that
he does not have that authority; otherwise, it will be caught by this revised wording. The revised
wording takes agency to the point where, if one is dealing with an accountancy firm, one can
presume that any individual party with whom one is dealing is omnipotent; that there are no
restrictions on his ability. One has every reason to believe that he has the power. He is a partner of
the firm and therefore he can do it. However, in order for the revised wording to bite, one must
know that he does not have the power.
How does the Minister envisage that a large accountancy firm will bring
to the attention of its
myriad of clients the restrictions on the ability to act which affect its partners? Will it be sufficient
to have a general notice at the bottom of the note paper saying that people ought to consult the
partnership about what powers individual partners have? How does he envisage this happening in
practice so that a limitation on the partner's ability to act may be made manifest to third parties
with whom the person is dealing?
Under Clause 6(3), where a person has been dealing habitually with a
partner of a firm and that
person then ceases to be a member of the firm, what duties does the limited liability partnership
have to inform the client that the person with whom he was dealing is no longer a member? If it
neglects to do that, is it still free of all liability just by sending a notice to the registrar? That would
seem to be a little unfair.
Lord Phillips of Sudbury: I absolutely agree with the last point made
by the noble Lord, Lord
Lucas. I believe that it will be a much more common occurrence than the Committee may
think--namely, the active attempt by people to avoid liability under this legislation by chopping and
changing registrations of members. If the Committee thinks that I am unduly cynical, I can only
say that it is a cynicism born of long experience. I am afraid that in certain sectors of the economy
there is a great deal of jiggery-pokery and every advantage will be taken.
I should also like to speak in support of remarks made by the noble
Lord, Lord Goldsmith. He is
correct in drawing a distinction between knowing and
24 Jan 2000 : Column 1379
believing. I merely point out that these days solicitors do a multiplicity
of things. I refer to them as
one example of the professional bodies that will take advantage of the LLP. They sell property;
they act as attorneys; they are very often partners and non-executive directors of companies of
which their firm is also the solicitor. I suggest that it is extremely difficult to know what someone
believes, or believed, given that a court will have to construe that.
A large firm of solicitors or accountants is in an extremely powerful
position over and against an
individual member of the public in sidelining or derailing a perfectly proper claim brought by an
individual by pretending--I use the word advisedly--that they did not believe that the partner
concerned did not have authority. In considering the Bill, we need to be extremely careful to give
no help at all to those who will, I fear, be unscrupulous in seeking to take undue advantage of what
is the extension of an immense public privilege via limited liability.
Lord McIntosh of Haringey: I have certainly got the big guns raising
questions about the new
drafting. I acknowledge that. My understanding as we went through the amendments last week
was that what we were doing was providing a failsafe on the side of the client--in other words, the
provision would make it more difficult for a limited liability partnership to evade any
responsibilities. But several noble Lords, including my noble friend Lord Goldsmith, have
suggested that the failsafe might be in the other direction. It was certainly not in my mind that that
should be the case. However, if the introduction of the words, "or believes", in the part of
subsection (2)(b) which refers to authority does go in the other direction and weakens the rights of
the third parties, those with whom the LLP is doing business, that is not what is intended.
This is a genuinely difficult issue. I recognise that we have sprung
the new wording on the
Committee at relatively short notice. I should like to include the wording because I believe it is
clearer to do it that way. However, I should like to write to all noble Lords and, if that is their
wish, meet with noble Lords before Report stage to make sure that we are of one mind about this
matter. I believe that we are all here on the side of the customers rather than on the side of the
professionals. I hope that on that basis noble Lords will not resist the amendments which have
been agreed to be an improvement in terms of clarity, if not entirely in effect.
On Question, amendment agreed to.
Lord McIntosh of Haringey moved Amendments Nos. 19 to 24:
Page 3, line 9, leave out ("in a particular matter")
and insert ("by doing that thing").
Page 3, line 10, leave out ("with whom he is dealing
in that matter either knows") and insert ("knows or believes").
Page 3, line 13, leave out ("person deals with a
limited liability partnership after a").
Page 3, line 14, leave out ("the") and insert ("a").
24 Jan 2000 : Column 1380
Page 3, line 14, leave out ("he is entitled to treat
the former member") and insert ("the former member is to be
regarded (in relation to any person dealing with the limited liability partnership)").
Page 3, line 17, leave out ("he") and insert ("the person").
On Question, amendments agreed to.
[Amendment No. 25 not moved.]
Lord McIntosh of Haringey moved Amendment No. 26:
Page 3, line 20, at end insert--
("( ) Where a member of a limited liability partnership is liable to
any person (other than another member of the limited
liability partnership) as a result of a wrongful act or omission of his in the course of the business of the limited liability
partnership or with its authority, the limited liability partnership is liable to the same extent as the member.").
On Question, amendment agreed to.
Clause 6, as amended, agreed to.
Baroness Buscombe moved Amendment No. 27:
After Clause 6, insert the following new clause--
(" . Unless otherwise agreed between members and the limited liability
partnership, a member is not an agent for another
member, is not liable for debts of the limited partnership and is not an employee of the limited liability partnership").
The noble Baroness said: This is a probing amendment designed to ensure
clarity with regard to
the relationship between members and the limited liability partnership. Based on present English
legal authorities, the fact that the LLP is incorporated with limited liability, has a separate legal
personality and no mutual agency of members should be sufficient to protect non-negligent
members where the LLP is the contracting party. In essence, the amendment seeks to reinforce
limited liability. I beg to move.
Lord McIntosh of Haringey: I had assumed that other noble Lords with
more expertise than I
would wish to intervene. There are three elements in the amendment. I am duty bound to deal with
all three. The first provides that, subject to the agreement between members, the member is not an
agent for another member. We do not believe that the provision is necessary. There is nothing in
the Bill to provide that one member is an agent of another. The member is only an agent of the
The second provision is that, subject to the agreement between members,
a member is not liable
for the debts of the limited liability partnership. Again, we believe the provision to be unnecessary.
The LLP is a body corporate and a separate legal person from its members. Under the common
law as it applies to corporations, the members of a corporation are not in general liable for its
debts. That is subject, of course, to the caveat that our intentions are to ensure, by regulation, that
if an LLP becomes insolvent, a member may be required to repay withdrawals made from the LLP
in the two years prior to winding up if it is proved that at the time of the withdrawal he knew or
had reasonable grounds for believing that the LLP was at the time of the withdrawal unable to pay
24 Jan 2000 : Column 1381
I refer to the proposed new Section 214A of the Insolvency Act which
we published twice in draft
for consultation, most recently in July last year, and which is the subject of a subsequent
amendment by the noble Lord, Lord Goodhart.
The third part of the amendment provides that, unless otherwise agreed,
a member is not an
employee of the limited liability partnership. We dealt with that point in government Amendment
No. 12, which has been agreed, by providing that a member of an LLP shall not be considered an
employee simply by virtue of being a member. I hope that at that time I explained why it was that
we did not believe that this matter should be subject to an agreement of the LLP; it should, in
contrast, be part of normal employment law, however opaque that may sometimes be.
For those three reasons, I am afraid that the Government cannot accept the amendment.
Baroness Buscombe: I thank the Minister for responding to what I made
clear was a probing
amendment. I thank him for addressing each of the three areas in detail. I am content to withdraw
Amendment, by leave, withdrawn.
Lord Goldsmith moved Amendment No. 28:
After Clause 6, insert the following new clause--
(" . Any member of a limited liability partnership shall be personally
liable in tort (or in Scotland in delict) to any person for
his own acts or omissions (but not for the acts or omissions of any other member of the limited liability partnership or for
the acts or omissions of any employee of the limited liability partnership except such as are under his supervision or
control) to the same extent as he would have been liable if the limited liability partnership had been a partnership subject
to the provisions of the Partnership Act 1890 and of which that member was a partner.").
The noble Lord said: I raise this amendment to air an issue about the
effect of the Bill if enacted.
Paragraph 10 of the Explanatory Notes states that,
"The LLP and not its members will be liable to third
parties. However, a negligent member's personal assets will
still be at risk. By way of example, under the general law, a professional person owes a duty of care to his client.
Negligent advice given in breach of that duty by a member of an LLP will, in general, give rise to a potential liability
on the part of that member as well as the LLP".
As I have understood the Explanatory Notes and remarks made in this
place, it has been regarded
as an important part of the Bill that, although partners will not be liable for their partners' acts, they
will remain liable for their own acts or omissions. I have a concern, however, as to whether it can
be said with the degree of confidence which the Explanatory Notes imply that that is what the
common law will provide.
At the moment the liability of a partner may arise either in contract
or in tort. The liability in
contract arises where the partner is one of those persons with whom an individual has contracted
to provide services. That liability will plainly not arise in future where a limited liability partnership
is involved. The whole point is that it will be a separate body corporate
24 Jan 2000 : Column 1382
that makes the contract, not the individual partners. The position in
relation to tort is that an
individual may owe a duty in certain circumstances. In relation to acts which cause personal injury
or loss of property there is no real difficulty. Someone who drives down the road is liable for his
acts whether he is conducting his own business or that of his employer. Where economic loss is
caused, over the past 10 to 15 years the courts have devoted much time to considering the precise
circumstances in which a duty of care may arise. The case of Caparo to which reference has
already been made is one such example, but not all of these cases are at first sight always easy to
The present position can be stated as follows: a person's liability
to another for economic loss, for
example by reliance on the spoken or written word, will depend on the court determining in all the
circumstances of the case whether such a duty is found to exist. That may sound somewhat
circular, and to an extent it is. The court looks at all the facts. The present test most often used,
although not always, is whether the person assumed a personal responsibility for the particular act.
