§ 5.19 p.m.
§ Lord McIntosh of Haringey
My Lords, I beg to move that this Bill be now read a second time. The concept of a Limited Liability Partnership Bill has received a great deal of close attention before being put to the House today. The measure was proposed by the previous administration, who set out the principles of a limited liability partnership in a consultation document at the end of their term in office. There was an overwhelming response to that document in favour of the introduction of limited liability partnerships in Britain.
This Government agreed with the inherent merit of the proposal, and in September 1998 a Limited Liability Partnerships Bill was published in draft for the first time. It received careful scrutiny from consultees, particularly professionals such as lawyers, accountants, architects, actuaries and surveyors, and also academics, trade associations and those representing the interests of potential investors, customers and suppliers.
The process was further refined in the new pre-legislative scrutiny process, which was undertaken by a committee of the other House. This proved to be a valuable contribution to the evolution of the Bill. A revised draft was published for information in July, and this is the version before the House today. There is little doubt from the consultations that this measure is something which would be warmly welcomed by the business community, but I also want to emphasise that we believe we have struck an appropriate balance between their interests and those of customers and suppliers who are potential creditors.
Perhaps it would be helpful to understand the evolution of the Bill if I briefly touch on the context in which it originally arose. In 1996 the Department of Trade and Industry published for consultation an authoritative investigation by the common law team of the Law Commission into the law of joint and several liability, a particularly complex area of common law. The report looked at the problems joint and several liability causes for professional defendants and in particular the fact that a particular defendant may be held liable for the whole amount of any damage suffered by the plaintiff, notwithstanding that other wrongdoers were also involved.
Overall the report concluded strongly against reform, the main reason being—I recognise that this is a very simplified summary of the report's detailed conclusions—that change towards a system of proportional liability would favour the wrongdoer at the expense of the plaintiff. Although the remit of that investigation did not extend to the joint and several responsibility within partnerships, the DTI took the opportunity to consult on the distinct but related question of whether to amend the law in Britain to allow limited liability partnerships.
The concept of limited liability partnerships was already well known in the United States of America and, closer to home, Jersey was working on the 1420 implementation of its own legislation. As a result of the consultation we concluded in 1998 against reform of the law of joint and several liability, but restated our commitment to introducing limited liability partnerships.
More generally, it is perhaps surprising to note that there has been no fundamental change to business entities in Great Britain since 1907, when the Limited Partnerships Act was introduced. And, of all the different forms of entity available, it is only the company which offers limited liability for all its members. Many people have remarked on the oddity that the only way to obtain limited liability is by organisation as a company. There is no doubt that limited liability is a privilege, but if appropriate safeguards are in place why should a business have to organise itself as a company?
I turn now to some of the detail of the Bill, and that will allow me to set out more of the detailed thinking behind it. The limited liability partnership would be a new corporate vehicle to which large portions of the Companies Act will apply, but it would retain certain aspects of a partnership. The LLP would be a separate legal entity from its members and ownership would rest with the members. Members would be free to agree between themselves their relationship with each other and they would be treated as agents of the firm.
However, unlike a partnership, the liability of individual members would be limited. Clearly that limitation of liability brings with it certain responsibilities: a need to ensure that the client is fully aware of the nature of the organisation with which they are dealing, and a need to ensure against abuse. As a result, although the LLP offers limited liability to its members, each member will owe a duty of care to his or her clients and, in the event that they are negligent, they will be fully liable to the extent of their personal assets, although fellow "innocent" members would have limited liability. Since members would be agents of the limited liability partnership, that partnership itself would also be liable for the actions of its members. Claims could be made against a limited liability partnership to the full extent of its assets.
The Bill also requires that the name of an LLP be followed by the words "limited liability partnership" or the acronym "LLP", so as to advertise its status. Also the Bill requires that the LLP be registered at Companies House, along with a list of its members, and that these records be kept up to date. The intention is to apply a further tier of creditor protection by means of secondary legislation. We plan to require financial disclosure equivalent to that required of companies and also to provide that members of a limited liability partnership could be sued for wrongful and fraudulent trading. We also plan to ensure that members could be disqualified from being members of an LLP and directors of a company.
Regulations would also provide for dealing with insolvency and the winding up of the entity, and would include provision to deter the siphoning off of funds by members, to the detriment of creditors. These proposed regulations have been published in draft for consultation twice, most recently in July this year.
1421 I recognise that a considerable weight of material will be left to regulations, but I am pleased that the Delegated Powers Committee has concluded that the provision for parliamentary control in the Bill is appropriate. It has, however, suggested that if the intention is to provide only for summary trial and a fine, such a limitation should appear in the Bill. But it is our intention to apply to LLPs the same offences as apply to companies under the Companies and Insolvency Acts, so as to ensure parity of treatment. It is important that members of an LLP are not treated more favourably than directors of a company. In some cases these offences are triable on indictment and punishable with imprisonment. For example, Section 458 of the Companies Act 1985 makes it an indictable offence to carry on the firm's business with the intent to defraud creditors.
The application of these offences in the first set of regulations will be subject to affirmative resolution. Were we at any stage to create new offences, these would also be subject to affirmative resolution.
An LLP will be treated for tax purposes as a partnership. This is because although it will be a body corporate, unlike a company where broadly, shareholders receive a dividend and directors receive a salary, the members of an LLP will receive a profit share. Partnerships have been exploited in the past for purposes of tax avoidance. We intend to amend the Bill to ensure that limited liability partnerships cannot be used for tax avoidance.
When we published the revised Bill in July, there were a number of comments from consultees, as a result of which we are considering some further minor amendments to the Bill. These would be intended to ensure that the legislation more effectively achieves the policy intentions. In particular, again in the context of taxation, we will be bringing forward amendments on the tax treatment to ensure that the transfer of a business between a partnership and an LLP is genuinely tax neutral.
I should like to turn to a couple of areas where no statutory provision is proposed, and to explain the reasons for this First, as regards the regulation of professionals, as I have said, the possibility of a limited liability partnership arose in the context of reviewing the law of joint and several liability and its particular effect on professionals. It is fair to say that the main interest in LLPs has come from the professional business community. We considered carefully, therefore, during the consultation process whether the LLP should be restricted to professionals and whether professionals in a limited liability partnership should be subject to particular regulation. We concluded against both these points.
Most professionals, for example, accountants, architects, surveyors and even solicitors, now have the option to incorporate, and the principle that they may operate with limited liability has been accepted for some years. However, few have chosen to become companies. That may be because it is considered that the structure of a company does not lend itself to successful professional/client relationships, because 1422 there may be a conflict between the need to act in the interests of shareholders and the need to act in the interests of a client. It may also be because the particular advantages of the partnerships structure have made firms reluctant to reorganise as a company. These are generally cited as being the benefits to be gained from common ownership and management together with the sense of fraternity that can exist between partners and the flexibility to determine the content of the agreement between partners.
In considering whether the Bill should provide for professional regulation of a limited liability partnership, we concluded that any regulation of the entity would be likely to add a new and additional layer of regulation over and above what was already being required. Why should, say, an auditor in an LLP be subject to a greater degree of regulation than an auditor in a partnership? Both would be fully liable for their own negligence and clients of an LLP would have the benefit of financial disclosure—a requirement not made of partnerships. Professional organisations such as the Law Society and the Institute of Chartered Accountants clearly will continue to regulate their members, regardless of whether business is being carried on through a partnership, a company or a limited liability partnership. We should be surprised and concerned if the introduction of LLPs were to cause any reduction in the regulation of the activity. The consultation process has not led us to believe that that will happen.
