HL Deb 24 January 2000 vol 608 cc1352-410

4.43 p.m.

Lord McIntosh of Haringey

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.—(Lord McIntosh of Haringey.)

On Question, Motion agreed to.

House in Committee accordingly.

[The DEPUTY CHAIRMAN OF COMMITTEES (Lord Brougham and Vaux) in the Chair.]

Clause 1 [Limited liability partnerships]:

Lord McIntosh of Haringey moved Amendment No. 1: Page 1, line 8, after ("is") insert ("a body corporate (with legal personality separate from that of its members) which is").

The noble Lord said: In moving Amendment No. 1, I should like to speak also to Amendments Nos. 2, 3 and 4. I know that the amendments appear complicated. However, strictly speaking, they are drafting amendments in the sense that, with them, the drafting of Clause 1 is, we hope, very much clearer than it would have been without them. I hasten to say that these amendments were not proposed by the department but by parliamentary counsel in the interests of clarity.

For the benefit of those noble Lords who took part at Second Reading, this morning I have sent to them—I hope that they will find it helpful—a copy of the Bill marked with the government amendments in their place. I do not recall this having been done before but it seemed sensible. If the noble Baroness, Lady Buscombe, does not have one, I am sorry. A copy will be whisked across the Chamber to her from the Box via the Doorkeepers so that she has it in front of her. I believe that noble Lords on the Liberal Democrat Benches have had copies, as has my noble friend Lord Goldsmith, who is not in his place.

If we look at the marked copy, we find that the wording is simply moved around so that the clause starts with reference to the, body corporate (with legal personality separate from that of its members)", which is the key to the understanding of Clause 1. In all other respects, the meaning of Clause 1 is not affected by the amendments. I beg to move.

4.45 p.m.

Baroness Buscombe

First, I thank the Minister for giving me and Mr Nicolas Gibb MP the opportunity to discuss a number of key issues which we and other Members of this House raised at Second Reading.

I thank the noble Lord for a most helpful meeting, for the accompanying notes, and for giving them to me now. However, on behalf of so many people with whom we and, I understand, the Government have consulted, I feel that it is my responsibility to make a plea with regard to Clause 1. Our concerns relate to a general application of partnership law. We are interested in retaining the partnership ethos. With that wish, we begin to question the value of a limited liability partnership. Without a partnership ethos which is clear on the face of the Bill, it becomes in a sense something of a hybrid without the culture of a partnership; that is, neither a partnership nor a company. I question whether that is what the Government intend.

Yes, an LLP can enter into contracts and it can hold property. It is a body corporate, separate from its members. I am grateful to the Minister that the amendments help to clarify that point. However, without express application to partnership law on the face of the Bill, I ant still unsure of its worth. That is why I have tabled an amendment to Clause 5 relating to the members of an LLP. That amendment tries to re-establish the relationship of members to differentiate them, if not the body corporate itself, for example, from employers, subject to company and employment law. In a sense, that is intended to demonstrate the existence of the partnership ethos.

Lord McIntosh of Haringey

I am most grateful to the noble Baroness for what she says. I repeat my apologies that the marked Bill did not reach her in time for her to consider it at greater leisure. I am grateful for what she says in the particular sense that it enables me to set out what became clear to me in the course of the discussions which we had last week with a number of noble Lords. It became clear that the principle on which we must insist all through the Bill is that we are changing as little other law as possible. We are responding to pressure, particularly from professionals, that there should be some way for them to achieve the goal of limited liability. We are considering the pride at which that achievement should be made. Everybody except the noble Lord, Lord Phillips of Sudbury, agreed with the validity of that goal. However, I may not have expressed as clearly as I would want the way in which we seek to achieve that.

We seek to achieve that by creating a new entity—the limited liability partnership—which falls under company law as far as possible and changes company law as little as possible except in respect of taxation. It falls under partnership law as little as possible and changes partnership law as little as possible except in respect of those matters which are the concern of company law.

The taxation of limited liability partnerships will be on the partnership analogy; every other aspect of the limited liability partnership will be on the companies analogy. The bulk of the text of the Bill consists of amendments to company law which are absolutely necessary in order for limited liability partnerships to be established and no further than that.

Similarly, we do not seek in any way to change the law or practice in respect of professional liability. That is a matter for the law and for the professions themselves. We do not want to diminish or increase it in any way. We do not seek to change the law except in so far as it is absolutely necessary in relation to insolvency. We are doing as little as possible in order to achieve this new entity. If we look at all the amendments in the light of those pillars of the temple, perhaps, which are built around that small change in the law, I believe that we shall understand it, as I have come to understand it, rather better than we did at the beginning.

I am grateful for what the noble Baroness said about the amendments to Clause 1. I commend Amendment No. 1 to the Committee.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendments Nos. 2 to 4: Page 1, line 10, after first ("in") insert ("the following provisions or). Page 1, line 14, leave out ("a limited liability partnership so incorporated") and insert ("such a body corporate"). Page 1, line 16, leave out from ("partnership") to first ("to") in line 18 and insert ("has unlimited capacity. ( ) The members of a limited liability partnership have such liability").

On Question, amendments agreed to.

Clause 1, as amended, agreed to.

Clause 2 [Incorporation document etc.]:

Lord McIntosh of Haringey moved Amendment No. 5: Page 1,1ine 27, after ("persons") insert ("associated for carrying on a lawful business with a view to profit").

The noble Lord said: In moving this amendment, I shall speak also to Amendments Nos. 6, 8, 9, 10, 11, 48, 50 and 51. These amendments follow on the consultation document which was published originally in 1997 and which said that to secure incorporation as a limited liability partnership, founding members would have to submit to the registrar a document which included a statement in prescribed form that the business was being formed with a view to profit. That follows the scheme of partnerships. Again, as I said a few moments ago, we do not intend to alter that scheme.

Partnership law refers to, carrying on a business in common with a view of profit". Instead of "in common" we have used the word "associated" and instead of "a view of profit" we have used the phrase "with a view to profit". That is the change between 1890 and 2000. I do not believe that it has any other impact. I am always reminded of the sign which appears in some company offices which says, "This is a non-profit company. It wasn't intended that way but that's the way it's worked out". That is why we must use the words "with a view to profit" instead of "non-profit".

The wording did not appear in the intervening draft since 1997, but we believe that it is necessary to restore those words. We do so for two reasons. First, we want to make it clear that, in our view, limited liability partnerships are unsuitable for charitable organisations. In view of the expertise of the noble Lord, Lord Phillips, in that area, I have written to him on that subject. I hope that he will agree that that is' he right course to take. Again, it does not extend the scope of partnerships, but seeks merely to make available this business entity for partnerships under the existing scope. Secondly, we want to discourage not-for-profit organisations—for example, members' clubs—from using the limited liability partnership vehicle.

There was no intention in the genesis and evolution of limited liability partnerships to provide for their use by organisations which were not operating with a view to profit and we do not see the entity as appropriate for that purpose. No interest has been expressed in limited liability partnerships by such entities in any of the consultations.

As a result of requiring the founding members to associate for the carrying on of a lawful business with a view to profit, it will be necessary on registration for them to present a statement that they have complied with the requirements for incorporation. There will be a penalty for making a false statement, and the registrar may accept the statement as sufficient evidence of their compliance. That follows the treatment of companies.

I could say more about charities and not-for-profit organisations. Indeed, if any Member of the Committee has any questions about that, I shall be happy to respond. But on the basis of what I have said, I hope that it will be recognised that those amendments do go back to the original intention of the exercise which was first consulted on in 1997. They make it explicit, as perhaps it will be said it always should have been, and I hope that the amendments will find favour with the Committee. I beg to move.

Lord Phillips of Sudbury

I thank the noble Lord, Lord McIntosh, for the remarks that he has made vis-à-vis the amendment to exclude charities from the purview of the Bill. Perhaps I may say that his thinking is impeccable. Although charitable status in this country does not attach to a particular format, which sets us apart entirely from the Napoleonic code countries, I believe that it is absolutely right to exclude charities from the provisions of this Bill.

I should like to raise a rather boring point on Amendment No. 6. Perhaps the Minister will consider whether the wording in the proposed paragraph (c) does not give a slightly wrong idea of what is intended. At present the amendment refers to, either a solicitor engaged in the formation of the limited liability partnership or anyone named in the incorporation document as a person who is to be a member'", and then it goes on. That gives a futuristic intention or meaning which is not intended. What is intended is that, either a solicitor engaged in the formation of the limited liability partnership", or anyone who subscribes to the incorporation document is capable of signing that statement. I draw that to the Minister's intention and hope that it will be dealt with in due course.

Lord McIntosh of Haringey

There are two possible answers to that. The first is that the wording comes from other legislation and is therefore sanctioned by precedent. Indeed, that is the answer. It follows the wording in Section 12 of the Companies Act.

