§ Order for Second Reading read.4.59 pm
§ The Parliamentary Under-Secretary of State for Trade and Industry (Dr. Kim Howells)
I beg to move, That the Bill be now read a Second time.
The creation of limited liability partnerships adds to the variety of business entities available to those wishing to set up in business in Great Britain. Firms can usually choose between being a company—which is good if one wants a split between ownership and management—and being a partnership, which is good if one wants greater flexibility in arranging the internal affairs of the business and does not mind unlimited liability. However, firms will now have the option of becoming a limited liability entity with the internal flexibility of a partnership.
Limited liability partnerships, or llps, were first proposed by the previous Administration, and responses to a consultation on the general principles were clearly in favour of their introduction. The Government agreed that the concept had merit and published a draft Bill in September 1998. That, too, was well received, and consultees provided feedback on the detail of the legislation. I should add that consultees represented a wide range of interests, including accountants, lawyers, actuaries, architects, surveyors, academics, trade associations and those representing the potential clients of an llp. The measure has wide support across the professional business community.
The Bill was subject to pre-legislative scrutiny by the Select Committee on Trade and Industry. The Committee's comments were a valuable contribution to the development of the Bill.
To explain the way in which we have chosen to construct the llp, I need to say something about where the idea of limited liability partnerships comes from. 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 complex area of common law.
The report examined the problems that resulted from joint and several liability for professional defendants. For example, defendants might find themselves liable for the whole amount of the damage caused to the plaintiff, even where other wrongdoers were involved. However, the report concluded strongly against any reform of the law of joint and several liability. The main reason was that a change towards a system of proportional liability would favour the wrongdoer at the expense of the plaintiff. This is a simplified summary of the report's detailed conclusions.
The common law team's remit did not extend to looking at joint and several liability in partnerships, but the Department of Trade and Industry at the time took the opportunity to consult on the question whether to allow for llps in Great Britain.
Llps were already a well-known concept in the United States of America, and Jersey—not New Jersey, but Jersey in the Channel islands—was also planning to introduce them. As a result of the process of consultation, 889 we concluded against any reform to the law of joint and several liability, but gave our commitment to the introduction of limited liability partnerships.
Surprisingly, there has been no fundamental change to business entities in Great Britain since 1907, when the Limited Partnerships Act was introduced. Only a company offers all its members limited liability, which perhaps seems a little odd in the 21st century. The creation of llps demonstrates the Government's commitment to ensuring that Britain maintains its competitive and up-to-date legal framework for business.
The development of llps takes account of the changing business environment, which has become increasingly litigious in recent years. The structure of an llp means that some firms may find it an advantage over a company, as it offers the freedom for members to arrange their internal relationship to each other and to the llp as they wish, while having the benefit of limited liability. That is likely to be popular with those who already have partnerships, but it may also prove to be of some benefit to start-up businesses.
§ Mr. John Burnett (Torridge and West Devon)
I am grateful to the Minister for giving way. I shall refer to this in my speech, if I am fortunate enough to catch your eye, Mr. Deputy Speaker. The Minister says that the limited liability partnership will be useful for other businesses. Will it be useful for other incorporated businesses? If so, it would be a lot more useful for incorporated businesses—that is, limited companies—if the tax penalties on disincorporation were eased.
§ Dr. Howells
I hope that the hon. Gentleman will bear with me. I shall deal with tax separately and in some detail, as it is a crucial component of the Bill.
In November 1999, the Bill was introduced in another place, where there was wide support for the concept. That is not to say that the Bill's passage through the other place was uneventful. A lively and useful debate took place, and the Government made a number of amendments, with which I shall deal later.
I am pleased to say that the Bill is in very good shape, and I thank Members of the other place for their contribution to bringing that about. We believe that the right balance has been struck between the interests of those who will want to be llps and of those who will do business with them.
Although the new entity is called a limited liability partnership, in many ways it is neither fish nor fowl. In some respects, it is closer to a partnership, while in others it is closer to a company. That hybrid quality has been at the root of most debates on the measure, with some wanting the entity to be allied more closely to a partnership and others wanting it to be allied more closely to a company.
We had to strike a balance. While members will be free to agree among themselves, their relationship being rather like that of members of other kinds of partnership, the llp itself will be a separate legal entity, owned by the members. That means that it will be able to enter into contracts, hold property and continue to exist independent of changes in membership. In that sense, llps will be closer to companies than to partnerships. We will 890 therefore apply to llps, by way regulation, appropriately modified companies legislation—for example, the Companies Act 1985, the Insolvency Act 1986 and the Company Directors Disqualification Act 1986.
The limited liability of the members is also clearly more closely akin to the position of a company than to that of a partnership. Limited liability is a privilege, and we need to ensure that it is not abused. The companies and insolvency legislation will help to do that.
Clause 6 makes it plain that a third party dealing with an llp will be entitled to rely on the fact that the member is an agent of the llp, but because the llp is a separate legal entity, we expect the third-party contract to be with the llp rather than with the member. That mirrors what happens in the case of companies. It is anticipated that, in the event of a claim for negligence, the claim would be against the llp rather than the member.
§ Mr. Burnett
I thought that an overriding principle of the Bill was that a member who conducted work for an individual client would be liable to the extent of the entirety of his assets, if he was found to be negligent.
§ Dr. Howells
That is absolutely true. If he is found to be negligent, he will be liable to exactly the same punishments, and to be pursued in the same way, as the director of a company; there is no doubt about that. The llp, however, is the first port of call when there is deemed to be a problem.
The llp would be liable to the full extent of its assets, but—I think that this is what the hon. Gentleman is getting at—that does not rule out the option of the third party's pursuing the negligent member as well. The third party, however, would only be able to sue the negligent member in tort, as the contract would have to be with the llp. Tort liability may be much more difficult to prove.
Clients of the llp will need to be made aware of the nature of the entity with which they are dealing. To help ensure that, firms using the abbreviation "llp" after their names will have to mention on their business letters and order forms that the letters stand for "limited liability partnership".
The Bill also requires that two or more people must be associated for the carrying on of a lawful business with a view to profit, and that their names must be on the incorporation document. The limited liability partnership and its members must be registered at Companies House. Its records must be kept up to date. The llp must also have two designated members whose responsibilities include filing the annual return, notifying Companies House of changes in membership and of any change to the address of the registered office.
Taxation is the other main subject of the Bill. The hon. Member for Torridge and West Devon (Mr. Burnett) asked about that. The Bill expressly provides for llp to be taxed as though they were partnerships. Without such provisions, they would be taxed as companies because, elsewhere, the Bill provides that they are corporate bodies. Although llp will be corporate bodies, they will retain the partnership ethos at their core. Like partnerships, llp will consist of members who are involved in running the firm. We anticipate that they will continue to be an important source of working capital. It was therefore agreed that it was more appropriate for an llp to be taxed as a partnership than as a company.
891 Several amendments were tabled to the tax provisions in another place. They were technical amendments, which were intended to ensure that the legislation achieved our objectives more effectively. One amendment was intended to apply sections 117 and 118 of the Income and Corporation Taxes Act 1988, with appropriate modifications, to llps. The purpose was to ensure that they could not be exploited for specific forms of tax avoidance. That would have involved members of llp being able to obtain tax relief for a loss sustained beyond their personal obligation to meet it.
Amendments were also made to ensure that the transfer of partnership assets from an existing partnership to an llp would be tax neutral. We thus maintain our policy of ensuring tax neutrality when conventional partnerships transform themselves into llps.
§ Mr. Burnett
When the Minister considers tax neutrality, I hope that he will refer to the possibility of limited liability companies becoming llp. Will he also confirm that, when he says that the transfer of a business or partnership into an llp will be tax neutral, it includes stamp duty?
§ Dr. Howells
I shall find out by the end of the debate. I believe that the provision includes stamp duty, but I shall confirm that later. Although I appreciate that the hon. Gentleman understands the purpose of the Bill, his initial and follow-up questions suggest a misunderstanding. I do not expect the Bill to be especially useful to incorporated businesses because they already have limited liability and have already organised themselves as a company. There is no reason for them to organise themselves into llps, which will be taxed as partnerships while companies are taxed as companies. I envisage no reason for, or easy way to make, the transformation of a company into an llp tax neutral.
§ Dr. Howells
That would be up to different companies. We hope to provide a new vehicle for companies and business; clearly, the decision would be up to them.