Secondly, it has been argued that the Bill should include added protection for creditors, perhaps through a statutory requirement for capital main-tenance or a guarantee from members. We have considered that point carefully and have decided not to include such a provision. An immediate reaction might be to think that that is rash. In particular, that might be felt by those who are familiar with the provisions of the Companies Act 1985 which regulate capital maintenance in companies. I do not want to go over the arguments now, but I note that an LLP will have no shareholders and we doubt very much whether a realistic level of capital maintenance exists to provide reasonable protection for creditors without there being a detrimental impact on the firm's ability to set up in and carry on business.
I hope it is clear from what I have said that the Bill has received much thought and attention from all-corners, including free advice from many highly paid professionals. Some of the issues are complex but I believe that the extensive consultation and, not least, the attention from Members of the other House have produced a balance which is practical and appropriate, taking account not only of the needs of business but also of its customers.
As I said at the start, the Bill represents one step, albeit an important one, in our commitment. to a modern legal framework. The LLP Bill is being taken forward at the same time as the review of company law. While the Bill is important enough to merit action now, we intend that amendments to company law ultimately arising from the review will be applied as appropriate to LLPs. We shall ensure that limited 1423 liability partnerships are not left behind as the legal framework for business is further refined. I commend the Bill to your Lordships.
§ Moved, That the Bill be now read a second time. (Lord McIntosh of Haringey.)
§ 5.32 p.m.
§ Baroness Buscombe
My Lords, it gives me pleasure to respond to the Minister by saying that we are, in large part, very supportive of the Bill. It is clear from our consultations with numerous outside professional bodies that the Government have been very willing to work with them in developing this proposal to introduce LLPs, following on from the previous administration.
In essence, the Bill seeks to provide particularly the large professional partnerships with the ability to take greater control over the potential liabilities arising from the provision of services in the litigious environment of the present day, while at the same time protecting the interests of clients and creditors. However, there are a number of remaining issues which concern us and which have been raised during the consultation period. I shall endeavour to refer to them in some semblance of order. I express it in that way as something of a protest, given that I feel the proposed legislation has been drafted in an unnecessarily complex manner. My heart already goes out to anyone who might wish to form an LLP without the benefit of extensive advice.
I turn, first, to Clause 1. Although we are pleased that LLP status will be available to all businesses and not just to professional firms, we are concerned to the extent that Clause 1(4) disapplies the existing the law relating to partnerships, principally the Partnership Act 1890, from limited liability partnerships, except as otherwise provided by the Bill or any other enactment. That creates difficulties in so far as the Bill is silent on the issues which are central to partnership law, most notably the rights and duties of the members of a limited liability partnership and, equally important, the relations between the partners.
Flowing from that, a number of issues will need to be addressed: for example, the right to share in capital and profits; the right of a member to be indemnified by the LLP in respect of payments made by him or liabilities incurred by him on behalf of the LLP; the right to take part in the business of the LLP; the right of members to have access to the books and records of the LLP; the right or absence of right to receive payment for services rendered by a member to the LLP; the procedure for calling and holding meetings, including any rights to appoint proxies and corporate representatives to attend meetings of members; the right to vote at meetings on the basis of one-member one-vote; the expulsion of a member; and the right of a member to retire as a member of the LLP by giving notice. All those issues contribute collectively to the partnership ethos and should therefore, we believe, be clarified. We suggest that that is done in the regulations under Clause 14 of the Bill.
1424 I move on to Clause 4, which deals with membership. The Bill does not provide for a member who wishes to retire from the partnership. As currently drafted, a member can cease to be so only upon death, dissolution of the LLP or by agreement with the other members. We wonder whether that is an oversight and suggest that, in the event of a member wishing to retire, notice should be given to the LLP rather than to the other members of the LLP.
Clause 5 deals with the relationship of members. With the Bill as currently worded, the members of an LLP would be subject to company law or employment law if there were no specific provision to the contrary. We believe that that would alter radically the nature of the partnership in an unacceptable way.
Under Clause 6, in relation to members as agents, we believe that the Bill should make clear that a member of an LLP will not be an employee of the LLP unless there is express agreement to that effect between the member and the LLP. Further, we believe that it is regrettable that Clause 6(1)(c) as drafted in the September 1998 version of the Bill was removed, since no agreement between members can be entirely comprehensive. The absence of statutory guidance will create considerable uncertainty as to the relationship between members and between members of the LLP itself, especially where the members of an LLP have no members' agreement or the members' agreement fails to deal with the key issues, some of which I have already outlined with reference to Clause 1 of the Bill.
With regard to Clause 8, we question the provisions for service as a designated member of the partnership, given, we believe, that the provisions, as drafted, could be open to abuse; for example, as we understand it, an LLP could assume as partners one or more offshore companies and register them as designated members, thus making it difficult for the regulatory authorities in the UK to ensure compliance or impose penalties. We suggest that the concept of designated members be removed from the Bill, making all the partners equally responsible for the LLP's conduct, including compliance with the registers.
With reference to Clause 10 regarding taxation, I am pleased that this evening the Minister has referred to tax neutrality as that is a matter about which we are concerned. We understand that the proposed objective is that tax neutrality should be achieved. We should certainly seek reassurance that if, for example, a partnership wishes to convert to an LLP, that will be treated for tax purposes as a continuation of the old partnership and not the discontinuance of the old partnership and the commencement of a new LLP, provided that the necessary conditions are met.
With regard to Clause 12, we believe that there should be changes to the stamp duty and stamp duty reserve tax exemptions on the transfer of property from an existing partnership to an LLP. The present exemption assumes that the transferors will be all the existing partners and that the partners will have the same proportionate interest in the property transferred to the LLP. We believe that that is too restrictive as it may dissuade the conversion of a 1425 partnership to an LLP in a situation where, for example, only a majority of partners are the same before and after the transfer.
Further, I shall refer briefly to issues concerning insolvency and return to them in Committee. In particular, Clause 13, which deals with the insolvency and winding-up of limited liability partnerships, provides for regulations which will apply or incorporate parts of the Insolvency Act 1986, including a proposed new Section 214A. Section 214A of the Insolvency Act would take effect when a partner knew or had reasonable grounds to believe that the LLP was insolvent. That is a more onerous test than the comparable existing Section 214. We believe that Section 214A is likely to lead to unnecessary business closures and job losses. Therefore, in our view it should be dropped from the Bill.
With reference to merger and acquisition accounting, the regulations would apply the requirements of the Companies Act 1985. The merger accounting provisions set out in paragraphs 10 and 12 of Schedule 4A of the Companies Act 1985 deal with equity shares being purchased for equity consideration. A share-for-share exchange cannot exist in a partnership—as the Minister has already said this evening, there will be, we assume, no shareholders—and, therefore, we believe that the provisions are meaningless.
However, having said that, mergers of partnerships do take place and therefore merger accounting provisions for LLPs will be necessary. We suggest that the regulations should be framed to allow special provisions in respect of merger accounting of LLPs.
Finally, I turn to the matter of disclosure. Under the proposed regulations, the disclosure requirements relating to the emoluments of directors translate into equivalent disclosure requirements for members of LLPs. In addition to the aggregate of members' emoluments and the numbers of members falling within bands, the chairman or equivalent and the highest paid member of the LLP must be disclosed with their emoluments. Small LLPs are exempted from that requirement.