However, that does not absolve me from giving my second answer, which is that I shall look at it again to see whether anything further needs to be done. I commend Amendment No. 5 to the Committee.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendment No. 6: Page 2, line 3, at end insert (", and (c) there must have been so delivered a statement in the form prescribed by regulations, made by either a solicitor engaged in the formation of the limited liability partnership or anyone named in the incorporation document as a person who is to be a member, that the requirement imposed by paragraph (a) has been complied with").

On Question, amendment agreed to.

Lord Phillips of Sudbury moved Amendment No. 7: Page 2, line 11, after ("and") insert ("home address and business").

The noble Lord said: In moving this amendment, I shall speak also to Amendment No. 31. I do not wish to inflict on the Committee a repetition of what I said on Second Reading, although it is quite true, as the Minister said a few moments ago, that apparently I am the only Member of this House who finds the whole of this measure superfluous and, indeed, contrary to the public interest.

It is interesting that only last week I was sitting round a board table of one of the very large firms of chartered accountants which are, of course, the main progenitors of this matter. At that meeting, the directors were required to sign to a limitation of their liability in respect of any claim arising out of their services. Indeed, that is what they do—and what they could and should continue to do. I shall not burden the House with the background to the matter. It would be improper to do so. These two amendments are small, but disproportionately effective if, like me, the House seeks to discourage anyone from abusing the limited liability privilege that the Bill will bestow upon partners. The same point is raised in Amendment No. 31 to Clause 9.

As a long-practising solicitor who has been engaged in commercial and partnership work all his practising life, I know that there is a peculiar sensitivity about declaring home addresses on the part of those who sign up as partners. I believe it is because people want to retain a separation between their business lives and the rest of their lives.

The simple requirement that any partner under a limited liability partnership should have on record his or her business address and his or her home address would be desirable and proper and would act as a minor but significant incentive to the partners concerned to run the partnerships properly. More importantly, I believe that it would give members of the public who had claims against any such person a better prospect of seeing such claims met.

Although it has been said that large solicitors' and accountancy partnerships are the main promoters of this Bill, when passed the Bill will apply to a vast number of small and very small businesses. My expectation is that accountants will advise small businesses—for example, small building businesses—to utilise the LLP precisely because, as the Explanatory Notes indicate, The essential feature of an LLP is that it combines the organisational flexibility and tax status of a partnership with limited liability for its members". That organisational flexibility will be of tremendous appeal to small businesses, some of which are recklessly and incompetently run, to take that part rather than the full limited liability part which is infinitely more onerous in its regulatory requirements.

We already have the slackest limited liability regime in the world. Only in this country can one walk into a law stationers arid purchase a limited liability company "off-the-shelf", and undoubtedly, that will be the case with these LLPs. In Germany, it takes at least 13 weeks to get through the paperwork and quite a considerable effort is required to ensure that everything is done properly and with due solemnity.

I believe that those two requirements, and a couple of others to which I shall speak later, will act as minor but significant deterrents to those who inevitably will abuse the new limited liability arrangements. I beg to move.

5 p.m.

Lord McIntosh of Haringey

I am interested in what the noble Lord says. The complaint that I heard about our provisions was that they were too draconian, rather than not draconian enough. There has always been a trickle, rather than a flood, of complaints by company directors that their security is put at risk by having to give their home addresses in legal documents. However, I do not hear that from the noble Lord, Lord Phillips.

This is a perfect example of what I said in relation to Amendment No. 1. We are making as few amendments to company legislation as possible, not least because the company law review, which started in 1998, is under way. We shall go out to full consultation within the next few months and we shall consider all these matters in great detail.

Here we have required that the incorporation document gives the names and addresses of all members of a limited liability company and that the registrar is notified of any changes in a member's address. That mirrors exactly the provisions of the Companies Act 1985, which in Section 289 requires directors to disclose their "usual residential address". That will be the case for members of a limited liability partnership because Clause 17 of the Bill says, 'address', in relation to a member of a limited liability partnership, means … his usual residential address". We do not think that there is a case for members of a limited liability partnership to be treated any differently from a company director by requiring them to give both their home address and their business address.

I know that the objections of the noble Lord, Lord Phillips, go further and that he describes our regime as the slackest limited company regime in the world. However, I am not tempted by his example of Germany where he said that it takes a minimum of 13 weeks to set up a limited company. That does not seem to me to be a desirable objective. If parts of our company legislation are slack and, therefore, damaging, and if there are problems about giving addresses, they can be dealt with in the company law review. In the mean time, it seems right for us to mirror company legislation in this Bill. I ask the noble Lord not to press his amendment.

Lord Phillips of Sudbury

Before the Minister sits down, can he give me a positive reason why it would not be a good idea to require the business address and the residential address? We are not talking about precisely the same animal as a limited liability company. This is an extension of state privilege to a class of business that hitherto has never been thought to be entitled to it—non-capitalist businesses.

Lord McIntosh of Haringey

This refers to the relationship with a body corporate which has not existed before. If the noble Lord relies on the analogy with partnerships, a person carrying out business with a partner in a partnership clearly carries out business directly with one person. It is common sense to seek a proper co-ordinate in order to track down that person if there is a problem. Here a body corporate is being created, which is exactly analogous to a limited company and it seems proper that we should mirror the requirements of company legislation.

The noble Lord asked for a positive reason. I suppose it is true to say that already there is a certain amount of work for the Registrar of Companies in recording changes of residential address. That work would increase substantially if he had to record changes of business address as well. Such changes cost money; they would cost the taxpayers money. However, I do not advance those arguments as overwhelming reasons.

Lord Phillips of Sudbury

I am not surprised by the Minister's reply, but I am disappointed. I believe that the Minister underestimates the degree of reckless incompetence and fraud at the bottom end of the business market behind limited liability. I do not accept his argument that too much expense would be involved. Too many people try to get away with secreting their business addresses as well as their residential addresses.

Lord McIntosh of Haringey

I do not want to prejudge what the noble Lord wants to do with his amendment, but is it not true that a lot of business addresses are concealed as box numbers? People can give a business address and they would still be covered legitimately by the amendment and it still would riot do any good.

Lord Phillips of Sudbury

With respect, that is not the case. As a result of this amendment, they would have to give their real business address and not some fictitious business address. However, I withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey moved Amendment No. 8: Page 2, line 15, at end insert— ("(3) If a person makes a false statement under subsection (1)(c) which he—

  1. (a) knows to be false, or
  2. (b) does not believe to be true,
he commits an offence. (4) A person guilty of an offence under subsection (3) is liable—
  1. (a) on summary conviction, to imprisonment for a period not exceeding six months or a fine not exceeding the statutory maximum, or to both, or
  2. (b) on conviction on indictment, to imprisonment for a period not exceeding two years or a fine, or to both.").

On Question, amendment agreed to.

Clause 2, as amended, agreed to.

Clause 3 [Incorporation by registration]:

Lord McIntosh of Haringey moved Amendment No. 9: Page 2, line 16, leave out ("requirement imposed by paragraph (b) of subsection (1) of section 2 has") and insert ("requirements imposed by paragraphs (b) and (c) of subsection (1) of section 2 have").

The noble Lord said: Amendment No. 9 was spoken to with Amendment No. 5. I beg to move.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendments Nos. 10 and 11: Page 2, line 18, leave out from ("unless") to end of line 19 and insert ("the requirement imposed by paragraph (a) of that subsection has not"). Page 2, line 23, at end insert— ("( ) The registrar may accept the statement delivered under paragraph (c) of subsection (1) of section 2 as sufficient evidence that the requirement imposed by paragraph (a) of that subsection has been complied with.").

The noble Lord said: With the leave of the House, I shall move Amendments Nos. 10 and 11 en bloc. I beg to move.

On Question, amendments agreed to.

Clause 3, as amended, agreed to.

Clause 4 [Members]:

Lord McIntosh of Haringey moved Amendment No. 12: Page 2, line 38, at end insert— ("(4) A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership (rather than members of a limited liability partnership), he would be regarded for that purpose as employed by the partnership.").

The noble Lord said: The noble Baroness, Lady Buscombe, raised at Second Reading the need to have an express clause in the Bill to ensure that members are not employees of the limited liability partnership; indeed, she was reflecting views expressed during the public consultation exercise that a member would be an employee and thus be entitled to protection under employment law. I am happy, therefore, to bring forward an amendment which makes it clear on the face of the Bill that a member is not an employee of the limited liability partnership. I beg to move.

Baroness Buscombe

I thank the Minister for that explanation and for bringing forward this amendment. However, notwithstanding that I am a lawyer, I find it difficult to understand this clause. I have read it more than half a dozen times and wonder whether we can improve on the wording, if I may be so blunt.

Is the clause saying that members can be employed so partners can be employed? What about designated members? I confess that I prefer—although I know the Minister will not warm to this—Amendment No. 17 wherein it becomes clear that the members are as partners and therefore subject to partnership law unless both the incorporation document makes it clear to the contrary together with the provisions of any agreement express or implied between the members of the LLP. As I have heard the Minister say in relation to Clause 1 that there is a move to exclude partnership law as far as possible in preference to company law, I therefore feel that I shall not get far with that amendment either.