Another amendment was made to ensure that members were treated for national insurance purposes as if they were partners in a partnership. Although we believe that it is right to tax llps as partnerships, we are aware that the tax treatment may allow scope for llps to be used when the primary or only attraction of llp status is tax treatment. I sense that the hon. Member for Torridge and West Devon was hinting at that when he spoke. Clearly, that is not intended. We shall consider that issue carefully with the Inland Revenue and, depending on our conclusions, measures may be introduced in the 2001 Finance Bill. The Revenue will consult widely on its intentions. It is important to emphasise that we do not intend to undermine the commercial certainty of llps' taxation treatment for those businesses for which llp status was intended. That will be at the forefront of our minds, whatever options are proposed.
Apart from those on tax, several amendments were made in the other place, the most notable of which included clarifying that an llp's members will not be its employees and putting it beyond doubt that, if an llp 892 member were liable to a person for a wrongful act or omission in the course of the llp's business, it would be liable to the same extent as the member.
We intend to apply secondary legislation to llps, which will include similar requirements to those for companies; it may be useful if I touch on what that will mean. The regulations will include a requirement for financial disclosure equivalent to that required of companies, provision that members of an llp can be sued for wrongful or fraudulent trading and provision that members can be disqualified from being members of an llp and a company director. The regulations will apply, with appropriate modifications, the provisions of the Insolvency Act 1986. Those modifications include a measure that will deter members from siphoning off funds to the detriment of creditors.
We have published the draft regulations for consultation twice—in September 1998 and July 1999. We shall amend the regulations to take account of the concerns expressed by consultees and by Members of another place about the disapplication of partnership law to llps. That is part of considering how far we treat llps as partnerships and how far we treat them as companies. As a result, we shall include a default provision that will apply if there is no llp agreement or if the agreement does not cover a particular issue. The draft proposals were consulted on and generally welcomed by those who responded.
It might be suggested that a significant weight of legislation will be applied to such an entity and it would be understandable if hon. Members asked whether a lighter touch were preferable. The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) knows full well that I am very much in favour of a lighter touch. However, I would argue strongly that we shall provide for an entity that will have the privilege of limited liability and we must ensure that a balance is struck between the interests of business and an llp's potential clients. Becoming an llp will be a purely voluntary and commercial decision. Any firm that chooses to become an llp and wants limited liability will compare the llp with a company. Anyone who makes that comparison will find that the regulatory requirements applied to an llp are not unreasonable.
The Bill has benefited from the careful and measured attention of learned consultees, learned Members of another place and the Trade and Industry Committee. As a result, we have achieved the right balance in creating a new entity that combines limited liability with the organisational flexibility of a partnership while ensuring that appropriate safeguards are applied to protect those who deal with the entity. I am pleased to commend the measure to the House.
§ Mr. Nick Gibb (Bognor Regis and Littlehampton)
I declare an interest. Actually, it is not really an interest; it is more a confession: I am a chartered accountant. Some of my best friends are chartered accountants. Many of my friends work for chartered accountancy partnerships. I worked for such a partnership for 13 years before entering the House.
The Bill is welcome. It started life under the last Conservative Government in response to concerns, particularly from the accountancy and legal professions, 893 about the difficulties of unlimited liability. The prospect of losing one's house and savings because of the negligence of a fellow partner whom one may not even have met in a larger partnership was becoming a huge impediment to recruiting and retaining key personnel.
§ Mr. Austin Mitchell (Great Grimsby)
I am sure that the hon. Gentleman will go on to paint the tear-jerking spectacle of those in accountancy partnerships living in terror in case their yachts, farms, pubs and holiday retreats are suddenly confiscated, but has it ever happened? We estimate that the total revenue set aside from the fee income for contingency claims was no higher than 2.7 per cent. Most of the things that are claimed to be a threat over accountancy never materialised.
§ Mr. Gibb
It has happened in the United States. A number of medium-sized firms have got into severe difficulties and partners have lost their personal assets, but it is the fear of losing, through no fault of their own, assets for which people have worked all their lives that is wrong. It also has an unhealthy effect on the working method within the firms. People might argue, as the hon. Gentleman no doubt would, that the prospect of losing everything if one does poor-quality work for a client concentrates the mind wonderfully and so increases the quality of work. My experience is that the determination to keep clients is the driving force behind doing good work. The fear of negligence action acts as a dampener on the work.
Letters giving advice are packed full of caveats and disclaimers. Sometimes it is barely possible to discern the actual advice that the letter seeks to give. Huge resources are pumped into ensuring that terms of engagement are correctly documented and filed, not to improve the quality of the work, but to safeguard the firm in case of legal action. That is the consequence of the ever-present threat of legal action.
Even under the Bill, it will still be possible for partnerships to be sued, but the prospect of partners unconnected with the negligence losing everything will go. It is wrong that, in circumstances where—the Minister alluded to it—99 per cent. of the blame for something going wrong attaches to, say, the impecunious fraudulent director of a company, and the audit firm or solicitor can be shown to be just 1 per cent. to blame for what went wrong, they can be sued for 100 per cent. of the loss. Because many of the partnerships have deep pockets, it is to those firms that aggrieved investors turn for recompense.
The general legal concept of joint and several liability will not be changed by the Bill, but the concept and joint and several liability within a partnership will. The limited liability partnership will be suable for breach of contract to the full extent of its assets. The partner responsible for any negligence will, as the Minister said, be liable under tort, but the remaining partners will be able to sleep easy at night knowing that their personal assets will be safe.
The Bill has been through an enormous number of stages. The last Conservative Government issued a consultative document in February 1997. A draft Bill 894 issued by the present Government in September 1998 was scrutinised by the Select Committee on Trade and Industry. The Government issued a new draft in July last year and a final Bill came out in November. Despite all that pre-legislative scrutiny, during which many of the less attractive options were dropped, the Bill that went to the other place still had a number of problems.
Conservative Members were concerned that the Bill provided no default mechanism to the existing body of partnership law in circumstances where the partnership agreement is silent: for example, the right to share in capital and profits, the right of a member to take part in the business, procedures for retiring as a member and procedures for holding and calling meetings. We believe that there should be a default mechanism, so that those rules are covered.
We were concerned about the inherent ambiguities that could enable partners or members to be regarded by the Inland Revenue as employees of the llp. We were concerned about the absence of any definition of "designated member". There are plenty of subsections about the appointment of designated members and the requirement for two such members, but no mention of what they are meant to do.
We were concerned about the inadequacy of the taxation provisions. The Bill is meant to be tax neutral, as the Minister said, but, before it went to the other place, there was no clarity over whether transferring a partnership to an llp would trigger a tax charge on the cessation of the old partnership. There is no mention of stamp duty consequences. We had enormous concerns about the insolvency provisions, which appeared to apply much stricter tests on trading while insolvent than similar provisions applicable to companies. We were concerned about the acquisition accounting requirements that llp would automatically be required to adopt. As hon. Members will clearly understand, that method of accounting for the merger of two llps would be absurd given that they do not issue shares.
All those issues were raised in the other place by my noble Friend Baroness Buscombe. Thanks to her effort—and, one must acknowledge, to the reasonable approach of the Minister, Lord McIntosh—those concerns were largely taken on board and substantive amendments were made in Committee. We have always said that, as an Opposition, we will say it as it is. If the Government do the right thing, we will say so; if they do the wrong thing, we will oppose them. This is a good Bill—much better, it must be said, thanks to my noble Friend's scrutiny—but one or two loose ends and remaining criticisms need to be aired, to which we can return in detail in Committee.
Far too many key provisions are hidden in secondary legislation. From the now 19 clauses and one schedule, one would have no idea of some of the Bill's basic tenets. One would have no idea that a member of an llp will remain liable to the full extension of his personal assets, notwithstanding the limited liability, for negligent work that he or staff reporting to him had carried out; no idea about a host of important issues relating to the legal position of members if the llp trades while insolvent; no idea about which company law and which partnership rules will apply to the llp. Those matters are in a host of regulations to be issued under sections 14, 15 and 16.
895 The Trade and Industry Committee was highly critical of the degree of use of secondary legislation in the Bill. Its report states:There does not at first sight seem to be any over-riding reason why the Regulations and schedules should not be incorporated into the Bill…We would…far prefer that the detailed secondary legislation proposed be incorporated in the Bill.The Committee recommended that revised drafts should be resubmitted to it for re-examination. Has that happened? Was the Committee asked to have a look at the revised draft statutory instruments?