A special difficulty arises when a legal entity is interposed between
the third party and the act of
the individual. That matter has been most recently considered in the decision of this House in
Williams v Natural Life Ltd. It is important to emphasise that that case concerned an ordinary
company. Putting it at its shortest, the test appears in the speech of the noble and learned Lord,
"The inquiry must be whether the director, or anybody
on his behalf, conveyed directly or indirectly to the
prospective franchisees that the director assumed personal responsibility towards the prospective franchisees".
In that case there was discussion about the circumstances in which the
director of a one-man
company might be liable. In its judicial capacity this House took the view that it did not necessarily
follow that, because a company was a one-man business, that individual owed a personal duty; it
would depend on whether on the facts he had assumed a personal responsibility. The extent to
which this is a difficult area can be shown by the fact that in that case the Court of Appeal and this
House differed as to the result: the Court of Appeal held that there was a duty of care; this House
held that there was not.
My concern, therefore, is that the statement in the Explanatory Notes
may give the impression that
undoubtedly the common law will give rise to a personal liability on the individual person who has
done the act or omission when I am not confident that that is the effect. It will depend on the
circumstances. I can think of cases where it is likely that the courts will find such a duty and cases
where that is much less likely. By way of example, in the simple case of a solicitor who sees a
client and directly gives particular advice on which the latter relies, it may very well be that the
court will find that the client relied on that particular solicitor and that he had assumed a personal
24 Jan 2000 : Column 1383
But what of the case where it is not a question of spoken advice being
given but a failure to act?
What if one's solicitor fails to file one's claim on time? Does the individual partner one sees first
assume a personal responsibility to file the writ or does one rely on the firm to do it, in which case
that partner may not have a personal duty? Of greater complexity and perhaps importance in the
context of accountants is the team job. What about a case where the job is done by a team of
partners, managers and assistants who together negligently, regrettably, make an error which
causes substantial loss? Which of those members owes the personal duty, or does any of them?
In those circumstances, does one rely on the individual partner or the well known firm? What of
the case where the letterhead says that no individual partner assumes any personal responsibility
for any act and one must look to the LLP alone?
The reason for moving the amendment is to raise this issue in the sense
of asking whether, if this
matter is fundamental to the Bill, words can be found that give effect to that intention, or whether it
is something with which one is prepared to live and in certain circumstances the common law may
not provide the remedy which the Explanatory Notes seem to suggest. The wording of the
amendment is not perfect. I confess that it is not easy to formulate an amendment which gives that
effect. I suggest that it is inappropriate to table an amendment which changes the general law. This
is a difficult area. The amendment seeks to put the individual partner in the same position as he
would have been in had it been an ordinary partnership. I have tabled the amendment to explore
that issue and the basis of the Explanatory Notes. I beg to move.
Lord Sharman: I rise to support the amendment. In so doing I repeat the declaration of interest
that I made at Second Reading: to wit I was a partner in a large firm of accountants for many
years and I continue to act as a paid adviser to that firm.
Of late I have frequently used the words in the Explanatory Notes to
explain and justify the Bill. It
is very important that the issue which has been raised is specifically addressed. I do not seek to
defend the Bill on the footing on which I have defended it; namely, to say that this is a necessary
development of the legislation but that nothing in it will in any way change the individual
responsibilities of a partner. That is widely believed to be the case outside this House. The point
that the noble Lord raises is a valid one, and I support the amendment.
Baroness Buscombe: I also support the amendment. I do not seek to repeat
everything that the
noble Lords, Lord Goldsmith and Lord Sharman, have set out with such clarity. This is a
tremendously important matter. During Second Reading there was brief debate on the clarity of
the parameters of the liability of the members of a limited liability partnership. Any clause such as
this, however difficult to draft, that makes clear on the face of the Bill the general parameters of
limited liability, and that individuals will be liable in the same
24 Jan 2000 : Column 1384
way as they would be liable in certain circumstances as the partners
in a normal partnership, can
only benefit all those who seek to establish limited liability partnerships following the passing of
Lord McIntosh of Haringey: I agree with a number of the observations
that have been made.
This is a very important issue and we should see to it that professional liability is not watered
down by the Bill. I also agree that it is difficult to see how to achieve that. I do not believe that to
apply the law of partnership, as the amendment seeks to do, is the right solution to the problem.
My noble friend has highlighted our reliance on the duty of care enshrined in common law to
achieve the liability of the negligent member of an LLP. He questions whether that is right or safe.
I recognise that there are concerns about the treatment of professionals
and their freedom to
operate with limited liability. But with this member we do not want to change the regulation of
professionals. We intend to create an alternative corporate form which will be available to anyone
carrying on a lawful business with a view to profit--that is, not just to professionals.
My noble friend and others have queried the statement in paragraph 10
of the Explanatory Notes
"Members benefit from limited liability because the
LLP is a separate legal person. The LLP and not its members
will be liable to third parties. However, a negligent member's personal assets will still be at risk. By way of
example, under the general law, a professional person owes a duty of care to his client. Negligent advice given in
breach of that duty [of care] ... will, in general"--
I emphasise the words "in general" because that is meant to be in the
form of a qualification--
"give rise to a potential liability on the part of that member as well as the LLP".
We think that that is indeed the case. A negligent member's assets will
be at risk. The risk for
members of a limited liability partnership may be smaller than for partners in a partnership, but the
risk is still there. That is why the Explanatory Notes are worded in that way. It is justifiable
because of the additional liability of the partnership as a body corporate. That is where the
protection of the third party comes in.
Lord Goodhart: Will the Minister explain the alleged additional protection?
The additional liability
of the LLP adds nothing to what the liability would have been if it had been operating simply as a
Lord McIntosh of Haringey: The intention is for the assets of the LLP
to be available to
compensate the complainant--I think that that is right term, not the plaintiff--against any claim. I
know that the noble Lord is sceptical about that because of the issue of joint and several liability.
However, I remind him that from many points of view joint and several liability is a difficult
concept to sustain.
We have approached the creation of this entity, therefore, on the basis
that it will be a body
corporate, and that the principles and regulations applied to companies are the most appropriate
ones to apply to
24 Jan 2000 : Column 1385
the LLP. We see significant disadvantages to what is being proposed.
The limited liability
partnership will be an entity which can be used by professionals and non-professionals alike. It
will create a choice of limited liability entity between a company or an LLP. We believe that it is
important to ensure a level playing field between the two entities.
Responsibility and the assumption of responsibility to a third party
is a general question which
runs through the law of tort. Were we to make a statutory provision, as the amendment suggests,
we would be freezing the law for members of a limited liability partnership by putting it into statute
law whereas common law would continue to evolve. This is particularly dangerous in the context
of the ongoing company law review, to which I have referred. It would create the prospect of an
undesirable disparity of treatment.
Further, we do not believe that this Bill is the right way to amend
the scope and application of the
law of tort. We tread on dangerous ground. Should the courts have to consider whether a member
of an LLP had been negligent, they would consider, among other things, whether that member had
assumed responsibility sufficient to give rise to liability for economic loss flowing from the
reliance placed on that. That is the point of Williams v Natural Life to which my noble friend
referred. In Williams it was found that there had been no personal dealings between the director
and the plaintiffs and no exchanges or conduct between them which could have conveyed to the
plaintiffs that the director was willing to assume personal liability to them. Indeed, there was no
evidence even that the plaintiffs had believed that the director was undertaking personal
responsibility towards them. The point here is that the assumption of responsibility was to be
determined objectively so that the primary focus had to be on exchanges between the parties.
Clearly, the courts' decision cannot be forecast with absolute certainty,
since their decision in any
case would depend not only on the general nature of the relationship between the member of an
LLP and his client, but also on the exact facts of that relationship, as is made clear from Williams.
I accept that a consequence of relying on common law is the possibility
of a greater degree of
evolution through the common law than where express provision is made in statute. But we see no
reason to make special provision for a limited liability partnership where it does not exist in
In the context of the company law review which will undoubtedly have
to consider the important
issues raised by the amendment, I hope that my noble friend will not pursue an amendment which
would lead at least in the short term to an imbalance between the law for companies and the law
for limited liability partnerships.
Lord Goldsmith: I confess to being somewhat disappointed and not persuaded
by the Minister's
reply. I understand that after the Bill becomes law
24 Jan 2000 : Column 1386
there will be three types of entity: an ordinary partnership; a limited
liability partnership; and an
ordinary company. In an ordinary company, the shareholders are liable only to the extent of their
contributions--the capital--they have put into the company. In an ordinary partnership, the partners
are liable for all their assets because of the joint and several liability principle.
