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Baroness Hayman: My Lords, the communique which the French Government issued last night stated that they were not in a position to lift the embargo due to the lack of sufficient guarantees on the definition and implementation of the test programmes, which must be improved and enlarged. They state that to that end it appears necessary for the Commission to organise working meetings between scientific experts, notably British and French. Secondly, they mention the adoption of a Community legislative base ensuring traceability and compulsory labelling in Europe for British beef and British meat products. I do not know whether the noble Lord, Lord Soulsby, will consider those to be the scientific bases for which he asked, but those points were raised in the communique issued by the French Government.
Lord Monson: My Lords, I want to put two questions to the Minister. First, are the French continuing to prevent British lorries carrying British beef travelling across France to export markets in, say, Italy, Switzerland or Spain, as was the case earlier this year?
My second question has nothing to do with the noble Baroness's department. Would she, as a Member of this House, agree that the Refreshment Department--and I am pleased to see the noble Lord, Lord Colwyn, in his place--ought forthwith to cease buying French wine, French cheese and anything else French until this illegal ban is lifted? After all, plenty of excellent alternatives are available.
Baroness Hayman: My Lords, I am equally delighted that the noble Lord, Lord Colwyn, is in his place because he will have heard what was said by the noble Lord, Lord Monson, and will have taken cognizance of it. However, individual consumers will do as they will. We should not believe that this is a matter of supporting the exports of one country or another. It is much more important and wide-ranging; it is an issue of whether one member of the European Community obeys Community law. I do not believe that we should take the matter down to another level.
Lord Pearson of Rannoch: My Lords, I join my noble friend Lord Marlesford in expressing regret that it is the noble Baroness the Minister who has had the unpleasant duty of reading out the Statement. I have one difficult question to ask her. We have heard so much about the Government's much vaunted charm offensive in the European Union, but does she agree that this episode proves that that charm offensive--at least with the French--has failed?
Furthermore, there are wider aspects to this unfortunate question in the background, in respect of which the Government's charm offensive is also failing. We have the saga of the withholding tax, which
Baroness Hayman: My Lords, the Government will stand up for the British national interest and for legitimate British interests within Europe. As regards a charm offensive, I must say that the anti-charm offensive of the previous government left Britain isolated in Europe. Today, France is isolated and on this issue we have the support of all our fellow members and of the Commission.
Lord Graham of Edmonton: My Lords, will the Minister always bear in mind that the genesis of the problem lies in the failure of the previous government to take adequate action when BSE was discovered? The failure of the previous government has all along the line led to these difficulties. Will she take it from me that, speaking on behalf of no one in particular, I believe that the British people fully understand not only the frustration of the farmers and of the Government but also why we are in this mess? It is not the fault of this Government; it is the fault of the French Government. Ultimately, the genesis of the problem lies with the previous administration of the party opposite.
Baroness Hayman: My Lords, a previous speaker suggested that this was not the time for recrimination and, in general, that is my view. BSE has been a national tragedy. It has been a tragedy for our farming community and for 47 families and we still do not know how many others may have been affected. In those circumstances, and seeing the many ways in which the tragedy has manifested itself--and this is only one aspect of it--it behoves all of us to have a little humility in asserting that people are to blame for one particular episode.
Lord McIntosh of Haringey: My Lords, I beg to move that this Bill be now read a second time. The concept of a Limited Liability Partnership Bill has received a great deal of close attention before being put to the House today. The measure was proposed by the previous administration, who set out the principles of a limited liability partnership in a consultation document at the end of their term in office. There was an overwhelming response to that document in favour of the introduction of limited liability partnerships in Britain.
This Government agreed with the inherent merit of the proposal, and in September 1998 a Limited Liability Partnerships Bill was published in draft for the first time. It received careful scrutiny from consultees, particularly professionals such as lawyers, accountants, architects, actuaries and surveyors, and also academics, trade associations and those representing the interests of potential investors, customers and suppliers.
The process was further refined in the new pre-legislative scrutiny process, which was undertaken by a committee of the other House. This proved to be a valuable contribution to the evolution of the Bill. A revised draft was published for information in July, and this is the version before the House today. There is little doubt from the consultations that this measure is something which would be warmly welcomed by the business community, but I also want to emphasise that we believe we have struck an appropriate balance between their interests and those of customers and suppliers who are potential creditors.
Perhaps it would be helpful to understand the evolution of the Bill if I briefly touch on the context in which it originally arose. In 1996 the Department of Trade and Industry published for consultation an authoritative investigation by the common law team of the Law Commission into the law of joint and several liability, a particularly complex area of common law. The report looked at the problems joint and several liability causes for professional defendants and in particular the fact that a particular defendant may be held liable for the whole amount of any damage suffered by the plaintiff, notwithstanding that other wrongdoers were also involved.
