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Lord Lucas: The noble Lord, Lord McIntosh, was kind enough to allow me a meeting with him before Committee stage. He made plain then that agency was not to be challenged; hence the way in which I have phrased the amendments. I do not intend to challenge agency. What I sought to get at here is how a member of the public comes to be in a position where he can reasonably believe a person who is a member of a partnership to have any particular level of authority. There are ways of doing so. If there are only a limited number of partners in the firm, it could put something on its letterhead. But suppose it is one of the big accountancy firms, with 1,000 or 2,000 partners scattered around the UK. How do the Government envisage that the limitations on an individual member's powers will be brought to the notice of a third party dealing with that member?

My proposal in Amendment No. 14 seeks to place a requirement on a limited liability partnership to have a public record which would be easily available and to which it might be assumed a third party would have recourse. If not, presumably something must be stated on a business card or a letterhead which indicates the limitation of a particular partner--otherwise there is no limitation. I should be grateful for the noble Lord's thoughts on that issue.

So far as concerns Amendment No. 25, that is certainly not challenging agency. I understand everything that the noble Lord has said, but he understands what I mean about the third party being in two very different positions under the two subsections. The fact that the Government have conceded Clause 6(3) should allow some flexibility under Clause 6(2) for provision to be made as to what a third party should ordinarily expect to do to arrive at the belief that he is required, presumably reasonably, to reach under Clause 6(2).

Lord McIntosh of Haringey: I am in some difficulty. I think that our rewording of Clause 6 in Amendments Nos. 18 to 24 and Amendment No. 26 covers the points made. I shall deal with the points in detail when I come to the amendments but it is not easy for me to do so now. Perhaps the noble Lord and I can agree that if he is not satisfied he can still come back to the

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substance of Amendment No. 14 on Report. We should then be able to make progress by having a single debate rather than two.

Lord Lucas: My Lords, I may well come back to it when the noble Lord deals with his amendments to Clause 6, but I shall I wait until I have listened to him on those. In the meantime, I beg leave to withdraw Amendment No. 14.

Amendment, by leave, withdrawn.

Clause 4 agreed to.

Clause 5 [Relationship of members etc.]:

Lord Phillips of Sudbury moved Amendment No. 15:

    Page 2, line 39, leave out subsection (1).

The noble Lord said: Perhaps I may remedy a defect. Before I spoke first this afternoon I failed to thank the noble Lord, Lord McIntosh of Haringey, for letting us have a marked copy of the Bill showing the Government's amendments. It was extremely helpful and we are grateful for that. It would be nice to think that it could be a precedent for future Bills.

The amendment is a probing one which seeks to get to the root of what Clause 5(1) of the Bill achieves. In the Explanatory Notes it says that,

    "Subsection (1) deals with the relationship between members".

On these Benches we do not understand why the subsection is necessary if that is all that it does. Incidentally, nowhere does it make clear that, whatever the members decide to do among themselves or as between themselves and the limited liability partnership, it cannot affect the rights of third parties.

Finally--again as part of the probe--the end of Clause 5(1) stipulates that it shall,

    "have effect subject to the provisions of the incorporation document".

We do not see why this should be drawn in. If it is, surely it should be "the provisions of the incorporation document as may be amended and registered". I beg to move.

Lord McIntosh of Haringey: I am sorry. I am not sure that I understand the noble Lord. I thought that Amendments Nos. 15 and 16 had to go together in the sense that Amendment No. 15 seeks to take out subsection (1) and Amendment No. 16 seeks to put something in its place. I have clearly misunderstood.

Lord Phillips of Sudbury: I am dealing with the list as it has been marshalled.

Lord Goodhart: I should explain that I asked for the Marshalled List to be changed this morning. The two amendments are not dependent on each other. As my noble friend explained, Amendment No. 15 is a probing amendment to find out what the subsection means. Amendment No. 16 is much wider.

5.45 p.m.

Lord McIntosh of Haringey: I am grateful. A limited liability partnership allows its members to have the freedom to regulate the internal affairs of a limited

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liability partnership with the agreement of the other members. One of the key differences between a limited liability partnership and a company is that by allowing the members the freedom to agree how the internal affairs will work, it will be free of the bureaucratic structure of a company. The agreement will remain private between the members.

However, it has never been our intention to allow the agreement between the members to be able to alter what goes into the incorporation document. This is because the incorporation document is published and sets out the public face of the LLP; that is, its name, its address, its initial members and its designated members. So Clause 5(1) imposes a limitation on the freedom of the members to regulate their rights and duties. It does not impose a limitation on their rights to have at any time agreements between themselves about the way in which the business should be conducted.

