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Lord Lucas: I am grateful for that explanation. Quite clearly, I am overwhelmed and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey moved Amendment No. 36:

("( ) In section 362(2)(a) of that Act (loan to buy into partnership), after "partner" insert "in a limited partnership registered under the Limited Partnerships Act 1907".").

The noble Lord said: In moving Amendment No. 36, I should like to speak also, if I am allowed, to Amendment No. 39 in the name of the noble Lord, Lord Goodhart, because I believe that we are trying to achieve the same objective.

As matters stand at present, a partner who borrows money at interest to provide working capital for him to invest in a partnership in which he is a member can claim tax relief for that interest. That is dealt with in Section 353 of the Income and Corporation Taxes Act 1988 (ICTA). That is a general provision which provides for tax relief to be given in respect of interest paid in certain circumstances. Section 362 of the ICTA provides for relief to be given under Section 353 where interest is paid on a loan to buy into a partnership or by a partner to provide working capital for a partnership in which he is a partner. Section 362 sets conditions that must be satisfied for relief to be available. The particular condition which is the subject of these two amendments is that the individual must have been a member of the partnership,

    "otherwise than as a limited partner".

During consultation, some respondents were concerned that that relief might not be available to members of an LLP in circumstances that would otherwise be similar. Amendment No. 39 proposes inserting a new subsection into Section 362 that would read:

    "For the purposes of subsection (2), an individual who is a member of a limited liability partnership shall be deemed to be a member of the limited liability partnership otherwise than as a limited partner".

I do not find that particularly easy to read out and understand.

This is saying that in considering a claim by a member of a limited liability partnership to relief for interest, the restriction of relief for a limited partner does not apply as partners in LLPs are deemed not to be limited partners in relation to their membership of the limited liability partnership. Our amendment proposes to modify the reference in Section 362(2) by inserting after the words "limited partner",

    "in a limited partnership registered under the Limited Partnerships Act 1907".

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In other words, otherwise than the limited partner, which is the threatening bit, it is made clear that it applies only to the 1907 Act and not to the 2000 Act. I know that our amendment is not very clear but it is slightly shorter and it achieves the same effect as Amendment No. 39. Therefore, I urge the Committee to accept our amendment.

Perhaps I may take this opportunity to say something about a proposed amendment to the tax provisions that we shall be making on Report. In the consultation process, we discussed a number of issues relating to the tax provisions, one of which resulted in Amendment No. 36. However, it became clear that there is a possibility that LLPs may be used for a particular form of tax avoidance.

That avoidance would take the form of loss relief being available to the partners in excess of the loss that they might have to bear. That is because loss relief is available for a loss "incurred" which may not always be the same as a loss "borne". Legislation already exists in Section 117 of the Income and Corporation Taxes Act 1988 to stop that happening with limited partnerships under the 1907 Act. The amendment will ensure that loss relief will not be available to members of a limited liability partnership beyond the loss that they could have to bear.

The provision has been discussed with consultees who are content that it is justified. I commend Amendment No. 36 to the Committee.

On Question, amendment agreed to.

[Amendments Nos. 37 and 38 not moved.]

Clause 10, as amended, agreed to.

[Amendment No. 39 not moved.]

Clause 11 agreed to.

Clause 12 [Stamp duty]:

Lord McIntosh of Haringey moved Amendment No. 40:

    Page 5, line 46, leave out from ("partnership") to end of line 4 on page 6 and insert ("in connection with its incorporation within the period of one year beginning with the date of incorporation if the following two conditions are satisfied.

(1A) The first condition is that immediately before its incorporation the person--
(a) is a partner in a partnership comprised of all the persons who subscribe their names to the incorporation document (and no-one else), or
(b) holds the property conveyed or transferred as nominee or bare trustee for one or more of the partners in such a partnership.
(1B) The second condition is that--
(a) the proportions of the property conveyed or transferred to which the persons mentioned in subsection (1A)(a) are entitled immediately after the conveyance or transfer are the same as those to which they were entitled immediately before its incorporation, or
(b) none of the differences in those proportions has arisen as part of a scheme or arrangement of which the main purpose, or one of the main purposes, is avoidance of liability to any duty or tax.

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(1C) For the purposes of subsection (1A) a person holds property as bare trustee for a partner if the partner has the exclusive right (subject only to satisfying any outstanding charge, lien or other right of the trustee to resort to the property for payment of duty, taxes, costs or other outgoings) to direct how the property shall be dealt with.").