Overall the report concluded strongly against reform, the main reason being--I recognise that this is a very simplified summary of the report's detailed conclusions--that change towards a system of proportional liability would favour the wrongdoer at the expense of the plaintiff. Although the remit of that investigation did not extend to the joint and several responsibility within partnerships, the DTI took the opportunity to consult on the distinct but related question of whether to amend the law in Britain to allow limited liability partnerships.
More generally, it is perhaps surprising to note that there has been no fundamental change to business entities in Great Britain since 1907, when the Limited Partnerships Act was introduced. And, of all the different forms of entity available, it is only the company which offers limited liability for all its members. Many people have remarked on the oddity that the only way to obtain limited liability is by organisation as a company. There is no doubt that limited liability is a privilege, but if appropriate safeguards are in place why should a business have to organise itself as a company?
I turn now to some of the detail of the Bill, and that will allow me to set out more of the detailed thinking behind it. The limited liability partnership would be a new corporate vehicle to which large portions of the Companies Act will apply, but it would retain certain aspects of a partnership. The LLP would be a separate legal entity from its members and ownership would rest with the members. Members would be free to agree between themselves their relationship with each other and they would be treated as agents of the firm.
However, unlike a partnership, the liability of individual members would be limited. Clearly that limitation of liability brings with it certain responsibilities: a need to ensure that the client is fully aware of the nature of the organisation with which they are dealing, and a need to ensure against abuse. As a result, although the LLP offers limited liability to its members, each member will owe a duty of care to his or her clients and, in the event that they are negligent, they will be fully liable to the extent of their personal assets, although fellow "innocent" members would have limited liability. Since members would be agents of the limited liability partnership, that partnership itself would also be liable for the actions of its members. Claims could be made against a limited liability partnership to the full extent of its assets.
The Bill also requires that the name of an LLP be followed by the words "limited liability partnership" or the acronym "LLP", so as to advertise its status. Also the Bill requires that the LLP be registered at Companies House, along with a list of its members, and that these records be kept up to date. The intention is to apply a further tier of creditor protection by means of secondary legislation. We plan to require financial disclosure equivalent to that required of companies and also to provide that members of a limited liability partnership could be sued for wrongful and fraudulent trading. We also plan to ensure that members could be disqualified from being members of an LLP and directors of a company.
Regulations would also provide for dealing with insolvency and the winding up of the entity, and would include provision to deter the siphoning off of funds by members, to the detriment of creditors. These proposed regulations have been published in draft for consultation twice, most recently in July this year.
I recognise that a considerable weight of material will be left to regulations, but I am pleased that the Delegated Powers Committee has concluded that the provision for parliamentary control in the Bill is appropriate. It has, however, suggested that if the intention is to provide only for summary trial and a fine, such a limitation should appear in the Bill. But it is our intention to apply to LLPs the same offences as apply to companies under the Companies and Insolvency Acts, so as to ensure parity of treatment. It is important that members of an LLP are not treated more favourably than directors of a company. In some cases these offences are triable on indictment and punishable with imprisonment. For example, Section 458 of the Companies Act 1985 makes it an indictable offence to carry on the firm's business with the intent to defraud creditors.
The application of these offences in the first set of regulations will be subject to affirmative resolution. Were we at any stage to create new offences, these would also be subject to affirmative resolution.
An LLP will be treated for tax purposes as a partnership. This is because although it will be a body corporate, unlike a company where broadly, shareholders receive a dividend and directors receive a salary, the members of an LLP will receive a profit share. Partnerships have been exploited in the past for purposes of tax avoidance. We intend to amend the Bill to ensure that limited liability partnerships cannot be used for tax avoidance.
When we published the revised Bill in July, there were a number of comments from consultees, as a result of which we are considering some further minor amendments to the Bill. These would be intended to ensure that the legislation more effectively achieves the policy intentions. In particular, again in the context of taxation, we will be bringing forward amendments on the tax treatment to ensure that the transfer of a business between a partnership and an LLP is genuinely tax neutral.
I should like to turn to a couple of areas where no statutory provision is proposed, and to explain the reasons for this. First, as regards the regulation of professionals, as I have said, the possibility of a limited liability partnership arose in the context of reviewing the law of joint and several liability and its particular effect on professionals. It is fair to say that the main interest in LLPs has come from the professional business community. We considered carefully, therefore, during the consultation process whether the LLP should be restricted to professionals and whether professionals in a limited liability partnership should be subject to particular regulation. We concluded against both these points.
Most professionals, for example, accountants, architects, surveyors and even solicitors, now have the option to incorporate, and the principle that they may operate with limited liability has been accepted for some years. However, few have chosen to become companies. That may be because it is considered that the structure of a company does not lend itself to successful professional/client relationships, because
In considering whether the Bill should provide for professional regulation of a limited liability partnership, we concluded that any regulation of the entity would be likely to add a new and additional layer of regulation over and above what was already being required. Why should, say, an auditor in an LLP be subject to a greater degree of regulation than an auditor in a partnership? Both would be fully liable for their own negligence and clients of an LLP would have the benefit of financial disclosure--a requirement not made of partnerships. Professional organisations such as the Law Society and the Institute of Chartered Accountants clearly will continue to regulate their members, regardless of whether business is being carried on through a partnership, a company or a limited liability partnership. We should be surprised and concerned if the introduction of LLPs were to cause any reduction in the regulation of the activity. The consultation process has not led us to believe that that will happen.
