Select Committee on Delegated Powers and Deregulation First Report



ANNEX 1

LIMITED LIABILITY PARTNERSHIPS BILL [HL]

Memorandum by the Department of Trade and Industry

Introduction

1.  This memorandum gives an account of the delegated powers proposed to be taken in the Limited Liability Partnerships Bill introduced into the Lords on 23 November 1999.

2.  The Bill provides for the creation of a new form of legal entity known as a limited liability partnership ("LLP") which will be a body corporate and exist as a legal person separate from its members. The essential feature of an LLP is that it combines the organisational flexibility of a partnership with limited liability for its members. The Bill provides primarily for the formation and registration of an LLP, its existence as a separate legal entity, the relationship between members and the LLP, eligibility to be a member and taxation. Briefly, powers are included in the Bill primarily to apply considerable quantities of primary legislation, with the intention of ensuring that limited liability partnerships are regulated similarly to companies. A duty is included to apply certain elements of insolvency law to ensure creditor protection. Where power exists to make regulations which are not company or insolvency law, the regulations would be subject to affirmative resolution.

3.  More specifically, the Bill contains the general principle that the relevant parts of insolvency law and law relating to companies and partnerships may be applied with appropriate modifications to LLPs. In addition, clause 13(1) of the Bill requires the Secretary of State to make provision applying or incorporating, with such modifications as appear appropriate, Parts I to IV, VI and VII of the Insolvency Act 1986. The principle as to the application of these provisions may, therefore, be subject to debate in Parliament.

4.  It is proposed to set out the detailed application of the provisions of the Insolvency Act 1986 and the Companies Act 1985 in regulations, rather than on the face of the Bill. There are a number of reasons for this. The policy for regulating a limited liability partnership has been predicated on the fact of its being a body corporate. The intention, therefore, is to apply to limited liability partnerships an equivalent level of regulation as applies to companies, by modifying as appropriate the relevant legislation affecting companies. These requirements have already been the subject of Parliamentary debate, and Parliament has agreed that the principles they contain are appropriate to regulate a limited liability entity. In addition, the provisions are extensive and would greatly lengthen the Bill - the current draft of the regulations runs to over 100 pages. Furthermore, it is essential to retain the flexibility to change the requirements for LLPs as company law and insolvency law changes. Specifically, a fundamental review of company law is in progress, and it seems wise to recognise that the provisions we wish to apply are under consideration elsewhere, and may themselves be subject to change in a few years time.

5.  We believe it is important, however, particularly in the context of transparency of Government, to set out our intentions clearly. We have therefore already published draft regulations twice in full. This has allowed thoughtful and detailed debate by consultees. It is unusual to have reached this level of preparation at this stage. A copy of the regulations is attached here by way of completeness[7].

6.  The powers in the Bill to make regulations or orders by statutory instrument are in clauses 13(1), 13(2), 14, 15(1) (which power is further detailed in 15(2)), 16(2) and 16(3). Clause 18 contains the power to commence the Act.

7.  By virtue of clause 16, all of the delegated powers in the Bill would be subject to a Parliamentary procedure save, as is usual, the power to make commencement orders.

Detail

CLAUSE 13 - INSOLVENCY AND WINDING UP

8.  Subsection (1) requires the Secretary of State to make provision applying or incorporating, with such modifications as appear appropriate, Parts I to IV, VI and VII of the Insolvency Act 1986.

9.  Subsection (2) enables the Secretary of State to make regulations about the insolvency and winding up of LLPs and oversea limited liability partnerships by applying any law relating to the insolvency or winding up of companies or other corporations.

10.  The purpose of subsections (1) and (2) is to ensure that limited liability partnerships - as a separate legal entity - can be made subject to provisions on insolvency and winding up. The reason for making subsection (1) a duty to apply specific parts of the Insolvency Act 1986 is to put beyond doubt the question of our intention to provide comparable creditor protection to that provided for a company, by regulating on voluntary arrangements, administration, receivership and winding up in the same way as for companies. It is proposed that the first set of regulations will impose liability to contribute by adapting section 214 of the Insolvency Act 1986, and in addition impose a further obligation, which can be found under s214A of the draft regulations.

11.  Subsection (2) allows us to go wider than the stated Parts of the Insolvency Act should it prove necessary to do so - this is, for example, with a view to giving us the option to take account of developments in common law. It also provides for us to regulate limited liability partnerships registered overseas but operating in the UK. Our intentions on this are set out in more detail under subsection (3) below.

12.  Regulations made under section 13 are generally made under the negative resolution procedure, except where regulations include any provision imposing liability on the part of members of a limited liability partnership to contribute to its assets in the event of its being wound up, and where regulations are made on oversea limited liability partnerships. Both these areas will be subject to affirmative resolution procedure as seems fitting given their potentially far-reaching effect. Given that the intention is that the first set of regulations will apply sections 214 and 214A, all parts of the first set of regulations will be subject to the affirmative resolution procedure.

13.  Subsection (3) defines an "oversea limited liability partnership" as "a body incorporated or otherwise established outside Great Britain and having such connection with Great Britain, and such other features, as regulations may prescribe." The creation of a British limited liability partnership makes it necessary to consider the regulation of oversea entities operating here. In particular, we have in mind the desire to ensure a level-playing field with British business, and to ensure an appropriate level of regulation - our particular focus is on treatment of oversea limited liability partnerships in a winding up, and financial disclosure (see also the detail on clause 14 below).

