Prem Sikka
Professor of Accounting
University of Essex


The proposed Bill provides a framework of accountability for Limited Liability Partnerships (LLPs). It contains some good features which are most welcome. These include the suggestions that the LLPs should be subjected to the

However, the Draft Bill suffers from a number of weaknesses and problems and these are highlighted below. Many of the comments contained in this submission are made in the context of the accountancy industry. This is not too unreasonable since this industry has been very vociferous is demanding LLPs. Major accountancy firms have already used their economic and political resources to draft their preferred form of private legislation. They subsequently had this legislation enacted for their benefit in Jersey and have since used Jersey as a lever to extract concessions from the UK government (see Cousins et al, 1998 for further details)


The Bill as presently drafted is difficult to read. Anyone trying to comprehend the Bill needs to simultaneously read a large number of Statutory Instruments and  sections  of a number of other statutes (not reproduced in the Draft Bill). These include:

It is difficult to see how in its present state the Bill can be subjected to adequate public scrutiny. Its present way of drafting may be acceptable to lawyers and accountants, but ordinary people who will be affected by its provisions will not have the resources to secure all the other relevant statutes and/or the time to make sense of them in the context of the proposed LLP Legislation.


The proposed LLP legislation is part of a long line of concessions to the auditing industry. Successive governments have diluted auditor responsibility and the redress available to third parties against negligent auditors. The present LLP proposals give considerable concessions to ‘producers’ and do nothing for the benefit of audit consumers.

The Companies Act 1948 gave professionally qualified accountants a statutory monopoly of the external audit function. This social bargain was firmly based upon the principle of  ‘joint and several’ liability of audit firm partners. Through various parliamentary debates, the legislature routinely assured the public that audits offer protection. For example, during the passage of the Companies Act 1929, audits were described as more than just for the “protection of shareholders and investors, wholly or even mainly” (Hansard, 21 February 1928, col. 1523). During the passage of the Companies Act 1948, audits were considered to be “in the interests and protection of the public  ....” (Parliamentary Debates, House of Lords, 18 February 1947, col. 745). During the passage of the Companies Act 1967, the then President of the Board of Trade said,  “It is right, both from the point of view of efficiency and of fair distribution of rewards, that full information should be available to shareholders, employees, creditors, potential investors, financial writers and the public as a whole” (Hansard, 14 February 1967, col. 360). Another supporter of the Bill added, “modern company laws should be concerned not just with the interests of the shareholders but with the contribution  of the company to the economic efficiency of the whole community” (col. 403). The Opposition benches supported the Bill and added that “We need a number of figures to be able to make that comparison, and it is this inquiry by those interested in the company, whether as an onlooker or as a shareholder in a number of companies, which is so important to improve the performance of companies in any particular industry” (Hansard, 14 February 1967, col. 444).

In return for the state guaranteed monopoly of the external audit markets, the auditors were obliged to accept the principle of ‘joint and several liability’ and would owe a ‘duty of care’ to audit stakeholders. Yet this social bargain continues to be diluted. Successive governments (see below) and legal cases (see below) have reduced the rights of audit stakeholders against negligent auditors. Today, individual audit stakeholders have few rights against negligent auditors. The proposed LLP legislation fails to even consider the issues.

The present UK legal position, as summed by the Law Lords in the case of  Caparo Industries plc v Dickman & Others [1990] 1 All ER HL 568, suggests that individual stakeholders have no rights against negligent auditors. In general, auditors only owe a ‘duty of care’ to the company (as a legal entity) rather than to any individual current/potential shareholder or creditor. The Law Lords said,

“I see no grounds for believing that, in enacting the statutory provisions [requiring publication of audited company accounts] Parliament had in mind the provision of information for the assistance of purchasers of shares or debentures in the market, whether they be already the holders of shares or other securities or persons having no previous proprietary interest in the company ...... For my part, however, I can see nothing in the statutory duties of a company’s auditor to suggest that they were intended by Parliament to protect the interests of investors.

“I therefore conclude that the purpose of annual accounts, so far as members [shareholders] are concerned is to enable them to question the past management of the company, to exercise their voting rights, if so advised, and to influence future policy and management. Advice to individual shareholders in relation to present or future investment in the company is no part of the statutory purpose of the preparation and distribution of the accounts”.

