§ Mr. Nick Gibb (Bognor Regis and Littlehampton)
I beg to move amendment No. 1, in page 3, leave out lines 22 and 23 and insert—(b) subject to paragraph (a), by the rules and principles which would apply if the law relating to partnerships applied to them.'.Neither of these are relevant interests, but I remind the House that I am a chartered accountant, so I ask hon. Members to go easy on the language that they use against chartered accountants and others. Also, I do not currently practice, but I contribute six or seven articles a year to Accountancy Age.
Having sat through the debate on the new clauses tabled by the hon. Members for Great Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins), I feel as though I am intruding on private grief. If the Labour party can tear itself apart on a relatively technical measure like this one, one can only wonder what machinations, discussions and divisions are taking place behind the scenes on issues of wider concern, such as Labour's failure to deliver on the national health service, education and crime.
§ Mr. Cousins
I assure the hon. Gentleman that we have had a most comradely exchange with the most comradely outcome. I should like to put that on record.
§ Mr. Gibb
I am grateful to the hon. Gentleman for that intervention. I am sure that it was comradely, but none the less Labour Members were split.
This is an important Bill which has had several layers of scrutiny. As the Minister said, it began life under the Conservative Government, but when it eventually began its passage through the other place, despite scrutiny and a report by the Select Committee on Trade and Industry, it still contained a number of problems.
The hon. Member for Great Grimsby was wrong to say that the Opposition did not give the Bill considerable scrutiny. My noble Friend Baroness Buscombe and I discussed our concerns in great detail with the Minister, Lord McIntosh, and owing to pressure in the other place by my noble Friend and a reasonable approach taken by the Minister, many of our concerns were dealt with by Government amendments. Indeed, had the Government taken such an approach on some of their more controversial legislation, they would not be in their current position in regard to credibility with the public.
There are nevertheless some remaining concerns which we raised in Committee and which the Government have not dealt with adequately. Our first concern is that of the so-called default provisions. Clause 1(5) of the Bill states: except as far as otherwise provided by this Act or any otherenactment, the law relating to partnership does not apply to a limited liability partnership.The reason for that provision is, according to the Government, that as an LLP is a legal person in its own right and is therefore a body corporate; in general, 947 partnership law should not apply; and company law should apply instead. However, the very essence of an LLP remains that of a partnership.
It was in order to retain the partnership ethos that professional firms have sought this form of incorporation rather than becoming companies proper. An LLP will still have what is in effect a partnership agreement regulating all the internal relations of a partnership; but particularly for smaller, less well advised partnerships which seek to become LLPs, it could well be that the internal partnership agreement will not have clauses that deal with every eventuality to be faced by a partnership in business.
In the past, this would not have mattered. The Partnership Act 1890—and the century of case law since—have filled in the gaps regarding almost every conceivable eventuality. Future case law, based on precedent and the principles established in earlier cases, would deal with future eventualities. Those matters may include the right of partners to examine the books and records, the right to take part in the management of the partnership, and questions regarding the expulsion of members.
Those issues may be dealt with adequately in the partnership agreement, but they may not be. Short agreements for smaller partnerships drafted when it was understood that general partnership law would apply may well not include many important provisions.
The amendment would provide that the law with regard to the internal arrangements of an LLP should default to general partnership law. Its wording has simply been lifted from an earlier draft of the Bill. The removal of the provision from the final Bill has aroused widespread concern.
That concern was such that the Government entered into a separate consultation exercise on the specific question of the default provisions. The views of many consultees were summed up in the Government's response document. One paragraph voiced the general concern, stating thatin the absence of an adequate agreement between the members of a Limited Liability Partnership, the relationship between members would be uncertain; there was a strong desire that partnership law should govern the rights and duties of the members of the Limited Liability Partnership … partnership law is well understood by partnerships and practitioners, with the principles established over many years.That was also the view of the Law Society, which stated:The Society was concerned with clause 1(5) which disapplies partnership law from limited liability partnerships unless otherwise provided in the Bill. The Society has always considered there to be the need for some default provisions that would operate in the absence of agreement to the contrary within an LLP and which would cover certain basic matters relating to the mutual rights and duties of the members of an LLP.The Law Society accepted that the Government had amended the Bill to insert one or two of the partnership law provisions in the regulations. However, it is inevitable that some areas will not be covered by the exhaustive and specific list that the Government have included in the regulations and, as always with this Government, it is small business that will suffer. Big, well advised partnerships will be fine, but yet again the Government are creating a complex regulatory regime that puts a premium on being well advised.
The hon. Member for Great Grimsby complained about advisers' incomes, but the pressure for greater regulation is created by him and those who share his philosophy. 948 Someone has to read, understand and remember the regulations for which the hon. Gentleman continually presses. That will lead to greater demand for expert advice, and therefore higher salaries for those prepared to do that work.
