Hansard, House of Commons Debates, 28 Jun 2000 : Column 929

                            Orders of the Day

                Limited Liability Partnerships Bill [Lords]

As amended in the Standing Committee, considered.

                               New Clause 2

                             Returns to registrar

' .--(1) Each limited liability partnership shall make an annual return to the registrar setting out--
(a) all claims made against the partnership for work performed by it;
(b) a statement by the relevant regulator that the partnership has complied with the relevant regulatory framework in its
field of business; and
(c) the average rate of pay for the partnership's employees in the top and bottom quartiles (in terms of remuneration).
(2) Any returns or reports made by limited liability partnerships to the registrar shall be made available for public
inspection.'.--[Mr. Mitchell.]

Brought up, and read the First time.

4.52 pm

Mr. Austin Mitchell (Great Grimsby): I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker (Mr. Michael Lord): With this it will be convenient to discuss the
following: New clause 4--Report of regulatory infractions and censures--

' .--Limited liability partnerships trading outside the United Kingdom shall report to the registrar all infractions of
regulatory rules and all censures by regulators in other jurisdictions.'.

New clause 7--Disclosure of emoluments--

' .--Any limited liability partnership in which the amount of profit before member remuneration and profit share exceeds
£200,000 shall publish details of director emoluments comparable in detail to those required of companies by Schedule 6
to the Companies Act 1985.'.

New clause 8--Statement of assets, etc.--

' . Each limited liability partnership shall, when filing annual accounts with the registrar, submit a statement showing--
(a) the value of the net assets of each partner; and
(b) whether any partner is at that time involved in litigation.'.

Amendment No. 19, in clause 6, page 3, line 35, at end insert--

'(2A) A statement of the scope of authority to act of each member shall be lodged with the registrar, displayed in all
partnership offices and made available to clients.'.

Amendment No. 24, in clause 9, page 5, line 7, after "days", insert--

'giving full details of the address, financial and property interests and other trading activities of new designated members,
and, in the case of those ceasing to be designated members, the reasons why they are leaving'.

Mr. Mitchell: Let me make it clear, as I did on Second Reading, that I do not like the Bill in any
way. Essentially, it gives a dodgy, dirty deal to fat-cat accountancy practices, and that should not
be the responsibility of the Labour party and a Labour Government. I find the speed with which
the deal is being done even more reprehensible, when we are not making any special

28 Jun 2000 : Column 930

concessions to trade unions or friends of the party. Indeed, many of our party's friends in local
government, education and the union movement are being treated as the enemy within, while we
are giving a dirty deal to accountancy houses.

The big accountancy houses have been pushing for this Bill, and have gone to extreme lengths to
get it. The process was begun by the Conservative Government, and while it is perfectly right for
a Labour Government to pursue that process, it is not right to introduce the Bill at this speed and
this early in the legislative programme without countervailing concessions.

As a prelude to the long list of amendments that I shall move, I say to the House that I am
resentful of the way in which my hon. Friend the Member for Newcastle upon Tyne, Central (Mr.
Cousins) and I have been treated. We wanted to be on the Standing Committee, but we were not,
and it would have been appropriate to have argued all this out in Committee rather than on the
Floor of the House, when another, welcome Bill follows and we are under great pressure to shut
up. I do not think that things should be done like that. The Hansard Society is to have a committee
on the scrutiny of legislation, and I shall write a case study in which the Bill is an example of how
not to scrutinise legislation. Instead of giving you my paranoia, Mr. Deputy Speaker, I shall deal
with the new clause.

The general principle behind all the new clauses and amendments that I have tabled is consumer
protection and ensuring that more information can be made available to the consumers of audit
and insolvency services and all the other services that accountancy houses provide, because the
Bill will protect accountants from the consequences of their own failure. If they carry out a bad
audit--which often comes to light only when a firm fails--because they are so busy selling other
services to the firm that they neglect or dilute the audit, they should be accountable in full for the
consequences. If an insolvency is protracted, which does not serve the interests of the creditors
because the insolvency practitioner owes no duty of care to them, they should also be
accountable in full.

We are making a concession to the big accountancy houses without introducing any effective,
independent regulation of accountancy and insolvency firms. We promised in our business
manifesto that we would have full, independent regulation. We are not fulfilling that commitment;
via so-called independent regulation, we are, classically, merely adding yet another layer to the
existing chaos of regulation. There are eight regulators for 1,800 practitioners in insolvency. That
is absolutely ludicrous, yet we are adding another layer above those eight. We are not providing
independent regulation.

Mr. Michael Fabricant (Lichfield): I was listening to the hon. Gentleman's argument with great
interest, but I left the Chamber briefly to find out how he voted on Second Reading. Of course he
did not vote because there was no Division. I wonder whether he is against the principle of the
Bill. I shall ask him a hypothetical question: if there had been a Division, would he have voted
against the Bill?

Mr. Mitchell: Probably, I would have voted against the Bill on Second Reading, but there was no

How would I have pursued the Bill's aims? As I said in my introductory remarks, during which the
hon. Gentleman left to find out information that was obvious

28 Jun 2000 : Column 931

to everyone else, it was right to pursue the Bill's aims because the Conservative Government--our
predecessors--had started to develop such legislation. I am a Fabian in such matters. Festina lente
is the slogan.

Let us make progress with the Bill while introducing corresponding concessions to protect
consumer interests and a corresponding framework of legislation to ensure that those accountancy
firms that opt to become limited liability partnerships are accountable. That is the essence of my
argument. Protection for consumers means providing a duty of care, which I shall attempt to do
under later amendments, and reversing the Caparo judgment.

The basic principle behind all the amendments and new clauses that I have tabled, especially in
this group, is that there should be maximum publication and recording of the available information
because partnerships are inherently secretive organisations. There can be many variations of
partnership and individual agreements.

Mr. John Burnett (Torridge and West Devon): What makes a partnership more secretive than
a sole trader?

Mr. Mitchell: I am not comparing partnerships with sole traders. We are talking about bigger
organisations than sole traders. The accountancy houses were allowed to set up as limited
companies under the Companies Act 1989, but only one accountancy house did so. Why? First,
there are tax disadvantages in becoming a limited company. Secondly, there are publicity
disadvantages; they have to disclose more information. They do not want to disclose. They are
secretive, powerful organisations.

I want more disclosure. I want more light; it is as simple as that. The consumer has a right to
know. People who might be affected by the business or insolvency of limited liability partnerships
have a right to know what their strengths and weaknesses are, so they should be subject to exactly
the same disclosures as a public limited company, as was provided for in the Companies Act.

5 pm

Another consideration behind the amendments, particularly this group of amendments, is the need
to avoid fraud and tax fiddles. It is possible for all kinds of dodgy organisations to register as
limited liability partnerships. The words "dodgy organisations" bring to mind Yorkshire Water,
now the Kelda Group. It is attempting to perpetrate what must be a deceit upon its shareholders: a
process of so-called mutualisation to pass on assets that do not yield much profit to the
shareholders. It will then offer itself as a management company to run the assets for a fee.

That must be a monstrous deceit of the consumer. One of my later amendments seeks to preclude
it all together, saying that publicly regulated utilities should not have such a facility. I mention that
in passing because the main problem is the use of those organisations to reduce the tax burden
and to perpetrate fraud and tax fiddles. The transfer to limited liability status gives rise to that.

I am glad that the Minister, in his many answers to my many questions, communicated that fact. I
have also written to the Chancellor of the Exchequer about the matter. Rightly, the tax regulation
differences between partnerships and limited companies is now being reviewed. They should be
aligned as closely as possible.

28 Jun 2000 : Column 932

Why are we pushing for the legislation to be implemented before that review has been completed?
People need to know what the tax benefits or disadvantages may be. In my view, there could be
disadvantages--or there should be--in transferring, so I do not want the legislation to be
implemented before the tax review has ended.

Mr. Fabricant: The hon. Gentleman is presenting a powerful argument as to why he opposes the
principle of the Bill. I understand where he is coming from, but I am a little confused in one
respect. He said in answer to my earlier question that, had there been a Division, he probably
would have voted against Second Reading. He makes it clear that he is against the principle of the
Bill. Why, then, did he not call for a Division on Second Reading, so that he could vote?

Mr. Deputy Speaker: Order. I urge the hon. Member for Great Grimsby (Mr. Mitchell) not to be
seduced into a Second Reading debate.

Mr. Mitchell: Thank you for warning me, Mr. Deputy Speaker. I was not going to follow the
hon. Member for Lichfield (Mr. Fabricant) down the path of his ignorance of parliamentary
procedure and the role of amendments on Report--the stage of the Bill's proceedings in which I
am participating.

Mr. Fabricant: On a point of order, Mr. Deputy Speaker. I wonder whether you could explain
something to me and for the benefit of the House: am I not right that someone can call for a
Division if he is a Member of the House?

Mr. Deputy Speaker: That has nothing to do with the matter that is before the House.

Mr. Mitchell: Thank you, Mr. Deputy Speaker. The hon. Member for Lichfield should not raise
silly, querulous points during my speech. He would have done better to use his position on the
Committee to raise some serious points there, instead of fighting to extend the vested interests and
privileges of the big accountancy houses. That was the essence of what he was doing on the
Standing Committee, which had only one Division, and in which Opposition Members promoted
those vested interests. It is a little nitpicking, to say the least, for him to raise those points with me,
having failed to fulfil his own responsibilities on the Standing Committee. However, I do not
intend to follow that argument.

I was saying that the measure should not be implemented until the review of the tax status of
partnerships and companies is completed; only then should it come into effect. I wish to raise
many points and to warn off the hon. Member for Lichfield (Mr. Fabricant), who has interjected
three times in an attempt to prolong my speech and who does not seem able to count, either. I
point out that this argument is, in essence, about the consumer and about the soul of the Labour
party and the Labour Government.

Conservative Members had their opportunity in Standing Committee and earlier to represent the
views of the vested interests, and they did that very articulately. Indeed, Liberal Members, who are
now engaged in hasty consultation at the last minute, also did that. It was a shame on Second
Reading to hear the Liberal spokesman

28 Jun 2000 : Column 933

speaking for professional vested interests when the only effective opposition in the House of
Lords came from Liberal Democrats and particularly from Lord Phillips of Sudbury who appears
on the Jimmy Young show.

Mr. Deputy Speaker: Order. The hon. Gentleman is again distracting the House from the new
clause that he is supposed to be moving. Will he please address his remarks to new clause 2 and
to the other new clauses and amendments that we are legitimately discussing?

Mr. Mitchell: I am grateful to you, Mr. Deputy Speaker, for bringing me back to the path of

Mr. Burnett: Will the hon. Gentleman give way?

Mr. Mitchell: I will not give way on this point, because I think I can anticipate the hon.
Gentleman's objection. It will lead me down a path along which I do not want to go.

On new clause 2, Ministers said that limited liability partnerships would be treated as companies.
In fact--and this is the purpose of the new clause--they have been treated more leniently. When a
company prepares its accounts, it must indicate its contingent liabilities under accounting standard
SS18, which accounts for contingencies. It is right that companies should do that, because
anyone to whom a company owes money or supplies services will want to know its liabilities. To
decide on the financial standing of a company, people need to know its contingent liabilities. That
protects creditors and suppliers and it provides information to the public.

It is important to bring LLPs into line with companies, because partnerships have few assets. All
the assets of a company are in its name, and creditors can try to get hold of them if it becomes
insolvent. That is not so with a partnership, which tends to have few assets and the case has to be
pursued against the negligent partner. I hope to come to the issue of how people will decide who
is the negligent partner and how he will be designated, because such information should be
available. However, creditors find that much less is up for grabs in a partnership than it is in a
company. The two entities should be aligned with each other. Initially, we were told that they
would be, but that has not occurred. New clause 2 would achieve that aim.