Secondly, it has been argued that the Bill should include added protection for creditors, perhaps through a statutory requirement for capital main- tenance or a guarantee from members. We have considered that point carefully and have decided not to include such a provision. An immediate reaction might be to think that that is rash. In particular, that might be felt by those who are familiar with the provisions of the Companies Act 1985 which regulate capital maintenance in companies. I do not want to go over the arguments now, but I note that an LLP will have no shareholders and we doubt very much whether a realistic level of capital maintenance exists to provide reasonable protection for creditors without there being a detrimental impact on the firm's ability to set up in and carry on business.
I hope it is clear from what I have said that the Bill has received much thought and attention from all-comers, including free advice from many highly paid professionals. Some of the issues are complex but I believe that the extensive consultation and, not least, the attention from Members of the other House have produced a balance which is practical and appropriate, taking account not only of the needs of business but also of its customers.
As I said at the start, the Bill represents one step, albeit an important one, in our commitment to a modern legal framework. The LLP Bill is being taken forward at the same time as the review of company law. While the Bill is important enough to merit action now, we intend that amendments to company law ultimately arising from the review will be applied as appropriate to LLPs. We shall ensure that limited
Baroness Buscombe: My Lords, it gives me pleasure to respond to the Minister by saying that we are, in large part, very supportive of the Bill. It is clear from our consultations with numerous outside professional bodies that the Government have been very willing to work with them in developing this proposal to introduce LLPs, following on from the previous administration.
In essence, the Bill seeks to provide particularly the large professional partnerships with the ability to take greater control over the potential liabilities arising from the provision of services in the litigious environment of the present day, while at the same time protecting the interests of clients and creditors. However, there are a number of remaining issues which concern us and which have been raised during the consultation period. I shall endeavour to refer to them in some semblance of order. I express it in that way as something of a protest, given that I feel the proposed legislation has been drafted in an unnecessarily complex manner. My heart already goes out to anyone who might wish to form an LLP without the benefit of extensive advice.
I turn, first, to Clause 1. Although we are pleased that LLP status will be available to all businesses and not just to professional firms, we are concerned to the extent that Clause 1(4) disapplies the existing the law relating to partnerships, principally the Partnership Act 1890, from limited liability partnerships, except as otherwise provided by the Bill or any other enactment. That creates difficulties in so far as the Bill is silent on the issues which are central to partnership law, most notably the rights and duties of the members of a limited liability partnership and, equally important, the relations between the partners.
Flowing from that, a number of issues will need to be addressed: for example, the right to share in capital and profits; the right of a member to be indemnified by the LLP in respect of payments made by him or liabilities incurred by him on behalf of the LLP; the right to take part in the business of the LLP; the right of members to have access to the books and records of the LLP; the right or absence of right to receive payment for services rendered by a member to the LLP; the procedure for calling and holding meetings, including any rights to appoint proxies and corporate representatives to attend meetings of members; the right to vote at meetings on the basis of one-member one-vote; the expulsion of a member; and the right of a member to retire as a member of the LLP by giving notice. All those issues contribute collectively to the partnership ethos and should therefore, we believe, be clarified. We suggest that that is done in the regulations under Clause 14 of the Bill.
I move on to Clause 4, which deals with membership. The Bill does not provide for a member who wishes to retire from the partnership. As currently drafted, a member can cease to be so only upon death, dissolution of the LLP or by agreement with the other members. We wonder whether that is an oversight and suggest that, in the event of a member wishing to retire, notice should be given to the LLP rather than to the other members of the LLP.
Clause 5 deals with the relationship of members. With the Bill as currently worded, the members of an LLP would be subject to company law or employment law if there were no specific provision to the contrary. We believe that that would alter radically the nature of the partnership in an unacceptable way.
Under Clause 6, in relation to members as agents, we believe that the Bill should make clear that a member of an LLP will not be an employee of the LLP unless there is express agreement to that effect between the member and the LLP. Further, we believe that it is regrettable that Clause 6(1)(c) as drafted in the September 1998 version of the Bill was removed, since no agreement between members can be entirely comprehensive. The absence of statutory guidance will create considerable uncertainty as to the relationship between members and between members of the LLP itself, especially where the members of an LLP have no members' agreement or the members' agreement fails to deal with the key issues, some of which I have already outlined with reference to Clause 1 of the Bill.
With regard to Clause 8, we question the provisions for service as a designated member of the partnership, given, we believe, that the provisions, as drafted, could be open to abuse; for example, as we understand it, an LLP could assume as partners one or more offshore companies and register them as designated members, thus making it difficult for the regulatory authorities in the UK to ensure compliance or impose penalties. We suggest that the concept of designated members be removed from the Bill, making all the partners equally responsible for the LLP's conduct, including compliance with the registers.
