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Earl Ferrers: My Lords, so far I have not taken any part in this Bill and do not profess to understand it. I rise merely to question the English of the amendments in the names of three distinguished noble Lords. Amendment No. 1 provides that,

    (a) death".

If he has died, ipso facto how can he possibly be a member? I would have thought that that was common sense. If the individual has died the future tense--"shall cease to be a member"--is incorrect. I was glad that the noble Lord, Lord Goodhart, realised that the amendments could not be accepted as they stood. I rather agree with him.

Lord Goldsmith: My Lords, throughout past debates I have been impressed by the care and thoughtfulness of the amendments proposed. I have been privileged to play a small part. However, I cannot agree with the noble Lord's proposal.

There seem to be two different questions. First, what, if any, part should be played in the management of an LLP by the representative of a deceased, bankrupt or otherwise insolvent partner? That is dealt with adequately by Clause 7 which provides that there shall not be interference in the management of the business by such a representative. That deals with the management side.

Secondly--it is the question to which the noble Lord draws attention--what should happen to the share of such a person? Both as a matter of principle and of practice the proposed amendment is not right. As a matter of principle it does not seem obvious that those who have chosen a method of corporate entity through a limited liability partnership should necessarily receive back either in their interests or the interests of their creditors what they have put into it. Even in the example of the three-person restaurant to which the noble Lord refers, it may be hard on the other two to provide by a default provision that the restaurant may have to come to an end because one of them has got fed up with the idea of being involved.

As a matter of practicality, the proposal creates enormous difficulties. The noble Lord was concerned that the court would have an impossible task (if I noted his words correctly) in deciding what should happen. I regret to say that from my perspective the court would have at least a very difficult task in following through the ideas proposed by the amendment. It proposes that the partnership member shall be entitled to receive from the partnership an amount equal to the value of his share of the capital. From my professional experience--I have dealt with a number of cases of valuation of shares in businesses--such valuations are particularly difficult to achieve. On what basis? On the net asset value basis? Is that a forced sale? Is it a going concern? Is it a share if it were sold on the open market? What account is to be taken of the fact that, as the amendment proposes, there is to be a reduction in the value resulting from someone ceasing to be a member? Who is to do the valuation: the court; a valuer? In my experience such matters are dealt with in

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a well-regulated organisation by a clear and detailed clause which often provides for an expert to deal with them.

I believe that the matter would have to be dealt with by agreement between the individuals at the time they set up the limited liability partnership. It would seem difficult to lay down any satisfactory default provision. I cannot support the amendment.

3.45 p.m.

Lord McIntosh of Haringey: My Lords, the noble Lord, Lord Goodhart, has no need to apologise to the House for bringing forward these amendments at this stage. Clearly these are matters which he considers important which did not arise in our earlier considerations. It is entirely proper for him to bring them forward.

Perhaps I may say this to the noble Earl, Lord Ferrers. In this case I do not think that the word "shall" implies the future--or, in the circumstances of which he speaks, the after-life. This is an imperative "shall" rather than a future "shall".

I understand well the desire of the noble Lord, Lord Goodhart, for members to be able to leave a limited liability partnership receiving on departure a fair value for their interest in the firm. We would expect, as he expects, that in most cases the members of an LLP would include in their agreement the terms on which a member may depart. But his concern is that in firms where no agreement exists between members, a departing member may be forced to accept unfavourable terms if he wants to be bought out. I hope that I have that right.

The comparison has been made with the position of a partner in a partnership where, subject to agreement, the partner has the power to dissolve the firm and therefore achieve a fair result. We believe that to provide a member of a limited liability partnership with the right to dissolve the firm would be inappropriate. The LLP will be a separate legal entity which might itself have contractual obligations. There is the rub. The noble Lord, Lord Goodhart, would like to see partnership law applied to what will be a corporate entity in circumstances where we think it would be inappropriate. Instead, as he has said on many occasions during the passage of the Bill, we have looked to the treatment of companies.

It is perhaps worth emphasising the point that the problem identified here is a general one which does not arise only for members of limited liability partnerships. The prospect of a buy-out provision has been considered for companies by the Law Commission and the Company Law Review. The Law Commission stopped short of suggesting a statutory entitlement to buy out in its report on shareholder remedies and instead proposed an article for Table A which would require the shareholders to make positive choices, in particular on valuation, in order to bring the article into effect.

The recently published consultation paper of the Company Law Review thought that even this was undesirable on the ground of the impossibility of

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prescribing a fair exit regime which would satisfy the full diversity of companies and on the basis that it would be a trap for ill-informed founders. Clearly, while the problems the noble Lord, Lord Goodhart, described do exist in companies, the potential desirability of a statutory provision has not yet been considered to outweigh the considerable practical difficulties it might create. It would be unwise in the concept just of LLPs to try to decide this issue.

Perhaps I should touch on some of the difficulties as they would affect limited liability partnerships. The amendment to Clause 5 would have the effect of placing an obligation on the LLP to buy out the departing member's share. How would we take account of the fact that in some LLPs the members' interests may be structured so that members have different entitlements to profits and capital, or have entitlements which may be deferred? How should a member's share be valued? My noble friend Lord Goldsmith raised the point. Who should make the valuation? How does one deal with goodwill? A statutory provision will inevitably not provide an answer to these questions that is appropriate in the large variety of circumstances which may arise. There is a considerable danger that a statutory provision which provides the right to be bought out but which does not provide a clear mechanism for calculating the buy-out price will simply give rise to litigation.

We need also to recognise the interests of the firm. How would we prevent the risk that the value of an outgoing member's share was sufficient to put the LLP into financial difficulties? That is exactly applicable to the example given by the noble Lord, Lord Goodhart, of three members of an LLP running a restaurant. This could have undesirable consequences for the employees of the LLP. Creditor protection is also an issue since there could be a conflict with the provisions designed to secure creditor protection, such as Section 214(4)(a) of the Insolvency Act 1986 which we intend to apply by regulation.

None of this is to say that we do not recognise the concerns expressed in the amendments; but it must be a question of balance. The aim of the noble Lord, Lord Goodhart, is to deal with the situation where not only is there no agreement between members but members have been unable to reach reasonable agreement when presented with the difficulty of one of them wanting to depart. He is not concerned with the generality of LLPs but with a small, poorly-run LLP which finds itself in an intractable position of disagreement. Would it be right in those circumstances to overlook all the difficulties I have set out and impose an entitlement to buy out the departing member's interest?

Again, as my noble friend Lord Goldsmith said, why should someone who has entered into business with others, setting up a registered legal entity with a recognised name and publicly notified membership, think that at will he can walk away with his investment intact? We must not forget that in establishing the LLP, the members created an entity which has a legal life independent of their own, not only in the interests

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of the departed and existing members which need to be considered, but also those of the LLP itself and, as I have said, its clients and employees.

More generally, minority protection is something we have been considering in the context of the consultation of the draft regulatory default provisions governing the relationship between members. The noble Lord, Lord Goodhart, referred to Section 459 of the Companies Act 1985. It may reassure him to some degree if I say that we are minded to apply by regulation this section which would have the effect that a member of an LLP would be able to apply to the court for an order on the ground that the affairs of the LLP were being, or had been, conducted in a manner which was unfairly prejudicial to the interests of its members generally or of some part of its members, including at least himself.

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