“As a purchaser of additional shares in reliance on the auditor’s report, he [the shareholder] stands no different from any other investing member of the public to who the auditor owes no duty”.

This is contrary to all the principles of natural justice. The Caparo judgement contradicts the public policy perspective suggested by Lord Denning in his dissenting judgement in Candler v Crane Christmas & Co [1951] 1 All ER 426.

“the law would fail to serve the best interests of the community if it should hold that accountants and auditors owe a duty to no one but their client. There is a great difference between the lawyer and the accountant. The lawyer is never called on to express his personal belief in the truth of his client’s case, whereas the accountant, who certifies the accounts of his client, is always called upon to express his personal opinion ….. and he is required to do this not so much for the satisfaction of his own client, but more for the guidance of shareholders, investors, revenue authorities and others, who may have to rely on the accounts in serious matters of business. In my opinion, accountants owe a duty of care not only to their clients, but also to all those whom they know will rely on their accounts in the transactions for which those accounts are prepared”.

In the UK, company directors can be held personally liable for publishing false and misleading accounts. Yet the same does not apply to auditors (Financial Times, 20 January 1991, p. 6). Auditors have been considered to be at fault in auditing financial statements (for example, see McNaughton (James) Paper Group Limited v Hicks Anderson & Co. [1991 1 All ER 134 and [1990] BCC 891; Berg Sons & Co. Limited & Others v Adams & Others [1992] BCC 661) but have escaped any damages on the ground that they did not owe a ‘duty of care’ to third parties.

Despite the numerous contradictions and the inequity of the present legal position, the DTI has failed to undertake any initiative to give audit stakeholders the ‘rights’ which are routinely available to stakeholders when they purchase mundane things, such as packets of sweets and crisps. In other spheres, public regulators produce ‘customer’ and ‘public’ charters to encourage rights for consumers and the general public, but none of the audit regulators have ever produced such a document. Despite claiming to issue ‘ethical guidelines’ none of the accountancy trade associations have ever urged auditors to owe a ‘duty of care’ to audit stakeholders.

Successive governments have neglected the welfare of audit stakeholders. The House of Lords judgement in the 1992 case of Pepper v Hart stated that in making sense of the meaning of legislation, the courts should also consider the statements made by the promoters of the legislation (e.g. Ministers and other promoters). Following this landmark decision, the DTI could have researched the statements made by Ministers during the Parliamentary passage of  various Companies Acts (some are reproduced above) and correct the Caparo judgement. Successive governments have done nothing. Yet in response to lobbying by the auditing industry they have found Parliamentary time, resources for the Law Commission and various Study Groups to consider and advance the auditing industry’s claims for further liability concessions. The examples include

 Of course, having secured the right to ‘incorporate’, the auditing industry had second thoughts because it did not want public accountability and taxation (see below) obligations that went with it and are routinely accepted by others. As the Institute for Chartered Accountants in England & Wales put it,

 “.... the obligation on [auditing firms trading as] companies to publish their accounts is perceived as a considerable drawback”  “..... firms have always stood out against revealing any financial information except their annual fee income” (The Accountant, September 1991, p. 2; Accountancy, April 1994, p. 26).

In contrast to the one-way traffic of numerous concessions to the auditing industry, the government has failed to find any parliamentary time and/or resources for the Law Commission to consider the interests of audit stakeholders.

There is no economic, moral or ethical reason for any government to continue to grant liability concessions to ‘producers’ and  ignore the  rights and needs of audit stakeholders.


In justifying the case for the LLP legislation, the government echoes the auditing industry’s views in that the firms are facing “excessive litigation” and that measures are needed to protect them. Such a logic is anti-consumer since any concessions given to the auditing industry necessarily reduce the redress available to the innocent plaintiffs. With numerous liability concessions, the auditing industry is unlikely to have strong economic incentives to deliver good audits and one would expect to see major firms embroiled in further cases of poor audits. Any concessions granted to the auditing industry cannot easily be denied to other ‘producers’. Where does this leave the UK consumer protection policy?