For the remaining LLPs, we feel that that disclosure requirement serves no useful purpose, is likely to deter overseas partnerships from taking LLP status in the UK, and should be dropped. We believe that the regulations should be amended accordingly.
In conclusion, we support the Bill in principle and look forward to the opportunity to return in Committee to the issues that I have outlined this evening.
§ 5.40 p.m.
§ Lord Sharman
My Lords, it is with some trepidation that I address your Lordships for the first time. I begin by placing on record both my thanks and appreciation for the very many kindnesses and help extended to me by the staff, officials and Members of your Lordships' House.
1426 I must first declare an interest. For 33 years, until relatively recently, I was a partner without limitation of liability. I served in what is loosely called one of the big five. For the last six years of that time, I was its chairman. I was an active participant in lobbying both the previous administration and this Government for legislation of this nature. So it is clear that I have a considerable interest to declare.
Having declared that interest, it is little wonder that I welcome the Bill. In my view, it is sorely needed. As the Minister said, it updates some very aged legislation. Importantly, it provides an extremely appropriate form of corporation for certain types of business for which incorporation as a company may neither be desirable nor feasible in fiscal terms. It goes some way to providing a partial answer to the huge incidence of litigation within professional firms today. It only goes a partial way and I think that that is right. It reflects also the increasing specialisation that one sees in that type of organisation and the assembly of different professions within a single partnership.
Finally, it puts the UK on an equal footing with many of our competitor nations, most notably the United States and many areas of continental Europe. As such, it will help us to avoid the drift towards overseas registration in limited liability partnerships. We already see limited liability partnerships operating in the UK today.
I am very much aware that maiden speeches are supposed to be non-controversial, but I want to compliment this Government and the previous administration on the process of consultation which this Bill has undergone. The DTI in particular has been extremely assiduous in canvassing views from a wide range of interested parties and it has dealt with them openly and logically. While some of the features of the draft Bill and the consultative documents have changed, by no means all of the wishes of those consulted have been accommodated; and nor should they have been.
It is useful to reflect for a moment on how we reached the point at which we are today. The original form of partnership was based on the concept of up to 20 people sitting around a table, making decisions jointly, and jointly and severally benefiting from the results of that by way of profits or the risks that were carried. For many, many years, until 1967, many professions were held to a 20 partner limit. As a result there were chains of partnerships which were inter linked. The Companies Act 1967 took away that level for certain professions, but for certain professions only.
Since that time, there has been a growth of business, with increasing internationalisation and now globalisation. Therefore, there is a need for scale to respond to service business which itself is on an increased scale. Those enterprises have become extremely large. While a typical "Big 5", which I know about, in 1967 might have had three or four linked partnerships of 20 partners, today it would have over 600 and would employ something like 10,000 people in the UK. Its gross annual revenues might be something in the order of £1 billion.
1427 So it is clear that the old business form of partnership, with the partners sitting around a table jointly agreeing, jointly benefiting and carrying the risk, is no longer appropriate. While the Companies Act 1989 allowed for incorporation of certain functions, that came really when the enterprises were already too large and it was a little late. The fiscal cost was just not affordable. We can argue also that the cultural cost of changing a partnership into a corporation might not be desirable for many of those professions.
There is a lesson to be learned here which we should bear in mind, and that is, that business moves so rapidly these days that legislation must keep up. We must be very nimble on our feet in relation to such legislation. When the e-commerce Bill comes before this House, we shall do well to bear that in mind.
So in welcoming the Bill, I do not see it as a let-off or a let-out in any way. As the Minister said, nothing that is contained within the Bill will relieve the individual from his personal responsibility for his actions to the full extent of his wealth. Nor should it.
In conclusion, I wish to make a comment on an issue which I regard as central to the limitation of liability; that is, disclosure of full financial information. I can speak with some experience in that regard because some five years ago, the firm of which I was a chairman went through that process voluntarily. I believe that it is absolutely fundamental that the price for limitation of liability is disclosure of financial affairs. It is not fair for customers to have to deal with a company or entity with limited liability about which they are unable to ascertain its financial wherewithal. Our disclosure included full details of my income. All that really happened was that we attracted a few extra column inches and I had to buy a few more drinks in the pub. And so I commend the Bill to your Lordships.
§ 5.38 p.m.
§ Lord Haskel
My Lords, it is my pleasure and privilege to congratulate the noble Lord, Lord Sharman, on a wonderful maiden speech and to thank him very much on behalf of the whole House. I have come across the noble Lord on one or two occasions and I know of his important work on and commitment to the introduction of best practice in the management of British companies. He has played an extremely important role in that and it has been an important factor in increasing the competitiveness of British industry. I congratulate him on that too. He has great experience of British industry. I hope that we shall hear from him often in the future so that we can have the benefit of that experience in your Lordships' House.
Turning to the Bill, I confess that my initial reaction was fairly hostile: mobile capital seeking more user-friendly jurisdictions and large partnerships threatening to move their legal base out of British jurisdiction to reduce the risk to the partners. I had always assumed that limited liability was invented so that people could take business risks. Without limited liability people would be less willing to take those risks and so the economy would suffer.
1428 What risks do professional people take? As long as they meet the demands of their professional standards, the advice and service that they provide is surely without the same kind of risk that people take in the course of normal business. Professional people are obliged to take out professional indemnity insurance.
In recent years most professions have allowed their members to incorporate. I have often thought that that would take care of some of those anxieties. Professionals from different professions can in-corporate together. Frankly, I have never understood why large accountancy firms, and other professional firms do not incorporate instead of threatening to move their legal base offshore to a more welcoming jurisdiction. Perhaps they like the partnership ethos, but do not want the worry of unlimited liability.
However, on further thought, and with the benefit of the explanation of the noble Lord, Lord Sharman, I accept that my view is somewhat old-fashioned. In modern business, professional services are delivered on a kind of production line basis. Different specialists from different professions work together and are involved with each other. Accountants and engineers work in teams. Doctors and lawyers work together. They depend on each other. In large firms partners may not even know each other as they can work in different offices, in different professions or even in different countries. So there is a concern in regard to this matter and there is a point. Quite rightly the Government are listening to the concern—a listening government.
Recently we have heard another voice. Last week in Seattle we heard it quite loudly. Some citizens complain that the real beneficiaries of globalised big business are the big firms and their senior managers, while the consumer is left to carry the cost and to take the risk. As the noble Lord, Lord Sharman, has explained to us, the big accountancy and professional services firms are among the biggest globalised businesses. I ask the Minister to listen to their voice too.
Nobody wants the Bill to become a symbol of that growing dissatisfaction with big business. As the Minister said, and as the noble Lord, Lord Sharman, implied, our task is to see that there are adequate safeguards for the consumer and that the Bill does not become a means whereby wealthy professionals can avoid financial penalties for negligence. To that end the Bill must encourage an ethos of probity as well as an ethos of partnership as mentioned by the noble Baroness, Lady Buscombe.
Ethos is important. It will ensure that the public will perceive the professional services companies as having an ethical and vocational drive that will lead to confidence and respect. Otherwise, the limited liability partnerships will be seen as a dodge. The regulations and the professional partners need to bear that in mind. For reasons of probity, openness and transparency are important elements in the Bill.