New clause 4 is about compliance with foreign rules. That is important. In the United States, the
Securities and Exchange Commission--which is the most effective independent regulator in the
world and the type of body that we should have in this country--is making a concerted attempt to
force differentiation in the big accountancy houses between the audit arm and the service arm. If
the audit arm sells services to its audit clients, that dilutes the effectiveness of the audit by making
the firm more compliant to the wishes of the directors selling the services. That creates an
undesirable vested interest if we are to have effective and independent audits. That shows the
importance of complying with foreign rules. That attempt is being made in the United States, and it
will come to fruition. Already, the SEC, which is not satisfied with professional self-regulation as it
exists in the United States, has produced a scathing report on PricewaterhouseCoopers.

28 Jun 2000 : Column 934

The interesting finding from the SEC inquiry was the amount of negligence that exists. In two
years, there were 8,000 violations of basic principles of accountancy and audit, particularly
partners and employees of PricewaterhouseCoopers holding shares in companies that were being
audited by PricewaterhouseCoopers. Eight thousand violations! The report stated that there were
serious structural and cultural problems in PricewaterhouseCoopers' compliance in these matters. In other words, the firm did not give a damn. It was negligent, there was a culture of laxness in the organisation, and it violated the rules of the industry. That report was an eye-opener to--

Mr. Deputy Speaker: Order. May I gently remind the hon. Gentleman that he has tabled new
clause 3, which deals with the United States, the Securities and Exchange Commission and so on?
I am happy for him to pursue his argument now, as long as he does not repeat it when he comes
to new clause 3.

Mr. Mitchell: The matter is better dealt with now, Mr. Deputy Speaker. I shall mention it only
briefly later.

That inquiry has extended to other firms, and there is a concerted attempt to prise the audit arms
apart. We should be inquiring in the same way. In my view, the big accountancy houses are far
too friendly with Government. I saw in The Observer on Sunday that since the election,
PricewaterhouseCoopers, Ernst and Young, and Pannell Kerr Foster had all donated staff to the
Treasury to draw up tax legislation. We do not have panels of criminals coming in to advise the
Home Office on the criminal law or police methods, but in the case that I mentioned, the interested
parties are being brought in to advise Government.

Mr. Stuart Bell (Middlesbrough): On a point of order, Mr. Deputy Speaker. Although my hon.
Friend is perfectly right to put his case, is he entitled to say that the largest and most reputable
accountancy firms in our country are criminals?

Mr. Mitchell: If my hon. Friend had listened--

Mr. Deputy Speaker: Order. The hon. Gentleman's remarks are not a matter for the Chair. They are a matter for the hon. Gentleman.

Mr. Mitchell: If my hon. Friend had listened, he would know that I said that we did not get
criminals in to advise the Home Office, and that it was ill advised to get interested parties in to
advise the Treasury on tax law. The analogy is there. I am aware of my hon. Friend's interest in
those accountancy houses. The point is valid, because the question will always be asked whether
we are soft-pedalling on the need to regulate those bodies because of the services provided to

Mr. Stephen O'Brien (Eddisbury): I have been listening with care to what the hon. Gentleman
has been saying. It seems to be a rant against a particular firm, which does not necessarily do the
House any credit. Would the hon. Gentleman be prepared to repeat what he has been saying
outside the House, without the cloak of parliamentary privilege?

Mr. Mitchell: What a ridiculous question. If the hon. Gentleman had said that he had listened
with interest,

28 Jun 2000 : Column 935

I would have been overjoyed. If he is listening with a police notebook in his hand, the point is
fatuous in the extreme. I have quoted the SEC's report on one particular company and the facts
about the firms advising the Treasury. That is all that I have done. That is repeatable inside or
outside the House. It is a matter of public record. I am sorry that we have to come down to such
silly, nit-picking points in objection to the argument that large blocks of power need to be
controlled and regulated, which is the responsibility of government.

5.15 pm

Mr. Burnett: I understand what the hon. Gentleman is saying. Does he believe that the
Government should impose on the Institute of Chartered Accountants in England and Wales more
stringent rules with which it can govern the affairs of its members?
Mr. Mitchell: I do not believe in professional self-regulation. Chaps regulating chaps is almost a
British myth. The Institute of Chartered Accountants in England and Wales is a puny body when
compared with the enormous power of the big five accountancy houses, whose fees run into a
total of £4.5 billion a year. These are enormous concentrations of power. A small professional
body cannot effectively regulate them, and so-called independent regulation, which we are
proposing, will not regulate them properly either.

I shall move on to new clause 7, despite the interruptions from vested interested on the
Opposition Benches. The Bill introduces some highly desirable changes, but accountancy houses
enjoy a state guaranteed monopoly on insolvency and auditing. It is therefore right to regulate. I
am glad that my hon. Friend the Minister gave the commitment that legislation will include a
requirement for financial disclosure equivalent to that which is required of companies. The new
clause deals with the disclosure of emoluments. The Minister told us--it is in the Bill--that limited
liability partnerships will provide information in the notes to accounts about the aggregate amounts
withdrawn or applied on behalf of members during the financial year. There is also the requirement
to disclose the earnings of the highest paid member in cases where profit exceeds £200,000.

The figure of £200,000 comes from schedule 6 to the Companies Act 1985. That Act requires that
information that is published should include emoluments, gains made by directors on the sale of
share options and amounts paid to directors under long-tem incentive schemes. I hope that the
Minister will tell us that the same categories will be covered in the requirements on limited liability
partnerships, and that his estimate of £200,000 is based on the categories to which I have referred.
Will LLPs be required to publish these details?

We all know that there is considerable disquiet about fat cats. The public need to know how much
they are being paid. It is possible for limited liability partnerships to own limited companies. We
would therefore have the ludicrous situation in which the limited company would have greater
obligations to disclosure than the LLP parent of that company, which is exempt from much of that
disclosure. That seems to be wrong.

I know that Opposition Members are not keen on disclosure of public information, but it is the
public's right to know, especially when incomes have been accrued in pursuance of a publicly
granted state-conferred monopoly in audit and insolvency.

28 Jun 2000 : Column 936

New clause 8 is about more disclosure of the assets of each partner. Concessions are conferred
on accountancy and other firms that are trading as LLPs. In the event of insolvency, the creditors
can call on the assets of an LLP, which as I have said will not be substantial. It is more the assets
of the negligent partner that are important. I return to the point which I broached earlier, which is
how the public know which partner is responsible for the negligence. Who is the negligent partner
against whom actions must be pursued? Knowledge of that might dissuade some clients from
having dealings with that partner.

Customers should have access to that information. If existing claims against a partner are such
that a further claim would take all his assets, the public need to know. How will they learn who is
the negligent partner and whether other allegations of negligence have been made against individual
partners of a limited liability partnership? People need to know who they are dealing with and what
their status is.

We are talking about public provision of information to safeguard creditors, including information
about individual partners' assets, against which claims can be made. We are limiting liability, so we
need to know what the assets are. In the case of a company, shareholders' liability is limited to the
extent of the paid-up shares, and the balance sheet lists the assets and liabilities for anyone to see;
but the balance sheets published by LLPs will not give the creditors full and fair information. All I
want is parity between the information published by LLPs and by limited companies. That seems

Amendment No. 19 deals with registration and is designed to let us know what authority each
member has to act.

Amendment No. 24 is again a matter of necessary public information for creditors and potential
creditors about the financial standing of the LLP.

I hope that my hon. Friend the Minister will respond to some of my points and clarify whether my
arguments are valid.

Mr. Fabricant: The hon. Member for Great Grimsby (Mr. Mitchell) delivered quite a rant and
proved his inability to count: I intervened twice, not three times. Some of his arguments, if not
persuasive, raise interesting questions that the Minister should address.

It is a good idea in principle for the liability of large partnerships to be limited. In this modern age,
partnerships can comprise 50, 100 or even 200 or 300 people--and in some instances, several
thousand--and it is not practical to expect them all to have joint and several liability, but I tend to
agree with the hon. Gentleman that, if the state is providing some protection, it should demand a
quid pro quo and expect certain information from the partnership.

I do not go as far as the hon. Gentleman. Judging from their faces, not many Government
Members would go that far. It is interesting to note the divisions on the Government side. The
Government feel--and I agree with them--that there should be some protection in the form of
limited liability, possibly echoing some of the protections that are available to companies under the
Companies Acts. Should not limited liability partnerships also have to meet some of the
obligations of disclosure in annual returns that are presently imposed on companies

28 Jun 2000 : Column 937

under the Companies Acts? I would welcome an unemotional and non-ranting answer to that
question--the Minister is known for his unemotional and accurate responses.

Mr. Jim Cousins (Newcastle upon Tyne, Central): I share much of the frustration and
irritation expressed by my hon. Friend the Member for Great Grimsby (Mr. Mitchell) at the
circumstances in which we find ourselves. Apparently, the Bill is technical and rather obscure--of
interest only to a few people who have a particular interest in some obscure points of law and
commercial practice. Yet it advances an important innovation in British commercial law, which
could well be taken up by many presently unlimited liability partnerships.

The hon. Member for Lichfield (Mr. Fabricant) said that the Bill was targeted at the needs of large
partnerships. He and the Government must recognise that a number of partnerships that are not
large may seek the protection and advantage of limitation of liability. That ought to give the House
cause for a little caution.

We find ourselves discussing this quite complex Bill, which advances an important new principle,
between the excitement of a statement on the Post Office, which is important, and the even greater
excitement of debate on the Fur Farming (Prohibition) Bill. That is not the ideal circumstance in
which to be discussing such a matter. It inevitably imposes a good deal of pressure--I do not
suggest in any way that it is external pressure--on those taking part in the debate.

Mr. Fabricant: Of course the hon. Gentleman is right that small as well as large partnerships may
seek the protection that the Bill will offer when enacted. However, given that there is similar
legislation in other parts of the world, does he fear that jobs might be lost if larger partnerships
centred outside the United Kingdom, in countries that offer partners protection?

Mr. Cousins: Of course I shall come to that point, although I hope not to be tempted too wide of
the new clauses and amendments.

The hon. Gentleman asked my hon. Friend the Member for Great Grimsby whether, in principle,
he accepted the idea of limitation of liability in partnerships. Were I to be asked that question, my
answer would be yes; I have no difficulty with the limitation of liability in partnerships.

The Partnership Act 1890 has always been considered to be one of the most ideal pieces of
legislation. It has endured for more than a century without any tampering with it, or amending of
its essential form or principles. It has stood the test of time; it has the clear concept of joint and
several liability.

However, the Act was framed when all partnerships were extremely small, the people were
individually known to each other, and the reputation, efficiency and performance of the partners
could be measured and tested by potential and actual partners. Any problems could be addressed
immediately, simply and directly. We have moved on: we now have partnerships that consist not
merely of thousands of partners but sometimes tens of thousands of partners, in which such
disciplines cannot apply.

28 Jun 2000 : Column 938

5.30 pm

It may be right to offer the protection of limited liability to such partnerships, but--this point has
already been discussed--the limitation of liability being offered here is not confined to such
circumstances. Small partnerships can also take advantage of it. Therefore, we are considerably
modifying the structure of the principle advanced in the 1890 legislation, and we should be
properly cautious about that.

I am prepared to consider the principle of limitation of liability in partnerships, but we must
consider whether this is the right moment to introduce such legislation. We still have the unfinished
business of the Caparo judgment, to which my hon. Friend the Member for Great Grimsby rightly
drew attention. Auditors appear to owe no significant legally meaningful duty of care to the
shareholders in the enterprises that they serve.

Accountancy was done no favours by the Caparo judgment. It opened a hole in accountability
and responsibility, which we are still puzzling how properly to fill. The present proposal to create
an independent regulator for accountancy, but not a statutory one, in a way seeks to undo the
damage that was done in the Caparo judgment.

One of my anxieties about the Bill is that until we can see the real strength of the framework being
offered under independent regulation--the proposals that are now being worked up in front of us
in the area of accountancy--it is difficult to know whether the Bill is appropriate and soundly
formed. There must be a legitimate anxiety about that.