As regards claims of “excessive litigation”, neither the DTI nor the auditing industry has provided any worthwhile evidence to support the claims. In particular it should be noted that

The iron law of market economies is that those delivering poor goods and services should not be protected. There is no economic, ethical or moral reason for giving auditors liability privileges which are not available to other suppliers of goods and services. The granting of any privileges to any supplier should always be accompanied by a strengthening of the rights of consumers. Currently, the market mechanisms relating to auditors are weak. The industry does not have an independent regulator, auditors do not owe a ‘duty of care’ to individual stakeholders, audit quality is not known to the public, the regulators do not name and shame firms involved in major audit failures and  stakeholders have no right to examine auditor working papers for any evidence of work done. In this climate, any further concessions to accountancy firms likely to be seen as against the ‘public interest’.


The UK government has been forced to introduce the LLP Bill because it has been held to ransom by major firms who are using Jersey as a lever to secure concessions from the UK government.

The background is that Price Waterhouse (now part of PriceWaterhouseCoopers) and Ernst & Young hired Slaughter & May (a London based law firm) to draft a LLP Bill for Jersey. The firms spent more than one million pounds on this exercise though the Jersey civil servants subsequently had to put the draft Bill in its traditional language. Rather unusually, the preface to the Bill also contained an acknowledgement of

 “the contribution of Price Waterhouse, Ernst & Young and others ....... to the structure and detail of the draft law” (page 2 of the  Draft Limited Liability Partnerships (Jersey) Law 199).

In this Bill (subsequently an Act), the major firms gave themselves virtually all the concessions they had been looking for - secrecy, limited liability and proportional liability, no rights for audit consumers and no dedicated audit regulator in Jersey. Under the registration conditions specified in the Act, only major accountancy firms could take advantage of LLPs in Jersey. To prevent any informed public scrutiny, the  Jersey LLP Law was given a so-called ‘fast track passage’. A Price Waterhouse senior partner is on public record  claiming that he was assured that the Jersey LLP Law would simply be “nodded through” (Accountancy, September 1996, p. 29).

The Jersey LLP legislation diluted the principle of ‘joint and several liability’. Any partner not directly connected with a negligent audit or assignment is protected and the liability is instead attached to the LLP itself and individual partners who have been guilty of a negligent act or omission. The Bill contained no public accountability requirements although the eventual Act (as a result of amendments secured by Deputy Gary Matthews) required firms to state on their letterheads and invoices that they were registered in Jersey. In particular Article 9(2) stated that “Subject to the partnership agreement, it shall not be necessary for a limited liability partnership to appoint an auditor or have its accounts audited”. The Act contained no provisions for investigating errant auditors and offered no rights to audit stakeholders. It contained little, if any, provisions relating to the insolvency of the LLPs. Indeed, the insolvency aspects were finally tabled in the Jersey states in May 1998 and 95 pages of legislation were nodded through in less than 30 minutes.

The Jersey LLP Law is the first time that any major Western business (e.g. major accountancy firms) has indulged in DIY legislation, persuaded a smaller state (e.g. Jersey) to pass it and then used that legislation to hold larger states (e.g. the UK) to ransom. With the Jersey LLP Law, the major firms (with the full support of the Institute of Chartered Accountants in England & Wales) have sought to reconfigure the international regulations to their advantage. The accountancy firms got the LLP law and the political lever that they sought, but the Jersey LLP law caused considerable political turmoil and led to ‘hate’ campaigns against those who opposed the Bill. Senator Syvret drew attention to the conflicts of interests in relation to the promotion of the LLP Law. He was given ‘indefinite suspension’ from the Jersey States, a device not used in any other democratic state in relation to the conduct of any democratically elected representative of the people. After a suspension of nearly six months, Senator Syvret was grudgingly restored because 57 UK MPs signed an Early Day Motion (EDM) condemning the Jersey government. It was also suggested that some UK MPs would pursue Senator Syvret’s suspension through the United Nations. Currently, Senator Syvret is pursuing a case in Strasbourg for violation of his human rights and a file titled “Syvret v United Kingdom” has been opened. The above brief background is necessary for understanding the emergence of  LLP legislation in the UK. By hastily enacting the LLP legislation and bowing down to major accountancy firms, what kind of message will the House of Commons be sending to other businesses?