The noble Lord said: Clause 12 deals with stamp duty. The purpose of Clause 12 is to ensure that the transfer of the business and partnership assets of an existing partnership to a limited liability partnership would be free from stamp duty. Without a special exemption, it is possible that a stamp duty liability could arise on such a transfer. The exemption is consistent with the principle behind the tax clauses as a whole which ensure that LLPs are taxed as partnerships and that conventional partnerships can convert themselves into LLPs without incurring one-off tax charges.

In practice, it is unlikely that all a previous partnership's property will be conveyed or transferred to the limited liability partnership on incorporation. It is likely that transfers of some assets will take place after completion of the formal incorporation procedures. As it was introduced, Clause 12 did not take account of that and we thought it necessary to bring forward an amendment to ensure that that procedural issue is dealt with.

There may also be genuine reasons for changes in membership of the partnership between incorporation of the limited liability partnership and the conveyance of property; for example, death, incapacity or retirement. We believe that such changes should not cause the withdrawal of relief provided that they occur within a reasonable time, which we take to be a year, and have no avoidance motive. I beg to move.

On Question, amendment agreed to.

Clause 12, as amended, agreed to.

Lord Goodhart moved Amendment No. 41:

    After Clause 12, insert the following new clause--


(" . In the Insolvency Act 1986, after section 214 insert--
Contribution by member to assets of limited liability partnership where property withdrawn.
214A.--(1) This section has effect in relation to a person who is or has been a member of a limited liability partnership where, in the course of the winding up of that limited liability partnership, it appears that subsection (2) of this section applies in relation to that person.
(2) This subsection applies in relation to a person if--
(a) within the period of two years ending with the commencement of the winding up, he was a member of the limited liability partnership who withdrew for his own benefit property of the limited liability partnership, whether in the form of a share of profits, salary, repayment of prepayment of interest on a loan to the limited liability partnership or any withdrawal of property, and
(b) it is proved by the liquidator to the satisfaction of the court that at the same time of the withdrawal he knew or had reasonable grounds for believing that the limited liability partnership--

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(i) was at the time of the withdrawal unable to pay its debts within the meaning of section 123 of the Act, or
(ii) became so unable to pay its debts after the assets of the limited liability partnership had been depleted by that withdrawal taken together with all other withdrawals (if any) made by any members contemporaneously with that withdrawal or in contemplation when that withdrawal was made.
(3) Where this section has effect in relation to any person the court, on the application of the liquidation, may declare that that person is to be liable to make such contribution (if any) to the limited liability partnership's assets as the court thinks proper.
(4) The court shall not make a declaration in relation to any person the amount of which exceeds the aggregate of the amounts or values of all the withdrawals referred to in paragraph (a) of subsection (2) made by that person within the period of 2 years referred to in that paragraph.
(5) The court shall not make a declaration under this section with respect to any person if it is satisfied that, after each withdrawal referred to in subsection (2), he had reasonable grounds for believing that there remained a reasonable prospect that the limited liability partnership would avoid going into liquidation.
(6) For the purposes of this section a limited liability partnership goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of winding up.
(7) In this section "member" includes a person in accordance with whose directions or instructions (otherwise than by way of advice given by him in a professional capacity) the members of the limited liability partnership are accustomed to act.
(8) This section is without prejudice to section 213."").

The noble Lord said: With certain changes, this amendment brings a clause onto the face of the Bill which at present appears in draft regulations published by the Government.

We do not object to the application of existing corporate insolvency rules to LLPs by way of regulations. But this clause creates a new and distinct form of liability which applies only to members of LLPs. We do not disagree with that in principle but we believe that a matter of such importance should be on the face of the Bill.

In the Government's letter of 10th January to the noble Baroness, Lady Buscombe, to which reference has already been made several times, reasons are put forward as to why the new Section 214A of the Insolvency Act should not be on the face of this Bill. The argument seems to me to be extremely weak. It says, for example, that putting a new Section 214A on the face of the Bill would result in the new clause appearing in the Insolvency Act when that Act contains no other reference to LLPs. That is perfectly true but my answer to that would be: so what?

The argument that new Section 214A means that the Bill would then have to define a "shadow member" is the feeblest argument of its kind that I have ever come across. I draw attention to what seems to be a satisfactory form of words to cover that particular problem in subsection (7) of the amendment.