However, I suggest that we look again at the wording, wherever possible, to simplify the legislation so that people in the community who want to take part in, and establish, a vehicle such as an LLP can understand with relative ease the parameters of a limited liability partnership and what it really stands for.

Lord Phillips of Sudbury

I identify myself with the remarks of the noble Baroness, Lady Buscombe. Amendment No. 12 is work for lawyers, however well intentioned.

Lord McIntosh of Haringey

Two issues arise here. The first is where the amendment should be placed in the Bill. The noble Baroness rightly identified our wish to have it placed here rather than where it can be seen as an amendment to partnership law more generally.

On the issue of the wording, I only wish it were possible to have a simple definition of an "employee". The noble Baroness did not have the misfortune of sitting through as much of the Employment Relations Bill last summer as I did. We spent many happy hours discussing the definition of "employee" and I fear that this is not the legislation to resolve those questions which could not be resolved at that time.

There is not a single test to determine whether or not a person is an employee. Many factors are taken into account. Sharing profits, for example, is prima facie evidence that a person is a partner. If the losses as well as the profits are shared, the presumption is even stronger. But when a person receives both a salary and a share of the profits, there is strong evidence that he is an employee. That was an important consideration when we dealt with employment relations legislation.

There have been requests that any statutory provision should state that members are not employees unless there is an express agreement to the contrary. I believe that is what the noble Baroness is getting at in Amendment No. 17. We feel that that is going too far. If a person receives a salary, does not share profits and exhibits all the characteristics of an employee, it is inappropriate for the LLP to exclude the employee's rights in relation to that person. In addition, such an approach would be inconsistent with the employment law approach under which the description which the parties apply to the relationship—again coming back to Amendment No. 17—is not conclusive.

The noble Baroness referred to designated members. A designated member is a member and is therefore covered by the clause. The intention is not to put a member of an LLP in a different position from that of a partner in a partnership. I found the wording difficult and I promise to look at it again to see whether it can be made clearer. However, I insist on the thinking behind the amendment which is that much different from Amendment No. 17.

On Question, amendment agreed to.

5.15 p.m.

Lord Goodhart moved Amendment No. 13: Page 2, line 38, at end insert— ("( ) Subject to any agreement with the other members to the contrary, a member of a limited liability partnership may cease to be a member on giving not less than 28 days notice to the limited liability partnership.").

The noble Lord said: Since this is the first amendment to which I have spoken, I should like to make it clear that, speaking for my party as a corporate body although clearly not for all the individual members of it, we regard this as a good Bill—

Lord McIntosh of Haringey

I would not even describe the Liberal Democratic Party as a "partnership", let alone a "corporate body".

Lord Goodhart

Despite the words of the Minister, we regard this as a good Bill, but a Bill capable of improvement and that is why we tabled a series of amendments to it.

Amendment No. 13 is concerned with the right of an individual member of an LLP to retire from an LLP on giving notice. At present the position under partnership law is that any partner can retire from the firm on giving notice unless the partnership agreement specifies otherwise. Clause 4(3) of this Bill provides that, A person may cease to be a member of a limited liability partnership (as well as by death or dissolution) in accordance with an agreement with the other members". Presumably that agreement can either be a membership agreement which specifies the circumstances in which a member can retire, or it could be an ad hoc agreement when one member wishes to go and the other members consent to his or her going. But what is the situation if there is no agreement which allows a member to retire and the other members do not consent to that specific member going? That member will be locked into a business, perhaps for life, in which he or she no longer wishes to participate. That cannot be right.

The Government's answer in the otherwise helpful letter which the Minister sent to the noble Baroness, Lady Buscombe, and copied to me, was that regulations would be made incorporating certain provisions of partnership law including, in the absence of an agreement to the contrary, the right to withdraw from a firm on notice.

I shall look at the whole question of fall-back provisions when we come to Amendment No. 16. But Amendment No. 13 is essential in any case. The right to withdraw on notice in the absence of a partnership agreement specifying otherwise is a basic principle of partnership law and there is no reason why that should be changed in the case of LLPs. Being locked in for an indefinite period may be all right in the case of a Companies Act company where many shareholders are often just investors, but it is not appropriate i n the type of corporation such as an LLP where members are expected to be working members. The right to withdraw should not be left to be dealt with in consequence of regulations and should be brought on to the face of the Bill.

Further, it appears to be possible to read Clause 4(3) as an exhaustive list of the ways in which a person may cease to be a member. If that is so, regulations which authorise someone to retire in the absence of an agreement might themselves be ultra vires. I hope that the Minister will be prepared to look at the issue again. I beg to move.

Baroness Buscombe

I very much took on board the Minister's response to my suggestion on Second Reading that, in the event of a member wishing to retire, notice should be given to the LLP rather than to the other members. I appreciate that it does not make good sense to allow an individual to opt out of his or her responsibilities. In the event, say, of there being fundamental problems with the partnership, that could be avoided simply by a member tendering his or her resignation by notice to the body corporate.

There are concerns in this respect. I hope that the Minister will be able to give us some reassurance that there is a way round the problem by, on the one hand, making sure that people respond to their responsibilities and liabilities and, on the other hand, ensuring that they are not locked in against their will ad infinitum.

Lord McIntosh of Haringey

I certainly recognise that there are concerns, and I am very sympathetic to them. Indeed, I want to see the same result as noble Lords opposite. We want to be sure that we deal with the case where a member wishes to cease to be a member of an LLP but where, due to a disagreement within the firm, the other members fail to give their agreement. That is the problem that the noble Lord has identified.

When the agreement is drawn up the terms and conditions for ceasing to be a member are very likely to be dealt with at that time. Therefore, if there were to be a disagreement, the agreement would come into force. However, I recognise that that is not good enough. There must be some mechanism that comes into play if the LLP fails to have an agreement or has an agreement that does not adequately deal with the departure of a member.

Therefore, we shall be including a default provision, along the lines of Section 24 of the Partnership Act 1890, which will deal with the problem. We shall be including such provision in regulations. This was not published with the draft regulations in July of last year, but our suggestions for that were published on the website in October or November of last year. Such proposals are subject to consultation and are still being consulted upon. We are considering whether something along the lines of Section 24 of that Act would be appropriate for a default, following Section 26, to cover retirement.

If necessary, we can deal with this when we reach Clause 5. However, perhaps I may indicate the areas that we propose to include in default provisions: the right to share equally in capital and profits; the right to be indemnified by the LLP for activities in the course of business; the right to take part in the management of the firm; no entitlement for remuneration; the right to have access to books and records; expulsion and retirement of members; decisions by majority vote; and the application of Section 459 of the Companies Act—protections against unfair prejudice. Members of the Committee should take note that retirement of members is included in that list.

In simple terms, "default provision" means that if the agreement does not contain provision for retirement and for all the other matters to which I referred, the default provisions that will be provided will come into force under the regulations and the member seeking to retire will be protected by them. I hope that the noble Lord will agree that that is a better way to do it than putting the provision on the face of the Bill, as proposed by his amendment. However, it will have the same effect.

Lord Howie of Troon

Before my noble friend the Minister sits down, perhaps he can clear up a slight problem that I have. We are discussing an important amendment and my noble friend said that certain information relating to the matter was published last October or November on the website. However, can he tell the Committee whether it was published anywhere else?

Lord McIntosh of Haringey

No, not to my knowledge. However, I shall check on the position and write to my noble friend.

Lord Goodhart

I recognise the Minister's goodwill and good intentions in the matter. At this point I shall deal only with the question of retirement because the other rather wider questions regarding Section 24 of the Partnership Act can be dealt with when we discuss Amendments Nos. 16 and 17.

As far as concerns retirement, it seems to me that this is in a rather special position as it is of particular importance. Unless the partnership agreement provides for the contrary, someone going into an LLP needs to be quite certain that he can get out of it. I wonder whether the Minister will agree to look again at the question of possible difficulties with vires because of the likely interpretation of Clause 4(3) as being an exhaustive list of the circumstances in which it is possible to cease being a member of the partnership. However, subject to that, I am happy to beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Lord Lucas moved Amendment No. 14: Page 2, line 38, at end insert— ("( ) A limited liability partnership shall maintain at its registered office a current list of the members of the partnership which shall include an explicit description of any limitations on the authority of each member to act for the limited liability partnership in any matter.").

The noble Lord said: In these amendments I am seeking to explore the way in which a third party who wishes to deal with a member of a limited liability partnership, or someone he believes to be a member—

Lord McIntosh of Haringey

The noble Lord referred to "these amendments". We had not proposed to group this with any other amendments, but I am happy to do so if the noble Lord so wishes. Without trying to put any pressure on him, and unless he is thinking of pressing his amendment to a Division, I wonder whether it might be easier if we dealt with this amendment and Amendment No. 25 when we reach Clause 6?

Lord Lucas

I apologise to the Committee. I should have said at the beginning that I intended to speak to Amendment No. 25 when moving this amendment. That is what is on my grouping list. I apologise for arriving here in some haste, almost late, and therefore not being as clear as I might have been.