It should also be recalled that the move for the Jersey lever was made at a time when, following the Companies Act 1989, the auditing industry already enjoyed the right to trade through limited liability companies. At its behest Section 310 of the Companies Act 1985 had also been reformed (see above). Following the Caparo judgement it did not owe a ‘duty of care’ to current/potential individual shareholders, creditors, employees or any other stakeholder. It made its Jersey move at the very time when the Law Commission (DTI, 1996), at its request, was conducting a feasibility study on the possibility of replacing joint and several liability with full proportional liability.

It is clear that the Jersey legislation was intended to hold the UK Parliament to ransom. ‘Give us what we want or we go offshore’ has been the main demand and threat by major accountancy firms. Despite threats, to date no major firm has relocated to Jersey. In practice, there are a number of difficulties inhibiting the firms from carrying out their threat of abandoning the UK in favour of Jersey. There was never any possibility that the firms would sack all their UK staff, close their offices and re-open afresh in Jersey. To do so would have invited enormous complications with the UK employment, taxation and other laws. Their method of business would not have changed. They would have audited their normal audit clients with UK based staff from normal UK offices. To move to Jersey, the firms would need to renegotiate all contracts with existing clients and suppliers and persuade them that in the event of dispute, all matters would be resolved according to the Jersey laws. This is hardly a practical proposition as UK citizens want disputes heard according to UK laws. At best, the firms are more likely to set-up ‘brass plate’ operations whilst retaining their statutory monopolies and lucrative fees in the UK. To operate in the UK (regardless of the place of their domicile), the firms would need to be licensed by a UK regulator and be subjected to its monitoring visits, on the same basis as that applicable to all other UK based auditing firms. As there is unlikely to be any real change in the trade by major firms, the UK courts may well decide that the Jersey move is a ‘sham’ deliberately designed to disadvantage creditors (Accountancy Age, 19 September 1996, p. 3).

Another major obstacle to any Jersey migration has been taxation. The Inland Revenue stated that the firms moving to Jersey will be taxed as limited liability companies rather than partnerships. This would require them to pay tax earlier rather than later and make deductibility of some expenses harder, possibly raising their tax bill by as much as 10% (Accountancy Age 29 May 1997, p. 1). The partners of Jersey based firms may also be liable to pay capital gains tax as they would be deemed to have dissolved a partnership, realising a large gain on their initial investment, and commenced a new corporate and overseas business. Major firms are contesting the Inland Revenue’s interpretations of tax laws and are seeking a judicial review (Accountancy, July 1997, p. 17; February 1998, page 18).

The Jersey Bill, however, did what it was intended to do. It alarmed the UK government  and the then President of the Board of Trade promised that legislation would be introduced with in a week (Financial Times, 28 June 1996, p. 22; 24 July 1996, p. 9). Eventually, the UK government published its consultation document (DTI, 1997) and the Draft LLP Bill (DTI, 1998) is likely to appease the firms even further.


As the UK LLP legislation is primarily designed to benefit major accountancy firms, some questions should have been asked about their mode of operations and accountability. However, the Draft Bill does not do so. By default, it assumes that partnership structures are appropriate for accountancy firms even though major firms have ‘Boards’ and individuals carry titles such as ‘Director of  Marketing’, ‘Director of Professional Developments’, etc. It is hard to believe that major firms with more than 500 partners somehow consult every partner before making any decision.

The appropriateness of partnership structures for major accountancy firms needs to be questioned, especially as accountancy firms themselves have argued, in the past, that such structures are unwieldy and inappropriate for them. This is why they demanded the right to incorporate and the Companies Act 1989 duly obliged. In addition, international regulators have also argued that the partnership structures are inappropriate for major firms. These structures have enabled the firms to avoid their responsibilities and obstruct investigations into audit failures.

Some episodes are cited below to argue that partnership structures are inappropriate for major auditing firms.