Lord Goodhart, a Liberal Democrat peer, said in the other place:The Delegated Powers and Deregulation Committee in your Lordships' House, of which I am a member, accepted the Government's proposals to put these provisions in regulations. But it seems to me that this comes close to the borderline and the more I look at sonic aspects of this Bill the more doubtful I am whether the Delegated Powers Committee was not rather too lenient.—[Official Report, House of Lords, 9 December 1999; Vol. 607, c. 1438.]He was right to express concern. The Committee's report draws attention to the fact that what is now clause 16 isa Henry VIII provision which allows regulations to amend or repeal primary…legislation.
§ Dr. Howells
The hon. Gentleman's criticisms are well placed: he is a well-known deregulator. However, is he aware that the first set of regulations will be subject to the affirmative procedure and that affirmative resolutions will then apply to anything that we introduce immediately afterwards? That should be some defence.
§ Mr. Gibb
I am aware of that, but I am grateful to the Minister for bringing it to the attention of the House. However, affirmative secondary legislation is still a far cry from primary legislation. Many regulations in that pile of draft regulations amend primary legislation. I have great concern, shared by many Members of both Houses, about secondary legislation amending primary legislation.
That was not the Committee's main concern. Its main concern was that the draft regulations created offences punishable on summary conviction by a fine, but the way in which those instruments were drafted was wide enough to allow the regulations to provide for imprisonment or for trial on indictment. The Committee thought that the Government intended to use those powers only to provide for summary trial and fine, and wanted that limitation to appear on the face of the Bill. As Lord McIntosh admitted in the other place,it is our intention to apply to LLPs the same offences as apply to companies…In some cases these offences are triable on indictment and punishable with imprisonment.—[Official Report, House of Lords, 9 December 1999; Vol. 607, c. 1421.]The Government wanted to see those powers to create offences which carry a punishment of imprisonment. Given that admission, and the fact that the Delegated Powers and Deregulation Committee had assumed in its conclusions that the delegated powers would not be used for such purposes, I urge the Committee's Chairman to look at the Bill again. I shall be interested to hear the Minister's response on that concern.
The over-use of delegated legislation is a serious matter, which should be of concern to all hon. Members. We shall seek to put it right, regardless of administrative inconvenience or precedent.
896 Our remaining concern over the drafting of the Bill relates to what have become known as the default provisions. The Minister also referred to them as such. Under clause 1, the whole body of partnership law is disapplied as regards llps except where it is explicitly provided for in the Bill. This is of concern because most of the firms that will want to convert to llp status will simply use their partnership agreement as the basis for the internal arrangements within the llp. The agreement may well be silent on a number of important issues, because well-established partnership law provides these details where they are not explicitly set out in the agreement. Small partnerships in particular will have relatively short agreements which may not include details such as the rules for the retirement of partners, the detailed rules about calling meetings or rules giving all parties the right to see the books and records. Those rights and rules are all there in general partnership law. To disapply that law may well cause difficulties for such smaller firms.
§ Dr. Howells
Presumably the hon. Gentleman is not arguing for over-prescription in terms of what a partnership should or should not be. One of the strengths of partnerships is the flexibility of arrangements. We are not seeking to take that away.
§ Mr. Gibb
I am grateful to the Minister for that intervention, but he misses the point. Our proposal in the other place was for a simple default provision where there were no provisions in an agreement about certain aspects of the partnership arrangement. When a crisis arose, those involved in a partnership could always fall back on those partnership laws that had evolved since 1890 through the courts and in statute. The Bill explicitly removes that default provision and could therefore give rise to difficulties. That is why in the other place my noble Friend Lady Buscombe proposed a provision that, for the avoidance of doubt, partnership law would apply if not otherwise excluded by the Bill. The Government rejected it on the grounds that, as the llp had a separate legal identity and would need primarily to adhere to the Companies Act rules, having a default to the partnership law rules might result in confusion and possible conflict.
§ Mr. Burnett
I agree with the central thrust of what the hon. Gentleman is saying. Does he agree that one of the great advantages of the Partnership Act 1890 is that not only has it stood the test of time, but a great deal of case law behind it is intelligible and easy to understand?
§ Mr. Gibb
The hon. Gentleman makes a very good point. We can never anticipate all the problems that will arise, but a hundred years of case law will probably have covered almost every likely contingency. We are rejecting that hundred years' experience in having clause 1(5) disapply all that body of partnership law.
We do not accept the Government's argument about why there should not be a default provision, because we are talking about the rules relating to the partnership agreement and the relationship between partners. The Law Society is also clear on that point. In its briefing for this debate, it states:The Law 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 a limited liability partnership and which would cover certain basic matters relating to the mutual rights and duties of the members of an LLP.897 In response to such concerns, the Government issued a consultation document in February, which proposed incorporating specific partnership law rules into delegated legislation under clause 15(c) of the Bill. The Government amended the Bill in the other place to enable that to happen. We will no doubt debate the issue in detail in Committee, but key provisions such as fundamental partnership rules should appear in primary legislation. We stick to our view that the Bill should contain an overall default provision.
I would also be grateful if the Minister could address another important concern raised by the Law Society over whether the Administration of Justice Act 1960, as in force, will permit firms of solicitors to adopt the new form of incorporation. It understands that the Act will need to be amended, so I hope that the Minister will respond to that point.
This is now a much improved and useful Bill that will assist professional firms to recruit and retain top-quality staff and partners who otherwise might be put off by the prospect of perpetual unlimited liability arising from the negligence of others. It should also reduce the risk of such partners fleeing to non-UK jurisdictions. Subject to our remaining concerns, which we will address in Committee and about which I trust the Minister will be as reasonable as his colleague in the other place, we remain supportive of an important and useful Bill.
§ Mr. Austin Mitchell (Great Grimsby)
I tend to get suspicious when I hear bipartisan bleating about how wonderful a Bill is, although that is not why I wished to speak. I do not know whether we will have a tripartisan bleat from the Liberals, although they put in some good work in opposition to the Bill in the House of Lords. I hope that that might be followed up here.
The Bill is not the epoch-making measure that it has been portrayed as, by both my hon. Friend the Minister and the Opposition. It is a shabby measure. If not sordid, it is at least suspect, and it is interesting that the songs of praise for it have come largely—in fact, overwhelmingly—from the vested interests. It is regarded as a technical Bill, but it will have enormous repercussions that should be more widely discussed. Unfortunately, we cannot discuss them in an atmosphere in which everyone agrees that the Bill is wonderful.
The Bill will take the limited liability partnership—a device that began as a vehicle for tax evasion in Texas and Delaware, specifically to limit the tax obligations of partners in firms—and turn it into a new vehicle for corporate business. We do not know what the consequences of doing that will be. They could be substantial or they could be minimal. I fear that they will be more substantial than we think.
The change in company and partnership law is being done at the behest of the mighty and the greedy, and indeed the mighty greedy. The lobby for the Bill comes overwhelmingly from the big five—formerly big six, until they started eating each other—accountancy houses. The fee revenue of the big five was £4.5 billion in this country alone in 1999. That makes them powerful organisations, and I do not like the spectacle of the Government rushing to serve their purposes, their greed and their desire to 898 protect their profits, revenues and incomes as partners. I can understand the Conservatives doing that, because that was the whole process of Conservative Government for 18 years, and it is fitting that they began the Bill. I am more doubtful when a Labour Government pursue the measure. After all, Labour is a new and pristine party that will not make concessions to vested interests. We must ask why the Bill is being introduced—and especially why now?
We know that the legislative timetable is packed. We know that there is a long queue of Bills. Discussions at the meeting of the parliamentary Labour party last week produced an enormous list of proposals from Labour Members for the legislative programme next year. These proposals included measures to deal with hunting with dogs; housing, including multiple occupancy; pensioners and carers, especially action on long-term care; the regulation of the private security industry; regulation and reform of park homes; equality and employment legislation; and consumer protection measures.
Those proposals are only a part of the list. There is an enormous list of socially responsible and sensible legislation that needs to be introduced, but we are told that that cannot happen because of pressures on the legislative timetable. However, one of those pressures is this sordid little Bill. Why is it being introduced, and why now?