With reference to Clause 10 regarding taxation, I am pleased that this evening the Minister has referred to tax neutrality as that is a matter about which we are concerned. We understand that the proposed objective is that tax neutrality should be achieved. We should certainly seek reassurance that if, for example, a partnership wishes to convert to an LLP, that will be treated for tax purposes as a continuation of the old partnership and not the discontinuance of the old partnership and the commencement of a new LLP, provided that the necessary conditions are met.
With regard to Clause 12, we believe that there should be changes to the stamp duty and stamp duty reserve tax exemptions on the transfer of property from an existing partnership to an LLP. The present exemption assumes that the transferors will be all the existing partners and that the partners will have the same proportionate interest in the property transferred to the LLP. We believe that that is too restrictive as it may dissuade the conversion of a
Further, I shall refer briefly to issues concerning insolvency and return to them in Committee. In particular, Clause 13, which deals with the insolvency and winding-up of limited liability partnerships, provides for regulations which will apply or incorporate parts of the Insolvency Act 1986, including a proposed new Section 214A. Section 214A of the Insolvency Act would take effect when a partner knew or had reasonable grounds to believe that the LLP was insolvent. That is a more onerous test than the comparable existing Section 214. We believe that Section 214A is likely to lead to unnecessary business closures and job losses. Therefore, in our view it should be dropped from the Bill.
With reference to merger and acquisition accounting, the regulations would apply the requirements of the Companies Act 1985. The merger accounting provisions set out in paragraphs 10 and 12 of Schedule 4A of the Companies Act 1985 deal with equity shares being purchased for equity consideration. A share-for-share exchange cannot exist in a partnership--as the Minister has already said this evening, there will be, we assume, no shareholders--and, therefore, we believe that the provisions are meaningless.
However, having said that, mergers of partnerships do take place and therefore merger accounting provisions for LLPs will be necessary. We suggest that the regulations should be framed to allow special provisions in respect of merger accounting of LLPs.
Finally, I turn to the matter of disclosure. Under the proposed regulations, the disclosure requirements relating to the emoluments of directors translate into equivalent disclosure requirements for members of LLPs. In addition to the aggregate of members' emoluments and the numbers of members falling within bands, the chairman or equivalent and the highest paid member of the LLP must be disclosed with their emoluments. Small LLPs are exempted from that requirement.
For the remaining LLPs, we feel that that disclosure requirement serves no useful purpose, is likely to deter overseas partnerships from taking LLP status in the UK, and should be dropped. We believe that the regulations should be amended accordingly.
Lord Sharman: My Lords, it is with some trepidation that I address your Lordships for the first time. I begin by placing on record both my thanks and appreciation for the very many kindnesses and help extended to me by the staff, officials and Members of your Lordships' House.
I must first declare an interest. For 33 years, until relatively recently, I was a partner without limitation of liability. I served in what is loosely called one of the big five. For the last six years of that time, I was its chairman. I was an active participant in lobbying both the previous administration and this Government for legislation of this nature. So it is clear that I have a considerable interest to declare.
Having declared that interest, it is little wonder that I welcome the Bill. In my view, it is sorely needed. As the Minister said, it updates some very aged legislation. Importantly, it provides an extremely appropriate form of corporation for certain types of business for which incorporation as a company may neither be desirable nor feasible in fiscal terms. It goes some way to providing a partial answer to the huge incidence of litigation within professional firms today. It only goes a partial way and I think that that is right. It reflects also the increasing specialisation that one sees in that type of organisation and the assembly of different professions within a single partnership.
Finally, it puts the UK on an equal footing with many of our competitor nations, most notably the United States and many areas of continental Europe. As such, it will help us to avoid the drift towards overseas registration in limited liability partnerships. We already see limited liability partnerships operating in the UK today.
I am very much aware that maiden speeches are supposed to be non-controversial, but I want to compliment this Government and the previous administration on the process of consultation which this Bill has undergone. The DTI in particular has been extremely assiduous in canvassing views from a wide range of interested parties and it has dealt with them openly and logically. While some of the features of the draft Bill and the consultative documents have changed, by no means all of the wishes of those consulted have been accommodated; and nor should they have been.
It is useful to reflect for a moment on how we reached the point at which we are today. The original form of partnership was based on the concept of up to 20 people sitting around a table, making decisions jointly, and jointly and severally benefiting from the results of that by way of profits or the risks that were carried. For many, many years, until 1967, many professions were held to a 20 partner limit. As a result there were chains of partnerships which were inter linked. The Companies Act 1967 took away that level for certain professions, but for certain professions only.