 “Price Waterhouse firms are separate and independent legal entities whose activities are subject to the laws and professional obligations of the countries in which they practice. ...... PW-US, like other Price Waterhouse firms throughout the world, is a distinct partnership.     Each firm elects its own senior partner; neither firm controls the other; each firm separately determines to hire and terminate its professional and administrative staff ..... each firm has its own clients; the firms do not share in each other’s revenues or assets ...” (Kerry and Brown, 1992, p. 257)
 On the one hand, the firms claim that they are ‘global’ and thus pitch for multinational audits. But such claims are dissolved when the firms are confronted with regulatory inquiries. The Kerry and Brown report made three recommendations (Kerry and Brown, 1992, Chapter 10). Firstly, that a condition of licensing to operate in a country (say USA or UK) be that the firm be required to  respond to any subpoenas issued by the host country and produce the evidence requested, regardless of where the affiliated entity is located. Secondly, the firms could be persuaded (voluntarily or through legislation, if necessary) to devise schemes and procedures (say a world wide Memorandum of Association),  which bind all other members (e.g. firms in UK, USA etc.). Thus if Price Waterhouse (UK) is subpoenaed by a Select Committee and is required to produce documents possessed by any of its affiliates, it will have to provide that information, subject to the laws of  the jurisdictions (as modified by any treaty with the UK) in which the firm operates. Thirdly, legislation (say in the UK) could require that only UK based firms (or their affiliates who agree to the requirements of the UK regulators) could audit a UK based or UK registered entity.

It is submitted that partnership structures enable firms to dilute their responsibilities and should not be permitted without an extensive investigation. The UK LLP proposals do not even consider such aspects. The proposed LLP legislation does not offer any practical way of regulating major multinational accountancy firms.


The government’s proposals are contrary to its own policies which seek to provide ‘level playing fields’ for all those engaged in a similar business field. The legislation as currently drafted favours accountants, lawyers and other occupational elites. It discriminates against their competitors. LLPs should be available to everyone.

Currently, three broad categories of business vehicles are available in the UK i.e. sole traders, partnerships (including limited partnerships) and limited liability companies. They are generally available to almost everyone regardless of the business sector, wealth, age etc. The draft LLP legislation marks a sharp departure from the above principle. The LLP structure  would be available only to those businesses who have  designated professional regulators (e.g. accountants, lawyers, architects etc.). The considerable tax, liability and disclosures privileges accompanying the LLP legislation are not being extended to other businesses even though many of  them compete with accountancy firms to sell consultancy, executive recruitment, forensic accounting, merger advice etc.

The government’s proposals are based on a mistaken view (see chapter 4 of the Draft Bill) . They assume that the main business of accountancy firms is auditing and/or insolvency. From what little information the firms allow to fall into the public domain, it is evident that probably less than 40% of the income of major firms is derived from the regulated activities i.e. auditing, financial services and insolvency (Accountancy Age, 10 June 1993; 30 July 1998, p.12-13). Arthur Andersen and reputed to be earning less than 25% of their total income from the regulated sectors. A large part of the major firms’ income is derived from sources which are neither subject to any formal regulation, nor covered by any monitoring arrangements exercised by the Recognised Supervisory Bodies (RSBs) and/or the Recognised Professional Bodies (RPBs). Yet the DTI seeks to restrict the LLP to accountants, lawyers, architects, actuaries etc. on the basis that these businesses (presumably in their entirety) are formally regulated. This simply is not true.

Under the terms of the Draft LLP Bill, any accountancy firm would be able to secure the LLP status even if the regulated business only forms a very small part of its business. In contrast, anyone competing with an accountancy firm and seeking to sell consultancy, forensic accounting, advice on mergers, cost-cutting, executive recruitment, secretarial work, book-keeping, etc. would not be able to secure the LLP status. They can only limit their liability through incorporation under the Companies Acts. This route requires fuller disclosure (i.e. more than that required for LLPs) and in most cases an external audit. These businesses have to pay corporation tax  payable within nine months of the year-end. Companies are taxed on an “accruals basis” rather than the “cash basis”. Their expense deduction is also less generous. In contrast, the government is demanding lower levels of  disclosure from LLPs. The LLPs will have the benefit of “cash basis” of taxation (on 22nd December 1997, the government indicated that the “cash basis” is likely to be withdrawn or diluted from the tax year 1999/2000) onwards which gives them  a considerable opportunity to smooth their taxable profits. They will also generally be taxed on a ‘preceding year basis’, giving the firms up to twenty-one months after the year-end to pay tax.