I had understood that the principal purpose underlying limited liability
partnership was to provide
a hybrid in which one did not have all the consequences of an ordinary company but excluded the
joint and several liability principle. Therefore, the partner would not be liable for the acts of his
partners save to the extent, as in a company, that he had contributed to the assets of the
partnership. At present if one sues a partnership, one looks first no doubt to the assets the
partnership has built up--its buildings, offices, cash balances, and insurance policies--before
turning to the homes and cars of individual partners.
As the noble Lord, Lord Sharman, said, it is understood outside this
Chamber that the Bill intends
to keep the individual responsibility of the partner as still his personal responsibility. Perhaps that
would assist towards maintaining the professionalism and ethos of partnerships to which the noble
Baroness, Lady Buscombe, and the noble Lord, Lord Phillips of Sudbury, referred.
One can argue about and differ on the interpretation the courts may
give. I have expressed my
position in relation to that. In tabling the amendment, I have sought not to change the general law
but to give the member of the limited liability partnership the same liability he would have had for
his own acts--not others' acts--in those circumstances.
Lord McIntosh of Haringey: Before my noble friend concludes his remarks,
I repeat the
difficulty which we see. I shall be glad to meet him again to discuss the issue--and indeed any
other noble Lords who would care to do so before Report stage. Of course, if we were
persuaded, we would put forward appropriate amendments.
I do not know whether I am grossly oversimplifying the issue. We seem
to be talking about two
aspects of common law: the law of contract; and the law of tort. The law of contract applies to
the body corporate; and the law of tort remains applicable to the individual members. That is
where negligence comes in. That is why there is a sense in which the individual responsibility of a
member is reduced: it is reduced only to obligations under the law of tort. But the important point
to establish--we have to arrive there in the end--is that the protection of the clients, the customers,
is not diminished in total.
Lord Goldsmith: I agree with my noble friend that there are two distinct
issues. As regards his
first point, I was about to say that I do not intend to press the amendment. I have heard the
remarks made by other Members of the Committee and I am happy that the Minister is willing to
consider the matter further. I beg leave to withdraw the amendment.
24 Jan 2000 : Column 1387
Amendment, by leave, withdrawn.
Clause 7 agreed to.
Clause 8 [Designated members]:
Baroness Buscombe moved Amendment No. 29:
Page 3, line 39, at beginning insert--
("( ) Each limited liability partnership shall have a minimum of two
designated members who shall be responsible for
complying with the administrative and filing provisions of this Act and regulations made pursuant to this Act.").
The noble Baroness said: The amendment seeks to clarify the role of
a designated member. As
currently drafted, the Bill does not appear to explain what a designated member is. I might sound a
little like a rusty record, but I am reading the Bill from the point of view of someone considering
establishing an LLP and wanting to know what the parameters are and who deals with what.
Clause 8 launches into provisions for designated members, stating that
anyone can become one.
An incorporation document specifies who they are, but not what they are. Therefore, the
amendment attempts to overcome that by explaining their role and providing that, in any event,
there must be a minimum of two in order to ensure proper compliance with the administrative and
filing provisions of the Act and regulations made pursuant to it. I beg to move.
Lord McIntosh of Haringey: Clause 8(2) provides that:
"if there would otherwise be no designated members, or only one, every member is a designated member".
That is supposed to mean that there should be at least two designated
members. I do not believe
that the amendment makes the role of the limited liability partnership any clearer than the current
provisions included in the Bill and the regulations. It provides an inaccurate paraphrase of their
function because the amendment adds the requirement that designated members should be
responsible for complying with the "administrative and filing provisions" as set out in the Act and
I understand the difficulty with Clause 8. It sets up all the conditions
under which designated
members are to be appointed and changed and how notification is to be given, but it does not
state what they will do. I apologise for that, but on questioning it appears that the drafting is not
uncommon. The reason is that the role and responsibility of designated members is analogous to
the phrase "an officer of the company" under the Companies Act. Under that Act, the obligations
on an officer of the company appear all over the place in many aspects of company legislation. If
we were to say that the role of a designated member is analogous to the role of an officer of the
company, we might be trapped into going through company legislation and finding hundreds of
instances where we should have to specify what the officer of the company, and therefore the
designated member, does. For the sake of saving ink and paper, we did not want to do that.
24 Jan 2000 : Column 1388
It is right that in general a designated member has administrative and
filing functions, but it would
be wrong to limit his role in that way. In some provisions, he is given a task which goes beyond
the mere administrative and in which he would take action that is significant for all the members.
For example, designated members sign the accounts, appoint the auditors for the first financial
year in respect of which auditors are appointed, and may apply to the Registrar of Companies for
the LLP's name to be struck off the register.
It would be complicated, and I believe unnecessary, to include this
additional provision in the Bill.
Despite the clause being counter-intuitive in the sense that it does not spell out the functions, there
is a good and rational reason for it and I hope that the noble Baroness will not press her
Baroness Buscombe: I thank the Minister for that explanation, but I
remain unconvinced that
there is an explanation of a designated member. The difficulty is in the drafting. I agree that the
drafting of the amendment is unsatisfactory, but it is important that wherever possible it is clear as
to who is what. I am disappointed that the Bill launches into what someone can and cannot do
without explaining why a designated member differs from a member. However, I accept the
Minister's response and beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 8 agreed to.
Clause 9 [Registration of membership changes]:
Baroness Buscombe moved Amendment No. 30:
Page 4, line 22, leave out ("fourteen") and insert ("28").
The noble Baroness said: The amendment seeks to allow more time when
a person becomes or
ceases to become a designated member. The Bill currently provides that notice shall be delivered
to the registrar within 14 days. Where there is any change in the name or address of a member,
notice is to be delivered to the registrar within 21 days.
I propose that in both instances 28 days should be allowed in order
to give the LLPs more time to
register the change. Some global partnerships have as many as 8,000 members; for example, some
of the major accountancy firms. We believe that the 14 and 21 days could be increased to 28
days, providing a more comfortable period within which to register. It was discussed at the Trade
and Industry Select Committee (paragraph 59 of its 4th report), which stated that the largest LLPs
will have many hundreds of members. I believe that that should read "hundreds of thousands".
Each year, one might have 100 new members, 150 moving house and 10 name changes due to
marriage or divorce.
The amendment is designed to allow for a little more leeway in registering
a change and complying
with the Bill. I beg to move.
Lord McIntosh of Haringey: I am pleased to say that I can meet the noble
Baroness half way.
We will split
24 Jan 2000 : Column 1389
the difference. I cannot agree to Amendment No. 30 because the 14-day
limit on the notification of
changes to members is the same as for the notification of changes to directors. It is an important
protection for those having business with them that they should be able to know quickly what
changes have taken place in the identity of members. We do not see any reason why it should be
any different for LLPs and companies.
However, the noble Baroness has a point in Amendment No. 32. Indeed,
in our response to the
trade and industry committee, we said that we should allow returns to be made within one month
of any change and her stipulation of 28 days is closer to one month than ours of 21 days. It is
longer than we provide for companies but I take the noble Baroness's point about large
partnerships with hundreds of members and I am willing to accept Amendment No. 32.
Lord Lucas: I should like to return to something the Minister has just
said: that the matter of
registering members' names and addresses was an important protection for those who deal with an
LLP. In what way does Clause 6 not cover that to make such registration unnecessary? There is
no obligation on someone dealing with a partnership to inquire into the register at all. As long as he
believes the person to be a partner, he is safe. I cannot see what additional protection is afforded
by having the register updated so frequently.
Lord McIntosh of Haringey: If I said that, I was giving the wrong impression.
I did not say that
registration is unimportant; it is clearly important. I said that we must have a better protection and
one which is available without the proactive step of going to the register. That is why I said that,
for example, on the letterhead and in any business correspondence, the members of a limited
liability partnership must indicate that they are members. The fact which matters in that respect is
that we are providing in the Bill a better protection than registration. It does not in any way remove
the necessity to have an efficient registration system, which is what is provided for here.
Lord Lucas: I understand that, but my understanding of the Bill at present
is that having the
members' names on the register is not important as part of the protection of third parties and
therefore it should be perfectly possible to make that time limit 28 days. Third parties gain nothing
by the speedy updating of the register. Twenty-eight days would be quite sufficient because the
protection is elsewhere in other clauses of the Bill.
Lord McIntosh of Haringey: The noble Lord may believe that it is belt-and-braces;
is taken away by providing for 14 days. Fourteen days seems to work for limited companies. In a
way, it is in the LLP's interest to notify the registrar, but the position must be the same as that for
limited companies and there is no reason why it should not be.
24 Jan 2000 : Column 1390
Baroness Buscombe: I thank the Minister for his response to Amendment
No. 30. I apologise
for not making it clear at the outset that I would be speaking also to Amendment No. 32. I believe
that the Minister judges from my inexperience here, but he obviously realised that I was referring
to both amendments. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 31 not moved.]
Baroness Buscombe moved Amendment No. 32:
Page 4, line 25, leave out ("21") and insert ("28").
The noble Baroness said: I beg to move.
On Question, amendment agreed to.
Lord Goodhart moved Amendment No. 33:
Page 4, line 42, at end insert--
("(5A) If a limited liability partnership fails to comply with subsection
(1), the person who becomes or ceases to be a
member or designated member or whose name or address has changed may deliver notice to the registrar.