For that reason I agree with the Trade and Industry Committee in another place, when it said that limited liability partnerships and their members should be 1429 required to disclose all the relevant financial information. I welcome the statement from the Minister that limited liability partnerships will be regulated similarly to companies. I also welcome the point made by the noble Lord, Lord Sharman, in this regard.
Of course, I understand that partnerships use their own money and riot shareholders' money. However, in many companies the shareholders and the directors are one and the same, so disclosure should be equivalent to that demanded by law from limited liability companies. I do not agree with the noble Baroness, Lady Buscombe, on her point about disclosure of partners' drawings. For the sake of openness, I believe that the disclosure of partners' drawings should also be made in the same way as those of company directors.
Perhaps I may say a word about management. The days when a director's duty of care was solely to the shareholders have passed. Directors now have a duty to inform themselves about all their company's activities. They have a duty of care to all the stakeholders. I hope that the regulations will oblige partners in limited liability partnerships to have the same broad duty to keep themselves informed, not only about their own professional activities, but also about the activities of the partnership as a whole and all the other stakeholders.
There is a strong "best practice" business case for that. Integrity and reputation are important. To that end, the duty of care in law that partners owe to third parties for acts of their colleagues or employees must be clear and not open to judicial review as claims arise. In the same way as directors can be banned for ignoring their duties of care, will partners be banned from entering into limited liability partnerships if they do likewise? How will the DTI monitor that? Perhaps it will be left to the professions to discipline their members.
The noble Baroness, Lady Buscombe, spoke of the complications. I do not believe that that is a big worry. The Bill will probably apply only to large partnerships. The disadvantage for small businesses being limited liability partnerships, compared with being limited liability companies, is that a limited liability partnership is a narrower form of limited liability. I presume that there will be a degree of personal liability to third parties for negligence which, in the main, does not apply to company directors. There is certainly more liability on insolvency resulting from the claw-back provisions mentioned by the Minister under which limited liability partnership members will be ordered to contribute to the assets on insolvency.
The Minister spoke of the major review of company law in the DTI. I suppose it is a pity that, owing to pressure from major partnerships, this legislation has come before the House before the review of company law has been carried out. I expect that that review will simplify greatly the regulations affecting businesses, especially small businesses.
I believe that the Minister indicated that the Bill is in keeping with the changes which are expected to emerge from the review, so that there will be little need for 1430 further changes in partnership law. I understand, for example, that the Law Commission is talking about the introduction of proportionate liability, instead of joint and several liability, where partnerships are concerned. I presume that that is the direction that the review will take.
I have stated my concerns about the Bill, but in spite of that I welcome the Bill because, as my noble friend said, it achieves an appropriate balance. I also believe it is important because it sets out to modernise business practice, which is the point made by the noble Lord, Lord Sharman. With the proviso that I have mentioned, it should contribute to the encouragement of best practice and high standards in the delivery of professional services. It will put us on an even footing with our competitors. Our economy can only benefit from that.
§ 5.58 p.m.
§ Lord Lucas
My Lords, I, too, welcome the Bill, as I welcome the noble Lord, Lord Sharman, to our company. It is always good to have another accountant in the House. As a rather less distinguished accountant myself, I agree that the Bill is thoroughly deserved by the accountancy profession. It will greatly benefit the profession and, therefore, the country.
In Committee, I shall pursue some of the more detailed aspects of the Bill. Much is to be left to regulation. The noble Lord, Lord McIntosh, has already given us some comfort about the way in which regulation will be applied to disqualification of directors, the necessity of keeping accounts on file and other such matters.
We shall also need to look at the way in which these regulations are to be promulgated. They will be an equivalent of company law, but all that is provided for in the Bill is that they should be subject to affirmative resolution. At least for the first set of regulations, there should be a requirement that they are consulted upon before they are subjected to the affirmative resolution procedure. It is difficult, if not impossible, to amend regulations. These will be extensive and detailed and we should not allow them simply to appear for a one-and-a-half-hour debate in this House, and then "whoosh". I am sure the Government intend to consult anyway, but it ought to be on the face of the Bill.
Changes to the regulations will have equivalent status to changes in company law and therefore a reasonable amount of notice and publicity should be given to them. Perhaps a prior period of consultation, if it appears appropriate tothe Minister, could be given. And there should be a requirement on the face of the Bill that the Minister considers the need for consultation. We will not then get into the pattern that the regulations can be amended in the same way as food safety regulations—at the last minute whenever something new appears. We are dealing with a rather more serious entity affecting (quite quickly I imagine), a large number of people who will come to live and work under the regulations that will be promulgated under the Bill.
1431 We also need to look at the consequences for the Companies Act of having this structure in place. Clearly, some companies will have subsidiaries. If we are restricted in naming a limited liability partnership if there is a company of the same name, then there needs to be a mirror restriction running the other way. I may have missed it in the Bill, but I did not see it. We need also to consider the way in which the insolvency legislation will impact on the funding of limited liability partnerships. I imagine they will often be funded by way of loans and guarantees from partners. They ought not to be allowed to rank alongside ordinary creditors. I do not believe there is any provision in companies legislation to say that directors' loans rank behind creditors, but directors' loans are rarely the principal source of funding of Companies Act companies.
We will take part in some interesting discussions on the detail of the Bill and how it works as it goes through Committee. But my principal interest will be the other uses to which this structure will be put. It will not just affect the major accountancy firms. There are already considerable uses of limited liability partnerships in this country, often overseas—Denver, Luxembourg and other jurisdictions—by the venture capital industry and the property industry. This Bill meets, in principle, the very real needs in structuring the relationships between the people participating in venture capital funding and in the funding of major buildings or major property portfolios where there can be real difficulties. At the moment they lack either limited liability or tax transparency.
The Bill will provide a great deal of potential, but in its present form there are some insuperable obstacles to it being used efficiently. In particular, Clause 6 does not allow for flexibility in the status of individual partners in any obvious way. Clearly, if one is running a venture capital fund the people taking the decisions are the fund managers, and the individuals participating are doing so more or less as sleeping partners. There has to be a mechanism acknowledged under Clause 6 whereby someone dealing with a sleeping partner in such a venture cannot think that they are dealing with somebody who is authorised to deal on behalf of the partnership.
Also, if we are looking at that sort of use of the structure, we shall need to consider the way in which the Financial Services Act and restrictions on marketing and dealing in securities will impact on the way in which people are encouraged to take up or dispose of participations in limited partnerships. That is not an aspect I found to be covered in the Bill, though it could easily be added by giving the Government power to make regulations under the Financial Services Act in the same way as they will have power in this Bill to make regulations under the Companies Act.
I look forward to the Committee stage. I hope the noble Lord, Lord McIntosh, will grant me audience before then so that I might see him, perhaps in the company of one or two people from the industries concerned, to see if we might question him and his 1432 officials on various aspects of the Bill. It may shorten the time we have to spend on these matters at Committee stage and, with luck, we will arrive at a Bill which is not only good for a profession to which I have the pride and privilege to pay £150 a year to keep the letters after my name, but also for the venture capital and property industries. They will benefit greatly in terms of their ability to do business and fund their activities if the Bill can be made just a little more flexible.
§ 6.5 p.m.
§ Lord Phillips of Sudbury
My Lords, it is a particular pleasure to be the first from these Benches to speak after the maiden speech of my noble friend Lord Sharman. Those of us who were aware of his coming here were knowledgeable of the fact that he has immense experience and authority within the accountancy profession. What he said today is but a harbinger, I am sure, of the contributions he will make to the deliberations of this House in years to come.