The government’s LLP proposals are anti-competition and do not create level playing fields for  the businesses competing in an identical field. There are additional complications as well.

Overall, the government’s proposals are anti-competition. It is desirable that the LLP status should be available to everyone.


The Draft LLP Bill proposes to extend all the privileges of partnership taxation to LLPs (clause 10). In contrast, the government is currently proposing to tax any offshore-based LLP as a limited company. Presumably this is to shackle the firms in the interim period and prevent any of them from moving offshore. Once the Draft LLP proposals are implemented, other commercial enterprises which are denied the benefit of LLPs will only  be able to compete with accountancy firms through the medium of limited liability companies. This is the only way their owners will be able to shield themselves from liabilities. However, they will not have the tax advantages available to LLPs.

Suppose a person  (not an accountant) is trading as a sole trader or in conjunction with another is trading as a partnership. Suppose this business sells consultancy, bookkeeping, secretarial and other services, but wishes to obtain the benefit of limited liability. Under the government’s current proposals that person cannot secure an LLP status and will have to form a limited liability company. All the assets of the previous business would need to be transferred to the new limited liability company, triggering possible capital gains and other liabilities, subject to various reliefs. In future that person would have to pay corporation tax within nine months of the year-end. Expenses would only be deductible if they can be shown to be “wholly, exclusively and necessarily” for business purposes.

In contrast, an LLP would have anything up to twenty-one months to pay tax and expense deduction is much easier. Both business  owners have liability shields, but one enjoys a more favourable tax position. There does not appear to be any ethical reason for creating the two somewhat unequal tax regimes.

It would appear that the LLP tax regime, i.e. partnership tax concessions could also be available to a single person trading through an LLP. The Draft Bill states that an LLP needs a minimum of two partners at the date of its formation. Suppose subsequently, one partner dies or retires. The Bill does not appear to contain any provisions relating to the number of  partners at a subsequent date.


The LLP proposals face practical problems. Under  the LLP Draft Bill, the liability for audit failure is primarily restricted to the assets of the LLP and the negligent partners. The assets of other partners are shielded.  But the stakeholders are rarely aware of the identity of the partners or the audit teams conducting an audit. In addition, shareholders appoint firms to the office of an auditor rather than the individual partner. Audit reports are produced on a firm’s headed paper and often signed by or on behalf of a firm. It is the firms which facilitate the organisational structure, training, staff, continuity, policies and procedures for the conduct of an audit. All the partners share the resulting profits. Yet the proposed legislation seeks to individualise audit failures.

The Bill does not contain any provisions for making the public aware of the financial standing of the individual partners, or their standards of work. Indeed, the Draft Bill states that LLPs  “will not be required to publish the details of their internal arrangements” (page 7). Why not? In the absence of  information how is the public to make informed choices? Would a statement showing the financial position of the partner-in-charge of an audit be appended to each audit report and distributed at each annual general meeting? More crucially, as the burden of liability shifts to the negligent partners, the public needs to know  the arrangements  relating to individual partners.


Even on the publication of financial information by LLPs, the government proposals are backward. For example, if LLPs are permitted 10 months after the year-end to deliver accounts and report to the Registrar of companies (page 25). This means that most of the information contained in the accounts would be more than a year old. No self-respecting company director or LLP partner would use such information for any worthwhile business purpose. Yet the government expect the public to use the very same information. We all know that to be useful all information must be timely. The government should require all large LLPs to file their accounts within 90 days of the year-end.

Those trading through limited liability companies are required to publicly file the company’s Memorandum and Articles of Association. In contrast, those trading through LLPs are also able to limit their liabilities, but the Draft Bill states that LLPs  “will not be required to publish the details of their internal arrangements” (page 7). This is contrary to the principles already in existence and there is no ethical reason for exempting LLPs from it.

It is disappointing that the government has made no attempt to develop any qualitative disclosures for LLPs. The qualitative disclosures are necessary because accountancy firms enjoy state guaranteed markets (e.g. audits, insolvency). The privileges should be accompanied by social obligations which need to be given visibility by disclosures.