It is a concession to a major vested interest, that of the big five accountancy houses. Unfortunately, it is not matched by any balancing changes to afford protection against any of the powers that are being given through the Bill. The Bill includes no protection for consumers of accounts—they are pretty weak or impotent when it comes to dealing with the big five or with unreasonable audits. Stakeholders in companies have very few rights to protect them from negligent auditors, but we are rushing to strengthen the position of those auditors. It is unreasonable to proceed in that way.
If we are to make such a concession to the big accountancy houses—we are giving them a special privilege—let us also give some privileges to the consumers of accounts, to stakeholders and to those who suffer from negligent auditors. We should reverse the Caparo judgment; we should impose a duty of care on auditors; and we should stop auditors taking on other business and thus introducing dilution. Company law imposes liability. Directors are responsible and liable if they publish false and misleading accounts. However, if an auditor publishes such accounts, there is no responsibility. Nevertheless the Bill will give auditors increased privileges.
The provisions that I have suggested could have been dealt with at the same time as the Bill. There is no reason for haste. That is why I have asked why the Bill is being dealt with so quickly. The Department of Trade and Industry company law review is continuing. It may propose some of the changes that I would like to see to redress the balance towards the consumer. Why not make these changes at the same time? That should be part of the deal.
If the big accountancy houses want to secure a special concession, in return they should make concessions to protect the consumer. However, they are not doing so, and we are handing them a concession on a plate. That is extremely unreasonable, especially for small shareholders, along with the stakeholders and employees who want to 899 know what is going on in their company and want honest, objective and effective audits. It is unreasonable similarly for those who rely on accounts to make investments. We are not giving those people any concessions while the vested interest is getting all that it wants. It seems that the consumers of accounts were not consulted in that process.
What about Lord Paul and his experiences with the purchase of a Fidelity radio? He found that if he was to sue the auditors he had to buy the company and sue the directors, who then had to sue the auditors. That sort of experience gives me no faith in redress against auditors, yet auditing is a monopoly granted by the state to a particular class of people. Why are we giving them a concession when it is surely our job to regulate them?
The United Kingdom has public limited companies and 600,000 partnerships. Now, we are creating an intermediate breed, limited liability partnerships, which might even be called a corporate third way—although I do not think that such a development was envisaged in Professor Giddens's third way. This development could have severe consequences. Such partnerships could be established by fraudsters and by those who have been disqualified as company directors. We are diluting controls over those people, who could slough off their responsibilities.
I know that new Labour is nice to business, and that it is right that we should be nice to business. All sections of the community have to get on. We are not in a class war and we no longer feel basic antagonism towards business. I also know that the accountancy houses have been very nice to Labour. When we were in opposition, they gave employment to people who have subsequently become Ministers. They have organised conferences for us, provided advisers and advice, and even attended our fund-raising dinners. They have done us good service. I do not think that they did that with any view of a return such as the Bill—they are averse to such sordid motives—but they are not averse to getting this legislation.
The legislation's origins are very murky indeed. I should like to detail those origins because they are not based solely on a process of consideration, as we have been led to believe by the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) and Ministers. The fact is that the big accountancy houses got into a panic—which was well detailed by the hon. Gentleman—because, as they have deep pockets, they felt vulnerable. They were afraid that people would make huge claims against auditors. They were afraid that people were thinking, "If you cannot do anything else, you can make a claim against the auditors." However, the panic that possessed auditors bore no relation to reality. It also took no account of their own involvement in their own mistakes.
These days, the accountancy houses offer auditing services to the big public limited companies and essentially use those services as a market stall from which to sell other accountancy services. They get their foot in at the plcs by auditing them, and then use the audit service as the basis for selling other services to the company. That practice, however, dilutes the auditing process. Obviously, if they want to sell other services to the firm, they will be complacent in auditing. Audit problems in such situations are, therefore, of the auditors' own making.
There may be audit problems and dodgy companies, but who made the auditors take on those companies as clients? Who made them take on Maxwell? What force 900 was used to make auditors audit the Maxwell accounts or the Bank of Credit and Commerce International accounts? Auditors do not need to take on the accounts of dodgy companies. They should, therefore, face the consequences of dealing with such companies. The accountancy houses are in that position because of their own greed and their desire to maximise both fee income and the sale of other services to audit clients.
The hon. Member for Bognor Regis and Littlehampton tried to hype up the houses' panic and alarm, but all the examples that he gave were from America. He could not produce any evidence of huge claims. The Select Committee on Trade and Industry also commented on the lack of evidence. Even the figures that have been mentioned are suspect, because they are the claim figures, not the settlement figures—which have not only been kept very quiet, but are very small indeed.
The hon. Gentleman also took no account of the fact that those who sue auditors usually come from other parts of the same big five accountancy house. Usually, the insolvency arm of an accountancy house sues to reclaim money from the audit arm at the same or another big five accountancy house. It is the worst type of incestuous suing. The tenor that auditors have expressed is terror of themselves and of other parts of their own firm.
§ Mr. Mitchell
I do not condemn the ability of audit firms to do their job well, but they are influenced by a desire to sell other services, which might make them more complacent than they would otherwise be. Business needs good, honourable auditors of integrity who provide a true and fair account of the affairs of the company. I do not want any constraint on that. If auditors do not do that, they should suffer the consequences. The Bill does not provide for that. We are protecting them from suffering the consequences by allowing them to escape the liability. We are not giving them any discipline or sanction to force them to provide that service.
§ Dr. Howells
I made it clear in my speech that limited liability partnerships are subject to all the same restrictions and controls as companies on fraudulent dealing or any other form of misdemeanour. I do not understand why my hon. Friend thinks that they are suddenly above the law.
§ Mr. Mitchell
I do not think that they are above the law, but no protection has been offered to the consumer. Admittedly, partnerships as they exist do not provide such protection, but we need a sanction against bad audits, fraudulent audits or misguided audits, which at present we do not have. The Bill will limit the liability of partners who might have been responsible for such audits. My figures suggest that only 2.7 per cent. of the total fee income of the big five goes on liability-related expenditure. Their huge tenor about the grab at their deep pockets is over 2.7 per cent. of their fee income. It is difficult to get verifiable information about that.
The accountancy firms tried to panic the Conservative Government, who referred the issue to the Law Commission. On the ground that proportionate liability 901 did not fit in, the Law Commission said no go—it might have said it in Latin, but it said that the firms could not have that special concession.
The big audit firms then began another devious manoeuvre. They were so anxious to secure limited liability that they went to the Jersey legislature and tried to buy legislation on their own terms. It was drawn up by Slaughter and May and financed by what was then Price Waterhouse and by Ernst and Young at a cost of £1 million. The Jersey law draftsmen found the legislation very unsatisfactory, but it gave the big audit firms all that they wanted. One of the senior partners of Price Waterhouse said that they were promised that it would be nodded through.
Unfortunately, the legislation that the firms wanted was not drawn up properly and the Jersey legislative draftsmen raised doubts. Attempts to rush it through caused protests and the expulsion of Senator Syvaret. It was delayed and the firms did not get the fast-track procedure that they wanted. When they got the legislation, they were warned by the Inland Revenue that there would be tax consequences if they set themselves up as limited liability partnerships in Jersey—so, after all that effort buying legislation in Jersey, no firm went there. They were using the process as a means of pressuring the Conservative Government. The hon. Member for Bognor Regis and Littlehampton has told us how proud he is of his accountant friends. Some of my best friends are accountants. A fear was created in the Conservative Government that all those black-coated accountants would don their black suits and trot off to Jersey to work in the sun.
That threat produced action. The Conservative Government began to draw up the legislation, we have continued with that. They did so under pressure from the big five and with a departmental civil service that works in what I would call close collusion—but let us say cahoots or a relationship—with the big accountancy houses. They are anxious not to offend them and are keen to do what they want, as they did in this case.
I pay tribute to my hon. Friend the Minister for his willingness to listen to the criticisms. The same goes for his predecessor. Changes were made—for example, we warned that if the concession was given just to accountants, other professional groups would have a rights case against the Government that they should be able to set up limited liability partnerships, so the original intention had to be widened.
However, the pressure was too strong and the Bill is the result. I still do not understand why it is necessary. I sat on the Committee that considered the Companies Bill in 1989—it was my last great effort as a Front-Bench Labour spokesperson. I was fired just before the Committee began its proceedings, but I still took a close interest in it. That legislation gave the accountancy houses the right to set themselves up as plcs if they wanted. They had been pressing for that, claiming that the fate of the accountancy profession depended on being given plc status. We gave them it, but only one accountancy firm took it up, converting its audit arm into a plc. That shows how they panicked. That alternative is still available. Why do they not want to be plcs? Why do they want special limited liability partnership status?