Furthermore, there have been a number of legal actions. Out of respect to my hon. Friend the
Member for Middlesbrough (Mr. Bell), I shall not start a cascade of prominent names and cause
him some agitation that important people in our commercial world might be denounced. However,
my hon. Friend must recognise that those people are suing each other. Such matters may all be
settled out of court. One would not attempt to speculate about that, but it is entirely possible.
However, if matters do come to court, the rehearsal of the evidence will provide some important
information which can guide us in legislatures and help us deal with some of the issues that arise in
partnerships if we begin to limit liability.
Mr. Stephen O'Brien (Eddisbury): I do not dispute what the hon. Gentleman says about
accountants suing each other, but to put it in perspective, much of what is happening is probably
driven by the insurance cover that those partnerships have, whereby they are required to pursue
their interests. The insurers drive them to that. Part of the point of the Bill is that limited liability
partnerships will, to some degree, obviate the need for that depth of insurance and the expense of
it, which is ultimately passed on to clients and consumers.

Mr. Cousins: That raises more issues than it tidies up. It may be true that insurance is one of the
drivers behind large accountancy firms suing each other over responsibility for the disappearance
of what, it must be recognised, are hugely significant sums of money. The loss of that money has
damaged thousands of individuals, voluntary organisations--in the case of BCCI, a large number
of voluntary organisations--and enterprises. We are not talking about something that is of no
significance; it is of profound significance.

28 Jun 2000 : Column 939

The hon. Gentleman says that partnership firms are suing each other because of the insurance
driver, and that such legal actions would not otherwise take place. That worries me. What are we
doing in this legislation, offering an alternative source of cover to insurance cover that can now be
purchased perfectly properly, and which is the basis of those legal actions? What will this
legislation cause to be hidden that would otherwise be exposed?

Mr. Fabricant: I am following the hon. Gentleman's argument with considerable interest, but
surely there is nothing in the Bill that prevents any client of an organisation that is perceived not to
have acted properly from suing the limited liability partnership?

Mr. Cousins: I have already referred to the great difficulty there. The pressure for the legislation
began in the accountancy partnerships, and although I entirely accept that far more than
accountancy partnerships may seek to take advantage of it, in the accountancy world we come up
against the great problems that my hon. Friend the Member for Great Grimsby and I have
mentioned--the Caparo judgment and its rather unfortunate inheritance.

Against the background of the Caparo judgment, any legal action against an accountancy
partnership faces the difficulty of having to overcome the consequences of that legal decision.
That point does not apply to other kinds of partnership that might seek to take account of the
legislation. I fully acknowledge that. However, the House knows that the driving influence in the
introduction of the legislation came from those accountancy firms. That is a relevant point.

Mr. Burnett rose--

Mr. Cousins: I do not want to take up too much time. I know that there is a custom whereby
people who want to talk at length always say that they do not want to detain the House, but on this
occasion I really do not want to detain the House, so I shall be careful about taking interventions.

The hon. Member for Lichfield (Mr. Fabricant) drew attention to the fact that there are legal
jurisdictions close to Britain--the one that is always mentioned is Jersey--in which limited liability
has already been carried into law. The Conservative Government's motive for wanting legislation
in this form was the fear that people would relocate to such regimes to take advantage of limited

All that has been overtaken by other events, in particular concerns about offshore legal and tax
regimes, which provide unfair competitive advantage. That is a difficult and complex issue, into
which I do not wish to stray this afternoon, but all will recognise that the Government have offered
leadership to Europe in striking a deal on the withholding tax only a fortnight ago, and setting up a
regime based on the exchange of information, which is a real, genuine and significant breakthrough
in tackling such offshore regimes. Therefore, it might again be wise to see how all that develops
before we advance as an argument for this legislation the fact that there may be competitive, more
attractive jurisdictions elsewhere in which people might seek to locate. That is an argument for a
little caution and delay.

28 Jun 2000 : Column 940

All the new clauses concern disclosure and the importance of making information available, which
will allow outsiders to form proper judgments about the good conduct and good management of
any regime which has the advantage of limited liability.

New clauses 2 and 8 advance the principle of openness in the specific context of financial
information. The creation of limited liability partnership regimes gives rise to a potential tax
problem. The Government acknowledge that in their correct intention to remove both the
possibility of improper tax avoidance and the use of a variety of legal vehicles to take advantage
of tax planning possibilities and thus improperly avoid taxation. I expected an intervention at that
point, but no one wishes to intervene, so I shall move on.

We are considering an important point. It would be extremely helpful if my hon. Friend the
Minister could clarify the Government's discussions about the tax regime that accompanies the
Bill, and the way in which that regime will work. The House would then be well informed.

New clause 7 attempts to deal with one of the issues that features in the Government's agenda for
company law reform. Sadly, we shall not legislate on that agenda until after the next general
election. Again, there is a question of timing. I know that my hon. Friend the Minister intends the
full force of current company legislation to be exercised over limited liability partnerships. We
cannot speculate on any future changes--the House is not the right forum or platform for indulging
in such speculation--but we are all considering the matter, and it would be helpful if my hon.
Friend could tell us that the Government intended to reflect future changes in company law in the
liabilities for disclosure affecting limited liability partnerships.

As my hon. Friend the Member for Great Grimsby rightly said, new clause 4 attempts to deal with
what goes on in other jurisdictional regimes. My hon. Friend rightly mentioned the work of the
Securities and Exchange Commission in the United States, and its attempts to provide for a
proper relationship between general accountancy work and the specific work of audit. It ensures
that those two functions are not confused, and that no market abuse occurs when people use their
economic power in one context to achieve economic advantages by sweeping up all the audit
work. The Securities and Exchange Commission properly tries to deal with fair competition and
market abuse.

There is no point in Opposition Members saying that the Securities and Exchange Commission
will not affect us here; it has already affected us. We are considering global partnerships that
engage in economic activities all over the world, which are caught by the actions of the Securities
and Exchange Commission. It is fair to ask how we will tackle those issues. It would be
unfortunate to be led down a road of competing jurisdictional regimes with barriers between them,
and all sorts of intergovernmental disputes over the propriety of one action by a regulator in one
country when compared with the different framework of rules in another country. We must try to
avoid that.

5.45 pm

The Government have referred a general bundle of issues to the Office of Fair Trading. It has
been asked to consider the way in which professional partnerships work,

28 Jun 2000 : Column 941

and the way in which demonstrable problems will be tackled. It would not be proper for my hon.
Friend the Minister to direct the OFT's work; it would be wrong, and I do not ask him to do that.
However, it would be proper for him at least to direct the OFT's attention to the matter so that it
could perhaps ascertain methods of avoiding the possibility of conflict between jurisdictions, and
of attempting to introduce in our regimes governing market abuse and fair competition some of the
benefits that the Securities and Exchange Commission brings to regimes in the United States.

I have mentioned important underlying issues, which all give grounds for caution; they are
reflected in the new clauses. I accept that Back-Bench amendments are not always framed well.
However, I have outlined the purpose of new clauses 2, 8, 7 and 4. I hope that I have explained
the reasons for them, and that my hon. Friend the Minister will be able to assist us in dealing with

Mr. Burnett: I declare at the outset that I am a solicitor and that I no longer practise. I used to
specialise in taxation and, to some extent, partnership matters.

Any trade or profession can become a limited liability partnership provided that at least two
persons--that includes companies--come together to form one. As has been said, the usual rules
for joint and several liability are not applicable to limited liability partnerships. Nevertheless, it is
worth putting on record that an individual member of an LLP is liable in tort for his or her actions,
if they are negligent or held to be negligent. The firm and all its assets are fully liable.

Disclosure should be at the heart of the Bill. I refer the House to my words on 23 May 2000 on
Second Reading. I said:

Finally, a fundamental principle of the Bill should be that the price for the limitation of liability is full disclosure of the financial affairs of a business and that such information should be readily available to the public.--[Official Report,  23 May 2000; Vol. 350, c. 907.]

I have not changed my mind. It would be in the interests of those who did not serve on the
Committee, or who have not studied the matter as deeply as others, and for the convenience of
the House, if the Minister set out clearly the disclosure obligations in the Bill.

The Parliamentary Under-Secretary of State for Trade and Industry (Dr. Kim Howells): I
am well aware of the concern of my hon. Friends the Members for Great Grimsby (Mr. Mitchell)
and for Newcastle upon Tyne, Central (Mr. Cousins) about accountancy and its regulation in this
country. They have made it clear that they believe that limited liability partnerships are a
concession to the professions, especially the accountancy profession.

By tabling the new clauses, my hon. Friends are trying to use the Bill as a means of regulating the
accountancy profession. As I said on Second Reading, I admire their tenacity and their concern
for the reform of accountancy regulation. However, it is not the Bill's function to regulate
professional activity. When regulation is believed to be necessary, the activity, not the LLP as an
entity, will be regulated.

28 Jun 2000 : Column 942

Time and deliberation were mentioned on several occasions. This Government and the previous
Government have consulted on the detail of the Bill for at least four years. A long and intensive
debate has therefore taken place about the proposals.

On the issue raised by my hon. Friend the Member for Newcastle upon Tyne, Central about the
investigation of the professions by the Office of Fair Trading, I share the views of my hon.
Friends that the issue of auditor independence--in particular, the extent to which an audit firm
should be able to provide a non-audited service to audit clients--is important. That applies not
only in the US, where the SEC has made proposals to deal with the issue, but in this country.

The OFT is conducting a review of the professions that will focus on, among others, accountants
and solicitors. Iam sure that the review will address the balance between competition and
regulation in relation to the accountancy profession. That work provides an excellent opportunity
to examine the concerns that my hon. Friends have raised about the ability of auditors to provide
non-audit services. The comments of my hon. Friend the Member for Newcastle upon Tyne,
Central encourage me to ensure that those conducting the review are fully aware of those
concerns, and I undertake to do so.

It has always been the intention that an LLP will have applied to it, through secondary legislation,
similar requirements to those that are applied to a company. The amendments, if they were
accepted, would add a heavy additional burden to LLPs in comparison with those of a company.
I am strongly of the opinion that that is not the right approach.

New clause 2 would add a substantial extra burden on an LLP in comparison to a company, and it
would be manifestly unfair to require such extra requirements on an LLP. There are no Companies
Act requirements for a company to set out any claims made against it for work done, nor does it
need to have a statement from its regulator stating that it has complied with the relevant regulatory
framework. In addition, I do not see what would be gained by giving details of employee pay,
which should be a matter between the employee and the LLP.

Under section 709 of the Companies Act 1985, any person may inspect the records kept by the
registrar, and that section will be applied to LLPs. New clause 4 would impose a burden on LLPs
trading outside the UK that goes beyond the requirements imposed upon a company or a
partnership. It is not the role of the registrar of companies to list infractions of regulatory rules,
either in the UK or in other jurisdictions. It is a matter of policy for the regulatory body concerned
to decide whether infractions should be reported. I shall try to return to that issue, because my
hon. Friends raised some interesting points.

New clause 7 would require an LLP to publish details similar to the details of director emoluments
that are required by schedule 6 of the Companies Act 1985. That issue was addressed by the
Trade and Industry Committee, which agreed that there was no reason why the Department should
revisit the issue of the disclosure of the highest paid members' drawings. I do not believe that
making available any further details of members' drawings would add anything. All LLPs will need
to provide information on the aggregate amounts withdrawn or applied on behalf of members
during the financial year

28 Jun 2000 : Column 943

in the notes to the balance sheet. That is in addition to the requirement to disclose the earnings of
the highest paid member in firms where profit--before member remuneration and profit
shares--exceeds £200,000. The disclosure of that information will allow potential creditors to take
a view on how the LLP is being managed and whether members are making excessive

New clause 8 would require the annual accounts of the LLP to include a statement that would
show the value of the assets of each partner and whether that partner was involved in any
litigation. I share my hon. Friends' aspirations for greater transparency and this central issue is
being examined by the independent company law review, which will make--I trust--some insightful
and radical proposals.

As an LLP is a separate legal entity, we envisage that third parties will contract with the LLP rather
than the member. For that reason, it is important that potential clients of the LLP are aware of the
assets of the LLP and it is why we have applied the financial disclosure requirements for
companies to LLPs. I do not believe that the disclosure of the net assets of members will add to
creditor protection. Nor do I believe that providing information on whether a member is involved
in litigation is right, because providing such information could be detrimental both to the individual
and the LLP. The member should be seen as an individual separate from the LLP. I strongly
believe that the new clause would be unfair and would go against our stated policy of having
comparable treatment for LLPs and companies.