Since that time, there has been a growth of business, with increasing internationalisation and now globalisation. Therefore, there is a need for scale to respond to service business which itself is on an increased scale. Those enterprises have become extremely large. While a typical "Big 5", which I know about, in 1967 might have had three or four linked partnerships of 20 partners, today it would have over 600 and would employ something like 10,000 people in the UK. Its gross annual revenues might be something in the order of £1 billion.
So it is clear that the old business form of partnership, with the partners sitting around a table jointly agreeing, jointly benefiting and carrying the risk, is no longer appropriate. While the Companies Act 1989 allowed for incorporation of certain functions, that came really when the enterprises were already too large and it was a little late. The fiscal cost was just not affordable. We can argue also that the cultural cost of changing a partnership into a corporation might not be desirable for many of those professions.
There is a lesson to be learned here which we should bear in mind, and that is, that business moves so rapidly these days that legislation must keep up. We must be very nimble on our feet in relation to such legislation. When the e-commerce Bill comes before this House, we shall do well to bear that in mind.
So in welcoming the Bill, I do not see it as a let-off or a let-out in any way. As the Minister said, nothing that is contained within the Bill will relieve the individual from his personal responsibility for his actions to the full extent of his wealth. Nor should it.
In conclusion, I wish to make a comment on an issue which I regard as central to the limitation of liability; that is, disclosure of full financial information. I can speak with some experience in that regard because some five years ago, the firm of which I was a chairman went through that process voluntarily. I believe that it is absolutely fundamental that the price for limitation of liability is disclosure of financial affairs. It is not fair for customers to have to deal with a company or entity with limited liability about which they are unable to ascertain its financial wherewithal. Our disclosure included full details of my income. All that really happened was that we attracted a few extra column inches and I had to buy a few more drinks in the pub. And so I commend the Bill to your Lordships.
Lord Haskel: My Lords, it is my pleasure and privilege to congratulate the noble Lord, Lord Sharman, on a wonderful maiden speech and to thank him very much on behalf of the whole House. I have come across the noble Lord on one or two occasions and I know of his important work on and commitment to the introduction of best practice in the management of British companies. He has played an extremely important role in that and it has been an important factor in increasing the competitiveness of British industry. I congratulate him on that too. He has great experience of British industry. I hope that we shall hear from him often in the future so that we can have the benefit of that experience in your Lordships' House.
Turning to the Bill, I confess that my initial reaction was fairly hostile: mobile capital seeking more user-friendly jurisdictions and large partnerships threatening to move their legal base out of British jurisdiction to reduce the risk to the partners. I had always assumed that limited liability was invented so that people could take business risks. Without limited liability people would be less willing to take those risks and so the economy would suffer.
What risks do professional people take? As long as they meet the demands of their professional standards, the advice and service that they provide is surely without the same kind of risk that people take in the course of normal business. Professional people are obliged to take out professional indemnity insurance.
In recent years most professions have allowed their members to incorporate. I have often thought that that would take care of some of those anxieties. Professionals from different professions can in- corporate together. Frankly, I have never understood why large accountancy firms, and other professional firms do not incorporate instead of threatening to move their legal base offshore to a more welcoming jurisdiction. Perhaps they like the partnership ethos, but do not want the worry of unlimited liability.
However, on further thought, and with the benefit of the explanation of the noble Lord, Lord Sharman, I accept that my view is somewhat old-fashioned. In modern business, professional services are delivered on a kind of production line basis. Different specialists from different professions work together and are involved with each other. Accountants and engineers work in teams. Doctors and lawyers work together. They depend on each other. In large firms partners may not even know each other as they can work in different offices, in different professions or even in different countries. So there is a concern in regard to this matter and there is a point. Quite rightly the Government are listening to the concern--a listening government.
Recently we have heard another voice. Last week in Seattle we heard it quite loudly. Some citizens complain that the real beneficiaries of globalised big business are the big firms and their senior managers, while the consumer is left to carry the cost and to take the risk. As the noble Lord, Lord Sharman, has explained to us, the big accountancy and professional services firms are among the biggest globalised businesses. I ask the Minister to listen to their voice too.
Nobody wants the Bill to become a symbol of that growing dissatisfaction with big business. As the Minister said, and as the noble Lord, Lord Sharman, implied, our task is to see that there are adequate safeguards for the consumer and that the Bill does not become a means whereby wealthy professionals can avoid financial penalties for negligence. To that end the Bill must encourage an ethos of probity as well as an ethos of partnership as mentioned by the noble Baroness, Lady Buscombe.
Ethos is important. It will ensure that the public will perceive the professional services companies as having an ethical and vocational drive that will lead to confidence and respect. Otherwise, the limited liability partnerships will be seen as a dodge. The regulations and the professional partners need to bear that in mind. For reasons of probity, openness and transparency are important elements in the Bill.
Of course, I understand that partnerships use their own money and not shareholders' money. However, in many companies the shareholders and the directors are one and the same, so disclosure should be equivalent to that demanded by law from limited liability companies. I do not agree with the noble Baroness, Lady Buscombe, on her point about disclosure of partners' drawings. For the sake of openness, I believe that the disclosure of partners' drawings should also be made in the same way as those of company directors.