902 In 1991, the Institute of Chartered Accountants in England and Wales said thatthe obligation…to publish their accounts is perceived as a considerable drawback.In other words, the firms want to keep their business to themselves. They do not want the partners to have to reveal their income. They do not want to reveal anything beyond the firm's total fee income. That is why they did not want to take up the offer of plc status.
We are giving those firms what they wanted. I am not sure of the tax position. As partnerships, they have advantages over plcs. The Bill does not create a new tax regime for llps. The Bill says that the tax effects are neutral. I am not sure. I hope that my hon. Friend will deal with that. Large numbers of plcs might see the benefits and convert themselves into llps. What is to stop them? There could be a mass exodus, not from partnerships to limited liability partnerships, but from plcs to llps. Do the Government anticipate that? Has there been an estimate of the possible scale of that? What are the restrictions?
Such a move would minimise corporation tax obligations. Indeed, the firms would escape the corporation tax regime and move on to schedule case 1 and 2. That requires them to be taxed on a cash basis, not an accrual basis. They can stagger their payments over a far longer period than plcs can. That is the advantage. Any account can be shifted from one year to another.
Expenditure on entertainment—or whatever—for plcs has to be wholly, exclusively and necessarily required. That is three obligations. For partnerships, the word "necessarily" is dropped. That is a much laxer tax regime on entertainment spending. Companies pay corporation tax nine months after the end of the year; llp partners have up to 21 months to pay their tax. That gives much more scope and must offer tax savings. As legal entities, plcs have a liability to pay tax and llps do not. The partners, not the organisation, are liable. The organisation can have no assets and be only a shell.
It is quite possible that there will be a loss of tax. We estimate that the shift from partnerships to limited liability partnerships will result in a tax loss of about £200 million a year. I can think of a lot better uses for £200 million, if our estimate is correct, than giving it to accountants, such as spending it on social purposes.
§ Dr. Howells
Will my hon. Friend tell me to whom he is referring when he says that "we" estimate that the measure will mean £200 million a year less in tax for the Inland Revenue?
§ Mr. Mitchell
I am referring to my associated body of accountants. That sounds like a massive Oxford college. Two accountants, another Member of Parliament and I have worked this out on the basis of the existing liability. The figures are perfectly credible. I am not a tax expert but the accountants are, and that is their assessment.
The limited liability partnership in Jersey was pretty weak, but it required the llps to post a bond of 5 million quid if they were going to operate. There was that to fall back on. I see no similar safeguard in this Bill, which leaves the way open for people to fiddle.
903 If I laid a legal claim against a limited liability partnership, it would take years to resolve. The Maxwell case took nearly a decade. As for the Bank of Credit and Commerce International case—
§ Mr. Mitchell
My hon. Friend is quite right. Let us suppose that my claim against the limited liability partnership is for £50 million. However, the partnership has no assets—it does not exist. There is nothing that can be seized or given to me when I win my case. What is there to stop the partners siphoning off the dosh over the years—the case will take several years to reach the courts—and turning the llp into a shell company with no brass at all?
The Bill allows for the recouping of payments for the previous two years. That is too short a period, considering that law cases go on for years. All credit to the Government for providing for a two-year period, but why not make it five? Otherwise, anyone winning litigation against a limited liability partnership could end up with nothing because there is nothing to be had. The money could have been siphoned off by the partners, whose liability has been limited.
We are all in favour of greater openness from companies, plcs, business in general and the Government. We all want to see disclosure. Some—not enough—is provided for by law in relation to plcs but not for limited liability partnerships, which will operate in a fashion akin to plcs. How much the partners are paid should be public knowledge. We need to know what their interest is and what their incomes are. Surely there is nothing to hide. One of the partners in an accountancy firm declared in the House of Lords that he had nothing to hide. He was quite happy for his income to be published. We need to extend the obligation to publish. Indeed, there is much less of an obligation on llps to publish than there is on plcs.
I hope that there will be new legislation on companies soon. When we use it to extend the obligations on companies to publish in their accounts factors such as low pay or their environmental record, will the same proposals extend to limited liability partnerships? Why are we creating a third category of corporate entity to which the obligations imposed on plcs do not apply? There is not enough information.
My final point is about regulation. Companies are regulated by the market, competition, the takeover panel and the Competition Commission. There is regulation of plcs, but who will regulate the llps? In accountancy, regulation is provided by professional bodies such as the Institute of Chartered Accountants and the Association of Chartered Certified Accountants. They are small compared with the huge might of the big five. The big five provide most of the staff when it comes to regulation—[Interruption.] It is good to know that my speech is exciting such interest. I am delighted that so many supporters of restricting llp status are gathering, muttering, "My heavens, he's right. This is true—we must take action."
There is no effective regulation. We do not have the sort of independent regulation that the Securities and Exchange Commission provides in the United States. It is reasonable for llps to have a proper framework of regulation.
904 Those are my worries about the Bill. I know that my hon. Friend has listened to our criticisms and I am grateful to him. I hope to make more points in Committee. They have to be taken into account, because the Bill gives privileges to a very wealthy and powerful body, and in particular the big five accountancy institutions. We are disturbing the existing structure of corporate governance and partnership governance to do that, without giving any concessions to the consumers of accounts. I question whether, at this stage, we should be doing that in this way.
§ 6.7 pm
§ Mr. John Burnett (Torridge and West Devon)
I should disclose at the outset that I am a solicitor, although I do not practise as such at the moment.
The Bill creates an entirely new and separate business entity which will be a legal person itself, similar to a limited company, called a limited liability partnership. It is open to any business to become an llp, provided that more than one individual or company is conducting the business. I shall lead on to the position of overseas partners, corporate partners and other matters. In an llp—unlike like a partnership—the liability of members will be limited. However, each member will owe a duty of care to his or her clients or customers in tort. In the event that an individual member is negligent, that member will be liable to the full extent of his or her own personal assets.
Other members—innocent members, for want of a better expression—will have no such personal liability. Claims, however, can be made against the llp to the full extent of its, rather than its members', assets.
§ Mr. Mitchell
The partnership is selling itself on its reputation and its work as a partnership, as a team of people. It might be 600-strong. It is the collective body and it is its reputation that is being sold. Why should not the other partners, whom the hon. Gentleman described as innocent, have a liability too?
§ Mr. Burnett
Because a limited liability partnership is a new entity and reflects the facts of life today. Joint and several liability is very unfair in certain circumstances.
The Bill requires the initials llp or the words "limited liability partnership" to follow the name of the business. That will advertise its status. The llp will be obliged to be registered at Companies House, along with a list of its members, and records must be kept up to date. I shall come back to that point later in my speech, although I understand that there will be a further tier of creditor protection in the requirement for financial disclosure, similar to that required in respect of limited companies. I believe that the Government will in due course publish regulations to deal with insolvency and the winding up of llps, and to deter avoidance of liability by members, which would jeopardise the position of creditors. I believe that the Government intend to apply to llps the same offences that apply to companies under the Companies and Insolvency Acts. I shall refer later to tax treatment of llps.
There has been much pressure on the Government from large, international legal and accounting firms for the introduction of this new business entity. I understand the reasons for that. One must question whether it is fair for a partner in London to be liable for all his or her assets as a result of the negligence of a partner in some far-off 905 country whom he or she has probably never met—indeed, given the size of some firms, some UK partners have probably not met some others.
The Bill requires the most careful scrutiny in order to protect the public and the position of creditors of llps. I shall concentrate on the pool of cash and assets available to creditors and the general provisions for protection. The Minister will be aware that if llps make rapid or premature distributions to members, they can run on a deficit basis to ensure that there will be few or no assets to which creditors may have recourse. Professional firms, such as firms of accountants or solicitors, will have professional rules that impose obligations to have what one hopes will be adequate indemnity insurance cover, but the public should realise that that covers clients, not other creditors. It does not cover employees, except in so far as they are clients of the firm.
