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Lord Burnham: My Lords, I hope that this order will apply to travellers on the Eurostar and not under it. This is an uncontroversial order but it is extremely high profile. Therefore, I have just one question for the noble Lord which I hope he will be able to answer unequivocally. Does he believe that the order will help to ensure that unfounded asylum seekers are stopped by the French authorities on their side of the tunnel?

Lord Bassam of Brighton: My Lords, I believe that to be the case and that it will be very effective in that regard.

Lord Goodhart: My Lords, we too are happy to support the order. However, I make only one comment: this order was included in the list of orders to be dealt with today only at very short notice, which made it difficult to give what is an important order the study it deserves.

Lord Ampthill: My Lords, my memory is a bit hazy and I hope your Lordships will forgive me for that. When I chaired the Select Committee on the Channel Tunnel Bill 11 years ago we strongly recommended that British immigration officers should travel on the train. Has that been implemented? It would seem to be an economical way of dealing with the problem. If people are discovered between Paris and Sangatte, they can be decanted at Sangatte and not go through the rigmarole that is implicit in the order.

Lord Bassam of Brighton: My Lords, I apologise, first, to the noble Lord, Lord Goodhart, for the way in which these matters had to be brought forward. They are widely recognised as being of crucial importance and there is urgency to this order. It follows swiftly on the discussions that took place at Cahors, which led to this happy situation in which the French will work much more closely with us to ensure that immigration control is not abused in the way it has been in the past, and in particular Eurostar itself is not abused.

In relation to the point made by the noble Lord, Lord Ampthill, my understanding is that immigration officials can travel and work on the trains in the way in which the noble Lord suggests. But we need the arrangements under this order in place so that their work and efforts can be that much more effective. We believe that they will be effective and that some of the matters considered by the Select Committee chaired by the noble Lord, Lord Ampthill, are now beginning to fall into place.

On Question, Motion agreed to.

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Limited Liability Partnerships Regulations 2001

12.35 p.m.

Lord McIntosh of Haringey rose to move, That the draft regulations laid before the House on 15th January be approved [3rd Report from the Joint Committee].

The noble Lord said: My Lords, I should start by explaining why we are considering only one set of regulations today when an earlier Order Paper showed that we would also be looking at the fees regulations. Unfortunately there was an error in the regulations and they had to be withdrawn. A new set of regulations was laid on 14th March and will be considered by the Joint Committee on Statutory Instruments next week. I apologise for the confusion.

The Chancellor announced in his Pre-Budget Report that the Limited Liability Partnerships Act 2000 will come into effect on 6th April. It will introduce for the first time in nearly a century a change to business entities in Great Britain. That is the result of over three years of consultation and debate with a wide variety of consultees. Detailed legislative proposals have been in the public domain since 1998, including a draft of what is now the LLP Act and these regulations. The Bill and the regulations were scrutinised shortly afterwards by the Trade and Industry Select Committee. The Bill also received close and thorough scrutiny in the other place and by Members of this House.

Firms that decide to become an LLP will enjoy the organisational flexibility and tax treatment of a partnership with the limited liability of a company. That means that the LLP will be a separate legal entity owned by its members. Therefore the LLP will be able to enter into contracts and hold property.

It is important to strike the right balance between the interests of those who want to carry on business as an LLP and those who will do business with them. I believe that the LLP Act, together with these regulations, achieves that objective. That is why it is important to apply very substantial parts of companies' legislation to LLPs with those modifications necessary to reflect the differences between a company and an LLP. The LLP does not provide a shield behind which the individual negligent professional can hide. Typically a client will have contracted with the LLP itself and will in the first instance therefore usually look to the LLP for redress under contract law. But this does not preclude action in tort against the negligent member who has assumed personal responsibility for his actions.

Let me comment on the legislative structure we have established for LLPs, including these regulations. The LLP Act provides a framework for setting up an LLP. It defines an LLP as a separate legal entity owned by its members; it sets out the mechanics and requirements for incorporation and establishes the relationship that exists between members, and between members and the LLP.