14.  This is not, however, a straightforward area in which to legislate. The most obvious difficulties are defining the class of entity which it would be necessary for us to regulate - there are a myriad of entities both in Europe and the United States of America which contain some of the features of our proposed LLP, but none of them bearing close comparison. Generally, they range from bodies corporate to true partnerships with a limited liability shield. Further, there is a need to provide appropriate regulation depending upon the nature of the problem - we have in mind here particularly the risk that some British firms may wish to register in oversea jurisdictions in order to avoid the effect of British legislation. It is difficult to predict how commercial vehicles might evolve, particularly in off-shore locations, and therefore important that the power enables us to achieve whatever regulation might be appropriate.

15.  The treatment of oversea entities generally is a complex area of legislation, and the treatment of oversea companies is being considered by the Company Law Review. At present many oversea limited liability partnerships are likely to be treated as unregistered companies, and it seems prudent to await the outcome of the Company Law Review's deliberations on the matter before considering legislation. We have publicly stated that we have no immediate intention to regulate in this area. Given its complexity, we undertake to consult widely before laying regulations. As noted earlier, any regulations made relating to oversea limited liability partnerships will be subject to affirmative resolution procedure.

CLAUSE 14 - APPLICATION OF COMPANY LAW ETC.

16.  This clause enables the Secretary of State to make provision in relation to limited liability partnerships and oversea limited liability partnerships: by applying or disapplying, with appropriate modification, any law relating to companies or other corporations; and by applying any law relating to partnerships.

17.  The purpose of this provision is to apply, in particular, relevant provisions from the Companies Acts 1985 and 1989. This will ensure that a limited liability partnership is treated similarly to a company on, for example, financial disclosure - which has been traditionally seen in UK law as the quid pro quo for limited liability. The intention is to apply also other provisions such as on the appointment of auditors, investigation, and registration of charges. The power extends to the law relating to corporations because, as a limited liability partnership will be a body corporate, potentially the law relating to corporations applies to it. Predominantly the law of corporations is contained in common law, not statute, and it is important to have power to be able to modify as necessary its application to limited liability partnerships.

18.  Partnership law is relevant because it is anticipated that many partnerships will convert to LLPs. Members of a limited liability partnership will be free to agree their internal arrangements in the same way as partnerships, and in considering the rights and duties between members, the Courts may refer to partnership law. In particular, we are considering the value of providing default provisions, in the event that the members of an LLP form an LLP with either an inadequate agreement or no agreement at all. An option being considered is modelled on section 24 of the Partnership Act 1890 and, like that section, would only apply in so far as there was no agreement on those matters. A small working group comprising officials and representatives from the legal profession is looking at this.

19.  The clause 14 powers are subject to the negative resolution procedure, save to the extent either that the provisions apply the law on corporations and partnerships, or that the provisions apply to oversea limited liability partnerships, where in both cases the affirmative procedure applies.

CLAUSE 15 - CONSEQUENTIAL AMENDMENTS

20.  Subsection (1) enables the Secretary of State to make such amendments or repeals as appear appropriate in consequence of the LLP Bill or regulations made under it. The intention is to apply, in particular, the Company Directors Disqualification Act 1986, and the Business Names Act 1985, both of which are important to ensure parity of treatment with a company. Whilst we expect to provide for at least most of the necessary consequential provisions, it is possible that further provisions may be required in future after the Bill is passed. The power would enable Ministers to make such provision.

21.  Subsection (2) provides that the regulations may, in particular, make amendments and repeals affecting companies, other corporations and partnerships. This is to provide for the situation where limited liability partnerships and companies interact, for example the insertion of the LLP into a company group structure as envisaged in section 736 Companies Act 1985.

22.  The power is subject to affirmative resolution procedure.

CLAUSE 16 - GENERAL

23.  Subsection (2) enables the Secretary of State to make regulations for dealing with non-compliance with any regulations (including the creation of criminal offences), impose fees and provide for the exercise of functions by persons prescribed by the regulations. A provision of this kind is standard and puts it beyond doubt that we can apply to limited liability partnerships similar provisions which apply to companies.

24.  Subsection (3) provides that the regulations made by the Secretary of State under the LLP Bill may contain appropriate consequential, incidental, supplementary or transitional provisions or savings and make different provision for different purposes. Although, it is not in fact intended to have transitional provisions at the time of introduction of the Bill, these may prove necessary in the future - for example, when we regulate on oversea limited liability partnerships.

25.  The powers contained in clause 16 are subject to the negative resolution procedure.

CLAUSE 18 - COMMENCEMENT, EXTENT AND SHORT TITLE

26.  Subsection (1) enables the Secretary of State to commence the provisions of the Bill on such days as he may appoint.

27.  It is anticipated that each of the provisions will be commenced at the same time and that the commencement will follow the passage of the Bill. In deciding when the provisions are to come into force, the Secretary of State will need to have regard to progress on implementing the necessary mechanisms to deal with limited liability partnerships - for example, the setting up of a registry. Ministers, therefore, believe it is important for there to be a commencement power in the Bill.

28.  The power is not subject to any Parliamentary procedure.

November 1999


7  "Limited Liability Partnerships - Draft Regulations, A Consultation Document"; published July 1999, ref URN 99/1025 - also available from the House Library or from the Department of Trade and Industry Back

 
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