I see no reason why a statement of the authority to act of each member needs to be lodged with
the registrar of companies and to be made available to clients, as suggested in amendment No. 19.
It goes beyond what is required of directors of a company or of partners in a partnership. The Bill
states in clause 6 that every member of the LLP is an agent of the LLP. A potential client will be
able to find out who the members and designated members are, and details of the financial
background of the LLP and any charges on the LLP will be available from Companies House. I
am happy to inform my hon. Friends that we require designated members to give details of their
addresses when they are appointed as designated members. That follows the requirements for the
appointment of directors.

On the question of taxation, which my hon. Friends raised, I said on Second Reading that even
though we believe that it is right to tax LLPs as partnerships, we are aware that, in some cases, the
primary or only attraction of LLP status might be the tax treatment. As a result, we are considering
the issue carefully with the Inland Revenue. Depending on our conclusions, legislation may be
brought forward in the Finance Bill in 2001. We would, however, consult widely before legislating.

I emphasised that our intention was not to undermine the commercial certainty of the taxation
treatment of LLPs for those businesses for which LLP status was intended, and I recognise that
that might happen. I know that my hon. Friends are concerned about that point--both about the
possible deterrent factor it might have, and about the uncertainties that would exist for those who
take the plunge to become LLPs. I share the concerns that they have raised about companies that
wish to become LLPs and about the need for greater clarity about the taxation

28 Jun 2000 : Column 944

implications of such a transformation. Indeed, the hon. Member for Bognor Regis and
Littlehampton (Mr. Gibb) raised similar points in Committee.

I am of the view, therefore, that it is appropriate to await the outcome of the review before
commencing the LLP legislation, so that anyone wishing to become an LLP may be certain of
what tax treatment it can expect. I do not expect that, in practice, that will cause delay, because
our expectation was that LLPs would not be available before early 2001. Clearly, were there to be
legislation in next year's Finance Bill, we would need in any case to be certain of our intentions by
that stage.

My hon. Friend the Member for Great Grimsby raised concerns about the prospect of water
companies using LLPs as a means of running not-for-profit mutualised companies. That is a novel
idea that has suddenly emerged on the scene since several water companies decided that they
cannot make profits out of supplying water. My hon. Friend expressed concern about the
intention of the owners of one particular company--Yorkshire Water--to split it in two and sell its
physical assets to a non-profit-making mutual company. In that context, a statutory undertaking
under the Water Industry Act 1991 must be a company limited by shares and could not be a
limited liability partnership. It is perhaps also worth noting that anyone wishing to become an LLP
must be carrying on a lawful business with a view to making profit. An LLP is therefore not
available as an option for non-profit-making organisations.

6 pm

The hon. Members for Lichfield (Mr. Fabricant) and for Torridge and West Devon (Mr. Burnett)
raised the general question of disclosure, and my hon. Friends the Members for Newcastle upon
Tyne, Central and for Great Grimsby made a number of valuable and interesting proposals in
respect of disclosure requirements for limited liability partnerships. It is, however, difficult to
accept those proposals simply in relation to LLPs without considering corresponding application
to companies.

It is our aim, as far as is possible, to keep the disclosure requirements for LLPs in line with those
for companies and--I hope that this addresses the point raised by my hon. Friend the Member for
Newcastle upon Tyne, Central--to ensure that changes in circumstances and what those changes
might generate in terms of demands for disclosure are allowed for within the remit and the report
of the independent company law review.

As I said earlier, the provision of information by companies is one of the key themes of the
company law review that the Government set up two years ago. The review has already published
proposals which would change quite radically some of the disclosure requirements. This therefore
provides the best opportunity for many years for my hon. Friends' ideas to be considered.

It is our intention that changes which are made to companies following the company law review
should then be applied to LLPs to the maximum extent possible. Given those reassurances, I very
much hope that my hon. Friends will withdraw their amendments.

Mr. Mitchell: I am grateful to my hon. Friend the Minister and I shall try to save what is left of
my career by gibbering that gratitude to him for a little while. He has

28 Jun 2000 : Column 945

given us some substantial assurances. First, I particularly like the assurance that the Kelda
Group--formerly Yorkshire Water--will not be able to get away with what I thought was a possible
subterfuge by registering as an LLP. I am grateful for that assurance, although it was not made in
relation to this group of amendments.

Secondly, I am grateful for my hon. Friend's substantial assurance that the Bill will not come into
effect until the tax review is completed. That is important as it will enable people thinking of setting
limited liability partnerships to know from the recommendations of that review what the tax regime
will be. That is a substantial advance in our argument.

My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) and I have been
entertaining the House with our nice guy, nasty guy double act--

Mr. Cousins: On a point of order, Mr. Deputy Speaker. I think that my hon. Friend meant to
imply that I was the nice guy.

Mr. Deputy Speaker: That is not a matter for the Chair.

Mr. Mitchell: Of course my hon. Friend is the nice guy.

Thirdly, my hon. Friend the Minister's assurances on disclosure and bringing partnership law and
safeguards into line with those that apply to limited companies through the company law review
has given us the incentive to make submissions along the lines of the arguments that we have put
before the House. We shall consider doing that in respect of both sets of provisions. That is
another substantial point.

Fourthly, my hon. Friend assured us that the Office of Fair Trading review will be looking at these
matters and I am sure that it will take into account fair competition considerations in respect of the
sale of other services.

We are grateful to my hon. Friend the Minister for those substantial advances and we feel that we
have achieved something in very difficult circumstances. Although Opposition Members tried to
heckle us--in particular, they tried to heckle me rather than my statesmanlike hon. Friend--we were
only doing the job of scrutiny that the Opposition singularly failed to do. Instead, they simply
pressed for further concessions for the vested interests.

We have been doing a job of scrutiny under a handicap. As the Bill originated in the House of
Lords, it will not be returning there for further amendment. I am grateful for the four substantial
concessions that my hon. Friend has given us and I realise they are all that we shall get at this
stage. I do not think that it should have been done in this way, but as it has we are grateful to my
hon. Friend for the concessions that he has made. As I am a realist, I shall withdraw the motion
and give notice that my hon. Friend and I shall not be moving any of the other amendments in our
names. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

28 Jun 2000 : Column 946

Mr. Deputy Speaker: As the hon. Member for Great Grimsby has said that he does not intend
to move his later amendments, we now move on to amendment No. 1, in the name of the official

                                 Clause 5

                          Relationship of members etc.

Mr. Nick Gibb (Bognor Regis and Littlehampton): I beg to move amendment No. 1, in page
3, leave out lines 22 and 23 and insert--

(b) subject to paragraph (a), by the rules and principles which would apply if the law relating to partnerships applied to

Neither of these are relevant interests, but I remind the House that I am a chartered accountant, so
I ask hon. Members to go easy on the language that they use against chartered accountants and
others. Also, I do not currently practice, but I contribute six or seven articles a year to
Accountancy Age.

Having sat through the debate on the new clauses tabled by the hon. Members for Great Grimsby
(Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins), I feel as though I am
intruding on private grief. If the Labour party can tear itself apart on a relatively technical measure
like this one, one can only wonder what machinations, discussions and divisions are taking place
behind the scenes on issues of wider concern, such as Labour's failure to deliver on the national
health service, education and crime.

Mr. Cousins: I assure the hon. Gentleman that we have had a most comradely exchange with the
most comradely outcome. I should like to put that on record.

Mr. Gibb: I am grateful to the hon. Gentleman for that intervention. I am sure that it was
comradely, but none the less Labour Members were split.

This is an important Bill which has had several layers of scrutiny. As the Minister said, it began life
under the Conservative Government, but when it eventually began its passage through the other
place, despite scrutiny and a report by the Select Committee on Trade and Industry, it still
contained a number of problems.

The hon. Member for Great Grimsby was wrong to say that the Opposition did not give the Bill
considerable scrutiny. My noble Friend Baroness Buscombe and I discussed our concerns in
great detail with the Minister, Lord McIntosh, and owing to pressure in the other place by my
noble Friend and a reasonable approach taken by the Minister, many of our concerns were dealt
with by Government amendments. Indeed, had the Government taken such an approach on some
of their more controversial legislation, they would not be in their current position in regard to
credibility with the public.

There are nevertheless some remaining concerns which we raised in Committee and which the
Government have not dealt with adequately. Our first concern is that of the so-called default
provisions. Clause 1(5) of the Bill states:

    except as far as otherwise provided by this Act or any other enactment, the law relating to partnership does not
    apply to a limited liability partnership.

The reason for that provision is, according to the Government, that as an LLP is a legal person in
its own right and is therefore a body corporate; in general,

28 Jun 2000 : Column 947

partnership law should not apply; and company law should apply instead. However, the very
essence of an LLP remains that of a partnership.

It was in order to retain the partnership ethos that professional firms have sought this form of
incorporation rather than becoming companies proper. An LLP will still have what is in effect a
partnership agreement regulating all the internal relations of a partnership; but particularly for
smaller, less well advised partnerships which seek to become LLPs, it could well be that the
internal partnership agreement will not have clauses that deal with every eventuality to be faced by
a partnership in business.

In the past, this would not have mattered. The Partnership Act 1890--and the century of case law
since--have filled in the gaps regarding almost every conceivable eventuality. Future case law,
based on precedent and the principles established in earlier cases, would deal with future
eventualities. Those matters may include the right of partners to examine the books and records,
the right to take part in the management of the partnership, and questions regarding the expulsion
of members.

Those issues may be dealt with adequately in the partnership agreement, but they may not be.
Short agreements for smaller partnerships drafted when it was understood that general partnership
law would apply may well not include many important provisions.

The amendment would provide that the law with regard to the internal arrangements of an LLP
should default to general partnership law. Its wording has simply been lifted from an earlier draft
of the Bill. The removal of the provision from the final Bill has aroused widespread concern.

That concern was such that the Government entered into a separate consultation exercise on the
specific question of the default provisions. The views of many consultees were summed up in the
Government's response document. One paragraph voiced the general concern, stating that

    in the absence of an adequate agreement between the members of a Limited Liability Partnership, the relationship
    between members would be uncertain; there was a strong desire that partnership law should govern the rights and
    duties of the members of the Limited Liability Partnership . . . partnership law is well understood by partnerships
    and practitioners, with the principles established over many years.

That was also the view of the Law Society, which stated:

    The Society was concerned with clause 1(5) which disapplies partnership law from limited liability partnerships
    unless otherwise provided in the Bill. The Society has always considered there to be the need for some default
    provisions that would operate in the absence of agreement to the contrary within an LLP and which would cover
    certain basic matters relating to the mutual rights and duties of the members of an LLP.

The Law Society accepted that the Government had amended the Bill to insert one or two of the
partnership law provisions in the regulations. However, it is inevitable that some areas will not be
covered by the exhaustive and specific list that the Government have included in the regulations
and, as always with this Government, it is small business that will suffer. Big, well advised
partnerships will be fine, but yet again the Government are creating a complex regulatory regime
that puts a premium on being well advised.

The hon. Member for Great Grimsby complained about advisers' incomes, but the pressure for
greater regulation is created by him and those who share his philosophy.

28 Jun 2000 : Column 948

Someone has to read, understand and remember the regulations for which the hon. Gentleman
continually presses. That will lead to greater demand for expert advice, and therefore higher
salaries for those prepared to do that work.

The amendment would reduce the premium for expert advice by making the regime simpler.

Mr. Gerald Bermingham (St. Helens, South): My sole reservation about LLPs has to do with
negligence on the part of professional firms. For example, the negligence policy of a firm of
accountants that becomes an LLP may not deal with any negligence created. That has been the
case in certain recent takeovers. In the old days, one could at least sue the partners to make up the
shortfall on the negligence cover, but that does not seem to be the case now.