(5B) Any person who delivers a notice under subsection (1) or (5A) which is materially incorrect shall be guilty of an
offence unless he had reasonable grounds for believing the notice to be correct.").
The noble Lord said: This is a short point. It is clearly desirable
that a former member who ceases
to be a member of an LLP should be able to dissociate himself as quickly as possible from his
membership. One way in which that is done--an important method--is by having his name
removed from the membership list on the register. As now provided under Clause 9, that notice
may be given only by the LLP itself. The LLP may, particularly if there is a membership dispute or
if the administration of the LLP is in some degree of chaos--which may happen with small
organisations--either refuse or fail to give the necessary notice. As the Bill now stands, a former
member who wishes the fact that he has left the membership to be recorded on the register would
have to go to court to seek an injunction ordering the LLP to give the necessary notice. That
would involve time and money, and it would surely be better to give the former member the right
to give notice himself personally if the LLP fails to do so.
There is, of course, a risk that someone might give notice of retirement
when he was in fact not
entitled to retire. The second half of the amendment is intended to cover such a situation, where
the proposed amendment to the register is known to be correct. I added the words "materially
incorrect" to exclude problems with minor errors such as an incorrect postcode given on a change
of address. There is nothing more that I can say on the matter; it is a short point, which I ask the
Minister to consider. I beg to move.
Lord McIntosh of Haringey: I certainly do not feel strongly about that
as an issue of principle.
The amendment creates a requirement for an LLP additional to that placed on companies. Under
company law, when the details of a director change, the company has the responsibility for
24 Jan 2000 : Column 1391
registrar. In situations of default, the company and officers are in
default and liable to a fine. There
is no expectation that the director whose details change needs to inform the registrar and face the
risk of a fine if the information is materially incorrect.
If we were to allow a member to inform the registrar of changes there
might be confusion both
within the LLP and with the registrar, as a member is unlikely to be aware whether or not a
registrar had been notified. Therefore, the same notification could go to the registrar twice and a
situation could arise where the registrar did not know which to believe; for example, if a member
left the LLP and informed the registrar of the fact when the LLP had already done so. That could
result in additional work for the registrar and confusion for the outside world. As I said, I do not
feel strongly about the matter, but, if the noble Lord has a point, it is one which applies to
company law more generally. Since it is not an urgent point, it might be as well for it to be
included in the company law review rather than introduced separately for LLPs and not for
Lord Goodhart: I thank the Minister. I accept that this is not the most
important amendment that
we are discussing today, but it is not right to treat LLPs and ordinary companies on the same
footing here, because there is a distinction between membership of a company and directorship in
the case of ordinary companies which does not apply to LLPs, where membership and
directorship are a single combined function. In those circumstances I believe that there is a
justification for treating LLPs differently from directorships. Indeed, there may be cases where a
member is more anxious to disassociate himself from a company than a director would be.
However, certainly for today I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No.34 not moved.]
Clause 9, as amended, agreed to.
Clause 10 [Income tax and chargeable gains]:
Lord Lucas moved Amendment No. 35:
Page 5, line 6, after first ("partnership") insert (", or any other activity or function of such a partnership,").
The noble Lord said: In moving the amendment I shall speak also to Amendments
Nos. 37 and
38. When I discussed the Bill with the Minister in his office, we covered the subject of tax
transparency. Certainly in the publicity about the Bill it has been said to be a vehicle which is tax
transparent. However, in the wording of the Bill, the tax transparency is limited to that which a
partnership would have because it is limited in the same way as is a partnership to the carrying on
of a trade or business.
I discussed with the noble Lord why that might be and what problems
that might create; for
example, if a large limited liability partnership sold its trade and was
24 Jan 2000 : Column 1392
left with various assets which were then disposed of, it was said--I
believe quite rightly--that that
would be very much a borderline case. It was said also that under those circumstances there
would be an argument for the limited liability partnership to trip into tax intransparency and
become liable to tax on its own account. In addition, it was said that circumstances existed where
that kind of transformation would be desirable, such as in the compulsory winding-up of a limited
liability partnership. In those circumstances, it would be better if the partnership were dealt with as
an entity on its own and subject to its own tax rather than continuing to refer to the members,
because they, in a way, would have ceased to be associated with the partnership.
As I said before, I have an interest in seeing whether we can make this
a suitable vehicle for
venture capital partnerships. Certainly the role of partners who do not undertake the active
management of the individual investments in such partnerships is on the borderline between trade
and investment. If those partners are going to use this type of provision--which, I believe, would
be worth while from the point of view of the United Kingdom economy--it seems undesirable that
they should be left in the rather unattractive hinterland between tax transparency and no tax
Admittedly from a relative state of ignorance, I see no difficulty in
expressing the tax transparency
the other way round. With these amendments, I have sought to ensure that this is a tax-transparent
vehicle except in certain circumstances. Amendment No. 38 serves to illustrate a particular
exception which would provide circumstances under which the vehicle was not tax transparent. It
seems to me that members, whether of an accountancy firm or of a venture capital partnership,
could rest easy knowing that that was a tax transparent vehicle, that they would pay tax as it was
due on them through the limited liability partnership, and that they would not suddenly wake up to
find that a tax inspector somewhere had decided that they were no longer trading and that under
those circumstances the whole tax treatment of their investment had changed. I beg to move.
Lord McIntosh of Haringey: I have two kinds of difficulty with these
amendments. One is a
technical difficulty and the other is a difficulty of principle. I shall deal first with the difficulty of
principle. The purpose of the Bill as a whole is to ensure that businesses which are currently
carried on in partnership can continue to carry on those activities without the disadvantage of
unlimited liability. The amendment would mean that activities which cannot be carried on in
partnership would be able to be carried on through the medium of an LLP. Therefore, they go
beyond the scope of the policy that was behind the introduction of the Bill. The noble Lord has
been quite open about that point in saying that he is interested in opening up the matter to venture
capital partnerships and, I believe, also to property. I believe that he said that at an earlier stage. I
may be wrong.
24 Jan 2000 : Column 1393
I do not believe that the noble Lord was present when we debated the
earlier part of the Bill this
afternoon. We carried Amendment No. 5 to Clause 2. The definition of the purpose of an LLP is,
"carrying on a ... business with a view to profit".
That is more explicitly in line with the provisions of the 1890 Act
than it was before. I am afraid
that what the noble Lord proposes in the amendment would extend the availability of LLPs
beyond that which was originally intended with partnerships. Therefore, that is the difficulty of
There is quite a big technical difficulty. As Clause 10 is currently
drafted, the special tax treatment
of LLPs as though they are a partnership is given only when the LLP carries on a trade,
profession or business. When those conditions are not met by an LLP, it will be taxed as though it
was a company. The amendments would have the effect that LLPs were taxed as partnerships,
irrespective of the activities that they carry on. However, they could then encounter the technical
difficulties which I shall set out.
From the point of view of calculating and collecting tax, there would
be no difficulty. But taxing
LLPs as companies is undesirable to those who believe that they may wish to set up LLPs, and
we have agreed to tax them, for the most part, as partnerships. However, the reason that there are
no technical difficulties in taxing an LLP as a company is important. That is because, by and large,
companies can receive any type of income, and the Taxes Acts have evolved to be sufficiently
flexible to deal with that. But Taxes Acts have evolved differently to tax partnerships established
under the Partnership Act 1890. Because of the way that that Act defines partnerships as,
"the relationship that exists between persons carrying on business in common with a view of profit"--
that, with some updating of wording, is what is now in Clause 2. The
Taxes Acts have evolved to
tax the income, and only that income, that can arise from such a partnership. As a result, the
Taxes Acts provide for the taxation of income received by partnerships from carrying on
businesses, which is a wide term that includes trades or professions.
Therefore, it we accepted the amendments, the Taxes Acts would have
to be extended (by
amendment through this Bill) to provide for taxing partnerships that had been established for
purposes beyond those for which they currently cater. We should need to have a special tax
regime for LLPs based on that for partnerships but covering non-business LLPs and their
non-business activities. That would not be easy. We should need to identify, and probably widen,
all the current Taxes Acts provisions that deal with partnerships. In addition, further tax rules for
non-business LLPs might need to be created.
I do not want to claim administrative convenience as my only objection
to the amendment.
However, it is quite a serious objection. I believe that such a provision would make a lot of money
24 Jan 2000 : Column 1394
in interpreting it and would involve much time for parliamentary counsel
in framing it. Therefore, I
rely rather on my objection of principle.
Lord Lucas: I am grateful for that explanation. Quite clearly, I am
overwhelmed and I beg leave
to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McIntosh of Haringey moved Amendment No. 36:
Page 5, line 10, at end insert--
("( ) In section 362(2)(a) of that Act (loan to buy into partnership),
after "partner" insert "in a limited partnership registered
under the Limited Partnerships Act 1907".").
The noble Lord said: In moving Amendment No. 36, I should like to speak
also, if I am allowed,
to Amendment No. 39 in the name of the noble Lord, Lord Goodhart, because I believe that we
are trying to achieve the same objective.