As I said to the noble Lord, Lord Goodhart, in response to an earlier amendment, we recognise that that does not in itself necessarily provide adequate protection for the outside world; that is, for the people doing business with the LLP. That is why I talked about the default provisions for an agreement which will be established to ensure that not only the interests of members on retirement are protected but, perhaps more importantly, the interests of the outside world are also protected. That is the distinction we seek to make in Clause 5(1).

Lord Phillips of Sudbury: I am grateful to the Minister for that explanation. I should be grateful if he would read what I said in Hansard and consider whether it might not be of advantage to all to make clear in Clause 5(1) that, whatever is done under its provisions, it cannot affect the rights of third parties. That is not explicitly stated.

The incorporation document is changeable. If one looks at the provisions of Clause 2(2), there are various aspects of the incorporation document which will be subject to change. Again, I am not sure that Clause 5(1) as drafted takes that into account.

These are all very technical matters and at the moment I am happy to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Goodhart moved Amendment No. 16:

    Page 2, line 44, at end insert--

("( ) Subject to this Act and to the provisions of the incorporation document and of any such agreement as is mentioned in subsection (1), the mutual rights and duties of the members of a limited liability partnership shall be governed by the rules and principles which would apply if the law relating to partnerships applied to them and the property of the limited liability partnership were partnership property.").

The noble Lord said: This is an important amendment--one of the most important that have been tabled to this Bill.

Up until now, partnership law has been made in part by the Partnership Act 1890 and in part by decisions of the courts. The 1890 Act is a classic of parliamentary draftsmanship: it is clear, simple and concise. Would that modern statutes were as effectively and briefly

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drafted as that. It has worked with almost no amendments and to general satisfaction for 110 years. It is showing some signs of age but it has still been the effective foundation on which partnership law has been based.

As has been pointed out, it contains a number of important default provisions--rules which apply to partnerships if the partnership agreement does not cover a particular issue. This Bill, however, is completely lacking in default rules--and it needs them, especially because many existing partnerships will convert into LLPs and they will need to know whether or not, and how far, the laws which have governed them as partnerships will continue to govern them as LLPs.

If one wants to look at the default rules, one has to look primarily at Section 24 of the Partnership Act. That provides default rules which are subject to agreement to the contrary. Those include the fact that members are entitled to equal shares in the capital and profits of the partnership; that they are entitled to indemnity for liabilities personally incurred in the course of conducting the firm's business; and all members are entitled to take part in the management of its business. No person may become a member of the firm without the consent of all the other partners. Business decisions shall be taken by a majority of the partners, but any change in the nature of the business must have the consent of all the partners. Lastly, all members have the right to inspect the firm's books.

Other important default provisions are provided for. Section 25 provides that there is no power to expel a member unless the agreement so provides. Section 26, which has already been discussed, provides for a right to retire from the firm on notice where no other provision has been made in the agreement. Section 30 provides that members are under a duty not to compete with the firm. There are also important rules of common law and equity that apply to partnerships, in particular the duty of partners to act in good faith towards each other. I should like to refer to a quotation from what I believe is the best known textbook on the subject, first published in the name of the famous judge, Lord Lindley. It states that:

    "Perhaps the most fundamental obligation which the law imposes on a partner is the duty to display complete good faith towards his co-partners in all partnership dealings and transactions".

That is an important principle. It is vital that default rules for the conduct of LLPs should be provided, especially because LLPs will be used as a simple and informal way of incorporating small businesses where it is likely that members' agreements will be defective and incomplete in a way that the agreements of substantial accountancy firms or solicitors' practices will not be defective.

The wording of Amendment No. 16 is based on an earlier text in a draft government Bill. I believe that Amendment No. 17 is intended to achieve the same purpose but with different wording. Powers are provided to include default provisions by regulations under Clause 14. The Government have stated their

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intention to do so in so far as that is appropriate. However, in spite of their intention, I have tabled the amendment for three reasons.

First, proper default provisions are of central importance to the working of LLPs and I believe that they should be set down on the face of the Bill, as was done in the case of the Partnership Act 1890. Secondly, although it may be easy to provide default provisions where they are based on existing statutes, they will be much more difficult to formulate where they are based on common law. The duty to act in good faith to fellow members is central to a partnership and should remain central to LLPs. The Government have objected to this in the letter to which I referred earlier. It is said that there may be a potential conflict between duties to fellow members and duties to the LLP. I do not believe that to be a real problem. The courts created the duty of good faith and I believe they are entirely able to apply that concept to a new context. For example, the suggestion that members might be held liable to account for a private profit to both the LLP and the members of the LLP is, in my view, simply fanciful.

Thirdly, we have not yet had sight of the draft regulations that will apply the partnership principles. I hope that we shall do so before the Bill is enacted, in the same way as we have seen the effective draft regulations the Government propose to introduce as regards winding up and insolvency. I beg to move.

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