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Baroness Buscombe : My Lords, in rising to speak to this amendment, first, I thank the Minister for

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providing me with a marked-up copy of the government amendments together with an explanatory note. Perhaps I may also thank all noble Lords who have kindly written to me and copied to me correspondence concerning a number of issues following the Committee stage of the Bill.

A comparison of the Bill in its form at Second Reading with the Bill that we are considering this evening confirms that we have made considerable progress. However, the consultation paper, Regulatory Default Provisions Governing the Relationship Between Members, dated February 2000, clearly illustrates the challenge of endeavouring to introduce a new vehicle--a new business entity--which, in the words of the Minister,


    "combines the best of both worlds",

is "an enormous privilege" and, at the same time, recognises the rights of third parties.

Taking this consultation paper together with the correspondence of the noble Lord, Lord Goldsmith, dated 2nd and 3rd March 2000 and addressed to the Minister, we on these Benches remain concerned as to how the rights of third parties will be protected. We are concerned in particular, in the event of a conflict, with how the potential responsibility of a member of an LLP would be apportioned--I shall quote the noble Lord, Lord Goldsmith--


    "in order to split out liability of the members for his own acts as opposed to the liability of others".

Surely that goes to the heart of this business entity.

Turning to Amendment No. 1, I recall expressing concern in the debate on Second Reading as regards Clause 1(4) in so far as, on the face of the Bill, no reference is made to issues which are central to partnership law, something one might have expected when discussing a new vehicle called a "limited liability partnership". Indeed, there is no express reference to the limits of liability. However, I also recall that the Minister's response to the concern when it was raised in Committee made it quite clear that, although the taxation of LLPs will be on the partnerships analogy, all other aspects of the LLP will be on the companies analogy. It is now clear that an LLP will be quite different from a partnership and that those areas of partnership law which govern the mutual rights and duties of the members, including key provisions of the Partnership Act concerning dissolution, joint and several liability and relations with third parties, will not apply to LLPs.

Although to some extent I am reassured by Clauses 5 and 6 of the Bill, assuming that regulations under Clause 14(c) will contain a number of default provisions modelled on Section 24 of the Partnership Act 1890, I have considerable sympathy with the amendment. It expressly covers a number of key issues, including dissolution either by members or by the court; the accountability of partners for private profits; the duty of a partner not to compete with the business of which he is a partner; and the disclosure of accounts and information as between partners and

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their legal representatives. For that reason, I look forward to the Minister's response to the proposed amendment.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord and to the noble Baroness for the way in which they have moved and spoken to the amendment. From the speech of the noble Lord, Lord Goodhart, it is clear that I shall need to use the long version of my response rather than the short version. However, I make no complaint about that.

In the debates at Second Reading and in Committee, I made it clear that, although the Bill will introduce a new business entity, we are not seeking to rewrite company law or partnership law. We seek to make as few changes as possible, other than those which are necessary to meet the demand from business and the professions for a new entity of this kind. For that reason, we have fundamentally resisted attempts both in Committee and, I am afraid, at this stage, to introduce into the Bill very substantial elements of partnership law, just as we have resisted attempts to amend company law any more than is absolutely necessary for the purpose of this exercise. I shall return to the amendments to Clause 5 before I conclude my remarks.

Two amendments were tabled in Committee: one from the noble Lord, Lord Goodhart, and one from the noble Baroness, Lady Buscombe. Both of them sought to apply, as a default, provisions of the Partnership Act 1890 and the noble Lord and the noble Baroness argued them with considerable force. I explained at the time that an LLP is a body corporate that is treated for tax purposes as a partnership. We strongly believe that it would create substantial uncertainties to apply partnership law in default to a body corporate. Companies Act provisions are being applied to an LLP by the regulations made under the Bill and the application of partnership law in general would lead to confusion as to how the two would interact.

However, we recognise that there is concern among consultees--indeed, that is why we issued a consultation document on the point--that circumstances may arise where, for example, an LLP does not have an agreement between its members, or where the agreement may not cover all situations. That is why in our amendment to Clause 5, which will be debated later, we say that there will be regulations but that those regulations will apply,


    "in the absence of agreement as to any matter, by any provision made in relation to that matter by regulations under section 14(c)".

In other words, we are looking to agreement between the members of the limited liability partnership as the first line of defence and providing for regulations in the absence of that agreement. This series of default provisions in legislation will allow us the flexibility to modify the provisions, as necessary, depending on the practical experience of the operation of LLPs.

I know that the noble Lord, Lord Goodhart, was not convinced by my arguments on the previous occasion. He said that he would bring the matter back on Report; indeed, he has done so. I said in Committee

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that we would consult on the draft provisions, and that is what we are doing. The draft regulatory default provisions were published in February for consultation. A copy was sent to those who participated in the Committee stage and is available in the Library of the House.