As my noble friend made clear, he spoke from his vantage point and I shall speak from mine. I am a practising solicitor of 36 years' continuance, every hour of that time having been spent in private practice. I am happy to remain a practitioner in a 40-solicitor firm, which is a tiny outfit compared to the one from which my noble friend comes. I also have a certain diffidence in speaking against the line of the Law Society, which has been one of the major proponents of this measure, and indeed against the line of my noble friend. But so be it. I am unconvinced of the need and sense of this measure.
Since no one has mentioned it and it has some philosophical reference to what is an important Bill, perhaps I may be allowed the liberty of taking a few seconds to look at the history of this matter. The bubble Act of 1719 was the start of this long march to limited liability. It was not until 1855 that limited liability was granted to companies other than those incorporated by Royal Charter. The reason for that was simple: the bestowal of limited liability upon those seeking to trade for profit is an immense public privilege, not a minor one.
In 1890 we had the Partnership Act—according to many solicitors, one of the most lucid, brief and effective measures ever passed in this House. If we go back to the record of the time, we may be more amazed to see how brief was the discussion upon it in this House. The great Law Lords of the day carved it up between them and it got the nod in the other place. There were 46 short sections, no schedules, and certainly no subsidiary legislation dependent upon it. If I may say so, with due deference to the noble Lord, Lord McIntosh, the balance that has been struck between matters contained in the main Bill and matters left for subsidiary legislation is a particularly unhappy one. But that is now water under the bridge.
I referred to the great privilege of limited liability. Today it is looked upon almost as a right. Yet if one can step back from the overwhelming commercialism of today's culture, why in principle should anyone 1433 pursuing a trade for gain expect to be protected from loss and damage they inflict on third parties? Why should they not bear the consequences of their incompetence, geed or negligence—I say nothing of fraud? We all know the conventional answer, but in my view it badly needs to be re-examined in the light of the steady undermining of public trust and probity, quite apart from the encouragement that the present law gives to ill-prepared and ill-executed speculation.
If I am playing devil's advocate in a somewhat provocative way, it is not merely to provide a counterpoint to the majority of the speakers in this debate, who will give, and have given, the Bill a loud "Hurrah!". There is need for cool reassessment as to what limited liability generally has done and is doing. Certain it is—and here I speak with only too much hands-on experience—that the protections for the public against unscrupulous corporate behaviour are, in reality, largely ineffectual.
The theoretical remedies against wrongful trading, or even fraud—I note that "wrongful trading" is likely to be incorporated into this measure—are very rarely accessible to those who are left holding the losses when a company founders. It is too easy for those of us in this House, enjoying, as we mostly do, a fairly elevated lifestyle, to underestimate the degree of public anger and almost disbelief at the incompetence of the law in protecting against serious fraud.
The Bill allows solicitors to use its limitation provisions alongside the traditional benefits of partnership. As the Explanatory Notes say, the limited liability partnership enjoys,the organisational flexibility and tax status of a partnership with [nonetheless] limited liability for its members".I shall refer in later stages of the Bill to what I believe are serious particular shortcomings.
As a practising solicitor for all this time, I must confess that I have sometimes wished for limited liability; but never for long. On really careful reflection, I have to say that I think it is right that solicitors have to practise without personal limited liability. In the first place, being jointly and severally liable is the very best incentive to exercise careful selection of one's partners; careful oversight of staff; extreme care with clients' funds, large quantities of which are regularly entrusted to us; a prudential approach to management of the practice and its resources, whether one is a junior or a senior partner, and whether or not many of those functions—as they are these days—have been delegated to committees; and an interest which extends across the whole of the partnership's a [fairs in an age where solicitors, and other professionals, are retreating into ever narrower and deeper ruts of specialism.
In terms of deserving and maintaining public trust, which I would maintain is a principle of overriding importance, the unlimited responsibility of all partners for the debts of their partnership is the most striking and effective manifestation and guarantor of that virtue. Of course, even with unlimited liability, terrible things happen. But nothing will achieve perfection.
1434 Certainly not—experience now tells us—an ever-burgeoning external regulation, which can even end up compounding the very problems it seeks to address. No, the one unavoidable, ever-present organic pressure for solicitors, and other professionals, to be virtuous is that if they fail the consequences will end up at their door, literally.
The big firms are driving this Bill. Although there has been consultation, and although the Law Commission did a good job, I have to say that very few of them have given considered response from the point of view of the consumer. The overwhelming advice tendered has come from those who have an interest in this Bill being passed. I should like to suggest that the big firms, earning as they do—no doubt fairly—big fees for their work, which can lead to large claims for negligence, have thriven in that environment. Where is the evidence to show that any of them needs the protection of this Bill in order for them to do their work effectively, competitively and profitably? There is no evidence. When did we ever hear of one of the big City solicitors losing his trousers? I have never heard of it, and I should like to hear from any noble Lord who has.
The classic justification of limited liability is that it strikes a fair balance as regards those who put at risk their capital for a venture which, through no fault of their own, then fails. To encourage that risk it is reasonable to afford a limit against further losses. But solicitors are not capitalists; we venture very little in the way of capital. We are supposed to be professionals. Even in the present age where commercialism has bit deep into the ethos of many firms, gravely to their and the public's disadvantage, we are still professionals.
I believe that the Bill is wholly unnecessary. All firms take out insurance. Those who find that inadequate are at liberty—and many of them exercise that liberty—to agree an upper limit on liability with the clients for whom they do the work.
Finally, I have to say that to extend the unique public privilege of limited personal liability primarily for the benefit of the largest, most lucrative and successful partnerships, which, in turn, act for the largest and most lucrative companies, strikes me as perverse, verging on the bizarre. Of course it will also protect smaller firms, but my impression and experience is that that is not a major issue for them. On no account, in any event, should we substitute limited liability for adequate insurance. Although the Government may say that measures will be incorporated in the Bill to prevent this. I have to tell them that I do not believe it. I think that one could, and will, end up with an extremely complex, clever piece of legislation that will in the event prove to be too clever by half. Therefore, while I would much prefer to agree with other noble Lords, I have to disagree with them wholeheartedly.
§ 6.16 p.m.
§ Lord Goldsmith
My Lords, while I admire, as always, the passion of the noble Lord in expressing his 1435 reservations and the reasons for them, I, for my part, will join those who have expressed a loud "Hurrah!" for this Bill. However, I have only two cheers at this stage. The first because, in my view, the Government are demonstrating a concern about the opportunities for enterprise. There is no doubt at all that the professionals in this country are extremely important earners of foreign currency and, most important, in the engine of the growth of wealth. The second cheer is because the Government are also dealing with a real problem. Here I speak as a barrister who has spent a substantial part—sometimes too much—of my professional life acting for or against professional firms that are accused of professional negligence.
My noble friend Lord Haskel said that he had come across the noble Lord, Lord Sharman, in the past. So have I: sometimes, though he may not have known it, he has been my client. However, more frequently, he has been the defendant I have been suing on someone else's behalf. I should say here that I pay tribute to the noble Lord's maiden speech. I suppose, therefore, that I am a paid-up member of the litigious environment to which the noble Baroness, Lady Buscombe, referred.