The two amendments certainly go together because they both bear on the substance of Clause 6 and the question of how a third party dealing with a member of an LLP is able to treat that person and, indeed, what assumptions he is allowed to make about the powers that that person has to bind the partnership. As the Bill stands—and we shall deal later with some proposed government amendments—Clause 6 falls into two principal sections; namely, subsections (2) and (3).

Under Clause 6 (2), which relates to the ordinary circumstances of dealing with a member of an LLP, "the person" who is dealing with someone has the right to treat him as an "agent" in all respects of the limited liability partnership if he believes him, to be a member of the limited liability partnership". There will be legal precedents that I do not pretend to be expert in as to what substance lies behind "belief', and that is what I am addressing in Amendment No. 14.

How does a person establish that someone is a member of a limited liability partnership? There will be a list at the registrar's office, but those concerned are not being asked in this subsection to look at that list. Indeed, they a re allowed a more generous interpretation; namely, a belief. However, when we turn to subsection (3), which is where a partner has ceased to be a partner, the third party is supposed to consult the registrar to make sure that the person with whom he is dealing, and whose word he is about to rely on, is still a member of the partnership.

This is a very odd dichotomy of systems to find within one clause of the Bill: we have the ordinary circumstances under which a person can act on the basis of reasonable belief; but if the person with whom he is dealing happens to have retired as a partner and he does not know, he will not be able to act on the basis of reasonable belief because a notice has been delivered to the registrar which he is supposed to have seen. I find that an odd combination. I think that it ought to be made consistent by requiring that a limited liability partnership has at its offices a list of members which includes any restrictions on the ability of those members to bind the partnership. I hope that that is what these two amendments achieve, but I should not be at all surprised to be told that they do not achieve that effect.

Amendment No. 14 requires the list to be kept and for data to be held as to how each member may be able to bind the partnership. In a brig accountancy partnership, this is likely to be quite fluid and quite detailed. Different members will have different capacities. It is not something which would easily be held by a registrar. My view is that it is quite sufficient if it is held at the partnership. It also then becomes something which is easily and commonly available to anyone dealing with that partnership and something which under Clause 6(2)(b) he might reasonably be supposed to have consulted in coming to the belief that a person was entitled to act for the partnership on the particular matter that he was discussing with that person.

Amendment No. 25 constitutes another way of looking at this matter. If we are to have Clause 6(3) as it is at present, it should not be possible for this third party access, which relies on dealing with someone, to be cut off at a moment's notice just because a document has been delivered to some remote registrar. There must be a time delay. If someone is to have the whole basis of his o r her dealings with a firm regulated by what has been filed with a registrar, he must be sure that if he looked at the information the registrar had a week ago that is still valid, and that he does not have to check with the registrar every waking moment to see whether or not the person he is dealing with has retired.

Therefore, the proposal in Amendment No. 25 is that if the Government insist on this dichotomy, there must at least be some protection for third parties so that they do not continually have to go back and forwards to the registrar. As I say, I have difficulties with that concept. A list at the limited liability partnership's offices would be commonly available to people to use under subsections (2) and (3) of Clause 6. We would then have just one method of establishing whether a person was entitled to hind the partnership. However, I do not lay any great store by the wording that I have chosen to achieve either of the aims I have mentioned.

The noble Lord, Lord McIntosh, will know that my particular interest in this clause comes from a wish to see this Bill in a form which can be used to fund venture capital funds, which are commonly made up of a group of institutions or rich individuals and a single managing partner. We need to find a practical way of informing a member of the public who is about to deal with someone who is a member of such a limited liability partnership that an individual may not be entitled to bind the partnership in all respects. That member will have an active role in the management of the partnership but it will not be the universal role that the managing partner would take. He or she would not, for instance, be authorised to make investments on behalf of the partnership.

As I said, the big accountancy partnerships commonly have great variations in what an individual partner can do. From my discussions with them it would appear that if there is an easy way in which they can make that information available in a standard form that does not involve having to do it through a registrar, they would feel happy with such a change to the Bill. I look forward to what the Minister may say on these points. I beg to move.

5.30 p.m.

Lord McIntosh of Haringey

I hope that there is less difference between us on this matter than I had originally suspected. I am grateful to the noble Lord for discussing Amendment No. 25 with Amendment No. 14. I had not recorded that provision in the groupings. I hope that he will forgive me if I say that there is a difficulty here in that he keeps referring to Clause 6 of the Bill as it stands; I have tabled amendments which seek to make substantial changes to Clause 6. I have sent the noble Lord a marked copy of the Bill showing the effect of those changes. I believe, and hope, that the changes that we seek to make to Clause 6 of the Bill—which, of course, we cannot debate yet—will address some of the points that the noble Lord makes.

My understanding has been that the intention behind Amendment No. 14 is to make it easier to allow for "passive" members of a firm, who will not bind the limited liability partnership with their actions. I believe that that has been confirmed by what the noble Lord said about venture capital funds.

Clause 6—this is absolutely fundamental to the Bill—determines that all members are agents of the entity. I understand the concern that a passive member may, inadvertently or otherwise, bind the limited liability partnership when it may not wish to be bound. However, the amendments that we are discussing would provide poorer protection for the third party than we intend.

As I said, agency is fundamental to the principles of a limited liability partnership. It is a necessary protection for creditors that their position should not vary depending on which member they deal with, unless they know that a member does not have authority to act in a particular matter, which is, of course, what our proposed new drafting of Clause 6 allows for. We do not believe that this is an unreasonable requirement—the third party should not be expected to be pro-active; in other words, to go and search the register in order to establish the authority or otherwise of a member. It would, in any case, be possible for the members of an LLP to safeguard their position further by contractually agreeing that a fellow member will not take any action which would bind the firm, and so provide that a member would be contractually liable to the firm if he breached that position.

I believe that Amendment No. 25 expresses a concern that a passive member may, inadvertently or otherwise, bind the limited liability partnership when it may not wish to be bound. However, as I said, agency is fundamental to the principles of a limited liability partnership. We think that it is far more important that the member should have the responsibility of saying to the person with whom he is dealing that he is a member of the partnership, rather than requiring the person outside to refer to the list in the registered office.

The noble Lord said that although third parties are not expected to be pro-active in establishing the authority or otherwise of a member, they are expected to be pro-active in discovering whether someone is an ex-member. We believe the need for this apparent disparity to be clear when one imagines the situation in which a third party may be dealing with an ex-member of a limited liability partnership. If the ex-member was purporting to the third party that he was still a member of the firm, he would be being dishonest, presumably for his own gain. The question here is whether it is right that a limited liability partnership should be bound by the ex-member's actions in such circumstances. We concluded that the limited liability partnership should not be so bound. It would create a risk that any ex-member purporting still to be a member of an LLP could bind that firm by his actions. However, in the situation where a third party is dealing with a bona fide member of an LLP, it is right that the firm should be bound by its member's actions unless the third party is told the extent, or otherwise, of that member's authority.

The noble Lord proposes a "cooling-off" period of 21 days during which an ex-member may still be treated as a member by a third party if he so claims himself to be. I think that that is unfair. The firm can have no control over a person once that person has ceased to be a member and any "cooling-off- period would, in practice, give carte blanche to an ex-member to undertake any act in the name of his old firm. I still hope and believe that we are not that far apart on this issue provided it is understood that the fundamental principle of the Bill is agency; in other words, interaction between the members of the limited liability partnership.

Lord Lucas

The noble Lord, Lord McIntosh, was kind enough to allow me a meeting with him before Committee stage. He made plain then that agency was not to be challenged; hence the way in which I have phrased the amendments. I do not intend to challenge agency. What I sought to get at here is how a member of the public comes to be in a position where he can reasonably believe a person who is a member of a partnership to have any particular level of authority. There are ways of doing so. If there are only a limited number of partners in the firm, it could put something on its letterhead. But suppose it is one of the big accountancy firms, with 1,000 or 2,000 partners scattered around the UK. How do the Government envisage that the limitations on an individual member's powers will be brought to the notice of a third party dealing with that member?

My proposal in Amendment No. 14 seeks to place a requirement on a limited liability partnership to have a public record which would be easily available and to which it might be assumed a third party would have recourse. If not, presumably something must be stated on a business card or a letterhead which indicates the limitation of a particular partner—otherwise there is no limitation. I should be grateful for the noble Lord's thoughts on that issue.

So far as concerns Amendment No. 25, that is certainly not challenging agency. I understand everything that the noble Lord has said, but he understands what I mean about the third party being in two very different positions under the two subsections. The fact that the Government have conceded Clause 6(3) should allow some flexibility under Clause 6(2) for provision to be made as to what a third party should ordinarily expect to do to arrive at the belief that he is required, presumably reasonably, to reach under Clause 6(2).

Lord McIntosh of Haringey

I am in some difficulty. I think that our rewording of Clause 6 in Amendments Nos. 18 to 24 and Amendment No. 26 covers the points made. I shall deal with the points in detail when I come to the amendments but it is not easy for me to do so now. Perhaps the noble Lord and I can agree that if he is not satisfied he can still come back to the substance of Amendment No. 14 on Report. We should then be able to make progress by having a single debate rather than two.