The position of creditors could be somewhat shaky under the arrangements. I emphasise the need for full and adequate disclosure at Companies House of the assets and liabilities of the llp. I should welcome the Minister's comments on vicarious liability. In large professional firms, many partners—members, as they will be called in llps—do little fee-earning work. A great deal of such work is done by employees, who will not be members. Is that a means by which members may shield their personal assets from liability? In other words, do direct contact and direct instruction to employees mean that there will be no recourse to any member's private assets? Members, particularly of large firms, can perfectly legitimately argue that their involvement in a practice or firm is managerial only. In cases of direct instruction to employees, what will be the member's personal position, and will employees be personally liable?
I appreciate that the llp will be liable in such cases, but there are compelling reasons for concern that some Ups may legitimately run on a deficit basis, to the detriment of clients, customers or creditors. My advice to professional clients in practice was always to avoid being a salaried partner: there are none of the advantages, and all the liabilities.
We all know what partnership liability is about. I was an equity partner in a law firm for many years. Such liability is joint and several, and it embraces all the assets of all equity partners and all salaried partners of the firm. That is certainly the case so far as outside creditors are concerned. A client of a major firm who is successful in an action against that firm may therefore have recourse to all the assets of all the partners, whether or not they are equity or salaried partners.
I should be grateful if the Minister would say whether consideration has been given to the consequences in the case of an individual who became a salaried member of an llp. Presumably, that individual would have no share in the profits of the firm and no say in its management. If the salaried member does the work for the client, will he or she be responsible to the extent of all his or her assets? If so, presumably the same may be said for employees. Those points emphasise the importance of creditor, client and customer protection.
The Bill envisages disclosure provisions similar to those applying to limited companies. Will the Minister elaborate on that form of disclosure? Will full accounts 906 have to be rendered annually of the financial affairs of the llp, including details of all shares of profits and salaries, especially those of the higher-earning members or the higher-earning employees? Will details of assets of the llp have to be included? I hope that details of all mortgages and charges, and of the amounts thereof, will be included in the information available to the public.
§ Dr. Howells
I may be able to help the hon. Gentleman. Only those firms in which the amount of profit before member remuneration and profit share exceeds £200,000 will have to state the amount of profit attributable to the member with the largest share.
§ Mr. Burnett
I am grateful to the Minister, but he mentions the member with the largest share when he surely means all the members. I shall leave it to the hon. Gentleman to return to that when he winds up the debate.
Presumably, on disclosure, all changes in membership of the firm will have to be notified to Companies House within a short period. I realise that, for tax purposes, all firms are going on to a full earnings basis. Nevertheless, the valuations for Inland Revenue purposes of work in progress or good will are pretty fluid and do not reflect the true value of such items. It may be that disclosure should be made of those items to show them as a true and fair valuation. That would make further assets of the firm or llp more apparent.
From a tax and administrative point of view, it will be easier to make distributions or allocations to members of an llp in their personal capacities than it is to make them to shareholders or directors of companies. Will there be rules on a sufficiency of distributable assets before distribution can be made to members? Will the company law offence of trading while insolvent be imported into the affairs of an llp? The last thing that the House will want to create is a business entity that opens up easy opportunities for fleecing the public.
It will be possible to start an llp by oral agreement, and I join the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) in saying that it is a shame that the provisions of the Partnership Act 1890—an excellent piece of legislation—will not apply. Heaven knows what chaos there will be in the circumstances in which an oral agreement forms the basis of an llp. The courts will be asked time and again to interpret the intentions of members where they have not been recorded in writing. Sometimes, I admit, written records may be even more misleading, but I hope that the Government will think again. The matter has been raised in the other place, and those of us who have worked for a long time with the 1890 Act know that it is excellent.
Significant tranches of the Bill have yet to see the light of day, and will be introduced by regulation. I noted what the Minister said about that, but I hope that important regulations will be subject to full scrutiny by both Houses. I have already mentioned legislation on insolvency and administration, but other regulations are to come. I understand that discussions are still proceeding with the Minister's Department in relation to clause 7(2) and the position of former members of an llp.
The main question is whether the DTI will relent on that clause and allow members to agree alternative arrangements to the fixed statutory arrangements. I remind the House of my earlier comments as to the flexibility of the 1890 Act.
907 Members of the public and, indeed, professional individuals would be most unwise to enter an llp without full and comprehensive advice from an expert. Presumably, the DTI has considered the foreign law implications of setting up an llp. At first sight, the matter would seem reasonably straightforward—individuals from any jurisdiction can form a UK-based llp. There will obviously be tax considerations, but such an arrangement would not seem inimical to the law of any overseas country, although I should welcome the Minister's comments on that point. Similarly, it would seem to be possible for a person to be a member of an llp that was a limited company that could be registered in any jurisdiction in the world.
I want to address the impact of revenue law on limited liability partnerships. The Minister has confirmed my understanding that the setting up of an llp is intended to be genuinely tax neutral—for all taxes, including stamp duty. Ministers have made statements to that effect, although they are not wholly correct. The matter depends on the medium in which the trade or profession is carried on immediately before the entity becomes an llp; if two individuals, who are conducting separate trades, decide to combine to form an llp or if an existing partnership or partnerships do so, the arrangement will probably be tax neutral.
I hope that the converse will apply—that, if an llp decides to dissolve itself into a series of businesses carried on by sole proprietors, a series of partnerships or a partnership, that process, too, will be tax neutral. As I pointed out, since the Finance Act 1998, transitional provisions have brought all firms on to a full earnings basis, rather than their staying on a cash basis. Presumably, such arrangements could be carried over one way or another—I should welcome the Minister's confirmation of that point.
As I pointed out in interventions on the Minister, a problem will arise when shareholders of a limited company want to form an llp. For about 20 years, Ministers and Inland Revenue officials have been pressed to ease the tax problems—especially those on capital gains—associated with disincorporation. Will the Minister hold consultations with his Treasury colleagues, dust off the disincorporation material and re-examine it? That would add to the flexibility of the UK economy, especially with the formation of this new business entity. There should be few problems in going from sole trader, partnership or llp into a limited company, but to go the other way would pose severe problems.
Subject to the caveats I have entered, the Bill should put the UK on an equal footing with many of our competitors—most notably the United States and areas of continental Europe where similar provisions already apply. Nevertheless, it is vital to secure proper protection for customers, clients and creditors. The Bill should contain nothing that would relieve individuals of personal responsibility for their actions and for the full extent of their assets.
Finally, a fundamental principle of the Bill should be that the price for the limitation of liability is full disclosure of the financial affairs of a business and that such information should be readily available to the public.
§ Mr. Stephen O'Brien (Eddisbury)
I apologise to the House for arriving slightly late. For the first time, I discovered the perils of having an office at 7 Millbank—when I read the annunciator screen and had to run to the Chamber.
I declare an interest as recorded in the Register of Members' Interests. Since last month, I have been parliamentary adviser to the Institute of Chartered Secretaries and Administrators—I have been a member of the institute since 1988 and a fellow since 1997. Before I became a Member, among various roles in management and manufacturing industry, I was assistant company secretary from 1988, and group company secretary from 1991 to 1998, of Redland plc, then a multinational UK FTSE 100 building materials company. Furthermore, between 1983 and 1988, I practised as a solicitor in a City of London firm. Although I remain on the roll of solicitors, I have no declarable interest, as I am non-practising. That qualification enabled me to hold the post of company secretary of a public limited company under the Companies Acts.
I welcome the Bill and congratulate my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) on a positive and supportive speech and on his identification of issues that remain to be addressed by the Government. That will ensure that the House improves the Bill so that it is of the quality that our professional and business community has a right to expect from us.
I pay tribute to the calibre of debate on the Bill in another place. I studied the proceedings in detail in Hansard. Their lordships dealt responsibly and forensically with a range of issues. I am happy to offer my support from the Opposition Benches. As has been mentioned, the previous Conservative Government proposed such a measure.
From my business experience in this country and abroad, I see the Bill as an important step in acknowledging the reality of the professional and commercial world—in the context of today's multinational companies and partnerships. The Bill is necessary not only to retain competitiveness, but to maintain and increase confidence in the corporate and legal structures for professional and commercial enterprises in the UK—whether large, medium or small—so that they can continue to take on all corners.
In response to the hon. Member for Great Grimsby (Mr. Mitchell), plc status is not the answer. Llp status best enables the retention and enhancement of the special culture of partnerships which is not a hallmark of plcs. It is important to understand the essential business ingredient that such a culture represents.