I can tell your Lordships what has happened over the past few years. Because of the growth of big money claims, because of the principle of joint and several liability—about which I shall say a few words in a moment—and because of the need to find a deep pocket, professionals, especially architects and accountants, have faced ever-larger claims. Why does joint and several liability achieve that? It does so because the law says that if you are in part responsible for damage you can be sued for all the damage. Never mind the fact that as between you and an evil director he bears 90 per cent of the moral blame; you, as the deep pocket, can be held liable for 100 per cent of the damages. That is what has been happening. That is the way that litigation has been conducted.
Although I wholeheartedly agree with the noble Lord, Lord Phillips of Sudbury, about the importance of the professionalism of someone who recognises that his own assets are at stake, the fact is that some of these claims really put at risk not merely the personal wealth of partners but also that of their families.
There have been attempts to review the law of joint and several liability. The United States found a way of dealing with the problem by effecting a law. The Common Law Team of the Law Commission in this country found that that was not a way of dealing with the matter.
This Bill seems to me to be an appropriate way of providing an opportunity to limit liability for those who want it. However, as my noble friend the Minister has said, it is important to ensure that the safeguards are in place. I refer to the safeguards for the public. There are measures which might have been taken from the Jersey equivalent of this law. There is, for example, a provision, relating to a certain amount of money, that requires a bond to be deposited as a condition of liability being limited. I can well understand why that is not necessarily the right way to deal with issues.
1436 However, it is important that the public are safeguarded. That is the reason that I reserve one cheer for the time being.
It is necessary also to sound a warning. The reason that under the present law partners are liable down to their shirt buttons is because each is agent for the other. Each is agent for the other because that is what partnership is. The Partnership Act, to which reference has already been made, defines partnership as people who are carrying on a business in common. This Bill does not state that everyone who is a member of a limited liability partnership shall not have liability. What it states, and what it will enact in Clause 1(4), is that the law relating to partnerships does not apply to a limited liability partnership.
If people choose to incorporate as a limited liability partnership, but carry on business as if they were still a partnership of the kind that people are used to—a partnership where the assets and integrity of the individuals are at stake—I predict that they will find that the courts may say, "Though you have incorporated a body, you are carrying on business in common together". I suggest that the courts need to be vigilant to make sure that the great privilege of limited liability—which is what this Bill will give—continues to carry with it the great responsibility, which includes the provision that members of the public know with whom they are dealing. They should have—I was glad to hear the noble Lord, Lord Sharman, make this point—full financial disclosure. They should have the full safeguards which the regulations are intended to provide.
I believe that some points in the Bill would benefit from further consideration in Committee—I shall not mention them at this stage—and there could be some fine tuning of the balance. But for my part I reserve my final cheer for that moment when I see that not only will the courts be vigilant, as I suggest, but that the Government are vigilant in making sure that the Bill goes no further than is necessary to maintain the proper balance between the interests of the public and the interests of professionals to which I have referred. In those terms I support this Bill.
§ Lord Phillips of Sudbury
My Lords, before the noble Lord sits down, with his great experience of litigation in this field, has he come across many cases of solicitors actually, as he put it, losing their shirt buttons, because I do not know of any?
§ Lord Goldsmith
My Lords, not solicitors, but I know of accountants who have come close to that. Outside the Chamber I could tell the noble Lord of one such case where the people concerned came close to having to hand in their shirts.
§ 6.23 p.m.
§ Lord Goodhart
My Lords, I start by asking the Minister whether there is any truth in the rumour that the reason the Government have brought this Bill forward is that they are so concerned about the future of their public private partnership that they wish to incorporate it as a partnership of limited liability. But, 1437 more seriously, I congratulate my noble friend Lord Sharman on a maiden speech which was not only remarkably well delivered but based on an enormous depth of experience. It makes it easy to see why he rose to the very top of his profession.
As we have been told, work on this Bill started at the end of 1996 under the previous government and has been taken forward by the present Government. On behalf of my party I am happy to give this Bill tripartisan support—with the exception, of course, of my noble friend Lord Phillips of Sudbury.
I should perhaps begin with a declaration of a lack of interest. I am a member of the Bar. Barristers, of course, do not form partnerships. We cannot be liable for the negligence of other barristers, even if they are members of the same chambers. Therefore, I, like the noble Lord, Lord Goldsmith, am not affected by the Bill.
Looking at the matter from this semi-independent position we certainly accept the need for a Bill of this kind. There has been an enormous increase in litigation over allegations of professional negligence. That is not in itself a bad thing. People who suffer loss as a result of professional negligence are in principle as entitled to compensation as anyone who has been physically injured by a negligent driver. But the consequences can, and are now threatening to, get out of hand. We are now in a situation where the partners in a large international accountants firm can be made personally bankrupt because of the negligence of a colleague many of them may never have met. The people who are at risk are—I say this with all respect to my noble friend—not necessarily either incompetent, greedy or negligent.
This is not a hypothetical issue. In the ADT case—this is a matter of public knowledge—damages of £65 million were awarded against a leading firm of accountants for the negligence of one partner. That was well above the indemnity insurance cover of that firm, and the individual partners were threatened very actively with personal bankruptcy. An appeal was in the end settled for a smaller, but still large, sum.
The risk of bankruptcy has seriously damaging effects. People will not join partnerships, or partnerships will go offshore to places where they can limit their liability. Many other jurisdictions do now allow partnerships to convert into corporate bodies. Limited liability has for 150 years been an essential cornerstone of commerce and industry throughout the world. The reasons why we now have limited liability for business organisations apply equally to professional ones. Limited liability is not just a privilege; it is now an essential tool in the whole organisation of commerce.
I wish to discuss the genesis and content of this Bill in a little more detail. I recognise that the Government have consulted widely on the terms of the Bill. We have had an excellent report from the Select Committee on Trade and Industry in another place. The Government originally proposed that the Bill should apply only to members of regulated professions such as solicitors and chartered accountants. That limitation was 1438 criticised in the course of the consultation. The Government accepted that criticism and I believe that they were right to do so. There is now no limitation on the type of business that can be carried on by an LLP.
However, it seems to me that some issues of importance remain. I agree very much with the points made by the noble Lord, Lord Goldsmith, in that regard. It seems to me that the first issue here is whether too much of the Bill has been left to regulations. Much of the meat of the Bill, particularly in the accounting requirements and the insolvency provisions, is to be contained in regulations. The Trade and Industry Committee said that it would prefer these provisions to be in schedules to the Bill rather than in regulations. 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 some aspects of this Bill the more doubtful I am whether the Delegated Powers Committee was not rather too lenient.
Most of the regulations will simply apply to LLPs the existing statutory rules which apply to companies incorporated under the Companies Act, but there will be power to modify that application. One particular modification contained in the draft regulations has been the subject of considerable debate in the course of discussions. The noble Baroness, Lady Buscombe, has already touched on this. Regulations will apply to LLPs Section 214 of the Insolvency Act 1986. That section makes company directors liable for wrongful trading; that is, the carrying on of business by people who know that the company is hopelessly insolvent. So far so good.
But Section 214 will be extended by the new Section 214A which will be created by the regulations and will apply only to LLPs. The result of that will be that members of LLPs will be liable for the debts of the LLP in circumstances where directors of an ordinary limited company would not be liable for the debts of that company. That may or may not be right. The Trade and Industry Committee agreed with that proposal; the Institute of Chartered Accountants strongly objects to it. Speaking for myself, I have not yet reached a final view on the issue.