Perhaps I may say a word about management. The days when a director's duty of care was solely to the shareholders have passed. Directors now have a duty to inform themselves about all their company's activities. They have a duty of care to all the stakeholders. I hope that the regulations will oblige partners in limited liability partnerships to have the same broad duty to keep themselves informed, not only about their own professional activities, but also about the activities of the partnership as a whole and all the other stakeholders.
There is a strong "best practice" business case for that. Integrity and reputation are important. To that end, the duty of care in law that partners owe to third parties for acts of their colleagues or employees must be clear and not open to judicial review as claims arise. In the same way as directors can be banned for ignoring their duties of care, will partners be banned from entering into limited liability partnerships if they do likewise? How will the DTI monitor that? Perhaps it will be left to the professions to discipline their members.
The noble Baroness, Lady Buscombe, spoke of the complications. I do not believe that that is a big worry. The Bill will probably apply only to large partnerships. The disadvantage for small businesses being limited liability partnerships, compared with being limited liability companies, is that a limited liability partnership is a narrower form of limited liability. I presume that there will be a degree of personal liability to third parties for negligence which, in the main, does not apply to company directors. There is certainly more liability on insolvency resulting from the claw-back provisions mentioned by the Minister under which limited liability partnership members will be ordered to contribute to the assets on insolvency.
The Minister spoke of the major review of company law in the DTI. I suppose it is a pity that, owing to pressure from major partnerships, this legislation has come before the House before the review of company law has been carried out. I expect that that review will simplify greatly the regulations affecting businesses, especially small businesses.
I have stated my concerns about the Bill, but in spite of that I welcome the Bill because, as my noble friend said, it achieves an appropriate balance. I also believe it is important because it sets out to modernise business practice, which is the point made by the noble Lord, Lord Sharman. With the proviso that I have mentioned, it should contribute to the encouragement of best practice and high standards in the delivery of professional services. It will put us on an even footing with our competitors. Our economy can only benefit from that.
Lord Lucas: My Lords, I, too, welcome the Bill, as I welcome the noble Lord, Lord Sharman, to our company. It is always good to have another accountant in the House. As a rather less distinguished accountant myself, I agree that the Bill is thoroughly deserved by the accountancy profession. It will greatly benefit the profession and, therefore, the country.
In Committee, I shall pursue some of the more detailed aspects of the Bill. Much is to be left to regulation. The noble Lord, Lord McIntosh, has already given us some comfort about the way in which regulation will be applied to disqualification of directors, the necessity of keeping accounts on file and other such matters.
We shall also need to look at the way in which these regulations are to be promulgated. They will be an equivalent of company law, but all that is provided for in the Bill is that they should be subject to affirmative resolution. At least for the first set of regulations, there should be a requirement that they are consulted upon before they are subjected to the affirmative resolution procedure. It is difficult, if not impossible, to amend regulations. These will be extensive and detailed and we should not allow them simply to appear for a one-and-a-half-hour debate in this House, and then "whoosh". I am sure the Government intend to consult anyway, but it ought to be on the face of the Bill.
Changes to the regulations will have equivalent status to changes in company law and therefore a reasonable amount of notice and publicity should be given to them. Perhaps a prior period of consultation, if it appears appropriate tothe Minister, could be given. And there should be a requirement on the face of the Bill that the Minister considers the need for consultation. We will not then get into the pattern that the regulations can be amended in the same way as food safety regulations--at the last minute whenever something new appears. We are dealing with a rather more serious entity affecting (quite quickly I imagine), a large number of people who will come to live and work under the regulations that will be promulgated under the Bill.
We also need to look at the consequences for the Companies Act of having this structure in place. Clearly, some companies will have subsidiaries. If we are restricted in naming a limited liability partnership if there is a company of the same name, then there needs to be a mirror restriction running the other way. I may have missed it in the Bill, but I did not see it. We need also to consider the way in which the insolvency legislation will impact on the funding of limited liability partnerships. I imagine they will often be funded by way of loans and guarantees from partners. They ought not to be allowed to rank alongside ordinary creditors. I do not believe there is any provision in companies legislation to say that directors' loans rank behind creditors, but directors' loans are rarely the principal source of funding of Companies Act companies.
We will take part in some interesting discussions on the detail of the Bill and how it works as it goes through Committee. But my principal interest will be the other uses to which this structure will be put. It will not just affect the major accountancy firms. There are already considerable uses of limited liability partnerships in this country, often overseas--Denver, Luxembourg and other jurisdictions--by the venture capital industry and the property industry. This Bill meets, in principle, the very real needs in structuring the relationships between the people participating in venture capital funding and in the funding of major buildings or major property portfolios where there can be real difficulties. At the moment they lack either limited liability or tax transparency.