Mr. Gibb: The hon. Gentleman raises a point that goes to the heart of the Bill. The aggrieved
person can still sue the partner or partners involved in preparing the negligent work. However, why
should the law for people in the accountancy or legal professions be different from that covering
people in the medical profession, such as nurses? They work for the health service but are not
subject to losing all the assets that they have built up over a lifetime.

It is not a matter of fat cats. There are 120,000 chartered accountants in this country. Most of
them could never be described as fat cats, and they live under the constant threat that they will
lose their lifetime assets because of the negligence of another partner. The Bill goes a long way
towards solving that problem, and it is welcome for that reason.

Mr. Bermingham: There is a world of difference between a partnership in a garage business and
one involving accountants, estate agents, solicitors or surveyors. The difference is simple: the first
provides a service, whereas the professionals provide advice. If the advice is wrong, the damages
can be massive. If the service is wrong, the damages are much smaller.

6.15 pm

Mr. Deputy Speaker: Order. I think that hon. Members are straying into Second Reading points.
The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) should address his remarks to
the amendment.

Mr. Gibb: I am grateful to you, Mr. Deputy Speaker, but I do not believe that the distinction
offered by the hon. Member for St. Helens, South (Mr. Bermingham) is valid. Advice and services
are very similar, in the sense that one either provides a service or advises someone else about it.
That similarity crosses all professional boundaries and is not confined to law and accountancy.

The amendment would reduce the Bill's complexity. Even at this late stage, I hope that the Minister
will relent and accept, if not its wording, then at least its principles.

Mr. Burnett: I shall not go over material discussed on Second Reading and in Committee, but I
was a senior partner in a large firm for more than 20 years and I know how important it is--for the
clients and customers of a partnership, as well as for the members of that partnership--to ensure
that the partnership ethos is

28 Jun 2000 : Column 949

preserved. It is important that a duty of good faith should exist between the partners, as that is in
the interests of clients and customers.

I strongly support the amendment. The Partnership Act 1890 is a good Act, as was said earlier. It
provides certainty and simplicity, and will provide some continuity. Simplicity is extremely
important, especially for small businesses that cannot afford the advice. They will not necessarily
know of the existence of regulations passed by the House.

I hope, even at this late stage, that the Government will remember the interests of small firms and
think again on this matter. The fall-back position should be provided by the 1890 Act: it has stood
the test of time and is supported by a large body of case law.

Mr. John M. Taylor (Solihull): Is not one of the limitations of the 1890 Act the fact that it
presupposes that ownership, profit sharing and decision making are all in step with each other? In
a modern partnership, is it not possible that distinctions may need to be made between who owns,
who makes decisions, and who makes profits?

Mr. Burnett: As usual, the hon. Member for Solihull (Mr. Taylor) is correct and makes a good
point. However, he knows that it is open to the parties who create a partnership under the 1890
Act to vary the profit-sharing and ownership proportions. They can do so with remarkable
simplicity. Although they will have to consider the tax implications of such an action, but it is the
Act's simplicity that is so important.

It is vital that small businesses do not have to fall back on the more tortuous and complicated
Companies Act 1985. I understand that there must be intricate provisions under that Act relating
to disclosure, and that the Insolvency Act 1986 also has a part to play. Even so, for the reasons
that I have given, the 1890 Act is an excellent piece of legislation and should not be rashly
discarded in the way that the Government propose.

Dr. Howells: I acknowledge the very proper concern expressed in the amendments in the name
of the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb), and the support given by the
hon. Member for Torridge and West Devon (Mr. Burnett). I will try to give the amendments the
respect that they deserve, because there is no question but that this is an important point.
However, I will explain why I will be resisting the amendments--much to the disappointment, I
know, of the hon. Member for Bognor Regis and Littlehampton.

Throughout the Bill's passage, there has been a great deal of debate about partnership law and its
application, or non-application, to limited liability partnerships. A general application of
partnership law to LLPs, very similar to what is proposed in amendment No. 1, was contained in
the draft Bill published in September 1998. Subsequently, we took the decision to remove it.
Nothing has yet led us to conclude that we were wrong to do so, and we remain opposed to any
attempt to reintroduce it. Let me explain why.

As the hon. Gentleman informed us, the main point is that an LLP is a body corporate, while a
partnership is not. That is a fundamental difference. So because a

28 Jun 2000 : Column 950

limited liability partnership will be a legal entity separate from its members, its clients will be able
to enter into contracts with the LLP itself, not the members. An LLP will also be able to hold
property. In addition, because of its separate legal status, an LLP will continue until it is formally
wound up, no matter what changes occur in its membership.

A partnership, however, exists only because the partners are carrying on business together, and it
has no separate life of its own. Contracts are between third parties and the partners themselves,
and changes in partners will cause the partnership to dissolve, although the partners can make
specific arrangements to prevent that from happening.

Many of the provisions of the Partnership Act 1890 would be inappropriate for an LLP. Sections
1 to 4 deal with the nature of the partnership. They are of no relevance to limited liability
partnerships, because the nature of an LLP is set out in the Bill. Sections 5 to 18 deal with the
relations of partners to persons dealing with them. Again, they are of no relevance to limited
liability partnerships because clause 6 deals with this for LLPs. Sections 19 to 31 deal with the
relations of partners to one another. Only eight of those sections are appropriate to LLPs. The
others deal with partnership property, for example, which is inappropriate for an LLP because
property can, and is likely to, be held by the LLP, not the members. They deal also with
retirement, which is dealt with in clause 4.

Sections 32 to 44 of the 1890 Act deal with the dissolution of a partnership and its consequences.
These sections would be inappropriate for an LLP, because it will be a separate body corporate,
and winding up will be dealt with by application of insolvency legislation, as the hon. Gentleman
hinted. Finally, sections 45 to 50 are supplemental.

So of the 50 sections of the 1890 Act, only eight are relevant or appropriate to LLPs. We intend
to apply appropriately modified versions of these eight sections to LLPs by way of regulation to
govern the relationship between members where there is no agreement. Yet the amendment
suggests that all 50 sections are relevant, when clearly they are not.

The amendment would also apply the general law relating to partnerships. Again, that has been
developed with regard to partnerships, not bodies corporate. In particular, over the years the
general law has developed the duties owed between partners. We believe that application of these
duties to an LLP would be problematic. The existence of the limited liability partnership as a
separate legal entity means that members will owe duties to the LLP itself. That is not the case in a
partnership. Thus a general application of partnership law could leave members of an LLP facing
concurrent duties--duties owed to the LLP, and duties owed to each other. There would be no
indication of which duty took priority were there to be a conflict.

The hon. Gentleman helpfully set out in Committee the extent to which the Government have
fuelled the debate.

28 Jun 2000 : Column 951

Initially, in response to consultee concerns, we established a small working group of officials and
representatives from the profession to consider the options. Discussion ranged over all the points
that I have raised, and the conclusion was that the preferred solution was to apply default
provisions dealing with the eight relevant sections of the 1890 Act that I have mentioned instead of
a blanket application of partnership law.

We went out to consultation on this in February. I am sure that the hon. Gentleman remembers
that full well--we said it often enough. The response was in favour of the approach that the
Government have adopted. The consultation paper also dealt with the question of whether we
should impose a duty of good faith as between members. As I explained in some detail in
Committee, we eventually decided against such a duty, although nothing in the legislation would
prevent members of a limited liability partnership including such a duty in their membership
agreement if they so wished.

Finally, perhaps I might comment on the two main arguments made by those in favour of a general
application of partnership law. First, they argue that partnership law is well understood and that
the Partnership Act 1890 is a model of simple and elegant legislation. However, as I have said,
partnership law is not just the 1890 Act, but an extensive body of general law. This is not simple,
even for experts. There are a number of complicated and sometimes vexed issues, which is why
the Law Commission is currently reviewing partnership law.

Next, it is argued that it is difficult to see how the expressed intention to create an entity that
combines partnership ethos with limited liability can be achieved without applying partnership law.
However, the LLP legislation remains silent on the relationship between members, so as to ensure
that there is freedom for members in each LLP to develop provisions appropriate to their specific
circumstances. It is that flexibility which those partnerships that are planning to convert to a
limited liability partnership are keen to see preserved in the new entity, and we believe that that is
what will preserve the partnership ethos.

I remain unconvinced that amendment No. 1 is necessary or suitable. I very much hope that the
hon. Gentleman will see fit to withdraw it.

Mr. Gibb: That was a useful exchange of arguments that we first rehearsed in Committee. I
cannot claim to have heard the four concessions from the Minister which the hon. Member for
Great Grimsby (Mr. Mitchell) imaginatively construed from the Minister's first response. I had
hoped that the Minister might, at the last moment, have given small businesses some concessions,
so he will not be surprised to hear that I am disappointed, although not surprised, at his response.
On that note, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Deputy Speaker: As the hon. Member for Great Grimsby (Mr. Mitchell) does not intend to
move several of his amendments, we now proceed to amendment No. 7.

28 Jun 2000 : Column 952

                                 Clause 15

                        Application of Company Law etc

Mr. John Burnett (Torridge and West Devon): I beg to move amendment No. 7, in page 10,
line 15, after "to", insert--

'bodies corporate recognised by the Law Society under section 9 of the Administration of Justice Act 1985,'.

Mr. Deputy Speaker: With this it will be convenient to discuss the following amendments: No.
8, in page 10, line 17, after "to", insert--

'bodies corporate recognised by the Law Society under section 9 of the Administration of Justice Act 1985,'.

No. 4, in page 10, line 22, at end insert--

'(2) For the purposes of this section any law relating to bodies corporate recognised by the Law Society under section 9
of the Administration of Justice Act 1985 shall be deemed to be a law relating to companies or other corporations'.

Mr. Burnett: We discussed in Committee a new clause that contained proposals fairly similar to
those in amendments Nos. 7, 8 and 4. Unfortunately, due to a technical hitch, I am now told that
solicitors might not be able to set up as LLPs--at least, not as soon as other professions. The
Minister was helpful in Committee, and was anxious that solicitors were not discriminated against.

There is a large body of legislation that makes reference to solicitors which will need amending in
the light of this Bill. The Law Society was led to believe that this could be achieved by making
regulations under clause 15, and that is what I have sought to do. However, I understand that the
Law Society has been told that the Minister's Department believes that it may lack the power to
make these regulations.

This has led to some confusion, and the Government clearly still intend solicitors to take
advantage of this new business entity. Indeed, the Minister assured me in Committee that solicitors
would not be penalised or discriminated against in any way. I hope that the Minister can put my
concerns at rest.

6.30 pm

However, there is still concern in the Law Society about how the Government will ensure that
solicitors are not discriminated against. The Minister suggested in Committee that it might require
primary legislation, but what chance is there of a dedicated solicitors Bill before this Bill comes
into force in 2001? I understand that another option might be to use orders under the regulatory
reform Bill, but that Bill is still in draft. When can we be certain that it will receive Royal Assent in
any event? It may be that the necessary changes can be made by using existing powers within the
body of legislation affecting solicitors and their practices, such as the Solicitors Act 1974 and the
Administration of Justice Act 1985. However, the Law Society is doubtful whether that can be
achieved, and I believe that the Department of Trade and Industry also has concerns.

It is surely the neatest solution to use clause 15 to make the necessary changes, in accordance
with the three amendments that we are discussing. Even though the DTI recently voiced doubts,
the Law Society still believes that the powers in the Bill are adequate, although I understand

28 Jun 2000 : Column 953

that we are waiting for parliamentary counsel to confirm that. I hope that the Minister will let us
have his views on that point. The amendment would simply make the power more explicit.

I know that the Minister is extremely concerned about this problem. He assured me in Committee
that no discrimination or prejudice would be suffered by the solicitors' profession as a result of
the introduction of this legislation. In other words, all trades and professions should be treated
equally and must equally be able to become LLPs in 2001. Many thousands of individuals who
make a great contribution to the United Kingdom economy wait to hear from the Minister his
response to the group of amendments.