As matters stand at present, a partner who borrows money at interest
to provide working capital
for him to invest in a partnership in which he is a member can claim tax relief for that interest. That
is dealt with in Section 353 of the Income and Corporation Taxes Act 1988 (ICTA). That is a
general provision which provides for tax relief to be given in respect of interest paid in certain
circumstances. Section 362 of the ICTA provides for relief to be given under Section 353 where
interest is paid on a loan to buy into a partnership or by a partner to provide working capital for a
partnership in which he is a partner. Section 362 sets conditions that must be satisfied for relief to
be available. The particular condition which is the subject of these two amendments is that the
individual must have been a member of the partnership,
"otherwise than as a limited partner".
During consultation, some respondents were concerned that that relief
might not be available to
members of an LLP in circumstances that would otherwise be similar. Amendment No. 39
proposes inserting a new subsection into Section 362 that would read:
"For the purposes of subsection (2), an individual
who is a member of a limited liability partnership shall be deemed
to be a member of the limited liability partnership otherwise than as a limited partner".
I do not find that particularly easy to read out and understand.
This is saying that in considering a claim by a member of a limited
liability partnership to relief for
interest, the restriction of relief for a limited partner does not apply as partners in LLPs are
deemed not to be limited partners in relation to their membership of the limited liability partnership.
Our amendment proposes to modify the reference in Section 362(2) by inserting after the words
"in a limited partnership registered under the Limited Partnerships Act 1907".
24 Jan 2000 : Column 1395
In other words, otherwise than the limited partner, which is the threatening
bit, it is made clear that
it applies only to the 1907 Act and not to the 2000 Act.
I know that our amendment is not very clear but it is slightly shorter
and it achieves the same
effect as Amendment No. 39. Therefore, I urge the Committee to accept our amendment.
Perhaps I may take this opportunity to say something about a proposed
amendment to the tax
provisions that we shall be making on Report. In the consultation process, we discussed a number
of issues relating to the tax provisions, one of which resulted in Amendment No. 36. However, it
became clear that there is a possibility that LLPs may be used for a particular form of tax
That avoidance would take the form of loss relief being available to
the partners in excess of the
loss that they might have to bear. That is because loss relief is available for a loss "incurred"
which may not always be the same as a loss "borne". Legislation already exists in Section 117 of
the Income and Corporation Taxes Act 1988 to stop that happening with limited partnerships
under the 1907 Act. The amendment will ensure that loss relief will not be available to members of
a limited liability partnership beyond the loss that they could have to bear.
The provision has been discussed with consultees who are content that
it is justified. I commend
Amendment No. 36 to the Committee.
On Question, amendment agreed to.
[Amendments Nos. 37 and 38 not moved.]
Clause 10, as amended, agreed to.
[Amendment No. 39 not moved.]
Clause 11 agreed to.
Clause 12 [Stamp duty]:
Lord McIntosh of Haringey moved Amendment No. 40:
Page 5, line 46, leave out from ("partnership") to
end of line 4 on page 6 and insert ("in connection with its
incorporation within the period of one year beginning with the date of incorporation if the following two conditions
(1A) The first condition is that immediately before its incorporation
(a) is a partner in a partnership comprised of all the persons who subscribe their names to the incorporation document
(and no-one else), or
(b) holds the property conveyed or transferred as nominee or bare trustee for one or more of the partners in such a
(1B) The second condition is that--
(a) the proportions of the property conveyed or transferred to which the persons mentioned in subsection (1A)(a) are
entitled immediately after the conveyance or transfer are the same as those to which they were entitled immediately before
its incorporation, or
(b) none of the differences in those proportions has arisen as part of a scheme or arrangement of which the main purpose,
or one of the main purposes, is avoidance of liability to any duty or tax.
24 Jan 2000 : Column 1396
(1C) For the purposes of subsection (1A) a person holds property as
bare trustee for a partner if the partner has the
exclusive right (subject only to satisfying any outstanding charge, lien or other right of the trustee to resort to the property
for payment of duty, taxes, costs or other outgoings) to direct how the property shall be dealt with.").
The noble Lord said: Clause 12 deals with stamp duty. The purpose of
Clause 12 is to ensure that
the transfer of the business and partnership assets of an existing partnership to a limited liability
partnership would be free from stamp duty. Without a special exemption, it is possible that a
stamp duty liability could arise on such a transfer. The exemption is consistent with the principle
behind the tax clauses as a whole which ensure that LLPs are taxed as partnerships and that
conventional partnerships can convert themselves into LLPs without incurring one-off tax charges.
In practice, it is unlikely that all a previous partnership's property
will be conveyed or transferred
to the limited liability partnership on incorporation. It is likely that transfers of some assets will
take place after completion of the formal incorporation procedures. As it was introduced, Clause
12 did not take account of that and we thought it necessary to bring forward an amendment to
ensure that that procedural issue is dealt with.
There may also be genuine reasons for changes in membership of the partnership
incorporation of the limited liability partnership and the conveyance of property; for example,
death, incapacity or retirement. We believe that such changes should not cause the withdrawal of
relief provided that they occur within a reasonable time, which we take to be a year, and have no
avoidance motive. I beg to move.
On Question, amendment agreed to.
Clause 12, as amended, agreed to.
Lord Goodhart moved Amendment No. 41:
After Clause 12, insert the following new clause--
INSOLVENCY: CONTRIBUTION BY MEMBER TO PARTNERSHIP ASSETS WHERE
(" . In the Insolvency Act 1986, after section 214 insert--
Contribution by member to assets of limited liability partnership where property withdrawn.
214A.--(1) This section has effect in relation to a person who is or has been a member of a limited liability partnership
where, in the course of the winding up of that limited liability partnership, it appears that subsection (2) of this section
applies in relation to that person.
(2) This subsection applies in relation to a person if--
(a) within the period of two years ending with the commencement of the winding up, he was a member of the limited
liability partnership who withdrew for his own benefit property of the limited liability partnership, whether in the form of a
share of profits, salary, repayment of prepayment of interest on a loan to the limited liability partnership or any withdrawal
of property, and
(b) it is proved by the liquidator to the satisfaction of the court that at the same time of the withdrawal he knew or had
reasonable grounds for believing that the limited liability partnership--
24 Jan 2000 : Column 1397
(i) was at the time of the withdrawal unable to pay its debts within
the meaning of section 123 of the Act, or
(ii) became so unable to pay its debts after the assets of the limited liability partnership had been depleted by that
withdrawal taken together with all other withdrawals (if any) made by any members contemporaneously with that
withdrawal or in contemplation when that withdrawal was made.
(3) Where this section has effect in relation to any person the court, on the application of the liquidation, may declare that
that person is to be liable to make such contribution (if any) to the limited liability partnership's assets as the court thinks
(4) The court shall not make a declaration in relation to any person the amount of which exceeds the aggregate of the
amounts or values of all the withdrawals referred to in paragraph (a) of subsection (2) made by that person within the
period of 2 years referred to in that paragraph.
(5) The court shall not make a declaration under this section with respect to any person if it is satisfied that, after each
withdrawal referred to in subsection (2), he had reasonable grounds for believing that there remained a reasonable
prospect that the limited liability partnership would avoid going into liquidation.
(6) For the purposes of this section a limited liability partnership goes into insolvent liquidation if it goes into liquidation at a
time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of winding up.
(7) In this section "member" includes a person in accordance with whose directions or instructions (otherwise than by way
of advice given by him in a professional capacity) the members of the limited liability partnership are accustomed to act.
(8) This section is without prejudice to section 213."").
The noble Lord said: With certain changes, this amendment brings a clause
onto the face of the
Bill which at present appears in draft regulations published by the Government.
We do not object to the application of existing corporate insolvency
rules to LLPs by way of
regulations. But this clause creates a new and distinct form of liability which applies only to
members of LLPs. We do not disagree with that in principle but we believe that a matter of such
importance should be on the face of the Bill.
In the Government's letter of 10th January to the noble Baroness, Lady
Buscombe, to which
reference has already been made several times, reasons are put forward as to why the new Section
214A of the Insolvency Act should not be on the face of this Bill. The argument seems to me to
be extremely weak. It says, for example, that putting a new Section 214A on the face of the Bill
would result in the new clause appearing in the Insolvency Act when that Act contains no other
reference to LLPs. That is perfectly true but my answer to that would be: so what?
The argument that new Section 214A means that the Bill would then have
to define a "shadow
member" is the feeblest argument of its kind that I have ever come across. I draw attention to what
seems to be a satisfactory form of words to cover that particular problem in subsection (7) of the
I suggest also to the Minister that the powers in Clause 13(1) are not
sufficient to support the
creation by regulation of the new Section 214A. The power in
24 Jan 2000 : Column 1398
Clause 13(1) is to apply the provisions of the Insolvency Act with such
modifications as appear
appropriate. Therefore, I ask of what is Section 214A a modification? It is not a modification of
Section 214 because that is incorporated quite independently by a separate regulation. It seems
clear to me that Section 214A is not a modification of any existing provision of the Insolvency Act
but is a wholly new provision. Therefore, it cannot be included by virtue of the regulations which
give power only to modify existing provisions. Therefore, I believe that the Government should
look again at that matter.
As regards the drafting, the amendment is different from the draft regulations
in two respects. The
first is subsection (7) to define "shadow member", which I have already mentioned. The other,
which is rather more substantial, is a change to the proposed subsection (5). That is raised in
answer to what seems to me to be a fair point put forward by the Law Society.