I suggest also to the Minister that the powers in Clause 13(1) are not sufficient to support the creation by regulation of the new Section 214A. The power in

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Clause 13(1) is to apply the provisions of the Insolvency Act with such modifications as appear appropriate. Therefore, I ask of what is Section 214A a modification? It is not a modification of Section 214 because that is incorporated quite independently by a separate regulation. It seems clear to me that Section 214A is not a modification of any existing provision of the Insolvency Act but is a wholly new provision. Therefore, it cannot be included by virtue of the regulations which give power only to modify existing provisions. Therefore, I believe that the Government should look again at that matter.

As regards the drafting, the amendment is different from the draft regulations in two respects. The first is subsection (7) to define "shadow member", which I have already mentioned. The other, which is rather more substantial, is a change to the proposed subsection (5). That is raised in answer to what seems to me to be a fair point put forward by the Law Society.

Section 214A applies if the member who makes the withdrawal knew or had reasonable grounds for believing that the limited liability partnership was insolvent when he made that withdrawal. Subsection (5) then disapplies the section if there was in fact a reasonable possibility of avoiding insolvent liquidation; for example, by trading out or by raising fresh capital.

The subsection (5) test is wholly objective, even if the relevant facts are not known to a member. So let us assume that a firm of solicitors suffers loss as a result of a claim against it of professional negligence. As a result of that claim, the firm is just insolvent and its members are willing and able to raise enough capital to cover that loss.

But unknown to the members, there exists another and very large liability of the firm for professional negligence where the claim is not made until after the withdrawal. The partner, other than the individual one at fault, has no way of knowing that such a claim exists because, ex hypothesi, it has not yet been made. But objectively, of course, if one looks at the facts, there is no prospect of avoiding the liquidation.

It seems to me that in such a circumstance, it would be wrong to penalise a withdrawal. Therefore, I suggest that the wording of my version of subsection (5), which makes it dependent on what is or should be known to the partner making the withdrawal, is better than the wholly objective test applied in the Government's version of subsection (5). I beg to move.

7.30 p.m.

Lord McIntosh of Haringey: I should make it clear that I do not base my resistance to the amendment on the amendments to Section 214A introduced by the noble Lord. On the face of it, they appear to be helpful and we shall consider them along with the other representations that have been made when considering

24 Jan 2000 : Column 1399

the form that this provision shall take in regulation. My resistance is only on the issue of whether the matter should be in regulation or on the face of the Bill.

At Second Reading the noble Lord, Lord Goodhart, said that he wanted a debate on this matter and now he has it. He has conducted it well and I congratulate him on it. However, on a wider basis, we want to resist attempts to include this matter and matters like it in the Bill rather than in the regulations. We believe that it would be peculiar to include on the face of the Bill this provision alone of all the insolvency provisions that we intend to apply. The noble Lord rightly referred to Clause 13(1). As we made clear during the course of consultation and as I explained at Second Reading, we intend to apply to limited liability partnerships, with appropriate modifications, the Insolvency Act 1986.

Whether this amendment is a modification is a matter of semantics. Clearly, the proposed new clause is linked to Section 214 of the Insolvency Act, and if it were put on the face of the Bill it would cause a muddle. There would be some primary legislation and some secondary legislation and this element would be set apart in the Bill from the remainder which will be in regulations. In case the response of the noble Lord to that is to suggest that we should include all the insolvency provisions on the face of the Bill, that would make the Bill very long and, more seriously, it would create insolvency legislation for LLPs that would be separate from that for companies.

We believe that there is a greater advantage in having the existing Insolvency Act modified in its treatment of LLPs. Of course, the Insolvency Bill will come before Parliament in the course of this Session. One reassurance I can give the noble Lord is that the regulations will be subject to the affirmative resolution procedure.

The insolvency regulations will not rewrite the Insolvency Act of 1986 for all purposes. They will make amendments only in so far as the Act is applied to LLPs. Putting Section 214A into the Bill, as this amendment does, the Insolvency Act would be amended for all purposes. That would look odd, as none of the other amendments to the Act exist for all purposes. It is sensible to keep all the insolvency provisions together.

We do not disagree with the noble Lord on an issue of principle. We are grateful to him for his suggestions about the wording and we shall certainly take account of them. However, as a matter of drafting and as a matter of consistency in legislation, it is better that the matter should be dealt with by regulation rather than on the face of the Bill.

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