It is possible that the government will expect the accountancy trade associations to develop the details. Such an approach to public policymaking is disappointing and is unlikely to secure ‘qualitative’ disclosures. The accountancy trade associations were formed to promote and further the interests of ‘producers’ and accountancy firms. They are funded by their members will inevitably represent the concerns of their members. They are unlikely to pay adequate attention to the public’s needs. For proper discharge of their social obligations, accountancy firms should  inter alia be obliged to publish the following (not meant to be an exhaustive list) additional information.


One argument is that liability rules should be devised to provide economic actors whose activities may cause harm to others with an incentive to take the socially optimal level of care to avoid causing such harm. How has the DTI squared this circle, especially as auditors do not owe a ‘duty of care’ to individual stakeholders?
 It appears that institutional investors are not convinced that LLPs or even incorporation provides the basis for securing ‘quality’ audits. The government has not offered any assurances about their concerns. If anything the insolvency aspects (e.g. ‘clawback’) mentioned in the 1997 consultation paper have been further diluted by the Draft Bill. Some of institutional investors’ concerns have been publicly aired.

The DTI has failed to provide any evidence to show that the provision of a LLP structure to auditing firms will lead to better ‘quality’ of audits. Indeed, the issues do not appear to have been examined through the eyes of audit stakeholders.

Most accountancy firms have very few tangible assets. Their biggest asset is staff and good name, but these do not form part of any balance sheet. The largest balance sheet item is likely to be accounts receivable. One possible consequence of the LLP legislation will be that firms will become more efficient in collecting accounts receivable and quickly distributing them to their partners. Thus at any given time, the LLP (which is the first port of call for any creditor) will have fairly minimalist resources. Any firm anticipating a major lawsuit would have enormous incentives to run down the firm’s assets and even transfer them to family and friends of the partners at regular intervals. Thus unlike the ‘joint and several liability’ regime, there is enormous potential for leaving only business shells to creditors.

It was, possibly, in anticipation of such a scenario that the DTI consultation paper (DTI, 1997, pages 12-13) proposed its “‘clawback” and “members’ guarantees” provisions to safeguard the interests of creditors. Such provisions become even more necessary as LLPs would be exempt from any ‘capital maintenance’ requirements. However, now it appears that under pressure from the auditing industry, the government has relaxed the “clawback” and “members’ guarantees”  requirements. Now the Draft Bill shifts the onus on to the liquidators by saying that “a liquidator may apply to the court to recover withdrawals of property of the firm made by a member within the two years prior to the winding-up at any time when that member knew that the firm was insolvent or would be made insolvent by the withdrawal. The burden of proof will rest with the liquidator”. The revised proposals are less positive than the earlier ones and would require considerable legal expense.

Contrary to the claims of the Draft Bill that “capital is maintained in order to sustain the company, and there is no intent to require the maintenance of a fund for the benefit of creditors in an insolvency” (page 12), it is argued that  ‘capital’ is seen as a kind of a fund out of which creditors can be protected and paid. It is true that companies can be formed with an issued capital of only £1, but such businesses are hardly of any significant size and the tiny amount of capital does not necessarily enable them to secure any credit either.

In addition it is not clear how the absence of any ‘capital’ will protect the Inland Revenue, Customs & Excise and other involuntary creditors.


Recently, the Edwards Report on the operation of financial regulations in the Channel Islands has suggested that all overseas businesses located there should be registered and regulated. Therefore, it is somewhat surprising that the Draft Bill states that “There is at this stage no intention to implement regulations for overseas LLPs. Any decision to introduce provisions for overseas firms will be subject to separate consultation” (page 16). Such a lacunae is unacceptable and does not lead to good regulatory environment. The government is also non-committal about when the proposed consultation will take place and why it has been postponed. Some certainty would be most welcome.

It would be recalled that a previous Ministerial statement stated that  to

“keep a level playing field with companies and partnerships registered in the UK, limited liability partnerships registered abroad but operating from a place of business in the UK will be required to file financial information equivalent to that to be required from limited liability partnerships registered in this country” (Hansard, 7 November 1996, col. 700).

The 1997 consultation document (DTI, 1997) stated that “The policy is to impose on overseas LLPs the requirements of the Bill” (page 39). Why has the government reversed its previous policy?


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