The amendment would reduce the premium for expert advice by making the regime simpler.
§ Mr. Gerald Bermingham (St. Helens, South)
My sole reservation about LLPs has to do with negligence on the part of professional firms. For example, the negligence policy of a firm of accountants that becomes an LLP may not deal with any negligence created. That has been the case in certain recent takeovers. In the old days, one could at least sue the partners to make up the shortfall on the negligence cover, but that does not seem to be the case now.
§ Mr. Gibb
The hon. Gentleman raises a point that goes to the heart of the Bill. The aggrieved person can still sue the partner or partners involved in preparing the negligent work. However, why should the law for people in the accountancy or legal professions be different from that covering people in the medical profession, such as nurses? They work for the health service but are not subject to losing all the assets that they have built up over a lifetime.
It is not a matter of fat cats. There are 120,000 chartered accountants in this country. Most of them could never be described as fat cats, and they live under the constant threat that they will lose their lifetime assets because of the negligence of another partner. The Bill goes a long way towards solving that problem, and it is welcome for that reason.
§ Mr. Bermingham
There is a world of difference between a partnership in a garage business and one involving accountants, estate agents, solicitors or surveyors. The difference is simple: the first provides a service, whereas the professionals provide advice. If the advice is wrong, the damages can be massive. If the service is wrong, the damages are much smaller.
§ Mr. Deputy Speaker
Order. I think that hon. Members are straying into Second Reading points. The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) should address his remarks to the amendment.
§ Mr. Gibb
I am grateful to you, Mr. Deputy Speaker, but I do not believe that the distinction offered by the hon. Member for St. Helens, South (Mr. Bermingham) is valid. Advice and services are very similar, in the sense that one either provides a service or advises someone else about it. That similarity crosses all professional boundaries and is not confined to law and accountancy.
The amendment would reduce the Bill's complexity. Even at this late stage, I hope that the Minister will relent and accept, if not its wording, then at least its principles.
§ Mr. Burnett
I shall not go over material discussed on Second Reading and in Committee, but I was a senior partner in a large firm for more than 20 years and I know how important it is—for the clients and customers of a partnership, as well as for the members of that partnership—to ensure that the partnership ethos is 949 preserved. It is important that a duty of good faith should exist between the partners, as that is in the interests of clients and customers.
I strongly support the amendment. The Partnership Act 1890 is a good Act, as was said earlier. It provides certainty and simplicity, and will provide some continuity. Simplicity is extremely important, especially for small businesses that cannot afford the advice. They will not necessarily know of the existence of regulations passed by the House.
I hope, even at this late stage, that the Government will remember the interests of small firms and think again on this matter. The fall-back position should be provided by the 1890 Act: it has stood the test of time and is supported by a large body of case law.
§ Mr. John M. Taylor (Solihull)
Is not one of the limitations of the 1890 Act the fact that it presupposes that ownership, profit sharing and decision making are all in step with each other? In a modern partnership, is it not possible that distinctions may need to be made between who owns, who makes decisions, and who makes profits?
§ Mr. Burnett
As usual, the hon. Member for Solihull (Mr. Taylor) is correct and makes a good point. However, he knows that it is open to the parties who create a partnership under the 1890 Act to vary the profit-sharing and ownership proportions. They can do so with remarkable simplicity. Although they will have to consider the tax implications of such an action, it is the Act's simplicity that is so important.
It is vital that small businesses do not have to fall back on the more tortuous and complicated Companies Act 1985. I understand that there must be intricate provisions under that Act relating to disclosure, and that the Insolvency Act 1986 also has a part to play. Even so, for the reasons that I have given, the 1890 Act is an excellent piece of legislation and should not be rashly discarded in the way that the Government propose.
§ Dr. Howells
I acknowledge the very proper concern expressed in the amendments in the name of the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb), and the support given by the hon. Member for Torridge and West Devon (Mr. Burnett). I will try to give the amendments the respect that they deserve, because there is no question but that this is an important point. However, I will explain why I will be resisting the amendments—much to the disappointment, I know, of the hon. Member for Bognor Regis and Littlehampton.
Throughout the Bill's passage, there has been a great deal of debate about partnership law and its application, or non-application, to limited liability partnerships. A general application of partnership law to LLPs, very similar to what is proposed in amendment No. 1, was contained in the draft Bill published in September 1998. Subsequently, we took the decision to remove it. Nothing has yet led us to conclude that we were wrong to do so, and we remain opposed to any attempt to reintroduce it. Let me explain why.