Lord Lucas

My Lords, I may well come back to it when the noble Lord deals with his amendments to Clause 6, but I shall I wait until I have listened to him on those. In the meantime, I beg leave to withdraw Amendment No. 14.

Amendment, by leave, withdrawn.

Clause 4 agreed to.

Clause 5 [Relationship of members etc.]:

Lord Phillips of Sudbury moved Amendment No. 15: Page 2, line 39, leave out subsection (1).

The noble Lord said: Perhaps I may remedy a defect. Before I spoke first this afternoon I failed to thank the noble Lord, Lord McIntosh of Haringey, for letting us have a marked copy of the Bill showing the Government's amendments. It was extremely helpful and we are grateful for that. It would be nice to think that it could be a precedent for future Bills.

The amendment is a probing one which seeks to get to the root of what Clause 5(1) of the Bill achieves. In the Explanatory Notes it says that, Subsection (I)) deals with the relationship between members". On these Benches we do not understand why the subsection is necessary if that is all that it does. Incidentally, nowhere does it make clear that, whatever the members decide to do among themselves or as between themselves and the limited liability partnership, it cannot affect the rights of third parties.

Finally—again as part of the probe—the end of Clause 5(1) stipulates that it shall, have effect subject to the provisions of the incorporation document". We do not see why this should be drawn in. If it is, surely it should be "the provisions of the incorporation document as may be amended and registered". I beg to move.

Lord McIntosh of Haringey

I am sorry. I am not sure that I understand the noble Lord. I thought that Amendments Nos. 15 and 16 had to go together in the sense that Amendment No. 15 seeks to take out subsection (1) and. Amendment No. 16 seeks to put something in its place. I have clearly misunderstood.

Lord Phillips of Sudbury

I am dealing with the list as it has been marshalled.

Lord Goodhart

Ishould explain that I asked for the Marshalled List to be changed this morning. The two amendments are not dependent on each other. As my noble friend explained, Amendment No. 15 is a probing amendment to find out what the subsection means. Amendment No. 16 is much wider.

5.45 p.m.

Lord McIntosh of Haringey

I am grateful. A limited liability partnership allows its members to have the freedom to regulate the internal affairs of a limited liability partnership with the agreement of the other members. One of the key differences between a limited liability partnership and a company is that by allowing the members the freedom to agree how the internal affairs will work, it will be free of the bureaucratic structure of a company. The agreement will remain private between the members.

However, it has never been our intention to allow the agreement between the members to be able to alter what goes into the incorporation document. This is because the incorporation document is published and sets out the public face of the LLP; that is, its name, its address, its initial members and its designated members. So Clause 5(1) imposes a limitation on the freedom of the members to regulate their rights and duties. It does not impose a limitation on their rights to have at any time agreements between themselves about the way in which the business should be conducted.

As I said to the noble Lord, Lord Goodhart, in response to an earlier amendment, we recognise that that does not in itself necessarily provide adequate protection for the outside world; that is, for the people doing business with the LLP. That is why I talked about the default provisions for an agreement which will be established to ensure that not only the interests of members on retirement are protected but, perhaps more importantly, the interests of the outside world are also protected. That is the distinction we seek to make in Clause 5(1).

Lord Phillips of Sudbury

I am grateful to the Minister for that explanation. I should be grateful if he would read what I said in Hansard and consider whether it might not be of advantage to all to make clear in Clause 5(1) that, whatever is clone under its provisions, it cannot affect the rights of third parties. That is not explicitly stated.

The incorporation document is changeable. If one looks at the provisions of Clause 2(2), there are various aspects of the incorporation document which will be subject to change. Again, I am not sure that Clause 5(1) as drafted takes that into account.

These are all very technical matters and at the moment I am happy to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Goodhart moved Amendment No. 16: Page 2, line 44, at end insert— ("( ) Subject to this Act and to the provisions of the incorporation document and of any such agreement as is mentioned in subsection (1), the mutual rights and duties of the members of a limited liability partnership shall be governed by the rules and principles which would apply if the law relating to partnerships applied to them and the property of the limited liability partnership were partnership property.").

The noble Lord said: This is an important amendment—one of the most important that have been tabled to this Bill.

Up until now, partnership law has been made in Part by the Partnership Act 1890 and in part by decisions of the courts. The 1890 Act is a classic of parliamentary draftsmanship: it is clear, simple and concise. Would that modern statutes were as effectively and briefly drafted as that. It has worked with almost no amendments and to general satisfaction for 110 years. It is showing some signs of age but it has still been the effective foundation on which partnership law has been based.

As has been pointed out, it contains a number of important default provisions—rules which apply to partnerships if the partnership agreement does not cover a particular issue. This Bill, however, is completely lacking in default rules—and it needs them, especially because many existing partnerships will convert into LLPs and they will need to know whether or not, and how far, the laws which have governed them as partnerships will continue to govern them as LLPs.

If one wants to look at the default rules, one has to look primarily at Section 24 of the Partnership Act. That provides default rules which are subject to agreement to the contrary. Those include the fact that members are entitled to equal shares in the capital and profits of the partnership; that they are entitled to indemnity for liabilities personally incurred in the course of conducting the firm's business; and all members are entitled to take part in the management of its business. No person may become a member of the firm without the consent of all the other partners. Business decisions shall be taken by a majority of the partners, but any change in the nature of the business must have the consent of all the partners. Lastly, all members have the right to inspect the firm's books.

Other important default provisions are provided for. Section 25 provides that there is no power to expel a member unless the agreement so provides. Section 26, which has already been discussed, provides for a right to retire from the firm on notice where no other provision has been made in the agreement. Section 30 provides that members are under a duty not to compete with the firm. There are also important rules of common law and equity that apply to partnerships, in particular the duty of partners to act in good faith towards each other. I should like to refer to a quotation from what I believe is the best known textbook on the subject, first published in the name of the famous judge, Lord Lindley. It states that: Perhaps the most fundamental obligation which the law imposes on a partner is the duty to display complete good faith towards his co-partners in all partnership dealings and transactions". That is an important principle. It is vital that default rules for the conduct of LLPs should be provided, especially because LLPs will be used as a simple and informal way of incorporating small businesses where it is likely that members' agreements will be defective and incomplete in a way that the agreements of substantial accountancy firms or solicitors' practices will not be defective.

The wording of Amendment No. 16 is based on an earlier text in a draft government Bill. I believe that Amendment No. 17 is intended to achieve the same purpose but with different wording. Powers are provided to include default provisions by regulations under Clause 14. The Government have stated their intention to do so in so far as that is appropriate. However, in spite of their intention, I have tabled the amendment for three reasons.

First, proper default provisions are of central importance to the working of LLPs and I believe that they should be set down on the face of the Bill, as was done in the case of the Partnership Act 1890. Secondly, although it may be easy to provide default provisions where they are based on existing statutes, they will be much more difficult to formulate where they are based on common law. The duty to act in good faith to fellow members is central to a partnership and should remain central to LLPs. The Government have objected to this in the letter to which I referred earlier. It is said that there may be a potential conflict between duties to fellow members and duties to the LLP. I do not believe that to be a real problem. The courts created the duty of good faith and I believe they are entirely able to apply that concept to a new context. For example, the suggestion that members might be held liable to account for a private profit to both the LLP and the members of the LLP is, in my view, simply fanciful.

Thirdly, we have not yet had sight of the draft regulations that will apply the partnership principles. I hope that we shall do so before the Bill is enacted, in the same way as we have seen the effective draft regulations the Government propose to introduce as regards winding up and insolvency. I beg to move.

Baroness Buscombe

I wish to speak briefly to Amendment No. 16 and then move on to speak to Amendment No. 17. The noble Lord, Lord Goodhart, and I are seeking to achieve similar results here, albeit using different wording. In that sense I concur with much of what the noble Lord has already said as regards Clause 5 of the Bill. However, I shall repeat what I said during the Second Reading debate on the Bill; namely, as presently worded, the members of a limited liability partnership will be subject to company law or employment law if no specific provision is made in this clause to the contrary. That would radically alter the nature of the limited liability partnership.

I appreciate that the Government have sought to clarify this in part, certainly with Amendment No. 12. However, I believe that Amendment No. 17 deflects any possible confusion between whether members are employees or partners while enunciating, by reference to the Partnership Act 1890 and the rules of equity in common law applicable to partnerships, the partnership ethos we are endeavouring to maintain on the face of the Bill. Furthermore, as the noble Lord, Lord Goodhart, has already said, we wish to recognise those areas that should be expressed in terms of default provisions modelled on Section 24 of the Partnership Act 1890; or, if not, we would appreciate the opportunity to review the draft regulations setting out those default provisions.