Dr. Howells: I rise with appropriate gravity, knowing that thousands of solicitors out there are
hanging on my every word. I restate my determination that solicitors will not be discriminated
against when it comes to their ability to form LLPs. I am sure that the hon. Gentleman will be
pleased to hear of the progress that we have made on this issue since we discussed it in
Committee. I said then that my Department was working with the Law Society and the Lord
Chancellor's Department to examine the detail of the legislation governing solicitors and consider
whether primary legislation was unavoidable and, if so, to determine what specific changes needed
to be made.

On the basis of the analysis carried out by the Law Society and the Lord Chancellor's Department
to date, we believe that the vires contained in the Bill are wide enough to make the amendments
that have been so far identified by regulation to ensure that solicitors may make use of LLPs.
Assuming that no further amendments are considered necessary that differ in kind to those already
identified, the amendments will be included in the regulations to be made under the Limited
Liability Partnerships Bill when it receives Royal Assent. I see no advantage in the amendments
tabled by the hon. Member for Torridge and West Devon (Mr. Burnett), and I invite him not to
press them.

Mr. Burnett: I am much comforted by the Minister's words. I am grateful to him for the attention
that he has given to this important matter. I note his comment that his Department, the Lord
Chancellor's Department and the Law Society believe that the vires are wide enough in the Bill as
drafted, and in the regulation provisions in clause 15. On that basis, I am happy to beg to ask
leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Gibb: I beg to move amendment No. 2, in page 10, line 22, at end insert--

'(2) Section 458 of the Companies Act 1985 (punishment for fraudulent trading) shall apply to limited liability

Mr. Deputy Speaker (Mr. Michael J. Martin): With this it will be convenient to discuss the
following amendments: No. 3, in page 10, line 22, at end insert--

'(2) No regulations made under subsection (1) above shall enable indictable criminal offences punishable by imprisonment
to be made applicable to limited liability partnerships, other than those which are contained in the Companies Act 1985
and Insolvency Act 1986 as at 1st June 2000.'.

28 Jun 2000 : Column 954

No. 11, in clause 17, page 10, leave out lines 31 and 32.

No. 6, in schedule, page 15, line 15, leave out--

'incorporated as a limited liability partnership with that name,'

and insert--

'a limited liability partnership or oversea limited liability partnership,'.

Mr. Gibb: During a debate earlier this afternoon, we heard from the hon. Members for Great
Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins) about the vast
salaries that some lawyers and accountants are able to command, but I should tell them that they
are responsible for those high salaries. The growing body of rules and regulations emanating from
this place that have to be obeyed by people in the real world is the cause of those high salaries.
The left-wing interventionist philosophy of the hon. Gentlemen and their party creates the pressure
for the vast majority of regulations.

When I started work as a tax adviser in 1986 at KPMG, or Peat Marwick Mitchell and Co., as it
was then, the tax legislation was contained in one volume of "Butterworths", and it was not a
particularly thick volume. Now there are three volumes, each bigger than the 1986 one and printed
on thinner paper. The tax practice grew hugely during that period as the volume of tax legislation
increased, and the same has happened to company law and no doubt a whole host of other areas
of law. I know that most of the increase took place under the Conservative Government, but the
pressure for regulation tended to come from the left-wing philosophy in our political regime, albeit
that much of the tax legislation was introduced in order to close loopholes.

The consequence is that the demand for people who have read, learned, remembered and
understood our legislation is increasing. Although the supply of people prepared to do that kind of
work has increased to a degree, the work is painstaking and not terribly exciting. So demand has
outstripped the supply and the people with experience and ability are now commanding high
salaries. The responsibility lies not with the City firms--with KPMG or PricewaterhouseCoopers,
which the hon. Member for Great Grimsby kept going on about--but with us in this place.

We pushed through vast volumes of new rules and tried to make it even easier for ourselves by
pushing large chunks into secondary legislation, which often are not debated. When they are
debated, it is done upstairs in Committee without the possibility of tabling amendments. We are
becoming a conveyor belt, mass-producing legislation that we expect people to obey. We deem
them to have knowledge of all the laws that we pass. Then some Members of Parliament have the
audacity to complain that society is devoting too many resources to reading and applying that

The Bill is a classic example of how a simple 19-clause Bill can spawn a volume of regulations.
Four clauses of the Bill simply empower the Government to create new swathes of regulations
contained in a volume the size of the copy that I have here. Clause 16 is a classic Henry VIII
clause, and it even provides power to make regulations that themselves can amend primary
legislation. There will be no First or Second reading, no tedious Committee stage, Report or Third
Reading. The primary legislation will simply be amended by a statutory instrument rubber-stamped
by a Committee upstairs.

28 Jun 2000 : Column 955

Throughout the Committee proceedings, when the Opposition have raised concerns--the hon.
Member for Torridge and West Devon (Mr. Burnett) shares our concern--about the quantity of
secondary legislation, the answer from the Minister was that it was better to use secondary
legislation because it was easier to amend. That is the point. We must make it harder, not easier to
amend and create new regulations. Some £10 billion of additional regulatory burdens have been
piled on to industry in just the past three years. Small business in particular is drowning under the
deluge of paperwork. We are becoming a nation of inspectors and regulators instead of
shopkeepers and entrepreneurs.

The House of Lords Select Committee on Delegated Powers and Deregulation carried out its
duties well when it examined the Bill. It alerted Parliament to the fact that clause 16 is a Henry VIII
provision, and we ought to take notice of that, not simply ignore it, as the Government did in
Committee. The Select Committee was set up to highlight Henry VIII provisions.

The report also highlighted the Committee's concerns about the use of secondary legislation to
create new serious criminal offences. In paragraph 8, the Committee says:

    The draft regulations create offences punishable on summary conviction by a fine but the power is wide enough to
    allow the regulations to provide for imprisonment or for trial on indictment. If, as seems likely, the intention is to
    provide only for summary trial and a fine, the Committee is of the opinion that it would be better for this limitation to
    appear in the Bill.

In other words, the Committee assumed that the power was intended to create only minor
offences. Its members felt that that was acceptable, but they were alarmed that the way in which
the clause was drafted could enable the creation of more serious offences. They thus
recommended that the Government should change the clause so as to reduce the power and to
confine it only to minor criminal offences.

The Government refused to do so, however. They insisted on the need to incorporate all the
existing criminal penalties under the Companies Acts and under insolvency legislation in the LLP
regime. That may be fair enough, but it should be done through primary legislation, not by
statutory instrument. The amendments would do precisely that; they would incorporate in primary
legislation the serious criminal provisions that the Government want to include.

In Committee, something more sinister was revealed: clause 17 is not merely about incorporating
in the LLP legislation the criminal provisions under existing company and insolvency law; it is also
about enabling new criminal offences to be created by secondary legislation. The Minister said

    it is important to preserve the flexibility to create offences in future and to decide how they should be punished . . .
    There may be new crimes for which we shall have to formulate new punishments.--[Official Report, Standing
    Committee F, 15 June 2000; c. 63.]

There we have it: new crimes and punishments created by secondary legislation. That is wrong.
The Minister knows that it is wrong. The House of Lords Committee on Delegated Powers and
Deregulation knows that it is wrong. That Committee was set up in 1992 with a specific

28 Jun 2000 : Column 956

responsibility: to point out to Parliament when such matters are wrong. The Minister should take
note of the Committee's views and accept our amendments.
Mr. Stuart Bell: I declare an interest as a barrister at law, as an adviser to Ernst and Young and
as a contributor to Accountancy Age.

Amendment No. 6 is technical; it may seem minor, but it is important for those firms affected by
the provisions and by those with whom they do business. It will mean that the British branch of an
oversea limited liability partnership will be able to continue to use a name that concludes with the
words "limited liability partnership", "LLP" or their Welsh language equivalents. As drafted, the
Bill would make it an offence for people to describe themselves as a limited liability partnership or
LLP unless they were incorporated in this country.

The pace of change in the global village is such that, sometimes, the drafting of legislation has
difficulty keeping up. That is the case for the Bill. Its present wording would cause problems for
all those LLPs that are registered in another jurisdiction, but have a place of business in the UK. It
is to the credit of the Government, of Ministers and of the Department of Trade and Industry that
they realised that such problems would be caused. I hope that they will look benevolently on my

It is thought that, for example, there are at least 30 United States law firms with LLP status that
have an office in London. Their LLP status shows why the Bill is welcome; it allows British firms
to compete on the same basis. The presence of such firms in London demonstrates the dynamism
of the international market for legal services.

It must be right, however, that all those doing business with firms whose partners have limited
liability should be aware of that fact. The thrust of the policy behind the Bill is that a firm's status
should be disclosed, together with the fact that its liability is limited. Under clause 14, the
Secretary of State will have power to regulate overseas LLPs. Furthermore, the DTI has suggested
that, in due course, it will hold consultations on appropriate provisions.

It would be quite inconsistent with such powers and with such an intention to forbid the use of the
LLP title from the outset. Fortunately, the solution is simple; it is to be found in the amendment.
The amendment ensures that an oversea LLP will not be prohibited from describing itself as such.
A definition of "oversea limited liability partnership" is to be found in clause 14(3): it is

    a body incorporate or otherwise established outside Great Britain and having such connection with Great Britain,
    and such other features, as regulations may prescribe.

The practical effect of that is that regulations will determine precisely which LLPs will be entitled
to the benefit of the amendment. I know that those firms with limited liability that have a place of
business in the United Kingdom are also subject to regulations under clause 14.

6.45 pm

The amendment reflects the on-the-ground reality of international law practice and recognises the
realities of the globalised economy. I am grateful to the Minister and to his Department for
acknowledging that. The amendment also serves the public interest by communicating to the

28 Jun 2000 : Column 957

the status of business organisations. In those circumstances, I hope that the Minister and the
whole House will welcome the amendment and further its passage onto the statute book.

Mr. Burnett: I speak to amendments Nos. 2, 3 and 11, tabled by the hon. Member for Bognor
Regis and Littlehampton (Mr. Gibb) and his hon. Friends. As the hon. Gentleman was kind
enough to point out during his speech, Liberal Democrat Members deprecate the use of regulation
to introduce so many of the provisions under the Bill; such power is utterly unsatisfactory. Most
pernicious of all are new regulations that could deny individuals their liberty. They should not be
incorporated in law except through primary legislation. That must be clear to all Members of the

Dr. Howells: I shall deal with amendments Nos. 2, 3 and 11, before dealing separately with
amendment No. 6, proposed by my hon. Friend the Member for Middlesbrough (Mr. Bell).

In Committee, the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) expressed
concern: first, that we were intending to apply to members of an LLP existing criminal offences
that apply to company directors and are punishable by imprisonment; and, secondly, that those
offences were to be imposed by secondary legislation. He expressed further concern that the
power in clause 17 was wide enough to allow the creation in regulations of new offences that may
also be punishable by imprisonment.

If I understand the hon. Gentleman correctly, amendment No. 2 is intended to probe why we have
not included in the Bill all the offences punishable by imprisonment. Any alternative interpretation
does not seem feasible. It is our intention to include section 458 of the Companies Act 1985 in
regulations alongside other offences, and I cannot imagine that there is anything so special about
that section that it should appear in the Bill when other sections--such as section 450, which
makes it an imprisonable offence to destroy, mutilate, falsify, or alter documents--remain in
regulations. Nor can I imagine that the intention is to place section 458 in the Bill as the only
provision punishable by imprisonment. How would we justify providing that, in some
circumstances, members of an LLP would face a lesser penalty than directors of a company for
the same offence?

Why, then, have we not put imprisonable offences in the Bill? Because we do not consider it
appropriate. As I have made clear, our intention is that the members of an LLP should face the
same penalties as members of a company; that seems a reasonable policy objective. The offences
arise from various provisions throughout the companies and insolvency legislation. We see no
reason to place those provisions in the Bill while others are confined to regulations. In considering
the legislation, Parliament concluded that the level of penalty was appropriate to a body corporate
with limited liability and to its directors. We see nothing about the limited liability partnership to
suggest that application of those penalties to members of an LLP is inconsistent with Parliament's

I shall now discuss amendment No. 3. I realise that the intention is to restrict our powers to
imprison members of a LLP to those offences that are contained at present in

28 Jun 2000 : Column 958

the Companies Act 1985 and the Insolvency Act 1986. The hon. Member for Bognor Regis and
Littlehampton would prefer it if, every time that the Government wanted to legislate to make an
offence punishable by imprisonment, they could do so only by introducing primary legislation.
That is a reasonable case to make.