Section 214A applies if the member who makes the withdrawal knew or
had reasonable grounds
for believing that the limited liability partnership was insolvent when he made that withdrawal.
Subsection (5) then disapplies the section if there was in fact a reasonable possibility of avoiding
insolvent liquidation; for example, by trading out or by raising fresh capital.
The subsection (5) test is wholly objective, even if the relevant facts
are not known to a member.
So let us assume that a firm of solicitors suffers loss as a result of a claim against it of
professional negligence. As a result of that claim, the firm is just insolvent and its members are
willing and able to raise enough capital to cover that loss.
But unknown to the members, there exists another and very large liability
of the firm for
professional negligence where the claim is not made until after the withdrawal. The partner, other
than the individual one at fault, has no way of knowing that such a claim exists because, ex
hypothesi, it has not yet been made. But objectively, of course, if one looks at the facts, there is
no prospect of avoiding the liquidation.
It seems to me that in such a circumstance, it would be wrong to penalise
a withdrawal. Therefore,
I suggest that the wording of my version of subsection (5), which makes it dependent on what is
or should be known to the partner making the withdrawal, is better than the wholly objective test
applied in the Government's version of subsection (5). I beg to move.
Lord McIntosh of Haringey: I should make it clear that I do not base
my resistance to the
amendment on the amendments to Section 214A introduced by the noble Lord. On the face of it,
they appear to be helpful and we shall consider them along with the other representations that have
been made when considering the form that this provision shall take in regulation. My resistance is
only on the issue of whether the matter should be in regulation or on the face of the Bill.
24 Jan 2000 : Column 1399
At Second Reading the noble Lord, Lord Goodhart, said that he wanted
a debate on this matter
and now he has it. He has conducted it well and I congratulate him on it. However, on a wider
basis, we want to resist attempts to include this matter and matters like it in the Bill rather than in
the regulations. We believe that it would be peculiar to include on the face of the Bill this provision
alone of all the insolvency provisions that we intend to apply. The noble Lord rightly referred to
Clause 13(1). As we made clear during the course of consultation and as I explained at Second
Reading, we intend to apply to limited liability partnerships, with appropriate modifications, the
Insolvency Act 1986.
Whether this amendment is a modification is a matter of semantics. Clearly,
the proposed new
clause is linked to Section 214 of the Insolvency Act, and if it were put on the face of the Bill it
would cause a muddle. There would be some primary legislation and some secondary legislation
and this element would be set apart in the Bill from the remainder which will be in regulations. In
case the response of the noble Lord to that is to suggest that we should include all the insolvency
provisions on the face of the Bill, that would make the Bill very long and, more seriously, it would
create insolvency legislation for LLPs that would be separate from that for companies.
We believe that there is a greater advantage in having the existing
Insolvency Act modified in its
treatment of LLPs. Of course, the Insolvency Bill will come before Parliament in the course of this
Session. One reassurance I can give the noble Lord is that the regulations will be subject to the
affirmative resolution procedure.
The insolvency regulations will not rewrite the Insolvency Act of 1986
for all purposes. They will
make amendments only in so far as the Act is applied to LLPs. Putting Section 214A into the Bill,
as this amendment does, the Insolvency Act would be amended for all purposes. That would look
odd, as none of the other amendments to the Act exist for all purposes. It is sensible to keep all
the insolvency provisions together.
We do not disagree with the noble Lord on an issue of principle. We
are grateful to him for his
suggestions about the wording and we shall certainly take account of them. However, as a matter
of drafting and as a matter of consistency in legislation, it is better that the matter should be dealt
with by regulation rather than on the face of the Bill.
Lord Lucas: On a matter of semantics, can the Minister enlighten me as to the limitation of the
word "modifications"? There must be an ultra vires question here somewhere? Where is the
Lord McIntosh of Haringey: That is an interesting point of semantics.
I would be interested to
have the views of "grammarians" on whether a modification can take the form of an addition rather
than of a change that involves subtraction. I shall not get
24 Jan 2000 : Column 1400
involved in this matter on the Floor of the House, but I shall gladly
write a learned letter to all
interested noble Lords.
Lord Goodhart: I am grateful to the Minister for his reply. The basis
for treating Section 214A
differently from anything else is that it is unique in that it creates a new form of liability which has
no parallel in the existing liabilities under the Insolvency Act. Therefore, it seems to me to justify
different treatment. I suggest that there really is a potentially serious problem here as regards vires
under Clause 13(1) of the Bill. There is a legitimate question of whether this constitutes a
modification. It is not for me to get the Government's legislation right.
Lord McIntosh of Haringey: This is a revising Chamber!
Lord Goodhart: The noble Lord would be well advised to consult the Parliamentary
Office as to whether this is in fact within the powers granted by Clause 13(1). I welcome what the
Minister has said about my amendment to Section 214A and I shall wait with interest to see
whether it bears any fruit. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Sharman moved Amendment No. 42:
After Clause 12, insert the following new clause--
("Insolvency: preferential debt liability
INSOLVENCY: LIABILITY FOR PREFERENTIAL DEBTS
.--(1) Subject to subsection (2), the members of a limited liability
partnership or overseas limited liability partnership
which has been wound up (including persons who ceased to be members before the commencement of the winding up)
shall be liable for its preferential debts (within the meaning given by section 386 of the Insolvency Act 1986) so far as
such debts have not been discharged in the winding up.
(2) Subsection (1) shall apply in relation to any member only to debts incurred while he was a member.").
The noble Lord said: The purpose of the amendment is to draw attention
to an anomaly which
appears to arise as a result of the combination of the application of the tax law to a limited liability
partnership as though it were a partnership and insolvency law to a limited liability partnership as
though it were a corporation.
The position of preferential creditors in both cases--I apologise for
being somewhat technical--is
complex on the bankruptcy of a partnership. Nevertheless, preferential creditors--unpaid VAT and
PAYE and particularly employees-- rank ahead of all other debts. If one looks at a limited
company that becomes insolvent--I stress that I am talking of a situation in which there is no
evidence of wrong-doing and of circumstances in which Section 214A would not apply--the pool
of assets is available to the creditors in total, but the preferential creditors rank first and tax on the
profits earned previously are unsecured and rank behind the preferential creditors.
24 Jan 2000 : Column 1401
In the case of a limited liability partnership, because it is taxed
as a partnership with fiscal
transparency, the tax arising on the profits which have been earned remains the liability of the
individual partners and they, quite rightly, may well withdraw funds from that partnership to satisfy
that liability. The result is that the total pool of funds available in the insolvency may have been
diminished by withdrawals to satisfy what would be unsecured creditors, thereby diminishing the
claim of preferred creditors.
I am particularly concerned about the position of employees in such
a situation. The employees
could see themselves disadvantaged. At present, when a partnership suffers insolvency the
employees have a right of claim against the individual partners' assets, which provides some
recompense, but in the case of insolvency law applying to a limited liability partnership as if it
were a corporation, employees would be in a different and a somewhat disadvantaged position. I
beg to move.
Lord McIntosh of Haringey: I am anxious to achieve the same kind of
result as that achieved by
the amendment, but I do not think that this is the right way to do it. First, the noble Lord referred
to employees and to the fact that certain debts of insolvency are ranked as preferential; in other
words, payable before non-preferential debts as set out in Schedule 6 of the Insolvency Act 1986.
They include debts due to the Inland Revenue, as the noble Lord said, but also to employees by
way of remuneration.
This amendment would make all members and former members of an LLP liable
preferential debts incurred during their membership. I do not believe that they should be liable to
make those payments. It would be against the principle of limited liability which is at the heart of
the Bill. In other words, it would extend the privileges of preferential creditors over those of
non-preferential creditors and I am sure that that is not what the noble Lord wishes to do. Also, it
means that LLPs would be treated differently from companies for insolvency purposes. There
really should be consistency in the law in this area and members of an LLP should not be in a
worse position than their company counterparts. It would make it a less attractive vehicle.
I question also the fairness of the amendment. If we take into account
the position of the
unsecured creditors, what justification can there be for government departments, which would be
the major beneficiaries of the amendment together with employees' remuneration, being repaid in
full when it is likely that unsecured creditors will receive little or nothing? Though I am sure the
amendment is moved with the best of motives, I do not believe it will achieve the objectives
required. I hope therefore that the noble Lord will not press it.
Lord Sharman: I am grateful to the Minister for his explanation. The
whole principle of
preference in insolvency is to place one class of debtors--or creditors, depending on which side
of the fence one sits--ahead of the others. That is precisely what the
24 Jan 2000 : Column 1402
law sets out to do. The preferential creditors, so far as they are government
government departments where the entity collects money on behalf of the Government. They are
not debts to the Government for income or corporation tax; in that sense they are VAT and
PAYE. It is important therefore that we should not, as we have with this legislation, effectively
place in regard to a pool of assets unsecured creditors ahead of preferred creditors. I recognise
from the Minister's explanation that this is an immensely complex subject. I do not propose to
press the amendment. I beg leave to withdraw it.
Amendment, by leave, withdrawn.
Clause 13 agreed to.