§ Mr. Mitchell
In that case, there will be a rush to give us maximum disclosure—as would be appropriate for a plc. If llps want to retain a special culture, the Government are allowing them to do so. There would thus be no objection to further disclosure on, for example, remuneration or internal company accounts—all the information that plcs have to provide.
§ Mr. O'Brien
I know that the hon. Gentleman has a long track record in favour of that argument. However, it is based on the false premise that disclosure goes hand in hand with the genuine interest of those who need the 909 information. The whole point about partnerships and about llps is that they are a collection of members—they will hold that information among themselves. A plc has many shareholders who have a right to the information. The analogy is not a proper one.
§ Mr. Burnett
Does the hon. Gentleman agree that it is in the interests of the public, creditors and clients that, when they deal with a firm with limited liability—because there will be some limited liability—full disclosure should be made?
§ Mr. O'Brien
Of course. The hon. Gentleman makes a valid point. However, that matter is covered by general rules, regulations and laws that will apply as well as the specific provisions of the Bill.
I shall focus my remarks on one aspect of the Bill, for the very good reason that all the other points have been fully covered in our debate and in the debate in another place, and I do not want to take up the time of the House by rehearsing those arguments. First, however, I offer a mild, general warning. As has been said, the drive for the Bill came mainly from firms or partnerships of accountants, solicitors and other professional services firms—especially larger, often international, firms. This country can rightly boast of our track record of global, competitive success in those fields. However, in our increasingly litigious and insurance-focused society, the pressures and inappropriateness of partners being responsible—down to the shirt on their backs—for liabilities, acts and omissions of other parties are neither competitive nor sensible. It is increasingly unrealistic and unreasonable for partners to have sufficient knowledge to be held personally responsible. I understand that and thus support the Bill.
However, I draw the House's attention to experience in the United States, where llps have existed for some time. The equivalent corporate structures apply under Californian legislation, as well as under Texas and Delaware law—a point not lost on the hon. Member for Great Grimsby. In large part, they are similar to the structure promulgated under the Bill.
I have personal knowledge and experience of how rapidly the llp structure came to be widely used for joint ventures such as those between manufacturing companies. There were many advantages, especially when non-US international companies came together in a joint enterprise for no premium. The structure offered relatively favourable tax advantages, as compared with the traditional company.
The Government should take advice on the matter from their specialist advisers, to ensure that the Bill has been reviewed in the light of the American experience. There must be no unexpected consequences flowing from the Bill if the llp structure is applied beyond the professional partnerships that the Government appear to have had in mind throughout their approach to its drafting and introduction.
I shall restrict my remaining remarks to matters of which I have experience and know a little about. Clause 8 910 deals with designated members. On Second Reading in another place, my noble Friend Baroness Buscombe questionedthe 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 to ensure compliance or impose penalties.I do not agree with my noble Friend's suggestion thatthe 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.—[Official Report, House of Lords, 9 December 1999; Vol. 607, c. 1424.]Lord McIntosh of Haringey replied thatthe noble Baroness was afraid of the role of the designated member. That is very specific and similar to the role of the company secretary. It includes a number of the powers placed on the company secretary under the 1985 Act such as the signing and filing of the annual return…It is desirable to keep the concept of a designated member for those purposes so that the authorities know who to approach.—[Official Report, House of Lords, 9 December 199; Vol. 607, c. 1443.]He added that it was equivalent to the provisions in the Companies Act 1985.
I understand my noble Friend's concern. I agree with Lord McIntosh's response in terms of the desirability of keeping the requirement, but the matter was developed in Committee in another place, when my noble Friend Baroness Buscombe tabled an amendment to clarify the role of the designated member. She said that the Bill did not appear to explain what a designated member was. Lord McIntosh answered that he understood the difficulty with clause 8:It sets up all the conditions under which designated members are to be appointed and changed and how notification is to be given, but it does not state what they will do. I apologise for that…but it would be wrong to limit his role in that way.—[Official Report, House of Lords, 24 January 1999: Vol. 608, c. 1387–88.]I believe that that problem has not been overcome. The House must ensure that all the terms of good corporate governance that have been learned and applied over the past 15 years are imported into the Bill. One solution, given the broad scale of business most likely to take advantage of llp status, would be to look at the role of secretary for limited companies, as defined under the Companies Acts, and to consider whether those provisions could be imported helpfully and efficiently into the Bill.
The role of the company secretary is under consideration as part of the Department of Trade and Industry's company law review, and is a matter for consultation. I acknowledge that parallel thinking is going on about the matter.
I suggest that a designated secretary need not be a member of an llp, just as the Cadbury reforms of corporate governance mean that a company secretary need not be a director of a company. That designated secretary could be appointed—and removed—by all the members.
I hope that the Minister will consider providing that every llp and its members should have recourse to the advice and support of a named, UK-resident llp secretary. That might meet the concerns expressed by Baroness Buscombe in another place. That llp secretary should be suitably qualified to assist members in safeguarding the llp's rights, advancing its interests and meeting its obligations. The secretary should be able to provide the 911 necessary advice and guidance to members about their obligations and responsibilities under relevant laws and regulations.
The company secretary is often said to act as the conscience of a limited liability company. Under current company law, company secretaries do not have to be chartered secretaries or members of the Institute of Chartered Secretaries and Administrators. The secretary of a small company can be any person. The secretary of a plc can be a qualified lawyer or accountant, as well as a chartered secretary, so I am not making an exclusive or special plea for chartered secretaries—and in any case the rules of the House would prevent me from doing so, given the interests that I listed at the beginning of my remarks.
I hope that the Government will consider the proposal that an llp must have a secretary. That would help meet the concerns expressed by the hon. Member for Great Grimsby. More important, it would enable the members of the llp to give proper regard to the interests of the company as a whole. They would be able to monitor the internal activities of the llp, safeguard the interests of all members and ensure that the interests of employees, creditors and other stakeholders were properly taken into account.
Llp members, in addition, could be confident that the members were being properly informed, advised and supported, individually and collectively. They would be able to help avoid some of the potential for factionalism that can develop in such firms, and be satisfied that there was someone available to take responsibility for internal disclosure in the llp.
The proposal could also ensure that the llp's decisions were properly made, recorded and implemented throughout the organisation, and that the decisions of the llp executive were properly interpreted and disseminated. Above all, it would ensure proper compliance with all statutory requirements.
I have listed my caveat, request and recommendation with regard to the Bill, but I am very happy to support what is a very welcome measure.
§ Dr. Howells
With the leave of the House, I shall respond to the debate.
We have had a good and valuable debate. I am pleased that the Bill has aroused so much interest, after an inauspicious start when the hon. Member for Torridge and West Devon (Mr. Burnett) seemed to be on his way out of the Chamber. I was glad that he did a U-turn and came back in. The debates in Committee should be interesting, and I shall try to deal with some of the many questions that have been raised this evening.
First, however, I want to thank the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb). His criticisms were constructive and he made some kind remarks about the way in which the Government have taken the Bill forward.
The hon. Member for Bognor Regis and Littlehampton asked about the imposition of fines and the power to imprison people for offences. The treatment applied to llps in that regard will be the same as that which applies to companies. The offences in the Companies Act 1985 were agreed to be appropriate for corporate entities such as companies. The Government intend only to apply the same offences and penalties to llps.
912 There is no reason why a member of an llp should suffer a lesser penalty than the director of a company for the same offence. I hope that that answer goes some way to satisfying some of the criticisms raised by my hon. Friend the Member for Great Grimsby (Mr. Mitchell), to which I shall turn in more detail in a moment.
The hon. Member for Bognor Regis and Littlehampton also said that the Law Society wanted the Administration of Justice Act 1960 to be amended to enable solicitors to become llps. Departmental officials have been discussing the matter with the Law Society and the Lord Chancellor's Department, but the hon. Gentleman will know that the legislation governing solicitors is very complex. Further consideration is being given to the necessary changes and to how they could be given legislative effect.
The hon. Member for Bognor Regis and Littlehampton asked about default provisions, which will be set out in regulation, as clause 5(1)(b) makes clear. I see no strong reason to put the regulations on the face of the Bill. They will apply in default, where there is no agreement, or where an agreement is inadequate. It is not usual for default provisions to appear in primary legislation.