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The Act also prescribes the scheme of taxation. The Parliamentary Under-Secretary of State for Competition and Consumer Affairs made a commitment during consideration of the LLP Bill in the other place to make clear the Government's approach to the taxation of LLPs and I will come back to that in a moment.

The aim of these regulations is to ensure that an LLP, as a body corporate, will be subject to similar requirements to those made of companies. But because the internal structure of an LLP is not prescribed like that of a company, it has been necessary to modify existing corporate legislation in its application to LLPs. The modifications we have made to companies legislation is only in relation to LLPs; it is not a fundamental change to company law. That must await the outcome of the independent Company Law Review, which will report to the Government in May.

I should comment on two issues relating to the structure of the legislation which were considered when the LLP Bill was before Parliament. The first is the extent to which it relies on the use of regulations. The worry, with which we disagreed, was that there was too great a reliance placed on secondary legislation. When we first decided on how we were going to regulate LLPs, we began from the principle that an LLP was a body corporate and that there should be an equivalent level of regulation applied to LLPs as there is to companies. That is part of the balance to which I referred earlier. What we have is a sensible structure. The essential characteristics, principles and rules for an LLP are set out in the LLP Act. The detail is left to regulation.

Most importantly, if we had done it any other way we would have had a structure which was unwieldy and difficult to adapt. The underlying requirements of company law, insolvency law and partnership law are all capable of change. I mentioned earlier the fundamental review of company law. At the appropriate time we shall need to adapt and apply many of the changes flowing from that process for LLPs. Also, the Law Commission has recently completed a consultation on a far-reaching reform of partnership law. We shall have to adapt that to LLPs in due course.

Insolvency law does not stand still. The new Insolvency Act 2000 modified the Insolvency Act 1986 and will be applied to LLPs as appropriate by statutory instrument once the secondary legislation has been made. In all three areas of the law, the changes will come before Parliament. Their subsequent application to LLPs then becomes largely a technical job, which is appropriate for secondary legislation.

The second point, which has been made on the structure of the regulations, is that legislation by reference is unhelpful to users. I sympathise with that argument. However, the alternative would have been to produce a set of regulations that run to hundreds of pages, much of which would reproduce existing law. That would have had the approach of completeness. However, the approach we followed highlights, for

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advisers who are familiar with company law, the differences in their application to LLPs. We understand that commercial publishers are likely to produce helpful consolidations of the law as it applies to LLPs.

I do not know how much of the detail your Lordships wish me to go into. Perhaps I may talk about three main strands in the regulations and then say a word about taxation. The first strand relates to accounts and audit. Part II of, and Schedule 1 to, the regulations apply Part VII of the Companies Act 1985 and set out the accounting and audit requirements for LLPs. These are broadly in line with the requirements placed on companies which ensure that LLPs have the same level of financial disclosure.

The second strand is contained in Part II of, and Schedule 2 to, the regulations, which apply the remaining sections of the Companies Act 1985 together with Part II of the Companies Act 1989 and the Company Directors Disqualification Act 1986 with appropriate modifications. That part of the regulations sets up a regime for the running of LLPs which is closely allied to that of a company.

The third strand is contained in Part IV of, and Schedule 3 to, the regulations and applies the first and third groups of parts of the Insolvency Act 1986 to LLPs. Those provide that LLPs are treated similarly to companies on insolvency issues, such as company voluntary arrangements, administration orders, receivership and winding up.

I shall pass over issues relating to financial services and LLPs and default provisions. I can comment on those if necessary. I stated that I would confirm the Government's approach to the taxation of LLPs; LLPs are a new business structure. Their tax treatment is an important factor for the businesses that are contemplating using them. There has been consultation over a long period to ensure that the tax treatment of LLPs balances the desires of business with the need to guard against tax loss. Most recently, in the Budget last week, the Inland Revenue published a Budget Note on the taxation of LLPs.