I shall refer briefly to the Minister's letter to me of 10th January 2000. He kindly clarified a number of issues, in particular in relation to Clause 5 of the Bill. He made it clear that there are a number of areas where the Government, through secondary legislation, would like to ensure that the relationship of the members of an LLP is clarified: the right to share equally in capital and profits; the right to be indemnified by the LLP for activities in the course of business; the right to take part in the management of the firm; no entitlement for remuneration for acting in the business of the LLP; the right to have access to books and records and decisions by a majority vote. In essence, we would appreciate some reassurance in relation to Clause 5 that such provisions will be set out in regulations. To that end, we would be grateful to have sight of those draft regulations before final decisions are made.

Lord Phillips of Sudbury

I should like to make one simple point. The Title of the Bill is thoroughly misleading unless the purport of one of these two amendments is accepted by the Government. The issue of ethos, as the noble Baroness, Lady Buscombe, called it, is crucial. I have been a member of a partnership for ever 30 years and I must say to the House that the spirit of a partnership can in fact be far stronger and more effective than the dry, technical provisions of a limited company. For that reason I do not think that this is a minor matter and I agree entirely with my noble friend Lord Goodhart that the amendments are fundamentally important. I hope very much that the Government will listen to the point being made here.

Lord McIntosh of Haringey

I thought that we had covered the point of the Short Title of the Bill during the Second Reading debate. I believe that there are two ways in which the Title may be read. The first is that limited liability with the word "partnerships" tacitly held in brackets provides for limited liability to be applied to partnerships. The second is actual limited liability partnerships; namely, the entity that will be created by the Bill before us. That is a completely new entity embodying elements of a partnership and of a limited company.

However, I appreciate the force of the points that have been made from both of the Opposition Benches and I do not wish in any way to underestimate their importance. However, I must return to what I said in response to amendments tabled much earlier this afternoon. The point of the creation of a limited liability partnership is that it is a body corporate which is treated as a partnership only for tax purposes. In other words, in every other respect it is not a partnership. If the noble Lord, Lord Phillips, who told the Committee that he has been a partner for over 30 years, wishes to continue being a partner with unlimited liability, he is entirely free to do so. It is only because members of many partnerships have expressed a wish for limited liability that we have gone to the extent of putting the Bill forward. The only basis on which we can put the Bill forward is to say that, in return for the benefit of limited liability, a price has to be paid.

The price that has to be paid is the price of transparency and, in general, of the application of as many as possible of the rules applying to limited companies. If a director of a company or a partner in a partnership does not like it, they are free not to do it. We are not imposing limited liability partnerships on anyone. We are trying to respond to a legitimate request and, at the same time, to protect the public who deal with these new business entities.

The attempt to provide a default provision that applies partnership law seems to go against the principles that I set out earlier today, and set out, perhaps not entirely clearly, at Second Reading. If we look at the matter in terms of the professional advisers who will be relevant, I take it that it will be tax lawyers with experience of partnerships who will be advising LLPs, and in all other respects corporate lawyers will deal with the issues which LLPs raise. However, as these amendments are drafted, they would create substantial uncertainties in seeking to apply partnership law by default to a corporate body. We are applying the Companies Act provisions by regulations made under the Bill and the application of partnership law in general would lead to confusion as to how they would interact. For example, the rules for winding-up and insolvency for a company are entirely different from those for a partnership. That is why we have decided not to apply partnership law as a default.

After very considerable thought and after the steps that I described in relation to earlier amendments, we have decided that the most practical option is to have this set of default provisions in the regulations which would apply subject to any agreement, express or implied, between the members. In other words, they would come into effect if an agreement did not cover the point. The noble Baroness, Lady Buscombe, read out the list of areas which we propose to include; as indeed I did in response to an earlier amendment. I said that they are available on the website. They are. I shall take them off the website and send them in hard copy to everyone taking part in this debate, and by e-mail to the noble Lord, Lord Lucas, who does not like to see things in hard copy. He has proper concern for the forests of Scandinavia. Whether we can go further right now in providing drafts of the regulations, I do not know. We will certainly have them available before Royal Assent. But we are in the middle of consultation on them and it might be misleading to send draft regulations now. I will do my best. If we can get draft regulations to noble Lords before Report stage we will certainly do so. I can confirm that they cover the points made. I can confirm that we intend that they should be applied and that they should be available to be debated by Parliament as early as possible. I cannot agree with the noble Lord, Lord Goodhart, that they should be on the face of the Bill. Indeed, the noble Baroness, Lady Buscombe, recognised that she might not be able to persuade us of that. We think it is better to provide flexibility for the amendments in case they need to be amended after the Bill has been enacted. A limited liability partnership is not a partnership, and it would be wrong to restrict its future evolution.

I want to say a few words about good faith, as the noble Lord, Lord Goodhart, quite legitimately referred to that. Although he described what I said at Second Reading as "fanciful", nevertheless I am going to have to repeat it. Even though no express duty of good faith is included in the Bill, we believe that as a LLP is a body corporate and the members are agents, the courts would find that a fiduciary duty existed between members and the LLP. If the rules and principles of the Partnership Act were applied to LLPs and the courts were to find that a fiduciary duty existed between members and the LLP, it would mean that an individual member was faced with parallel fiduciary duties: duties that were owed to the LLP and duties owed to fellow members. In such an event the Bill would not be able to provide a mechanism to decide which duty would prevail, even when there was a conflict.

That could result in particular difficulties with regard to the duty contained in the Partnership Act to account for private profits. To whom should the account be made; to the LLP or other members? There would be the potential for double jeopardy and the need to prioritise between the rights of the members and the rights of the LLP.

I know that I have not convinced the noble Lord, Lord Goodhart, on that point. Perhaps it is a subject that we can discuss between now and Report stage. But that is the considered view of the Government. It is also our considered view that we can best deal with these matters by regulation, as I suggested, rather than on the face of the Bill. I invite the noble Lord not to press his amendment.

6 p.m.

Lord Goodhart

I have to say that I find the Minister's response somewhat unsatisfactory. I am concerned particularly that the Government have approached this matter on the footing that a LLP is essentially a company similar to the Companies Act companies rather than anything which is in the nature of what we now know as a partnership. It seems to me that it would have been much better to approach the issue from the other direction, and to say that there are partnerships which need protection in the form of limited liability, and that that limited liability should be given to them in a way that does as little damage as possible to existing partnership law.

I accept that the provisions for the winding-up of partnerships are fundamentally inconsistent with the idea of limited liability and that one needs to incorporate the provisions from the Insolvency Act relating to winding-up. I accept also that, given the existence of limited liability, there has to be a great deal more transparency in connection with the financial information about the firm. But it does seem to me that there are a great many principles in partnership law which can, and should, be applied to relations, particularly to the relations between the members of an LLP. I think it is important to preserve what both the noble Baroness, Lady Buscombe, and my noble friend Lord Phillips said about the ethos of the partnership system. I fear very much that that will be lost when we come to LLPs.

I should say that the argument that flexibility is necessary in this case is not correct. It seems to me that what we are looking at is principles of partnership law that have been established, at least since the Partnership Act 1890, and in many cases earlier. Those principles are well-established. It is easy to identify those which are appropriate to LLPs and to weed out those which are not. Certainly I would not expect to see the regulations which apply to parts of partnership law have any need of change. In that case it would have been appropriate for the Government to have introduced these default provisions on the face of the Bill rather than by way of regulation. There is of course a problem with timing. I can understand that it is not easy for the Government, having reached where they are, to go back and have a different approach. It would certainly be much easier for us if we were at least able to see what the Government are actually proposing and not merely what they are consulting about. That is why I regret that it is suggested that the draft regulations will not be available until possibly Royal Assent.

Having said that, at this stage I shall certainly ask leave to withdraw the amendment. We shall have to consider whether, either in this or another form, the amendment should be brought back on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 17 not moved.]

Clause 6 [Members as agents]:

Lord McIntosh of Haringey moved Amendment No. 18: Page 3, line 7, leave out from beginning to ("member") in line 8 and insert ("But a limited liability partnership is not bound by anything done by a member in dealing with a person if— (a) the").

The noble Lord said: In moving Amendment No. 18, I should like to speak also to Amendments Nos. 19 to 24. These are amendments to Clause 6 to which I referred in discussing earlier amendments. They seem complicated on the Marshalled List, but I hope that the marked copy of the Bill which I supplied makes it possible for me to say that these are largely technical or drafting amendments. However, there is an issue of substance here which I want to set out.

Concerns were expressed, particularly by the professional consultees, that the effect of the drafting of Clause 6(2) goes further than was intended by removing the agency of the member in the circumstances described at Clause 6(2)(a) and (b). Paragraph (a) refers to where the member has no authority to act and paragraph (b) refers to where the person with whom he is dealing believes that he has no authority to act or does not know or believe him to be a member of a limited liability partnership. The amendments respond to those concerns and ensure that the Bill meets the agreed intention. It is important that the member should continue to be an agent of the limited liability partnership for all purposes, even if his acts do not, in certain circumstances, bind the LLP. The agent—the member—owes fiduciary duties to the principal—the LLP. Those should apply even if, in a particular case, his acts do not bind the firm.