My hon. Friend the Member for Great Grimsby made some vehement criticisms. I very much welcome his contribution, which was infused with the crusading spirit that he deployed on behalf of the victims of a number of prominent and disgraceful scams in which, I am afraid, accountancy firms played a shoddy and collusive role. In a sense, he asked a question: why should businesses have to organise themselves as a company to gain limited liability, provided that appropriate safeguards are in place to protect clients and third parties? I wonder what harm there is in that choice if the safeguards are there.
Creation of limited liability partnerships will allow our businesses to compete internationally with those already organised as llps overseas. That is an important issue. It is no good having companies if they cannot compete with similar companies overseas. We shall lose jobs, services and expertise in the long run. That point must be made, as it is a very important one for businesses that operate globally.
Many firms wish to maintain a partnership ethos, with every member having a stake in the business and a role in management as well as operating in good faith towards fellow members. It is difficult, particularly for a large firm, to sustain such an ethos in a company structure. Several hon. Members have made that point and it is important.
My hon. Friend asked with great energy whether the Bill was not just a sop to the accountancy profession. Indeed, much sniping has suggested that the Bill is a concession to the profession. That is not the case. As I have said, there is no reason why businesses should have to organise themselves as a company to obtain limited liability, provided that appropriate safeguards are in place to protect clients and third parties. The Bill, along with the intended regulations, will achieve an appropriate level of protection.
In addition, the llp will not be restricted to accountants nor even to professionals. We took the decision some time ago that the llp will be available to any firm of two or more people. We expect that it will prove attractive to start-up businesses that may or may not be comprised of professionals. Although the internal organisation of the llp 913 will be for its members to agree—that agreement will remain confidential to them—the intention is to make regulations that will apply appropriately modified provisions from company law. Clauses 14 and 15 provide powers to do that. That means that members and/or the llp itself can be pursued, for example, for wrongful or fraudulent trading—a point that was at the heart of my hon. Friend's criticisms. The llp can also be investigated and members can be disqualified from being a member of an llp and from being a director of a company. Specific provision will be made to ensure that members cannot siphon off funds in the event of insolvency. Regulations will also require llps to file financial information equivalent to that required of a company.
My hon. Friend's underlying criticism related to the regulation of professionals. I want to be clear; it is not the Bill's function to regulate professional activity. Where regulation for a particular activity is thought necessary, the activity—not the entity through which it operates—will be regulated. Regulation will be achieved through a mixture of statutory and non-statutory regulation. That means that it does not matter whether a professional chooses to operate as a partnership, a company, a sole trader or, in future, as an llp. If the activity is regulated, it will continue to be regulated regardless of what status the professional chooses for his business.
That does not mean that I am unsympathetic to my hon. Friend's arguments about the regulation of professions. I am glad that the Office of Fair Trading has decided, at long last, to take a good look at the way in which some professions operate. However, that is not what the Bill is about.
My hon. Friend raised the question of company law review and auditor liability. The consultation document published by the company law review steering group in March invited comments on a number of issues relating to the audit and the auditor. In particular, the document expressed the view that there was a need both to extend the range of the auditor's duty of care and to ensure that that extension is not abused. It was suggested that that should be done by introducing effective constraints on the circumstances in which claims can be made. I see no need at this time to take any more of the House's time on the issue of auditor liability, but it is under discussion by the company law review steering group, which has yet to reach any conclusions.
My hon. Friend and the hon. Member for Torridge and West Devon asked about the disclosure of members' earnings. Regulations will require that the earnings of the highest paid members will have to be disclosed, and total earnings will also be disclosed, as will the total number of members. It will therefore be possible for someone to work out the average earnings.
My hon. Friend asked whether it would not be wise to require some form of capital maintenance or a guarantee from members to ensure financial provision in the event of difficulties. We have considered carefully the concerns expressed about the lack of minimum capital requirements, which would be similar to those made of companies, or the lack of some kind of financial guarantee from members in the event of failure. In practice, private companies are able to hold capital worth as little as £1 and public companies are required to hold at least £50,000. However, as my hon. Friend pointed out, those sums seem 914 irrelevant when creditors may be owed tens of millions of pounds or, as in the case of the Bank of Credit and Commerce International, billions of pounds.
A minimum capital requirement does not necessarily translate into the availability of funds in the event of insolvency. Even so, some have argued that there is a public interest in protecting less well informed consumers—who do not expect to become a creditor when purchasing goods or services from an llp—to a greater degree than the level to which they are protected when they deal with partnerships or companies. However, as I am sure my hon. Friend will acknowledge, the difficulty is devising a regime that, while allowing for a reasonable level of funding to protect creditors, is not so burdensome as to prevent firms from setting up in business or to discourage them from trading through difficulties.
The hon. Member for Torridge and West Devon asked about the overseas members of partnerships. Some firms—for example, a professional firm with branches in the United States—may have members who operate overseas. For a partnership, if the partner in London is negligent, the partner in America is jointly and severally liable to the full extent of his assets. In an llp, the American partner would not run such a risk even if it were possible for a claim to be made successfully against the London partner.
§ Dr. Howells
I may give way in a moment, but I would like to move on.
The hon. Gentleman asked about accounting requirements. Traditionally, in United Kingdom legislation, the quid pro quo for limited liability is seen to be financial disclosure. It is right that those dealing with a business that has limited liability should be able to discover basic information about its financial status. I agree with him entirely on that. Our intention is thus to require equivalent financial disclosure as between an llp and a company. Using the power in clause 15, it is intended to make regulations applying to llps under the accounts and audit provisions of the Companies Act 1985, but with appropriate modifications. They will achieve financial disclosure equivalent to that required of a company.
The hon. Gentleman asked about the ability to have salaried partners in an llp.
§ Dr. Howells
Salaried members, I am sorry. Anyone who wishes to become a member of an llp must be registered as such at Companies House and clause 6 will make that person an agent of the llp. As such, the llp will be liable for his actions. If a client can prove that a member owed him a duty of care and was liable for it, the member would be liable.
§ Dr. Howells
The partner would be liable: the employee would not be liable.
I shall move on, as the hon. Gentleman asked many questions, some of which I shall try to answer. He asked about clause 7 and queried the need to reconsider the 915 position of a former member. The Law Society raised concerns about the Bill's drafting and we are considering whether we agree that there is a potential problem. I assure the hon. Gentleman that that is receiving due attention.
The hon. Gentleman and other hon. Members asked wide, but vital, questions about accounting requirements. As I said, in UK legislation, the quid pro quo for limited liability has traditionally been seen to be financial disclosure. The hon. Gentleman and my hon. Friend the Member for Great Grimsby asked whether accounting requirements on llps will be different from what is currently in place for companies. Broadly speaking, the answer is no. The accounting requirements on llps will be comparable to those for companies. The detail to be provided in llps' accounts will be comparable to that provided by companies, but the information given will reflect their different structure. For example, llps will not have share capital and will not pay dividends.
It is intended that all llps will provide information in the notes to the accounts about the aggregate amounts withdrawn or applied on behalf of members during the financial year. That, along with the requirement to disclose the earnings of the highest-paid member in cases in which profit exceeds £200,000, will help creditors to make an informed decision about whether it is in their interest to trade with a particular llp.
I believe that the hon. Member for Eddisbury (Mr. O'Brien) asked whether the Bill should clarify the role of a designated member by including a specific definition of a designated member; or at least he reflected concerns that were voiced in another place about the matter. We do not believe that a definition would make the role of a designated member any clearer than current provisions in the Bill and regulations. We followed the format adopted in the Companies Act, which imposes duties and powers on an officer of the company. There is no single definition of an officer's role in that Act. As an llp would be a legal entity separate from a limited company, it was felt that it would be more appropriate to have a different title to avoid confusion.
Several powers placed on a company secretary under the Companies Act, such as the signing of the annual return, will be transferred to a designated member. However, the designated member's responsibilities, such as appointing auditors, will go beyond those of a company secretary.
The hon. Gentleman asked about designated members and offshore members. An llp must have two designated members and a registered office in England, Wales or Scotland. We do not believe, therefore, that we need to prevent an offshore member being a designated member. Indeed, an officer of a company can be based offshore. If 916 there is a breach, the llp can be pursued, regardless of whether the designated member is based overseas or in this country.
I hope that I have attempted to answer all the questions that were raised and I am pleased to commend the Bill to the House.
§ Question put and agreed to.
§ Bill accordingly read a Second time, and committed to a Standing Committee, pursuant to Standing Order No. 63 (Committal of Bills).