As the hon. Gentleman informed us, the main point is that an LLP is a body corporate, while a partnership is not. That is a fundamental difference. So because a 950 limited liability partnership will be a legal entity separate from its members, its clients will be able to enter into contracts with the LLP itself, not the members. An LLP will also be able to hold property. In addition, because of its separate legal status, an LLP will continue until it is formally wound up, no matter what changes occur in its membership.
A partnership, however, exists only because the partners are carrying on business together, and it has no separate life of its own. Contracts are between third parties and the partners themselves, and changes in partners will cause the partnership to dissolve, although the partners can make specific arrangements to prevent that from happening.
Many of the provisions of the Partnership Act 1890 would be inappropriate for an LLP. Sections 1 to 4 deal with the nature of the partnership. They are of no relevance to limited liability partnerships, because the nature of an LLP is set out in the Bill. Sections 5 to 18 deal with the relations of partners to persons dealing with them. Again, they are of no relevance to limited liability partnerships because clause 6 deals with this for LLPs. Sections 19 to 31 deal with the relations of partners to one another. Only eight of those sections are appropriate to LLPs. The others deal with partnership property, for example, which is inappropriate for an LLP because property can, and is likely to, be held by the LLP, not the members. They deal also with retirement, which is dealt with in clause 4. Sections 32 to 44 of the 1890 Act deal with the dissolution of a partnership and its consequences. These sections would be inappropriate for an LLP, because it will be a separate body corporate, and winding up will be dealt with by application of insolvency legislation, as the hon. Gentleman hinted. Finally, sections 45 to 50 are supplemental.
So of the 50 sections of the 1890 Act, only eight are relevant or appropriate to LLPs. We intend to apply appropriately modified versions of these eight sections to LLPs by way of regulation to govern the relationship between members where there is no agreement. Yet the amendment suggests that all 50 sections are relevant, when clearly they are not.
The amendment would also apply the general law relating to partnerships. Again, that has been developed with regard to partnerships, not bodies corporate. In particular, over the years the general law has developed the duties owed between partners. We believe that application of these duties to an LLP would be problematic. The existence of the limited liability partnership as a separate legal entity means that members will owe duties to the LLP itself. That is not the case in a partnership. Thus a general application of partnership law could leave members of an LLP facing concurrent duties—duties owed to the LLP, and duties owed to each other. There would be no indication of which duty took priority were there to be a conflict.
The hon. Gentleman helpfully set out in Committee the extent to which the Government have fuelled the debate. 951 Initially, in response to consultee concerns, we established a small working group of officials and representatives from the profession to consider the options. Discussion ranged over all the points that I have raised, and the conclusion was that the preferred solution was to apply default provisions dealing with the eight relevant sections of the 1890 Act that I have mentioned instead of a blanket application of partnership law.
We went out to consultation on this in February. I am sure that the hon. Gentleman remembers that full well—we said it often enough. The response was in favour of the approach that the Government have adopted. The consultation paper also dealt with the question of whether we should impose a duty of good faith as between members. As I explained in some detail in Committee, we eventually decided against such a duty, although nothing in the legislation would prevent members of a limited liability partnership including such a duty in their membership agreement if they so wished.
Finally, perhaps I might comment on the two main arguments made by those in favour of a general application of partnership law. First, they argue that partnership law is well understood and that the Partnership Act 1890 is a model of simple and elegant legislation. However, as I have said, partnership law is not just the 1890 Act, but an extensive body of general law. This is not simple, even for experts. There are a number of complicated and sometimes vexed issues, which is why the Law Commission is currently reviewing partnership law.
Next, it is argued that it is difficult to see how the expressed intention to create an entity that combines partnership ethos with limited liability can be achieved without applying partnership law. However, the LLP legislation remains silent on the relationship between members, so as to ensure that there is freedom for members in each LLP to develop provisions appropriate to their specific circumstances. It is that flexibility which those partnerships that are planning to convert to a limited liability partnership are keen to see preserved in the new entity, and we believe that that is what will preserve the partnership ethos.
I remain unconvinced that amendment No. 1 is necessary or suitable. I very much hope that the hon. Gentleman will see fit to withdraw it.
§ Mr. Gibb
That was a useful exchange of arguments that we first rehearsed in Committee. I cannot claim to have heard the four concessions from the Minister which the hon. Member for Great Grimsby (Mr. Mitchell) imaginatively construed from the Minister's first response. I had hoped that the Minister might, at the last moment, give small businesses some concessions, so he will not be surprised to hear that I am disappointed, although not surprised, at his response. On that note, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ Mr. Deputy Speaker
As the hon. Member for Great Grimsby (Mr. Mitchell) does not intend to move several of his amendments, we now proceed to amendment No. 7.