I shall now discuss amendment No. 11. It is clause 17 which provides that regulations may, in
particular, make provisions for dealing with non-compliance with any of the regulations, including
the creation of criminal offences. However, amendment No. 11 would remove that provision in its

The House of Lords Select Committee on Delegated Powers, which the hon. Gentleman
mentioned, drew the attention of the other place to the powers to create offences by regulations,
and invited it to consider whether the Bill should be amended to provide that such offence should
be punishable, on summary conviction, by a fine.

We explained in our response that it was our intention to apply to limited liability partnerships the
same offences applying to companies. We noted that the creation of new offences would be
subject to affirmative resolution, and our intention to apply existing offences for companies in the
first set of regulations would mean that these would also be subject to affirmative resolution.

While we have no intentions at this stage to apply to LLPs anything other than the offences
applying to companies, the power is wide enough to create new offences, as I think that our
response indicated quite clearly. We believe this to be a prudent provision for the future, and
consistent with similar provisions in existing legislation.

I cannot agree that amendments Nos. 2, 3 or 11 are either appropriate or necessary. In addition, if
we look at their practical effect, we can see that they would be highly problematic. Amendment
No. 3 is to clause 15, and to regulations made under subsection (1) of that clause, yet it is the
power in clause 14 which provides for the Government to make regulations on the insolvency and
winding up of limited liability partnerships or oversea LLPs. Were we to accept these
amendments, we would be prevented from making any provision for non-compliance with
regulations on the insolvency and winding up of LLPs. That cannot be right.

I shall now discuss amendment No. 6. I am very grateful to my hon. Friend the Member for
Middlesbrough for raising this point. Our attention has been drawn very recently to the
inconsistency between the drafting of this paragraph, and our statement to the Select Committee
on Trade and Industry in June 1999. We told that Committee that company legislation which
requires that oversea companies prominently display the company's name and the country in
which it is incorporated will also be applied to oversea-registered LLPs by regulation, and that this
includes the requirement to display that information on letterheads and on all notices and other
publications of the LLP. That remains our intention.

The question then arises as to why we need additionally to prevent the use of the phrase "limited
liability partnership" at the end of the title of an oversea-registered LLP. That would cause
particular difficulties for existing oversea LLPs, many of whom will be required by the legislation
of the jurisdiction in which they are registered, to include those words.

28 Jun 2000 : Column 959

We have concluded that it is unnecessary both to restrict the use of the words "limited liability
partnership" in the title of oversea LLPs and to require that they display their place of registration
on all their publications. The latter should prove wholly sufficient to notify clients that they are
dealing with an oversea entity.

Therefore, while I ask the hon. Member for Bognor Regis and Littlehampton to withdraw
amendment No. 2 and not to press amendments Nos. 3 and 11, I will agree to amendment No. 6,
tabled by my hon. Friend the Member for Middlesbrough--a rare event indeed in the progress of
the Bill.
Mr. Gibb: I will accede to the Minister's request that I ask the leave of the House to withdraw
amendment No. 2 and refrain from pressing amendments Nos. 3 and 11, but he was slightly
disingenuous when he knew very well the purpose of the amendments. It was not intended to
restrict the use of prison in dealing with people who commit serious company law or insolvency
law offences. The purpose of the amendments is to point out the very real concerns, raised by the
House of Lords Select Committee on Delegated Powers, that it is not proper--it is not right--for
new serious criminal offences punishable by prison to be introduced into our legal system by
means of secondary legislation.

The salient question is not whether the affirmative or negative resolution procedure is used, but
whether the new crimes are created by secondary legislation, which cannot be right. Such a
measure should go through the full procedures of the House--First Reading, Second Reading,
Committee stage, Report stage and Third Reading--and then pass on into the Lords, so that there
is a full chance of the whole nation being aware of the creation of those new criminal offences.

The provisions are very wrong. It is a sad day when our House is rubber-stamping and
mass-producing this kind of criminal legislation through secondary legislation. I beg to ask leave
to withdraw the amendment.

Amendment, by leave, withdrawn.


                         Names and registered offices

Amendment made: No. 6, in page 15, line 15, leave out--

'incorporated as a limited liability partnership with that name,'

and insert--

'a limited liability partnership or oversea limited liability partnership,'.--[Mr. Stuart Bell.]

Order for Third Reading read.

6.55 pm

Dr. Howells: I beg to move, That the Bill be now read the Third time.

The Bill will introduce, for the first time in nearly a century, a new vehicle for carrying on a
business. It is the result of three years of consultation and debate with a wide variety of interested
and learned individuals. Detailed legislative proposals have been in the public domain since
September 1998, and these were scrutinised shortly afterwards by our own Select Committee on
Trade and Industry. Since then, the Bill has received close and thorough scrutiny in the other
place and by Members of this House.

28 Jun 2000 : Column 960

The Bill before you today, Mr. Deputy Speaker, is in very good shape, and I take the opportunity
to thank all those, on both sides of the House, who participated in the many lively and interesting
debates that we have had on the detail to ensure that this is the case.

6.56 pm

Mr. Gibb: We have now reached the final stage of the Bill's long journey to the statute book. It is
one of the few Bills that the Government have managed to get through both Houses without its
becoming logjammed in the congestion that they have created in the other place, so this is quite a
novel occasion.

The Bill started life under the Conservative Government, in response to some genuine concerns on
the part of the accountancy and legal professions, which were finding it increasingly difficult to
retain some of their best people because those people were refusing to accept the risks of
becoming a partner.

Listening to some of the members of the Labour party and their deep-rooted prejudices and
hostility to accountants has been quite a revelation. There are 114,000 chartered accountants in
this country, who work hard for a living, like anyone else. Some are paid well; others are not. But
why should that particular line of work expose participants to the risk of losing a lifetime's savings
as a result of the negligence of a fellow partner? That approach does not apply to doctors or
nurses in the national health service--no one could say that the work of a chartered accountant is
more important than that of a doctor or a nurse--or to teachers, or even to bankers in the City of
London, so why should it apply to accountants and solicitors?

The Bill simply addresses that historical anomaly and, if anything, it is likely to ease the upward
pressure on salaries as firms of solicitors and accountants find it easier to recruit and to retain key

Mr. Fabricant: Is it not also the case that people using those services will also find that their fees
are reduced, as was pointed out earlier in our debates this evening, because there will be less need
for firms to take out indemnity insurance, which can be so costly nowadays?

Mr. Gibb: My hon. Friend makes a very valid point, and I hope that the hon. Members for Great
Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins), who tabled several
amendments, will take it on board.

The Bill was one of the first to undergo the new procedure of being examined by a Select
Committee before beginning its passage through Parliament. The Select Committee report was of
a very high quality and certainly resulted in the removal from the Bill of a raft of the more
unacceptable and unworkable provisions. However, it is disappointing that the Committee has not
been given the opportunity to examine in more detail the whole volume of draft regulations which
were re-published in almost final form in May 2000. Given that the meat of the Bill is contained in
those regulations, I believe that the experiment of having a Bill scrutinised by a Select Committee
has not been completed, given that it has not yet looked at those regulations. The Committee
requested to look at those regulations. I hope that before

28 Jun 2000 : Column 961

those regulations are laid before Parliament, a report will be prepared on the volume of draft
regulations that the Government have published.

The new draft Bill that followed the Select Committee report went through a further consultation
process. However, the final Bill, which started life in another place, gave rise to a number of
concerns. My noble Friend Baroness Buscombe highlighted on Second Reading our concern over
the disapplication of partnership law and the absence of a default to that law on issues on which
the partnership agreement is silent. The Government have dealt with that matter in part, although
not satisfactorily.

The Government took on board and dealt satisfactorily with our concern about the absence of
provisions to deal with a member wishing to retire from a limited liability partnership. We were
also concerned about an ambiguity in the Bill: whether members of an LLP could be construed as
employees. That would have significant tax and employment law consequences for that member.
Again, Lord McIntosh took on board Opposition concerns and amended the Bill to make it clear
that members of an LLP were not to be employees.

We were concerned about the taxation provisions in the Bill and whether converting from a
partnership to an LLP would trigger a capital gains and a stamp duty charge. We secured
assurances and amendments on that matter in another place. Other issues, such as insolvency and
acquisition accounting were also raised and dealt with. Indeed, if Ministers were as responsive to
Opposition concerns in this House as they seem to have been, on occasion, in another place, they
might not now be developing a reputation for being out of touch and arrogant.

Having said that, the Opposition are pleased that we have ensured that this legislation, which is
important for commerce, will go on to the statute book in a better form than it would otherwise
have done. We remain concerned about the absence of a general default clause and alarmed at the
extensive regulatory powers contained in the Bill, in particular clause 16--the Henry VIII
clause--and the power to create new serious crimes and punishments by secondary legislation,
which is contained in clause 17.

Those important reservations aside, the Bill is welcome. As my hon. Friend the Member for
Lichfield (Mr. Fabricant) just intimated, it will do much to ease concerns among professional firms
and we can only hope that that may lead to industry facing smaller increases, or even reductions,
in professional fees.

7.2 pm

Mr. Burnett: We support the Bill, although some other improvements should have been made. I
am encouraged by what the Minister said about its applicability to solicitors.

We discussed clause 7 at length in Committee-- the provisions that relate to ex-members. The
Minister criticised that clause in Committee, at least by implication, because he considered it to be
inflexible. On report, I tabled amendment No. 5, but it was not selected. I hope that the Minister
will think again about that matter. The amendment would have made it clear that clause 7(2) was
intended to have a similar effect to section 31 of the Partnership Act 1890, which the Minister
conceded was

28 Jun 2000 : Column 962

important and prayed in aid for flexibility. Such an amendment would preserve flexibility with
regard to the arrangements for the internal management of a limited liability partnership, which is

There are to be further consultations and regulations in respect of taxation. I draw the Minister's
attention to the roll-over relief provisions that impact unsatisfactorily on LLPs. Roll-over relief has
been an aspect of capital gains tax since the inception of that tax in 1965, I believe. At present,
gains on the sale of an asset used in a trade can be rolled over into partnership property--that is,
an existing 1890 Act partnership. There are special rules if the property is a wasting asset. Where
that roll-over has taken place, the gain is not recaptured if that 1890 partnership comes to an end,
provided that the assets are not disposed of. One pays the tax, including the tax on the rolled-over
gain, when the asset is sold. If one partner leaves and sells his interest, the gain crystallises at that
point and only in relation to that proportion of the asset that is sold. If an 1890 partnership ceases
trading and the asset is owned in the same proportions as it was owned in the partnership when it
was functioning, the rolled-over gain does not crystallise--it does not do so until the asset is sold.

I hope that the Minister will confirm that that capital gains tax treatment should apply to LLPs as it
does to existing partnerships. It is important because there will be no cash to pay the tax until the
asset is sold and that will affect small businesses in particular. We talked about that in our debates
on report. Small businesses do not have the benefit of high-powered and expensive lawyers and
accountants to advise them--we must remember that any trade or profession can become an LLP.
First, the small business will not have the cash to pay the capital gains tax. Secondly, small
businesses require simplicity. If they cease trading as an LLP, they do not know that rolled-over
gains will necessarily have to be payable in those circumstances.

Roll-over relief is important for small businesses--it is important for all businesses--and that is
reflected in the fact that the relief for assets used in a trade which has not altered since the
inception of capital gains tax in 1965. It is important because it encourages investment, which will
encourage jobs. I hope that the Minister will think again about those two matters: clause 7 and the
roll-over relief.