Amendment No. 20 provides that third parties—the outsiders, if one likes—who have knowledge which bears on a member's status cannot rely on the member being an agent of the LLP. The circumstances in which that would apply would be where, first, the third party knew or believed that the individual with whom he was dealing was not a member of the LLP; and, secondly, the third party knew or believed that the member with whom he was dealing had no authority.

We have gone further in the second provision than was originally the case in the Bill by saying that a third party cannot rely on the member being an agent where he believed that the member had no authority. The specific change is intended to cover the situation where a member of an LLP does something wholly unconnected with the LLP; for example, a member of an LLP of solicitors who goes into the business of selling second-hand cars. It would not require absolute knowledge; belief would be a sufficient test.

I believe that Clause 6, as amended by Amendments Nos. 18 to 24, is not only clearer than it was originally but also more precisely reflects our intentions. I beg to move.

6.15 p.m.

Baroness Buscombe

I rise to speak in support of this group of amendments. For my part, the amendments help to clarify the, meaning of Clause 6. Having cast aspersions on previous amendments in relation to the drafting of the Bill, it is only fair that I say that the drafting in this instance has helped to clarify the parameters of the agent. The Minister is already aware that, in relation to Clause 6 as a whole, we regret the dropping of subsection(1)(c), as it appears in the earlier draft of the Bill. That made specific reference to the law relating to partnerships. Following all that has been said today, it is clear that since the earlier drafting of the Bill the Government have very much moved on in terms of the accent on company law as opposed to partnership law.

Lord Goldsmith

I agree that the wording of the clause is much improved, but I want to raise one issue in relation to it. It relates to the particular words to which my noble friend the Minister referred—that the person knows or believes that the member has no authority. It is right to contrast that with Section 5 of the 1890 Act, which uses the expression, and the person with whom he is dealing either knows that he has no authority or does lot know or believe him to be a partner". The concept of belief in relation to "partner" makes a good deal of sense. If one does not believe someone to be a partner, one has no business believing that he has authority to act on behalf of anyone else. But the more I look at it, the more I am troubled by the watering down of knowledge in relation to paragraph (a)—in relation to the question of whether the person who otherwise ought to be able to assume that the member has authority is to be deprived of the benefit of that; that is to say, not to be able to hold the limited liability partnership to account.

If he knows that the person does not have authority, I have no difficulty with the provision at all. That is what the Partnership Act 1890 provided. My question concerns belief. What is it that would justify saying that someone cannot rely on the member binding the firm because he does not know that he does not have authority—yet he believes that to be so? I am worried that that expression should not be taken in any way as amounting to, for example, simply suspicion. I wonder whether it is worth further considering precisely what the expression adds to the wording which otherwise I entirely endorse.

Lord Lucas

I should be grateful if the Minister could help me by clarifying one or two points on this revised wording. First, under Clause 6(1)(b)., the important thing for a partnership to do if a partnership has such a member—for instance, my accountancy partnership has a member who is not entitled to sign audit reports—is to ensure that third parties dealing with that partner know that he does not have that authority; otherwise, it will be caught by this revised wording. The revised wording takes agency to the point where, if one is dealing with an accountancy firm, one can presume that any individual party with whom one is dealing is omnipotent; that there are no restrictions on his ability. One has every reason to believe that he has the power. He is a partner of the firm and therefore he can do it. However, in order for the revised wording to bite, one must know that he does not have the power.

How does the Minister envisage that a large accountancy firm will bring to the attention of its myriad of clients the restrictions on the ability to act which affect its partners? Will it be sufficient to have a general notice at the bottom of the note paper saying that people ought to consult the partnership about what powers individual partners have? How does he envisage this happening in practice so that a limitation on the partner's ability to act may be made manifest to third parties with whom the person is dealing?

Under Clause 6(3), where a person has been dealing habitually with a partner of a firm and that person then ceases to be a member of the firm, what duties does the limited liability partnership have to inform the client that the person with whom he was dealing is no longer a member? If it neglects to do that, is it still free of all liability just by sending a notice to the registrar? That would seem to be a little unfair.

Lord Phillips of Sudbury

I absolutely agree with the last point made by the noble Lord, Lord Lucas. I believe that it will be a much more common occurrence than the Committee may think—namely, the active attempt by people to avoid liability under this legislation by chopping and changing registrations of members. If the Committee thinks that I am unduly cynical, I can only say that it is a cynicism born of long experience. I am afraid that in certain sectors of the economy there is a great deal of jiggery-pokery and every advantage will be taken.

I should also like to speak in support of remarks made by the noble Lord, Lord Goldsmith. He is correct in drawing a distinction between knowing and believing. I merely point out that these days solicitors do a multiplicity of things. I refer to them as one example of the professional bodies that will take advantage of the LLP. They sell property; they act as attorneys; they are very often partners and non-executive directors of companies of which their firm is also the solicitor. I suggest that it is extremely difficult to know what someone believes, or believed, given that a court will have to construe that.

A large firm of solicitors or accountants is in an extremely powerful position over and against an individual member of the public in sidelining or derailing a perfectly proper claim brought by an individual by pretending—I use the word advisedly—that they did not believe that the partner concerned did not have authority. In considering the Bill, we need to be extremely careful to give no help at all to those who will, I fear, be unscrupulous in seeking to take undue advantage of what is the extension of an immense public privilege via limited liability.

Lord McIntosh of Haringey

I have certainly got the big guns raising questions about the new drafting. I acknowledge that. My understanding as we went through the amendments last week was that what we were doing was providing a failsafe on the side of the client—in other words, the provision would make it more difficult for a limited liability partnership to evade any responsibilities. But several noble Lords, including my noble friend Lord Goldsmith, have suggested that the failsafe might be in the other direction. It was certainly not in my mind that that should be the case. However, if the introduction of the words, "or believes", in the part of subsection (2)(b) which refers to authority does go in the other direction and weakens the rights of the third parties, those with whom the LLP is doing business, that is not what is intended.

This is a genuinely difficult issue. I recognise that we have sprung the new wording on the Committee at relatively short notice. I should like to include the wording because I believe it is clearer to do it that way. However, I should like to write to all noble Lords and, if that is their wish, meet with noble Lords before Report stage to make sure that we are of one mind about this matter. I believe that we are all here on the side of the customers rather than on the side of the professionals. I hope that on that basis noble Lords will not resist the amendments which have been agreed to be an improvement in terms of clarity, if not entirely in effect.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendments Nos. 19 to 24: Page 3, line 9. leave out ("in a particular matter") and insert ("by doing that thing"). Page 3, line 10, leave out ("with whom he is dealing in that matter either knows") and insert ("knows or believes"). Page 3, line 13, leave out ("person deals with a limited liability partnership after a"). Page 3, line 14, leave out ("the") and insert ("a"). Page 3, line 14, leave out ("he is entitled to treat the former member") and insert ("the former member is to be regarded (in relation to any person dealing with the limited liability partnership)"). Page 3, line 17, leave out ("he") and insert ("the person").

On Question, amendments agreed to.

[Amendment No. 25 not moved.]

Lord McIntosh of Haringey moved Amendment No. 26: Page 3, line 20, at end insert— ("( ) Where a member of a limited liability partnership is liable to any person (other than another member of the limited liability partnership) as a result of a wrongful act or omission of his in the course of the business of the limited liability partnership or with its authority, the limited liability partnership is liable to the same extent as the member.").

On Question, amendment agreed to.

Clause 6, as amended, agreed to.

Baroness Buscombe moved Amendment No. 27: After Clause 6, insert the following new clause—

MEMBERS: SUPPLEMENTARY

(" Unless otherwise agreed between members and the limited liability partnership, a member is not an agent for another member, is not liable for debts of the limited partnership and is not an employee of the limited liability partnership").

The noble Baroness said: This is a probing amendment designed to ensure clarity with regard to the relationship between members and the limited liability partnership. Based on present English legal authorities, the fact that the LLP is incorporated with limited liability, has a separate legal personality and no mutual agency of members should be sufficient to protect non-negligent members where the LLP is the contracting party. In essence, the amendment seeks to reinforce limited liability. I beg to move.

Lord McIntosh of Haringey

I had assumed that other noble Lords with more expertise than I would wish to intervene. There are three elements in the amendment. I am duty bound to deal with all three. The first provides that, subject to the agreement between members, the member is not an agent for another member. We do not believe that the provision is necessary. There is nothing in the Bill to provide that one member is an agent of another. The member is only an agent of the LLP.

The second provision is that, subject to the agreement between members, a member is not liable for the debts of the limited liability partnership. Again, we believe the provision to be unnecessary. The LLP is a body corporate and a separate legal person from its members. Under the common law as it applies to corporations, the members of a corporation are not in general liable for its debts. That is subject, of course, to the caveat that our intentions are to ensure, by regulation, that if an LLP becomes insolvent, a member may be required to repay withdrawals made from the LLP in the two years prior to winding up if it is proved that at the time of the withdrawal he knew or had reasonable grounds for believing that the LLP was at the time of the withdrawal unable to pay its debts. I refer to the proposed new Section 214A of the Insolvency Act which we published twice in draft for consultation, most recently in July last year, and which is the subject of a subsequent amendment by the noble Lord, Lord Goodhart.