The Bill will provide a great deal of potential, but in its present form there are some insuperable obstacles to it being used efficiently. In particular, Clause 6 does not allow for flexibility in the status of individual partners in any obvious way. Clearly, if one is running a venture capital fund the people taking the decisions are the fund managers, and the individuals participating are doing so more or less as sleeping partners. There has to be a mechanism acknowledged under Clause 6 whereby someone dealing with a sleeping partner in such a venture cannot think that they are dealing with somebody who is authorised to deal on behalf of the partnership.
Also, if we are looking at that sort of use of the structure, we shall need to consider the way in which the Financial Services Act and restrictions on marketing and dealing in securities will impact on the way in which people are encouraged to take up or dispose of participations in limited partnerships. That is not an aspect I found to be covered in the Bill, though it could easily be added by giving the Government power to make regulations under the Financial Services Act in the same way as they will have power in this Bill to make regulations under the Companies Act.
I look forward to the Committee stage. I hope the noble Lord, Lord McIntosh, will grant me audience before then so that I might see him, perhaps in the company of one or two people from the industries concerned, to see if we might question him and his
Lord Phillips of Sudbury: My Lords, it is a particular pleasure to be the first from these Benches to speak after the maiden speech of my noble friend Lord Sharman. Those of us who were aware of his coming here were knowledgeable of the fact that he has immense experience and authority within the accountancy profession. What he said today is but a harbinger, I am sure, of the contributions he will make to the deliberations of this House in years to come.
As my noble friend made clear, he spoke from his vantage point and I shall speak from mine. I am a practising solicitor of 36 years' continuance, every hour of that time having been spent in private practice. I am happy to remain a practitioner in a 40-solicitor firm, which is a tiny outfit compared to the one from which my noble friend comes. I also have a certain diffidence in speaking against the line of the Law Society, which has been one of the major proponents of this measure, and indeed against the line of my noble friend. But so be it. I am unconvinced of the need and sense of this measure.
Since no one has mentioned it and it has some philosophical reference to what is an important Bill, perhaps I may be allowed the liberty of taking a few seconds to look at the history of this matter. The bubble Act of 1719 was the start of this long march to limited liability. It was not until 1855 that limited liability was granted to companies other than those incorporated by Royal Charter. The reason for that was simple: the bestowal of limited liability upon those seeking to trade for profit is an immense public privilege, not a minor one.
In 1890 we had the Partnership Act--according to many solicitors, one of the most lucid, brief and effective measures ever passed in this House. If we go back to the record of the time, we may be more amazed to see how brief was the discussion upon it in this House. The great Law Lords of the day carved it up between them and it got the nod in the other place. There were 46 short sections, no schedules, and certainly no subsidiary legislation dependent upon it. If I may say so, with due deference to the noble Lord, Lord McIntosh, the balance that has been struck between matters contained in the main Bill and matters left for subsidiary legislation is a particularly unhappy one. But that is now water under the bridge.
I referred to the great privilege of limited liability. Today it is looked upon almost as a right. Yet if one can step back from the overwhelming commercialism of today's culture, why in principle should anyone
If I am playing devil's advocate in a somewhat provocative way, it is not merely to provide a counterpoint to the majority of the speakers in this debate, who will give, and have given, the Bill a loud "Hurrah!". There is need for cool reassessment as to what limited liability generally has done and is doing. Certain it is--and here I speak with only too much hands-on experience--that the protections for the public against unscrupulous corporate behaviour are, in reality, largely ineffectual.
The theoretical remedies against wrongful trading, or even fraud--I note that "wrongful trading" is likely to be incorporated into this measure--are very rarely accessible to those who are left holding the losses when a company founders. It is too easy for those of us in this House, enjoying, as we mostly do, a fairly elevated lifestyle, to underestimate the degree of public anger and almost disbelief at the incompetence of the law in protecting against serious fraud.
As a practising solicitor for all this time, I must confess that I have sometimes wished for limited liability; but never for long. On really careful reflection, I have to say that I think it is right that solicitors have to practise without personal limited liability. In the first place, being jointly and severally liable is the very best incentive to exercise careful selection of one's partners; careful oversight of staff; extreme care with clients' funds, large quantities of which are regularly entrusted to us; a prudential approach to management of the practice and its resources, whether one is a junior or a senior partner, and whether or not many of those functions--as they are these days--have been delegated to committees; and an interest which extends across the whole of the partnership's affairs in an age where solicitors, and other professionals, are retreating into ever narrower and deeper ruts of specialism.
In terms of deserving and maintaining public trust, which I would maintain is a principle of overriding importance, the unlimited responsibility of all partners for the debts of their partnership is the most striking and effective manifestation and guarantor of that virtue. Of course, even with unlimited liability, terrible things happen. But nothing will achieve perfection.
