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Lord Lucas: On a matter of semantics, can the Minister enlighten me as to the limitation of the word "modifications"? There must be an ultra vires question here somewhere? Where is the borderline?

Lord McIntosh of Haringey: That is an interesting point of semantics. I would be interested to have the

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views of "grammarians" on whether a modification can take the form of an addition rather than of a change that involves subtraction. I shall not get involved in this matter on the Floor of the House, but I shall gladly write a learned letter to all interested noble Lords.

Lord Goodhart: I am grateful to the Minister for his reply. The basis for treating Section 214A differently from anything else is that it is unique in that it creates a new form of liability which has no parallel in the existing liabilities under the Insolvency Act. Therefore, it seems to me to justify different treatment. I suggest that there really is a potentially serious problem here as regards vires under Clause 13(1) of the Bill. There is a legitimate question of whether this constitutes a modification. It is not for me to get the Government's legislation right.

Lord McIntosh of Haringey: This is a revising Chamber!

Lord Goodhart: The noble Lord would be well advised to consult the Parliamentary Counsel Office as to whether this is in fact within the powers granted by Clause 13(1). I welcome what the Minister has said about my amendment to Section 214A and I shall wait with interest to see whether it bears any fruit. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Sharman moved Amendment No. 42:

    After Clause 12, insert the following new clause--

("Insolvency: preferential debt liability

.--(1) Subject to subsection (2), the members of a limited liability partnership or overseas limited liability partnership which has been wound up (including persons who ceased to be members before the commencement of the winding up) shall be liable for its preferential debts (within the meaning given by section 386 of the Insolvency Act 1986) so far as such debts have not been discharged in the winding up.
(2) Subsection (1) shall apply in relation to any member only to debts incurred while he was a member.").

The noble Lord said: The purpose of the amendment is to draw attention to an anomaly which appears to arise as a result of the combination of the application of the tax law to a limited liability partnership as though it were a partnership and insolvency law to a limited liability partnership as though it were a corporation.

The position of preferential creditors in both cases--I apologise for being somewhat technical--is complex on the bankruptcy of a partnership. Nevertheless, preferential creditors--unpaid VAT and PAYE and particularly employees-- rank ahead of all other debts. If one looks at a limited company that becomes insolvent--I stress that I am talking of a situation in which there is no evidence of wrong-doing and of circumstances in which Section 214A would not apply--the pool of assets is available to the creditors

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in total, but the preferential creditors rank first and tax on the profits earned previously are unsecured and rank behind the preferential creditors.

In the case of a limited liability partnership, because it is taxed as a partnership with fiscal transparency, the tax arising on the profits which have been earned remains the liability of the individual partners and they, quite rightly, may well withdraw funds from that partnership to satisfy that liability. The result is that the total pool of funds available in the insolvency may have been diminished by withdrawals to satisfy what would be unsecured creditors, thereby diminishing the claim of preferred creditors.

I am particularly concerned about the position of employees in such a situation. The employees could see themselves disadvantaged. At present, when a partnership suffers insolvency the employees have a right of claim against the individual partners' assets, which provides some recompense, but in the case of insolvency law applying to a limited liability partnership as if it were a corporation, employees would be in a different and a somewhat disadvantaged position. I beg to move.

Lord McIntosh of Haringey: I am anxious to achieve the same kind of result as that achieved by the amendment, but I do not think that this is the right way to do it. First, the noble Lord referred to employees and to the fact that certain debts of insolvency are ranked as preferential; in other words, payable before non-preferential debts as set out in Schedule 6 to the Insolvency Act 1986. They include debts due to the Inland Revenue, as the noble Lord said, but also to employees by way of remuneration.

This amendment would make all members and former members of an LLP liable for the preferential debts incurred during their membership. I do not believe that they should be liable to make those payments. It would be against the principle of limited liability which is at the heart of the Bill. In other words, it would extend the privileges of preferential creditors over those of non-preferential creditors and I am sure that that is not what the noble Lord wishes to do. Also, it means that LLPs would be treated differently from companies for insolvency purposes. There really should be consistency in the law in this area and members of an LLP should not be in a worse position than their company counterparts. It would make it a less attractive vehicle.

I question also the fairness of the amendment. If we take into account the position of the unsecured creditors, what justification can there be for government departments, which would be the major beneficiaries of the amendment together with employees' remuneration, being repaid in full when it is likely that unsecured creditors will receive little or nothing? Though I am sure the amendment is moved with the best of motives, I do not believe it will achieve the objectives required. I hope therefore that the noble Lord will not press it.

Lord Sharman: I am grateful to the Minister for his explanation. The whole principle of preference in

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insolvency is to place one class of debtors--or creditors, depending on which side of the fence one sits--ahead of the others. That is precisely what the law sets out to do. The preferential creditors, so far as they are government departments, are government departments where the entity collects money on behalf of the Government. They are not debts to the Government for income or corporation tax; in that sense they are VAT and PAYE. It is important therefore that we should not, as we have with this legislation, effectively place in regard to a pool of assets unsecured creditors ahead of preferred creditors. I recognise from the Minister's explanation that this is an immensely complex subject. I do not propose to press the amendment. I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Clause 13 agreed to.

Clause 14 [Application of company law etc.]:

Lord Goodhart moved Amendment No. 43:

    Page 6, line 34, at end insert--

("( ) requiring limited liability partnerships and oversea limited liability partnerships or any category of limited liability partnership or oversea limited liability partnership to effect and maintain policies of insurance on such terms and for such amount as may be specified against such risks as may be specified (including risks of negligence by a member, agent or employee of the limited liability partnership or oversea limited liability partnership),").

The noble Lord said: Amendment No. 43, somewhat unusually, proposes to give an additional power to the Government. Solicitors and chartered accountants are required by their professional rules to carry professional indemnity insurance. Personal liability of partners arises only if the damages exceed the insurance cover or there is some non-disclosure which entitles the insurers to disclaim.

That means that victims are unlikely to obtain compensation unless the claim against the partners is extremely large. But a requirement to carry professional indemnity insurance does not apply to all businesses or professions which are likely to be carried on as LLPs. There is therefore a risk of moral hazard. If the members of the firm know that in the event of a large claim they can simply wind up the firm and start again, they may be tempted to reduce their insurance cover or indeed not to insure at all. This may or may not turn out to be a problem. But the Government should have reserve powers to require LLPs to comply with minimum insurance requirements for professional negligence.

That would not be appropriate across the board. For example, it would not be appropriate for an LLP which is running a corner shop. But, in general, firms offering skilled services to the public should insure against the negligence of their members or employees. There should therefore be a flexible power for the Government to say that in certain categories, where adequate insurance is not a requirement of their professional bodies, the carrying of insurance is a

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necessary condition for obtaining limited liability. The Government should therefore have the power to insist on insurance being carried. I beg to move.

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