The LLP Act introduced new sections into tax legislation to the effect that an LLP carrying on a trade, profession or business with a view to profit will be taxed as a partnership. The LLP structure is available to all businesses, as we recognised that it could be attractive to others and not just professional firms. However, it has never been our intention to allow the formation of LLPs to be driven by their tax treatment, or to open up the likelihood of significant loss of tax revenue. The review of tax treatment that was announced during the passage of the LLP Bill identified that the use of LLPs as property investment vehicles opened up significant scope for tax loss. By "property investment", I refer to a business consisting wholly or mainly in the making of investments in land or buildings.

The tax loss would arise if tax-exempt bodies such as pension funds, the pension business of life insurance companies and tax-exempt business of friendly societies were to invest in property via LLPs, instead

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of through property investment companies. The proposals concerning property investment outlined in the Pre-Budget Report and confirmed in the Budget Note are to prevent that tax loss and to avoid creating distortions in the investment market. They do not restrict what businesses LLPs may choose to carry on and they will not be relevant to the vast majority of businesses contemplating using LLPs. They will not affect the current arrangements used by pension funds, so there is no question of tax proposals removing a tax break that is currently enjoyed. As primary tax legislation, they will be subject to parliamentary scrutiny.

The regulations undoubtedly add a fair number of pages to the legislation on LLPs, but they follow closely from the drafts we exposed for consultation both before and during the passage of the Bill. They strike a balance between the interests of those wishing to form LLPs and those wishing to have dealings with LLPs. I believe that it is the right balance. I beg to move.

Moved, That the draft regulations laid before the House on 15th January be approved [3rd Report from the Joint Committee].--(Lord McIntosh of Haringey.)

12.45 p.m.

Lord Burnham: My Lords, I thank the Minister for that explanation. Earlier he seemed to be preening himself on the brevity of the regulations but at the end of his comments he seemed to admit that they are not so brief. I make that point because when the Bill, which was a mere 19 clauses, one schedule and 16 pages, left this House, it had several hours at Second Reading, three days in Committee and several more hours on Report and Third Reading in the other place. However, today this draft SI covers 57 pages, 10 regulations and six schedules. It covers the meat of the whole LLP regime, and a substantial part of the regulations which should have been incorporated into primary legislation.

The noble Lord listed the regulations which it is necessary to have at hand for a study of LLPs. But it is worse than that. To determine the company law provisions that apply, one must refer not only to Schedules 1 and 2 to which provisions do and do not apply, and which provisions are amended and how, but to Regulation 3 of the regulations which we are discussing today. Regulation 3 states:

    "references to other provisions of the 1985 Act and to provisions of the Insolvency Act 1986 shall include references to those provisions as they apply to limited liability partnerships in accordance with Parts III and IV of these Regulations".

We are particularly concerned at the introduction of criminal sanctions in a matter involving commercial affairs by means of secondary legislation. We accept that as a matter of convenience sanctions imposed by the Companies Act 1985 as amended, which was duly debated in both Houses, could conveniently be included in the regulations if they are merely producing identical provisions to the Companies Act and simply altering the terminology as appropriate. For instance, the word "members" could be substituted for "officers" or "directors".

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However, I should like to draw the attention of the Minister to page 23 and the reference to subsection (5) of Section 391A of the Companies Act. The regulation reads:

    "For subsection (5) substitute:

    'If a copy of the representations is not sent out as required by subsection (4), then unless subsection (6) applies, the limited liability partnership and any designated member in default commits an offence. A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3".

But subsection (5) of Section 319A merely provides:

    "If a copy of any such representations is not sent out as required because it is received too late or because of the company's default, the auditor may (without prejudice to his right to be heard orally) require that the representations be read out at the meeting."

This is the introduction of a fine and a criminal record when no such sanction applies against company directors. When my honourable friend Nick Gibb raised the matter in another place, the Minister said that he understood that it was currently an offence under the Companies Act and that it was a proper function and a duty to make those representations as appropriate. He therefore did not see that it was a new crime, although it was a reference that was not included in earlier publications. So far as we can tell from the section of the Companies Act I have quoted, contrary to what the Minister said in the other place, it is not an offence under that Act.

I am relying on a copy of the relevant section which my noble friend Lady Miller obtained from the Library on Wednesday. Will the Minister explain the discrepancy before he asks us to approve this new criminal offence without primary legislation?

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