But it is clearly an important issue which requires a proper debate in your Lordships' House. Regulations cannot be amended and therefore are not suitable for debate on detailed provisions such as Section 214A. I therefore ask the Government whether they are prepared to put the proposed Section 214A on to the face of the Bill. We could introduce an amendment to do that—we will do so if necessary—but it would be much better if the Government were prepared to do so.
The next issue—again this has been touched on by the noble Baroness—concerns the application of existing partnership law. The title of the Bill is misleading. The Bill does not allow partnerships to limit liability while continuing as partnerships. The Bill creates a new kind of corporate body into which some existing partnerships will convert.
1439 Partnership law—on this point I very much agree with my noble friend Lord Phillips of Sudbury—has proved a flexible and effective way of carrying on certain kinds of business, particularly in the professions. It has two defects which will be cured by the Bill: one is unlimited liability and the other, which applies in England but not in Scotland, is the lack of separate legal personality.
The earlier draft of the Bill contained a provision that the neutral rights and duties of the members of an LLP should be governed, subject to the provisions of any agreement between the members, by the rules and principles which would apply if the law relating to partnerships applied to them. No such provision appears in the present Bill. I ask the Minister, why not?
Partnership law provides a useful and necessary default code on many matters not covered by an agreement. The noble Baroness gave a list of the issues which are covered by partnership law and would need to be covered in the case of LLPs. I would add the principle of the duty of partners to act with good faith towards each other, which is perhaps the central principle of the whole of partnership law. I very much hope that will continue to apply to LLPs. It seems to me that the relevant provisions in partnership law are much more appropriate for LLPs than the equivalent provisions in company law.
The Law Society and the Institute of Chartered Accountants are both concerned about the removal from the draft Bill of the provision to which I earlier referred. Unless the Government can produce a convincing reason to the contrary, I believe that the provision of the previous draft should be brought back.
I have two final points, both relating to the consequences of insolvency. The first concerns the importance of professional indemnity insurance, which provides an indemnity against liability for professional negligence. This means that the firm and its partners—other than the one or ones guilty of negligence—are not at risk of insolvency for liability within the cover provided by the insurance. A number of professions, including solicitors and chartered accountants, require indemnity insurance under their professional rules. But not all LLPs providing services will be covered by the rules. Of course, professional indemnity insurance can be very expensive and there may be a temptation to say, "Now that we have limited liability, let us save money by cutting back on insurance". That would be extremely unfortunate.
Self-regulation is best, but the Government should give themselves a reserve power to impose a professional indemnity insurance requirement on classes of LLPs which are not required to do so by a professional body or where the professional body's requirements are insufficient.
There is another problem. Professional indemnity insurance does not help the ordinary creditors of the 1440 LLP or the partnership. At paragraph 45, the Trade and Industry Committee said:We are none the less uneasy at the prospect of introduction of this new vehicle destitute of either minimum capital requirements or guarantees from members, and dependent on the perceived likelihood—or hope—that there will be some LLP assets available to creditors".I share the unease of the committee, particularly because insolvent LLPs will have, in most cases, very few realisable assets. As usual, the banks will be okay because they will insist on secured personal guarantees from the members of the LLP. But, again as usual, unsecured creditors will get little or nothing.
I am particularly concerned about the position of employees of LLPs. It is more difficult to state the problem than to provide the answer. I wonder whether, for example, the Government have considered the possibility that if the assets of an LLP are insufficient to meet in full debts due to or in respect of employees—which are preferential debts in insolvency law, and that includes four months' salary or wages—the members of the LLP should continue to be personally liable for that balance, even though their liability for other debts is limited. That is put forward merely as a suggestion, not as a firm proposal. The Government should look at such issues during the course of the Bill.
Having said that, I am happy to conclude by repeating our general welcome for this Bill in principle.
§ 6.36 p.m.
§ Lord McIntosh of Haringey
My Lords, I am grateful to all noble Lords who have taken part in the debate. I am particularly happy to join in the congratulations given to the noble Lord, Lord Sharman, for an excellent maiden speech. It was not only well informed but delivered with almost no notes. That is the true test of a maiden speech. His speech was very largely in support of the Government. All maiden speeches should follow that rule.
I was slightly taken aback by the noble Lord, Lord Goodhart, saying that the title of the Bill was misleading. It depends on how one reads it. He read it as being a "Limited Liability for Partnerships Bill", whereas we read it as being a "Limited Liability Partnerships Bill"—in other words, a description of an entity which will be created as a result of the Bill. If we take our interpretation, on the whole it would be agreed that the short title of the Bill properly describes that new entity and, therefore, is not misleading.
The noble Baroness, Lady Buscombe, started by describing the Bill as unnecessarily complex. She then went on to list a whole range of things which she thought ought to be in the Bill because they were included in partnership law and appeared to be being dropped from partnership law. The noble Lord, Lord Goodhart, made the same point with a rather different emphasis.
There is no diminution of the responsibilities of partners in partnerships. We are attempting to create a new business entity which, in effect, combines the best of both worlds. It gives what everyone has acknowledged is the enormous privilege of limited 1441 liability, but it demands in return many of the obligations—indeed almost all of the obligations—required of companies. It does so in such a way that everyone who has been consulted—and they have been not only professional firms and still less only large ones—believes it appropriate. If we were to include all the obligations of partnership as the noble Baroness, Lady Buscombe, would wish us to d o, the Bill would be very much longer and more complex than it is now. I am not sure that we would achieve her objective—
§ Lord Goodhart
My Lords, I am grateful to the noble Lord for giving way. Could not that result be achieved by reinserting the one short subsection that appears in Clause 6 of the previous draft?
§ Lord McIntosh of Haringey
My Lords, we could certainly consider that matter. As regards the drafting of the Bill and the fact that in my opening speech I referred to a number of government amendments, as it is known, and as I said, we have carried out intensive consultation and taken the views of the Trade and Industry Committee in another place. We published in July a draft Bill and regulations. We thought that the right thing to do, even though our thinking had moved on to a certain extent, was to bring before your Lordships the draft Bill on which consultation had taken place so that people were not looking for differences between the July 1999 version and anything which might subsequently come to mind. That means that we have had further thoughts to which I have referred. It also means that we are open to discussion about other matters which noble Lords may wish to raise.
§ Baroness Buscombe
My Lords, I thank the Minister for giving way. Perhaps I did not make myself clear. I was referring to understanding what the Bill meant. So much of the material is not on the face of the Bill but in the regulations. To understand them one has to refer to the Companies Act and the Insolvency Act. So understanding the Bill has become rather complex.
§ Lord McIntosh of Haringey
My Lords, I cannot accept that criticism for two reasons. The first, simple reason is that the Delegated Powers and Deregulation Committee has accepted that the balance between secondary and primary legislation is appropriate. That has always been a matter of prime importance in this House. Basically, if it does not like it, the Government will not get away with it. The second reason is that the regulations are intended to do something rather different from most regulations. They apply, where appropriate and with appropriate modification, the Companies Act and the Insolvency Act to this new business entitity. It is right that they should refer to that legislation. It is right that the provisions should be subject to regulation because the Companies Act and the Insolvency Act are themselves subject to change. If we were to bring all these matters onto the face of the Bill, in the context of the review of company law which is taking place and of the insolvency Bill, which is to 1442 come before Parliament this Session, we would risk enacting legislation which would have to be amended very rapidly. That is not a good idea.