The big firms are driving this Bill. Although there has been consultation, and although the Law Commission did a good job, I have to say that very few of them have given considered response from the point of view of the consumer. The overwhelming advice tendered has come from those who have an interest in this Bill being passed. I should like to suggest that the big firms, earning as they do--no doubt fairly--big fees for their work, which can lead to large claims for negligence, have thriven in that environment. Where is the evidence to show that any of them needs the protection of this Bill in order for them to do their work effectively, competitively and profitably? There is no evidence. When did we ever hear of one of the big City solicitors losing his trousers? I have never heard of it, and I should like to hear from any noble Lord who has.
The classic justification of limited liability is that it strikes a fair balance as regards those who put at risk their capital for a venture which, through no fault of their own, then fails. To encourage that risk it is reasonable to afford a limit against further losses. But solicitors are not capitalists; we venture very little in the way of capital. We are supposed to be professionals. Even in the present age where commercialism has bit deep into the ethos of many firms, gravely to their and the public's disadvantage, we are still professionals.
I believe that the Bill is wholly unnecessary. All firms take out insurance. Those who find that inadequate are at liberty--and many of them exercise that liberty--to agree an upper limit on liability with the clients for whom they do the work.
Finally, I have to say that to extend the unique public privilege of limited personal liability primarily for the benefit of the largest, most lucrative and successful partnerships, which, in turn, act for the largest and most lucrative companies, strikes me as perverse, verging on the bizarre. Of course it will also protect smaller firms, but my impression and experience is that that is not a major issue for them. On no account, in any event, should we substitute limited liability for adequate insurance. Although the Government may say that measures will be incorporated in the Bill to prevent this, I have to tell them that I do not believe it. I think that one could, and will, end up with an extremely complex, clever piece of legislation that will in the event prove to be too clever by half. Therefore, while I would much prefer to agree with other noble Lords, I have to disagree with them wholeheartedly.
My noble friend Lord Haskel said that he had come across the noble Lord, Lord Sharman, in the past. So have I: sometimes, though he may not have known it, he has been my client. However, more frequently, he has been the defendant I have been suing on someone else's behalf. I should say here that I pay tribute to the noble Lord's maiden speech. I suppose, therefore, that I am a paid-up member of the litigious environment to which the noble Baroness, Lady Buscombe, referred.
I can tell your Lordships what has happened over the past few years. Because of the growth of big money claims, because of the principle of joint and several liability--about which I shall say a few words in a moment--and because of the need to find a deep pocket, professionals, especially architects and accountants, have faced ever-larger claims. Why does joint and several liability achieve that? It does so because the law says that if you are in part responsible for damage you can be sued for all the damage. Never mind the fact that as between you and an evil director he bears 90 per cent of the moral blame; you, as the deep pocket, can be held liable for 100 per cent of the damages. That is what has been happening. That is the way that litigation has been conducted.
Although I wholeheartedly agree with the noble Lord, Lord Phillips of Sudbury, about the importance of the professionalism of someone who recognises that his own assets are at stake, the fact is that some of these claims really put at risk not merely the personal wealth of partners but also that of their families.
There have been attempts to review the law of joint and several liability. The United States found a way of dealing with the problem by effecting a law. The Common Law Team of the Law Commission in this country found that that was not a way of dealing with the matter.
This Bill seems to me to be an appropriate way of providing an opportunity to limit liability for those who want it. However, as my noble friend the Minister has said, it is important to ensure that the safeguards are in place. I refer to the safeguards for the public. There are measures which might have been taken from the Jersey equivalent of this law. There is, for example, a provision, relating to a certain amount of money, that requires a bond to be deposited as a condition of liability being limited. I can well understand why that is not necessarily the right way to deal with issues.
It is necessary also to sound a warning. The reason that under the present law partners are liable down to their shirt buttons is because each is agent for the other. Each is agent for the other because that is what partnership is. The Partnership Act, to which reference has already been made, defines partnership as people who are carrying on a business in common. This Bill does not state that everyone who is a member of a limited liability partnership shall not have liability. What it states, and what it will enact in Clause 1(4), is that the law relating to partnerships does not apply to a limited liability partnership.
If people choose to incorporate as a limited liability partnership, but carry on business as if they were still a partnership of the kind that people are used to--a partnership where the assets and integrity of the individuals are at stake--I predict that they will find that the courts may say, "Though you have incorporated a body, you are carrying on business in common together". I suggest that the courts need to be vigilant to make sure that the great privilege of limited liability--which is what this Bill will give--continues to carry with it the great responsibility, which includes the provision that members of the public know with whom they are dealing. They should have--I was glad to hear the noble Lord, Lord Sharman, make this point--full financial disclosure. They should have the full safeguards which the regulations are intended to provide.
I believe that some points in the Bill would benefit from further consideration in Committee--I shall not mention them at this stage--and there could be some fine tuning of the balance. But for my part I reserve my final cheer for that moment when I see that not only will the courts be vigilant, as I suggest, but that the Government are vigilant in making sure that the Bill goes no further than is necessary to maintain the proper balance between the interests of the public and the interests of professionals to which I have referred. In those terms I support this Bill.
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