Clause 14 [Application of company law etc.]:
Lord Goodhart moved Amendment No. 43:
Page 6, line 34, at end insert--
("( ) requiring limited liability partnerships and oversea limited liability
partnerships or any category of limited liability
partnership or oversea limited liability partnership to effect and maintain policies of insurance on such terms and for such
amount as may be specified against such risks as may be specified (including risks of negligence by a member, agent or
employee of the limited liability partnership or oversea limited liability partnership),").
The noble Lord said: Amendment No. 43, somewhat unusually, proposes
to give an additional
power to the Government. Solicitors and chartered accountants are required by their professional
rules to carry professional indemnity insurance. Personal liability of partners arises only if the
damages exceed the insurance cover or there is some non-disclosure which entitles the insurers to
That means that victims are unlikely to obtain compensation unless the
claim against the partners is
extremely large. But a requirement to carry professional indemnity insurance does not apply to all
businesses or professions which are likely to be carried on as LLPs. There is therefore a risk of
moral hazard. If the members of the firm know that in the event of a large claim they can simply
wind up the firm and start again, they may be tempted to reduce their insurance cover or indeed
not to insure at all. This may or may not turn out to be a problem. But the Government should
have reserve powers to require LLPs to comply with minimum insurance requirements for
That would not be appropriate across the board. For example, it would
not be appropriate for an
LLP which is running a corner shop. But, in general, firms offering skilled services to the public
should insure against the negligence of their members or employees. There should therefore be a
flexible power for the Government to say that in certain categories, where adequate insurance is
not a requirement of their professional bodies, the carrying of insurance is a necessary condition
for obtaining limited liability. The Government should therefore have the power to insist on
insurance being carried. I beg to move.
Baroness Buscombe: I should like to speak briefly in support of this amendment. It is a good
24 Jan 2000 : Column 1403
require the members to carry professional indemnity. I hope that the
knock-on effect will be a
reduction in fees on the part of professional firms which now claim that the extent of their fees is
in relation to the high cost of indemnifying their partners because there is no limited liability.
Lord McIntosh of Haringey: I am interested to find both opposition parties
in favour of giving
more power to government. Adam Smith would turn in his grave, if not Friedrich von Heich.
Unfortunately, the amendment would go a lot further than giving power
to government. It would
place responsibilities on government which would be impossible to achieve. The amendment
would provide that the regulations should not just say that insurance shall be provided; that is one
thing. By the way, this is all kinds of indemnity insurances, not just professional indemnity
insurance. It would also say that the regulations should set the appropriate levels for the insurance
and define the risk which should be covered. It asks not only that the Government should
intervene but also that the Government should go into the insurance business by defining risks and
setting appropriate levels for insurance. After all, what may be appropriate for one business is not
necessarily appropriate for another.
In any case, who is to say that insurers will find that all the risks
are insurable. For example, a
small architectural practice winning a major contract for a bridge or building would find it
impossible to obtain insurance for that. It may be impossible to obtain insurance for new areas of
If we are talking of professional indemnity--that is what the noble
Baroness, Lady Buscombe, is
talking about, even if the amendment is not--surely it is right for the professional body to insist on
the professional indemnity insurance rather than the Government to ensure it through legislation.
There are no other examples of business entities being required to provide indemnity insurance.
For professions where professional indemnity is required, cover is required
no matter what entity
the professional operates through, and there is no reason to think that it will be different for LLPs.
We have been told by consultees that the experience of the construction industry is that there is no
reduction in insurance cover when firms change from a partnership to a company. Insurance
policies are carefully worded. It is not necessarily the case that the insurer would pay out in every
situation, particularly where the situation was simply business failure. To include a provision of
this kind would give a false sense of security to those who deal with LLPs, quite apart from my
major objection of turning the Government into an insurance company.
Lord Goodhart: I am grateful to the Minister for his reply, even if
it was somewhat unhelpful on
this subject. There are of course precedents for insurance
24 Jan 2000 : Column 1404
being required--not indemnity insurance but, for example, liability
insurance against injury to
employees is a government requirement. The reason we provided for this to be in regulations is
that it gives a great deal of flexibility to government to make the decisions and say what level of
insurance should be required. It seems to me that there may be a breach of the provision which a
future government will be unable to do anything about. However, I do not intend to press the
matter. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Buscombe moved Amendment No. 44:
Page 6, line 43, at end insert--
("(2) Regulations under this section shall in relation to the acquisition
of, or merger with, a business by a limited liability
partnership, make provision enabling the limited liability partnership to elect to account for that acquisition either using
merger accounting or acquisition accounting methods, as its members see fit.").
The noble Baroness said: This is a probing amendment. Its purpose is
to access the draft
regulations to ensure that they distinguish between accounting practices for limited liability
partnerships and those for mergers and acquisitions of a business.
As I stated at Second Reading, the merging and accounting provisions
set out in paragraphs 10
and 12 of Section A of Schedule 4 to the Companies Act 1985 deal with equity shares being
purchased for equity consideration. Such an exchange--share for share--cannot exist in a
partnership and the Minister has already made clear that we will assume that no shareholders exist.
However, having said that, this amendment recognises that distinct merger
methods do exist. Perhaps I may make a brief reference to the Minister's letter to me of 10th
January wherein he makes it clear--we discussed this point--that it is the Government's intention to
ensure that LLPs are able to make use of merger accounting provisions. Clearly, a completely
different kind of scrutiny is required for merger and for acquisition accounting. Therefore, we feel
it important that this should be made clear. I beg to move.
Lord McIntosh of Haringey: This Bill is certainly an educational process
for me because I had
no idea that there was any difference between merger and acquisition accounting. Indeed, I have
had to learn about it from scratch. Therefore, anything I get wrong is entirely my fault and not that
of my advisers. Because merger accounting is generally done by agreement, my understanding is
that the result of the merger accounting process is that the profits are likely to be higher and that
net assets are likely to be rather lower than under acquisition accounting.
In any case, even if I am not right about that, there is a difference
in the reported value of the LLP
and the way in which it would be presented in the best light according to which method of
accounting is appropriate. Because the reported value of a business can be different according to
24 Jan 2000 : Column 1405
measure is used, the choice of merger or acquisition accounting is a
very hot topic. It is a matter
that has to be defined in great detail in legislation.
Our draft regulations include conditions that would need to be complied
with before merger
accounting could be used. Perhaps I may point out to the noble Baroness, Lady Buscombe, that
my letter to her did not say tout court that merger accounting could be available; it said that it
could be available under certain conditions. The conditions are based on those that apply to
companies with provision for appropriate adaptation when one of the parties is not a company.
These conditions are supplemented by additional conditions in an accounting standard.
Given the significant difference in results and financial position of
an LLP that could arise from
giving it the choice of accounting methods, I am sure that Members of the Committee will agree
that it would not help to make comparisons between the accounts of different LLPs. It would also
enable LLPs to have the opportunity to select the method that portrayed them in the best light. We
are convinced that there should be some regulation of the accounting method to be used by LLPs
for business combinations. The most important argument here is that this choice is not available to
companies; that it is not available for very good reason; and that there would need to be a very
good reason why the LLPs concerned should be able to choose between the two accounting
methods. I hope that the noble Baroness will not pursue the amendment.
Baroness Buscombe: I agree with the Minister in that I, too, have found
this to be something of a
learning curve. I should like to have the opportunity of reading his response in Hansard tomorrow
and of revisiting this matter. However, in the light of what the noble Lord said, I beg leave to
withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 14 agreed to.
Clause 15 [Consequential amendments]:
Lord Lucas moved Amendment No. 45:
Page 7, line 2, at end insert--
("( ) Regulations may provide for the manner in which the accounts of
a limited liability partnership are to be consolidated
in the accounts of a member who is a body corporate.").
The noble Lord said: My interest here is to gain some elucidation from
the Minister as to how the
Government see these new animals being consolidated, or otherwise, in the accounts of other
corporate bodies that hold a share--if one might use that general term--in these limited liability
partnerships. Is it intended that they should always be accounted for as investments, or will there
be occasions when the credits and debits (or, as we accountants call them, the figures on the side
nearest the window and those on the side nearest the door) should be shown in full in the "parent"
body corporate's accounts? Alternatively, will there be occasions when there is no necessity to
publish separate accounts for an LLP because it is regarded as being a subsidiary of a body
corporate? I am just
24 Jan 2000 : Column 1406
hoping that the Minister will be able to give me some indication of
the direction in which the
Government are thinking on these matters. I beg to move.
Lord McIntosh of Haringey: I hope that I have understood the amendment
having listened to the noble Lord, I am not sure that I have. The amendment is not about the
accounts of the limited liability partnership; it is about the accounts of the member who is a body
corporate. The first thing to be said is that we are dealing here with a special case. Not all LLPs
will have bodies corporate as members. Indeed, I imagine that most of the professional LLPs will
not have bodies corporate as members. Therefore, the amendment will not apply.
However, where there is a corporate body that is a member of an LLP,
regulations will provide for
the way in which the accounts of the LLP are consolidated in the accounts of the member who is
a body corporate. At present, the accounting treatment to be used by the corporate member
would vary according to its relationship and interest in the LLP. As a company, the treatment of
its accounts is governed by the Companies Act. Therefore, as with companies, if the LLP is a
subsidiary, the corporate member would usually consolidate the accounts of the LLP in its own
group accounts, in accordance with the provisions of the Companies Act. If the relationship is
less than a subsidiary--for example, if it is an associated company, an investment or a general
investment--different accounting treatments would be appropriate.