§ Lord Phillips of Sudbury
My Lords, does not the Minister agree that the Title of this Bill is Limited Liability Partnerships. It does not contain a definition of limited liability, which misses the heart of the matter.
§ Lord McIntosh of Haringey
My Lords, I do not agree. Limited liability is defined by analogy with the limited liability available to directors and shareholders of a company.
§ Lord McIntosh of Haringey
My Lords, the noble Lord is a brave and solitary voice on these matters. I respect and admire him for it. Clause 1(3) of the Bill states,with such liability on the part of its members to contribute to its assets in the event of its being wound up as is provided for by virtue of this Act".It has always been our intention that if a member of a limited liability partnership is negligent—rather like a professional person who gives negligent advice to his client—then both the limited liability partnership and the member who gives negligent advice would be liable. That is the restriction on limited liability that is at the heart of this Bill.
§ Lord Phillips of Sudbury
My Lords, once again I am grateful to the Minister for giving way. The noble Lord said,by virtue of this Act".That is in subsidiary legislation and not on the face of the Bill.
§ Lord McIntosh of Haringey
My Lords, that is because the subsidiary legislation is the adaptation of company and insolvency legislation to this new business entity. That is why it is in the form of regulation.
I was asked by other noble Lords whether the changes in regulations would be subject to consultation. As it is known, we had very full consultation on the regulations which were finally published in July. We shall be consulting on any changes to that legislation and, as always, they will be subject to parliamentary approval. There is no attempt to sneak anything past Parliament or the business community. That is the last accusation that can be made to this Government.
The noble Baroness, Lady Buscombe, suggested, as did some of the consultees, that we should require an agreement between members before registration or provide a default agreement. We are sympathetic to the idea of a safety net by way of short provisions such as Section 24 of the Partnership Act 1890. With the representatives of those who have been consulted, we have been looking at how that can be achieved through 1443 secondary legislation. The power in Clause 14 would be wide enough. That would deal with all the areas that the noble Baroness mentioned such as share capital, profits, access to the books and so on.
She said that Clause 4 does not deal with the retirement of members. Indeed not. It is important that members should not be able to walk out on a partnership which they suspect may be in difficulties. They may be part of those difficulties. It would not be an attractive proposition if they were able to walk out without the agreement of other members.
The noble Baroness was concerned that Clause 6 should not mean that members are treated as employees. She is quite right. It is our intention to make sure that members should not be regarded as employees because they are members. We shall look to see whether it is necessary to amend the Bill in that way. Broadly, the noble Baroness approved of the provisions in Clause 10 as regards tax neutrality. I am grateful for that.
As regards Clause 8, the 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 a company secretary under the 1985 Act such as the signing and filing of the annual return, the approval and signing of the annual accounts and filing them with Companies House besides other accountancy and audit functions. It is desirable to keep the concept of a designated member for those purposes so that the authorities know who to approach. There are also provisions in the Companies Act 1985 concerning what happens if there is a breach of obligations.
Both the noble Baroness and the noble Lord, Lord Goodhart, referred to Section 214A of the Insolvency Act. The noble Baroness thought that it was onerous and should be removed, but the noble Lord, Lord Goodhart, believed that it should be on the face of the Bill. I do not know that I can reconcile those two positions. There has been a great deal of controversy about the claw back provision if members leave within two years of the winding up or if they siphon off funds within that time. Again, we shall consider the results of the consultation. We are certainly not going to be able to satisfy both the noble Lord and the noble Baroness—probably neither of them.
Disagreement was expressed by the noble Baroness, Lady Buscombe, about disclosure of the remuneration of the members. However, the noble Lord, Lord Sharman, and other noble Lords expressed their welcome for that. I shall take the consensus of the House that our provisions are appropriate. The noble Baroness also asked for provision for merger accounting to be made in the regulations. However, the Government and the consultees felt that the Bill adequately achieves that purpose.
I was interested to hear the views of the noble Lord, Lord Sharman, on joint and several liability. However, as he knows, the view of the Law Commission was against a fundamental review of joint and several liability, mainly on the basis that if any change were 1444 made it would be bound to benefit the potential wrongdoer rather than the punters—as I always call them. For that reason, we turned against such a solution.
My noble friend Lord Haskel queried the issue of the liability of members. A member of an LLP who is a professional will owe a duty of care to his clients. If he gives bad advice to his clients he will be potentially liable for the whole extent of his assets. I believe that there is some confusion about the degree of protection that exists even for directors of limited companies. Any limited company that requires working capital of any size has to go to the bank for finance. The bank will not provide loans, overdraft facilities or any service of that kind without personal guarantees from the directors who are seeking it. I know this from personal experience because on many occasions I have had my house in hock to the bank—potentially in hock: I have never actually lost it—simply as a director of a limited company. I do not believe that members of limited liability partnerships will be any better off.
Perhaps I may summarise my response to the noble Lord, Lord Lucas, by saying that we would of course be delighted to meet him to address his concerns. I tried to address a number of them—as I understood them—earlier today in a letter. However, we shall certainly wish to talk to the noble Lord about the important issues he has raised on the applicability of this entity to venture capital and to property. Those are the other uses of the LLP structure which is being created by the Bill. I believe that I have dealt as best I can with the issues of primary and secondary legislation, with consultation on the revised regulations, and with the reasons why so much of the Bill must be implemented by regulation.
As I said earlier, the noble Lord, Lord Phillips, was a brave and lone voice and I respect him for that. However, I shall be interested to see in what way he intends to express his point of view by amendment to the Bill. I suspect that if he really wanted to pursue the matter, he should have put down an amendment that the Bill be given its Second Reading in six months' time. I think that the noble Lord has such a fundamental objection that there is little I can do to reassure him. However, I can say—from a personal point of view—that when I first saw the Bill and read the arguments for it, my immediate reaction was to say that this is an enormous privilege. It is the punters—the potential creditors; that is, the suppliers and customers—who must be protected. All my questions to officials on the meaning of the Bill were directed to that end rather than in thinking that the professions and their members were likely to suffer in any way from the provisions of the Bill.
My noble friend Lord Goldsmith also raised the wider issue of joint and several liability. I believe that I have already explained why the Government will not pursue that more general point. However, I very much agree with him that we shall need the vigilance of the courts in order to ensure that the public know with whom they are dealing. I very much welcome the support given by my noble friend to financial disclosure, not only of remuneration, but much more 1445 importantly, the publication of the accounts of the LLP. That is a fundamental issue. I agree with my noble friend and all noble Lords who spoke on this matter that nothing in the Bill must be interpreted as being tolerant of reduced professional obligations by any of the professions who choose to take up this new entity.
Many noble Lords have pointed out—as have I ad nauseam—that the Bill provides an enormous privilege and it must be used responsibly. The Bill has been drafted to ensure that it can only be used responsibly and not for tax avoidance purposes or to avoid transparency in business relationships. However, if there is any way that noble Lords can show us that the measure has been framed wrongly for that purpose, then we shall be sympathetic to appropriate amendments at later stages.
The Government's intentions in putting the Bill forward are entirely transparent. I believe that we have achieved the right balance, but we shall be happy to listen to the kind of informed comment and criticism that we have heard today as the Bill proceeds through the House. I commend the Bill to your Lordships.
On Question, Bill read a second time, and committed to a Committee of the Whole House.