Finally, we support the Bill and we wish it a swift Royal Assent so that it can become the law of
the land in short order. No body of individuals, no profession and no individual trade should be
excluded or prejudiced because they cannot become an LLP at the same time as all the other
organisations, trades or professions.
7.7 pm

Mr. Mitchell: I had not intended to take part in this debate, but the hon. Member for Bognor
Regis and Littlehampton (Mr. Gibb) provoked me to do so by arguing that Labour Members were
attacking accountants. We were not attacking accountants; we were primarily attacking the power
of the big five accountancy houses, which inflict damage on the rest of the profession by their
failures, by the sort of cases that come up against them and by stealing business from smaller
accountants. We should protect the smaller accountants. We should use the power of
Government and Parliament as a countervailing power against the over-weaning dominancy of the
big accountancy houses, which are now such a power in the land.

28 Jun 2000 : Column 963

In the United States, the Securities and Exchange Commission is attacking such power
assiduously. The difference between the two countries is that the Bill is another milestone on the
rise to power of such companies. In that situation, it is right to insist on concessions in return for
the privilege of limited liability partnership that is being given--concessions on consumer
protection, protection for stakeholders and more effective regulation. In this country, those
concessions come later, and I hope that they will do so.

The Bill does not show the House at its best. All the speeches, apart from those of my hon.
Friends the Minister for Competition and Consumer Affairs and the Member for Newcastle upon
Tyne, Central (Mr. Cousins) and myself, were a defence of professional privilege and attitudes,
even those of the Liberal Democrats--that party should be speaking for the people, but its
members concentrated on the purpose and privileges of solicitors and the professions, not on
countervailing their power. That does not show scrutiny at its best.

In conclusion, to recoin an old Irish joke, like the man in Little Grimsby who asked the way to
Great Grimsby and was told, "I wouldn't start from here," I would not start from here.
Unfortunately, we are doing so. It is right now that we should ensure the proper regulation of the
powerful accountancy houses and of the profession. It is right now to enhance the power of
stakeholders in response to the privileges that are being conferred on the accountancy profession.
It is also right to argue that audit work should be split from the sale of other services. That is the
next agenda on reform, and I hope that we go on to undertake it. In conclusion, I thank my hon.
Friend the Minister for a sterling performance: he has listened, responded and treated all the
arguments with respect, intelligence and courtesy, and I congratulate him on that.

7.10 pm

Mr. Fabricant: I support the Bill and, as the Minister knows, I served on the Committee that
considered it. The Bill had its genesis in the last Parliament, and it is right and proper that the
present Government should continue with the measure.

The hon. Member for Great Grimsby (Mr. Mitchell) gave a long catalogue of complaints against
the larger accountancy firms. Even if he were right, I can see no reason why that should inhibit the
Bill's passage, as the Bill relates to a very different issue. Certain concerns were raised by my hon.
Friend the Member for Bognor Regis and Littlehampton. I am especially concerned that, in this
Bill, as in other Government Bills, there is yet again, a blank cheque in relation to secondary
legislation. Something that is important and ought to be included in the Bill is going to be left to
delegated legislation.

On this occasion, the issue is the level of offences and the penalties that will accrue to them. That
is particularly strange, as I pointed out in Committee, because clause 9(6) deals with the level of
offence. It states:

    A person guilty of an offence under subsection (4) is liable on summary conviction to a fine not exceeding level 5 on
    the standard scale.

The Government are therefore able to state what the level of offence should be. It is inconsistent
and wrong that they choose not to do so with other offences which are named, quite rightly, in the

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Government Members have expressed concern about the principle of the Bill, which is the
removal of joint and several liability of partners. However, as the Liberal spokesman, the hon.
Member for Torridge and West Devon (Mr. Burnett), pointed out, along with my hon. Friend the
Member for Bognor Regis and Littlehampton, nothing under the law on civil torts prevents a
prosecution against a particular partner for duties that are not carried out in accordance with the
law. That is right and proper, and that facility will not be removed by the Bill's enactment.

The Bill is needed. The movement since 1890 towards a global economy means that a partnership
alone is not enough in this day and age. The hon. Member for Great Grimsby highlighted the
growth of the larger accountancy firms. I agree that that has happened in the United States of
America, which has protection similar to that proposed in the Bill. We need that protection here in
the United Kingdom. As I said in Committee and earlier today, there must be equity between the
protection afforded in overseas countries and that offered in the UK.

With those reservations, I join my hon. Friend the Member for Bognor Regis and Littlehampton in
wishing the Bill a fair passage. Despite our reservations about it, it will be good for business and,
more important, good for British jobs.

7.14 pm

Mr. Stuart Bell: I shall briefly commend the Bill and add to the comments of the hon. Member
for Bognor Regis and Littlehampton (Mr. Gibb). It is perfectly right to say that the Bill owes its
origins Lord Freeman, who was Minister at the time. It was quickly taken up by the Labour party
in opposition, and in our manifesto we said that we would introduce a Bill on limited liability
partnerships. We also made a commitment to independent regulation, to which I shall return in a

I commend the hon. Members for Bognor Regis and Littlehampton and for Torridge and West
Devon (Mr. Burnett) and Opposition Back Benchers. I have forgotten which queen said that when
she went to her grave and they opened her heart, they would see Calais written upon it. [Hon.
Members: "Mary Stuart."] I thought it was, but I did not dare say so on the spur of the moment,
in case I would stand corrected later. I commend my hon. Friends the Members for Great
Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins), as I have a feeling
that, when the LLP graves of the accountants and solicitors are opened up, they will see "Great
Grimsby" and "Newcastle, Central" engraved inside. Anyone wishing to know what my hon.
Friend the Member for Great Grimsby will do for an encore on independent regulation was given a
reasonable impression tonight.

Finally, I commend with the utmost sincerity my hon. Friend the Minister and his staff at the
Department of Trade and Industry, who have lived with the substance of the Bill for four
years--one year in opposition and three in government. The Bill has followed the new
parliamentary procedures introduced by the new Labour Government, has gone through a Select
Committee and pre-legislation Committees and, after three years, has emerged as better legislation.
This is a great day for parliamentary procedure, the Ministry, the Government and the House of
Commons. I commend the Bill to the House and, as the hon. Member for Lichfield (Mr.
Fabricant) said, I wish it a safe passage.

28 Jun 2000 : Column 965

7.16 pm

Mr. Stephen O'Brien: As I did at the beginning of Second Reading and in Committee, I declare
an interest as fellow of the Institute of Chartered Secretaries and Administrators and as a
parliamentary adviser to that body. I have been a non-practising solicitor since 1988.

I welcome the Bill and I pay particular tribute to the way in which it was handled in the other place
before it came here. I pay special tribute to my colleague Baroness Buscombe who made a
number of points that helpfully illuminated ways in which the Bill could be improved and in which
the Houses of Parliament could introduce legislation that would be welcome and, we hoped,
would improve company competitiveness and international location, so that companies that need
to compete can make sure that they reside appropriately in this country.

I made a number of points on Second Reading and in Committee, many of them born out of my
personal business experience, in so far as I have dealt with--indeed, I have established--an LLP in
overseas territories and was responsible for it. I therefore have some experience which I have tried
to bring to the attention of the House. I certainly wish to support fully all the points made by my
hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) and to back his careful,
well-judged scrutiny of the Bill, especially the default provisions and, indeed, the Henry VIII

It is disappointing, however, that the Government's approach to retaining that clause in the Bill has
left a residual doubt about whether there will be proper scrutiny of potentially serious provisions
that could be added later and which would have a direct effect on the competitiveness and
effectiveness of this form of corporate entity. Above all, there is a need to take account of what
the hon. Member for Great Grimsby (Mr. Mitchell) said and to ensure that there is total
transparency and disclosure, which is the price to be paid for conferring limited liability on what
were unlimited corporate entities.

I fully acknowledge that the Government have acknowledged the matters that I have raised, but it
is disappointing that they have not acted on a couple of important points that highlight the
concerns of those with experience of these issues. I shall re-emphasise a couple of those points,
and I crave the indulgence of the House to place them on the record. First, the Bill has focused,
quite understandably, on large professional partnerships, and I fear that implications about the way
in which the new corporate entity will be used have been missed.

Again, from my experience, I think that it is clear that the Bill will be a very attractive vehicle for
overseas partnering and joint ventures, often in this country. Certainly that is the way in which a
similar measure was applied in California and other states in the America. It carries certain tax
advantages and also rightly reflects the business relationship in manufacturing companies, with
which I am familiar.

Despite raising those issues in earlier debates, I have not heard a reply from the Minister, and I
note that he has been well supported by a raft of advisers here--they are sitting in the box--and in
Committee. I asked whether advice had been fully taken on the experience of those

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overseas territories in which there are joint ventures for manufacturing companies, and it would
have been helpful to have heard a reply.
Dr. Howells: I assure the hon. Gentleman that we took advice. I understand the point that he
makes, and I hope that a wide range of LLPs will be formed.

Mr. O'Brien: That is somewhat reassuring, and I thank the Minister for letting me know that that
advice has been taken. It would be helpful to share it a little more fully later.

Such entities will be attractive to property companies, which, as we know, have particular risks
and liabilities. The contractual and relationship issues in business are often represented by those
concerned with property valuations and the title to ownership, and LLPs will hold a significant
attraction to property ventures. There is a demand in property companies to examine--again,
reflecting experience abroad--whether it would be appropriate and sensible for their
competitiveness to create a mechanism by which a particular partner in such a property LLP could
opt out of being bound. At the moment, all LLP members will be entitled to buy because of the
way in which LLPs are structured. That is a matter of serious debate because of the nature of
accountability and transparency, but is also goes to the heart of the way in which property risk is
assessed and represented. Although I mentioned that in Committee, I wanted to place it on the
record again now.

The Minister generously suggested that I had made some constructive points during the
consideration of the Bill. I am not flattered because I realise that that is part of the hon.
Gentleman's customary generosity. I am concerned that the points that I made on clause 8 were
not taken up. The concern is that there has been an attempt to retain the partnership ethic, by
which all members take responsibility, under the requirements of clause 8, unless at least two
designated members have been appointed.

Although I can understand the mindset that has driven that provision, I am concerned especially
about those LLPs that will not have the appropriate expertise, such as firms of accountants or
solicitors, which, again, have driven the thinking on the provision. Given the importance of the
compliance and governance needed to deliver the very transparency and accountability that is at
the heart of the Bill, it would have been appropriate to examine more closely the possibility of
having a partnership secretary, company secretary, or a designated person.

There is a distinction to be drawn between members, who clearly carry the overall business
responsibility and accountability, and those who are required to deliver compliance and
governance. As the Minister has said, nothing precludes an LLP appointing such a person as an
employee. However, it would have been better to have stated that in the Bill, if for no other reason
than that similar provisions exist under the Companies Acts for company secretaries in plcs. That
confers the necessary status and authority in the corporate entity to command the necessary
respect around the board table--or, in this case, around the LLP members table--where advice,
high technical competence or a degree of conscience are required of the corporate entity to ensure
governance. That is the case not least because things are not always

28 Jun 2000 : Column 967

rosy in partnerships; there will be disputes and factions. At times, it is helpful if such a person sits
at the high table with the status and professional expertise to take the necessary action. It is
disappointing that that point has not been taken more seriously.

That said, I have thought carefully about the Bill and whether I should have tabled amendments in
Committee and on Report. I chose not to do so because the Bill is part of a wider issue; a major
consultation exercise is being undertaken on company law reform. That consultation has run
somewhat parallel to the Bill, but has preceded it because of the way in which the legislation has
come about. In that context, I hope and request that the Minister and his officials in the
Department will carefully consider the points that I made about clause 8; they are even more
important because of that company law reform.

We should take advantage of all that has been learned about governance during the past 10 years,
not least from the Cadbury report and the ensuing developments. We should at last put the
genuine expectations about what is required of companies on a much more sound footing, and
perhaps frame them in statute. We should ensure that they have the requisite person in place to
ensure good governance. I shall defer pressing that point until we debate company law reform. I
thank the Minister for the courtesy with which he has treated the points that I have made. I, too,
agree that the process has been worth while.

Question put and agreed to.

Bill accordingly read the Third time, and passed, with an amendment.

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