|Previous Section||Back to Table of Contents||Lords Hansard Home Page|
Lord Goodhart: My Lords, these are massive regulations. They include great chunks from both the Companies Act 1985 and the Insolvency Act 1986. Clearly, a consolidated version of both Acts as they apply to LLPs will be required. I hope only that the Minister is right in saying that commercial organisations will produce them. That may well be the case, but in my experience consolidated versions take some months to appear. Therefore, for some time to come it will be necessary to rely on the terms of the regulations--that is, if the LLPs are to be brought into operation in the near future. I should be interested to know the timetable that the Minister has in mind for introducing a state under which the new LLPs can be set up.
I shall be interested to hear the Minister's answers to the questions posed by the noble Lord, Lord Burnham, and I want to raise a number of points of varying importance. I shall begin with the least important. The first, on which I may not have the support of my noble friend Lord Phillips of Sudbury, relates to the impact of the Business Names Act 1985.
An LLP trading under a name other than its corporate name gets the worst of both worlds. Like a company incorporated under the Companies Act, it must include the corporate name on its business stationery. That is fair enough. Like a partnership with
Secondly, Sections 288 and 364 of the Companies Act 1985, as modified in relation to LLPs, require details of the usual residential addresses of members to be provided to the registrar. Recent events have shown that in some circumstances it is undesirable that the public should be made aware of home addresses. We have in mind what happened in respect of Huntingdon Life Sciences. A similar problem could arise in some LLPs, particularly solicitors and insolvency practitioners, both professions being likely to make use of LLPs and both often being involved in situations of personal conflict with bankrupts, unhappy opponents of clients or disappointed clients. Those conflict situations could lead to harassment or violence. I wonder therefore whether it would be possible to eliminate the need to deliver the home addresses to the registrar.
The third point relates to the default provisions in Part VI of the regulations. Those are generally welcome, but the list of default provisions does not include any duty on members of an LLP to act in good faith towards each other. It is true that the duty to act in good faith does not appear on the face of the Partnership Act 1890, but it is long established by decisions of the courts to be at the core of the partnership relationship. We believe that it should also be recognised as the core of the relationship between members of LLPs and that can be achieved only by including it in the list of default provisions.
The final and most important defect is complicated and needs some explanation. I raised the matter at the Third Reading of the Bill. Members of LLPs may cease to be members in a number of ways, in particular by death or retirement. When someone ceases to be a member, the question arises of what happens to their interest in the assets of the LLP. In a great majority of cases, that will in practice be covered by the terms of the agreement. But that will not always be the case; there will be some inadequately drafted agreements, informal agreements, which do not provide for that. The question is: what happens if the agreement does not provide for it?
The default provision in the case of partnerships is that the departure of a member causes a dissolution and that the outgoing member is thereupon entitled to his or her share of the assets of the dissolved partnership, leaving the other members of the partnership free to reform the partnership between themselves if they want to. The default provision in the case of a company with share capital is quite different. The member has share capital, remains a member as long as he or she holds those shares but can of course sell them.
It is true that in some cases, particularly in small companies, the shares are in practice unsaleable and in that case the shareholder is locked in. However, if that shareholder is treated in an unprejudicial way, he or she can apply to the court for a remedy under Section 459 of the Companies Act 1985. Therefore, if the company is profitable but the directors distribute all the profits and pay no dividend on the shares, the shareholder can go to the court to ask for an order for his or her shares to be bought out.
However, there is no answer to the question of what happens to the proprietary rights of the outgoing member of an LLP. My view is that the property is the property of the LLP and must remain the property of the LLP after the retirement. In the absence of a right in the agreement to take out the retiring or deceased member's share of the assets, that member has no such right and loses his or her interest in the LLP without any compensation.
We welcome the fact that after some uncertainty about the matter, Section 459 is to be applied to LLPs by the regulations. But Section 459 can be relied on only by current members of an LLP and cannot be the basis of a claim by a former member that he is being treated unfairly by not being paid out any of his asset interests in the LLP.
It is difficult to know what the default provision ought to be. If there is a right to an immediate pay out in default, that may destroy a viable business. If the right to a pay out is deferred until the dissolution of the LLP, the outgoing member may be locked in and unable to get access to the assets for a very long time.
Plainly, the confiscation of a proprietary interest on retirement or death and its transfer to other members cannot be the right answer. The difficulty of finding the best answer does not excuse the Government's failure to provide an answer at all. We suggest that the best answer may be a default provision: first, that the departure from membership does not deprive the outgoing member of the right to his or her share in the assets of the LLP; secondly, that the payment of that share should be made on terms, and at a time, which is just and equitable; and, thirdly, that in the absence of agreement between the parties a county court should have power to decide what is just and equitable. I accept that that solution is itself not free from difficulty because it would mean uncertainty and perhaps an increased need to go to court. Nevertheless, it is plain that something needs to be done on this important issue and that no answer to this undoubtedly very difficult question is contained in the regulations as they now stand.
Lord Phillips of Sudbury: My Lords, I very much associate myself with the observations of both the noble Lord, Lord Burnham, and my noble friend Lord Goodhart about the length and complexity of the regulations. They are five times as long as the principal Act and several times longer than the Partnership
I thank the Minister for complying with his undertaking to me in this House on 6th March by amending Section 351 of the Companies Act to require those LLPs which do not set out in their title the fact that they are limited liability partnerships to do so, albeit in smaller print on their notepaper and so on. Naturally, that leads me not to associate myself with the remarks of my noble friend Lord Goodhart. I understand the excesses of violence which disfigure our times, but I believe that to retreat behind a wall of anonymity--many large LLPs will be magnificently anonymous--is too high a price to pay for what is an extremely rare but real risk to operators of businesses.
I should like to make two points on Part VI which contains the default provisions that will apply to LLPs unless the members otherwise agree. My first point concerns paragraph 7(7) which governs the right of members to access the books and records of the limited liability partnership. That is a very important provision. I believe that the vast majority of LLPs will not have comprehensive agreements which cover these matters. There could be an ambiguity here. The first part of paragraph 7(7) states:
I turn to paragraph 7(9) which is really an anti-competition provision. Unless he has consent, a member cannot carry on any business which competes with that of the LLP. In normal legal circles the notion of carrying on a business carries a proprietorial connotation and does not cover a situation where one is an employee of a business. I believe that that leaves this provision rather lamely placed, because anyone can circumvent it simply by arranging for his wife or friend to set up a limited company of which he or she becomes an employee. In that way one simply bursts through the provision. That lends support to the point raised by my noble friend Lord Goodhart about the absence of any reference to good faith. I believe that a good faith provision would plug the hole that exists in the current wording of paragraph 7(9). If the Minister is minded to comment on that, I should be grateful.
|Next Section||Back to Table of Contents||Lords Hansard Home Page|