However, whatever the relationship with the corporate member, the LLP
would still have to
prepare its own accounts for its members and for filing at Companies House. Therefore, I do not
believe that there is any need to provide in regulations for the accounting treatment to be used by
the corporate member. There is no proposal to change the provisions of the Companies Act. I
suggest that we leave the law as it stands.
Lord Lucas: I am grateful to the Minister for that explanation and beg
leave to withdraw the
Amendment, by leave, withdrawn.
Clause 15 agreed to.
Clause 16 [General]:
Lord McIntosh of Haringey moved Amendment No. 46:
Page 7, line 16, after ("regulations") insert ("(whether or not together with other provisions)").
The noble Lord said: In moving this amendment, I shall speak also to
Amendment No. 47. I find
the drafting of these amendments extraordinarily difficult. It is to some extent helped by the
marked copy of the Bill, which I have provided for noble Lords. I should point out here that the
amendments were instigated by parliamentary counsel, not by the department. The intention
behind them is to ensure that there is no risk of any subordinate legislation requiring both the
affirmative and the negative procedure.
24 Jan 2000 : Column 1407
The amendment makes it clear that the regulations made under Clause
16(4) and which require the
affirmative resolution can be made if what is approved in draft is an instrument containing them,
together with regulations that require only the negative resolution procedure. The amendment also
makes it clear that an instrument that has been laid in draft and approved under the affirmative
resolution procedure does not require to be approved under the negative resolution procedure. I
should tell the Committee that I have not come across this problem before. But if parliamentary
counsel think that it is a problem, clearly we must take it seriously. I beg to move.
On Question, amendment agreed to.
Lord McIntosh of Haringey moved Amendment No. 47:
Page 7, line 31, leave out ("subsection (4) applies
to the regulations)") and insert ("a draft of it has been approved
by a resolution of each House of Parliament)").
On Question, amendment agreed to.
Clause 16, as amended, agreed to.
Clause 17 [Interpretation]:
Lord McIntosh of Haringey moved Amendment No. 48:
Page 7, line 39, at end insert--
(""business" includes every trade, profession and occupation,").
The noble Lord said: This was spoken to with Amendment No. 5. I beg to move.
On Question, amendment agreed to.
Clause 17, as amended, agreed to.
Clause 18 agreed to.
In the Schedule:
Lord Phillips of Sudbury moved Amendment No. 49:
Page 9, line 41, at end insert ("but shall for a
year after the change show the replaced name (prefixed by the words
"formerly registered in the name") on all invoices, contracts, accounts, notepaper and such other documents of the
partnership and representations and in such media and manner as the Secretary of State may by regulations
The noble Lord said: Amendment No. 49 is in the same vein as some of
the earlier amendments
concerning requirements for registration particulars of members of LLPs. This amendment is also
designed to protect members of the public against the shenanigans--as I am afraid there will be--of
those who seek to abuse the LLP status.
I cannot help resisting the earlier remark of the Minister about Adam
Smith turning in his grave.
Before Adam Smith reached his grave, limited liability
24 Jan 2000 : Column 1408
was extremely rare indeed. I think that he would be turning in his grave
over and over again at
some of the consequences that are likely to flow from this Bill.
Lord McIntosh of Haringey: But was it not Adam Smith who also said that
all professions were
a conspiracy against the laity?
Lord Phillips of Sudbury: That is precisely why I have opposed this
Bill stock, root and branch.
I am a great admirer of my own profession. I am afraid that this measure is a conspiracy against
the public interest from start to finish. However, I am more concerned with the small traders who
will take advantage of the special privileges of this Bill. Let us make no bones about it; this will
provide your two-man cowboy building outfit with a uniquely flexible and light framed means of
screwing the public, to put it in Anglo Saxon terms. One of the most common methods of doing
that is by changing the name of the entity concerned. It is all very well to say that people should
search in the register before they get Mr Brown and Mr Trant to build their porch. But we all know
that they do not. We all know that the general public will get nowhere near this register. We all
know that the great firms of accountants and solicitors will be impeccable in the way they use the
provisions of this Bill. I am solely concerned with those who will not.
The amendment is self-explanatory. The Government may think that the
requirement period of a
year after the change of name is too long, but I think that the principle is a sound and
common-sense one. The fact that it may not be required in other parts of the corporate law at
present does not impress me at all. The fact that there may be great machinations afoot to change
the law of limited liability companies does not impress me at all. We have here a particularly
privileged entity that we are in the course of creating which will--I am sure that all Members of the
Committee will agree with me--be used wholesale by small traders. The amendment is the only
practical way that I can think of alerting members of the public with no business access or
particular knowledge to whom they are dealing with. I beg to move.
Lord McIntosh of Haringey: I am a paid up member of the conspiracy theory
party. I agree
with the noble Lord, in that I think that it is much more likely that there is conspiracy than cock-up
in most aspects not just of history but of public policy. However, I think that on this occasion the
noble Lord goes a little too far. I am sorry that he rejects the notion which he knows perfectly well
will form my answer; namely, that if the provisions of his amendment do not apply to limited
companies, there is no good reason why they should apply to limited liability partnerships.
Lord Phillips of Sudbury: I thank the Minister for giving way. Does
he not agree none the less
that one of the commonest ways of defrauding the High Street
24 Jan 2000 : Column 1409
public is by changing the names of limited liability businesses? Is
not that reason enough for
considering this amendment?
Lord McIntosh of Haringey: It is certainly an argument for bringing
forward one part of the
company law review. Indeed, there are occasions--for example, in corporate governance--where
we believe that it may be necessary to bring forward issues which form part of the company law
review. We have never set our face against urgent matters having to be dealt with in a shorter
time-scale than is permitted by the company law review. However, I do not think that the matter
we are discussing is one of them. I do not think that the differences between LLPs and limited
companies are sufficient to justify the special treatment which is proposed by this amendment.
Limited liability partnerships as bodies corporate are governed almost
entirely by company law
rather than by partnership law. The only exception concerns the tax treatment. All of the abuses
which the noble Lord describes are possible, as he rightly says, as regards limited companies.
That is true whether they are phoenix limited liability companies or phoenix limited liability
partnerships. The main features of a phoenix limited liability partnership would be that an LLP
would go into liquidation and a successor company continue the business with the same
members, the same trading address and the same assets. These are offences when committed by
companies, and they will be offences when committed by LLPs.
An insolvency practitioner who holds office as liquidator is required
to report these offences to
the Director of Public Prosecutions. If there is evidence that there has been fraudulent or wrongful
trading, there is the power to apply to the court for an order that those responsible should make a
personal contribution towards the assets of the limited liability partnership. If the DPP forms the
view that the conduct of a member has been such as to make him unfit to be involved in the
management of an LLP, he is required to make a report to the Secretary of State who will then
have the power to apply to the court for a disqualification order if he thinks that it would be in the
public interest to do so.
The noble Lord is sceptical as regards the efficacy of some of these
provisions. I do not know
whether the events I have described happen more often in Sudbury than in other parts of the
country. I would not dream of casting any aspersions on the worthy burghers of Sudbury and I
do not think that the noble Lord practises there anyway! Despite the noble Lord's
24 Jan 2000 : Column 1410
rejection of this argument in advance, the argument must be that the
provision should be the same
for companies as for LLPs.
Lord Phillips of Sudbury: I am grateful for at least some of the Minister's
remarks. I shall report
his remarks to the mayor and corporation of Sudbury. However, to be serious, I must say that it is
disappointing to hear the Minister concede that there is a real problem here with limited liability
companies and then effectively to say that the Government are not prepared none the less as
regards a new limited liability animal to do something about it. It could take years for any changes
pursuant to the present review to come into effect.
Although there are statutory protections with regard to wrongful trading,
provisions and the rest of it, the Minister must accept that this area of law is singularly ineffective.
It is honoured in the breach. One of my jobs is that of legal adviser on the "Jimmy Young Show".
Over 25 years I have heard of hundreds of thousands of cases of abuse in relation to small, local
companies that get nowhere near the attention of the DTI and get nowhere near being addressed
by the various provisions to which the Minister refers.
It depresses me that in this House we are so far out of touch with public
opinion, if I may put it
this way, at the bottom end of the social spectrum. People are ripped off, day in, day out, by the
easy availability of limited liability for off-the-shelf companies and the protections provided for
them, and with no real remedies.
I shall withdraw my amendment, but I urge the Minister to consider that
it is not too late to review
this issue. I hope that he will do so.
Amendment, by leave, withdrawn.
Lord McIntosh of Haringey moved Amendments Nos. 50 and 51:
Page 11, line 10, leave out ("trades or").
Page 11, line 15, after ("name,") insert ("commits
(2) A person guilty of an offence under sub-paragraph (1)").
The noble Lord said: I spoke to Amendments Nos. 50 and 51 with Amendment
No. 5. I beg to
move them en bloc.
On Question, amendments agreed to.
Schedule, as amended, agreed to.
House resumed: Bill reported with amendments.
House adjourned at eleven minutes past eight o'clock.