The document raises three issues: first, whether the LLP regulations should contain such default provisions, and how they should be drafted; secondly, whether the LLP regulations should impose a duty of good faith between members; and, thirdly, whether, under minority protection, Section 459 of the Companies Act should be applied to an LLP. If the amendment before us were agreed to, it would pre-empt the outcome of that consultation. I cannot see any good reason why we should do so. Moreover, some of the provisions included in the amendment are, in our view, inappropriate for application.

I turn now to the details of each of the provisions in the Partnership Act 1890 that Amendment No. 1 seeks to incorporate into the Bill. Section 19 of the Act provides that mutual rights and duties of partners may be varied by consent. It is implicit in Clause 5 that an LLP is governed by agreement between its members. The part of our Amendment No. 7 to Clause 5 that I read out makes that clear. Indeed, the amendment would make the position even clearer because it provides that the mutual rights and duties of the LLP, and its members, are governed by an agreement between members, or between the members and the LLP, or, in the absence of an issue, by the default provisions contained in the regulations. I cannot agree that it is necessary for Section 19 to be applied to LLPs.

Section 24 contains the rules as to the interests and duties of partners subject to any agreement between them. The draft default provisions that we propose to include in regulations are based primarily on Section 24. We have concentrated on including those areas that were considered by consultees to be the most appropriate for limited liability partnerships. However, it was not considered necessary or appropriate to include the two provisions--Section 24(3) and (4)--which govern the financial relationship between partners and the partnership. We regard this as an area that should best be left to the members to decide between themselves.

Section 25 deals with the terms on which a partner can be expelled from the firm. This, too, is included in the draft default provisions. The noble Lord, Lord Goodhart, referred to Section 26, which is dealt with in Amendment No. 5.

Section 28 requires partners to render to any partner true accounts and full information of all things that affect the partnership--I love the Victorian language. It is our intention to apply by regulation Section 238 of the Companies Act 1985 to LLPs. That will require a copy of the LLPs annual accounts, together with a copy of the auditors' report on those accounts, to be sent to every member of the LLP and every holder of the LLP's debentures within a month of their being signed, and no later than 10 months after the end of the accounting period. In addition, the draft default

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provision requires that the books of the LLP should be kept at the place of the LLP and that every member may have access to, inspect and copy any of them. Therefore, I see no reason for Section 28 to be applied; indeed, I would go as far as to say that the wording is less robust than that which we are including in the regulations. Failure to comply with Section 238 would mean that the LLP and the designated members who were in default would be guilty of an offence and liable to a fine.

Section 29 concerns the accountability of members for private profit and Section 30 deals with the duty of a partner not to compete with the firm. We have suggested including provisions along these lines in the default provisions and we have sought consultees' views. Although the consultation paper suggests that it might be considered inappropriate to make these variable by an agreement between the LLP's members, the paper also points out that Section 19 of the Partnership Act appears to suggest that, even in the case of a partnership, Sections 29 and 30 may be overridden by consent.

Sections 32 and 35 concern the dissolution of a partnership either by expiration or notice, or by the court. An LLP will be a separate body corporate. It is our intention to apply to LLPs, by regulation, the appropriate parts of the Insolvency Act 1986, like those that apply to a company. It would not be appropriate to apply to a body corporate the dissolution provisions of a partnership; for example, it could have detrimental consequences if a member of an LLP were able to dissolve the LLP simply by giving notice to the other members. What if the LLP had entered into contracts with third parties? The LLP's status as a separate legal entity requires that dissolution is dealt with formally.

The noble Lord, Lord Goodhart, referred to the possibility of a member being permanently incapacitated. We believe that the application of the Insolvency Act 1986 would cover the situation because the legislation deals with such circumstances; for example, in a company with two members, one may become incapacitated. However, we shall consider that matter further to ascertain exactly how the partnership provisions and the insolvency legislation interact.

The noble Lord, Lord Goodhart, was good enough to say in his introduction that the difference between us has very much narrowed as regards whether these provisions should appear on the face of the Bill or in regulations. In view of the detailed analysis of the 1890 Act and what we propose to do in regulations, subject to consultation, I hope that I have persuaded the noble Lord that it would be better to leave such matters to regulation.

6 p.m.

Lord Goodhart: My Lords, although I do not know whether the Minister has persuaded me that it would be better to leave this to regulations, he has certainly managed to persuade me--if I ever thought of doing

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otherwise--that this is not an issue on which we should force a Division of the House. Following the publication of the consultation paper, clearly this matter is one that causes us much less concern than was previously the case. The only issue to which we may return on Third Reading is the question of what should happen in the event of incapacity, given the fact that an LLP is clearly intended to be the sort of body within which a small group of people are working together. I understand that it would not necessarily be appropriate to dissolve the LLP or wind it up, but it may be desirable to include some kind of default provision that would enable the interest of someone who has become incapacitated to be bought out--


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