The third part of the amendment provides that, unless otherwise agreed, a member is not an employee of the limited liability partnership. We dealt with that point in government Amendment No. 12, which has been agreed, by providing that a member of an LLP shall not be considered an employee simply by virtue of being a member. I hope that at that time I explained why it was that we did not believe that this matter should be subject to an agreement of the LLP; it should, in contrast, be part of normal employment law, however opaque that may sometimes be.

For those three reasons, I am afraid that the Government cannot accept the amendment.

Baroness Buscombe

I thank the Minister for responding to what I made clear was a probing amendment. I thank him for addressing each of the three areas in detail. I am content to withdraw the amendment.

Amendment, by leave, withdrawn.

6.30 p.m.

Lord Goldsmith moved Amendment No. 28: After Clause 6, insert the following new clause—

MEMBERS' LIABILITY

(" Any member of a limited liability partnership shall be personally liable in tort (or in Scotland in delict) to any person for his own acts or omissions (but not for the acts or omissions of any other member of the limited liability partnership or for the acts or omissions of any employee of the limited liability partnership except such as are under his supervision or control) to the same extent as he would have been liable if the limited liability partnership had been a partnership subject to the provisions of the Partnership Act 1890 and of which that member was a partner.").

The noble Lord said: I raise this amendment to air an issue about the effect of the Bill if enacted. Paragraph 10 of the Explanatory Notes states that, The LLP and not its members will be liable to third parties. However, a negligent member's personal assets will still be at risk. By way of example, under the general law, a professional person owes a duty of care to his client. Negligent advice given in breach of that duty by a member of an LLP will, in general, give rise to a potential liability on the part of that member as well as the LLP". As I have understood the Explanatory Notes and remarks made in this place, it has been regarded as an important part of the Bill that, although partners will not be liable for their partners' acts, they will remain liable for their own acts or omissions. I have a concern, however, as to whether it can be said with the degree of confidence which the Explanatory Notes imply that that is what the common law will provide.

At the moment the liability of a partner may arise either in contract or in tort. The liability in contract arises where the partner is one of those persons with whom an individual has contracted to provide services. That liability will plainly not arise in future where a limited liability partnership is involved. The whole point is that it will be a separate body corporate that makes the contract, not the individual partners. The position in relation to tort is that an individual may owe a duty in certain circumstances. In relation to acts which cause personal injury or loss of property there is no real difficulty. Someone who drives down the road is liable for his acts whether he is conducting his own business or that of his employer. Where economic loss is caused, over the past 10 to 15 years the courts have devoted much time to considering the precise circumstances in which a duty of care may arise. The case of Caparo to which reference has already been made is one such example, but not all of these cases are at first sight always easy to reconcile.

The present position can be stated as follows: a person's liability to another for economic loss, for example by reliance on the spoken or written word, will depend on the court determining in all the circumstances of the case whether such a duty is found to exist. That may sound somewhat circular, and to an extent it is. The court looks at all the facts. The present test most often used, although not always, is whether the person assumed a personal responsibility for the particular act.

A special difficulty arises when a legal entity is interposed between the third party and the act of the individual. That matter has been most recently considered in the decision of this House in Williams v Natural Life Ltd. It is important to emphasise that that case concerned an ordinary company. Putting it at its shortest, the test appears in the speech of the noble and learned Lord, Lord Steyn: The inquiry must be whether the director, or anybody on his behalf, conveyed directly or indirectly to the prospective franchisees that the director assumed personal responsibility towards the prospective franchisees". In that case there was discussion about the circumstances in which the director of a one-man company might be liable. In its judicial capacity this House took the view that it did not necessarily follow that, because a company was a one-man business, that individual owed a personal duty; it would depend on whether on the facts he had assumed a personal responsibility. The extent to which this is a difficult area can be shown by the fact that in that case the Court of Appeal and this House differed as to the result: the Court of Appeal held that there was a duty of care; this House held that there was not.

My concern, therefore, is that the statement in the Explanatory Notes may give the impression that undoubtedly the common law will give rise to a personal liability on the individual person who has done the act or omission when I am not confident that that is the effect. It will depend on the circumstances. I can think of cases where it is likely that the courts will find such a duty and cases where that is much less likely. By way of example, in the simple case of a solicitor who sees a client and directly gives particular advice on which the latter relies, it may very well be that the court will find that the client relied on that particular solicitor and that he had assumed a personal duty.

But what of the case where it is not a question of spoken advice being given but a failure to act? What if one's solicitor fails to file one's claim on time? Does the individual partner one sees first assume a personal responsibility to file the writ or does one rely on the firm to do it, in which case that partner may not have a personal duty? Of greater complexity and perhaps importance in the context of accountants is the team job. What about a case where the job is done by a team of partners, managers and assistants who together negligently, regrettably, make an error which causes substantial loss? Which of those members owes the personal duty, or does any of them? In those circumstances, does one rely on the individual partner or the well known firm? What of the case where the letterhead says that no individual partner assumes any personal responsibility for any act and one must look to the LLP alone?

The reason for moving the amendment is to raise this issue in the sense of asking whether, if this matter is fundamental to the Bill, words can be found that give effect to that intention, or whether it is something with which one is prepared to live and in certain circumstances the common law may not provide the remedy which the Explanatory Notes seem to suggest. The wording of the amendment is not perfect. I confess that it is not easy to formulate an amendment which gives that effect. I suggest that it is inappropriate to table an amendment which changes the general law. This is a difficult area. The amendment seeks to put the individual partner in the same position as he would have been in had it been an ordinary partnership. I have tabled the amendment to explore that issue and the basis of the Explanatory Notes. I beg to move.

Lord Sharman

I rise to support the amendment. In so doing I repeat the declaration of interest that I made at Second Reading: to wit I was a partner in a large firm of accountants for many years and I continue to act as a paid adviser to that firm.

Of late I have frequently used the words in the Explanatory Notes to explain and justify the Bill. It is very important that the issue which has been raised is specifically addressed. I do not seek to defend the Bill on the footing on which I have defended it; namely, to say that this is a necessary development of the legislation but that nothing in it will in any way change the individual responsibilities of a partner. That is widely believed to be the case outside this House. The point that the noble Lord raises is a valid one, and I support the amendment.

Baroness Buscombe

I also support the amendment. I do not seek to repeat everything that the noble Lords, Lord Goldsmith and Lord Sharman, have set out with such clarity. This is a tremendously important matter. During Second Reading there was brief debate on the clarity of the parameters of the liability of the members of a limited liability partnership. Any clause such as this, however difficult to draft, that makes clear on the face of the Bill the general parameters of limited liability, and that individuals will be liable in the same way as they would be liable in certain circumstances as the partners in a normal partnership, can only benefit all those who seek to establish limited liability partnerships following the passing of this Bill.

Lord McIntosh of Haringey

I agree with a number of the observations that have been made. This is a very important issue and we should see to it that professional liability is not watered down by the Bill. I also agree that it is difficult to see how to achieve that. I do not believe that to apply the law of partnership, as the amendment seeks to do, is the right solution to the problem. My noble friend has highlighted our reliance on the duty of care enshrined in common law to achieve the liability of the negligent member of an LLP. He questions whether that is right or safe.

I recognise that there are concerns about the treatment of professionals and their freedom to operate with limited liability. But with this member we do not want to change the regulation of professionals. We intend to create an alternative corporate form which will be available to anyone carrying on a lawful business with a view to profit—that is, not just to professionals.

My noble friend and others have queried the statement in paragraph 10 of the Explanatory Notes that, Members benefit from limited liability because the LLP is a separate legal person. The LLP and not its members will be liable to third parties. However, a negligent member's personal assets will still be at risk. By way of example, under the general law, a professional person owes a duty of care to his client. Negligent advice given in breach of that duty [of care] … will, in general"— I emphasise the words "in general" because that is meant to be in the form of a qualification— give rise to a potential liability on the part of that member as well as the LLP". We think that that is indeed the case. A negligent member's assets will be at risk. The risk for members of a limited liability partnership may be smaller than for partners in a partnership, but the risk is still there. That is why the Explanatory Notes are worded in that way. It is justifiable because of the additional liability of the partnership as a body corporate. That is where the protection of the third party comes in.

Lord Goodhart

Will the Minister explain the alleged additional protection? The additional liability of the LLP adds nothing to what the liability would have been if it had been operating simply as a partnership.

Lord McIntosh of Haringey

The intention is for the assets of the LLP to be available to compensate the complainant—I think that that is right term, not the plaintiff—against any claim. I know that the noble Lord is sceptical about that because of the issue of joint and several liability. However, I remind him that from many points of view joint and several liability is a difficult concept to sustain.

We have approached the creation of this entity, therefore, on the basis that it will be a body corporate, and that the principles and regulations applied to companies are the most appropriate ones to apply to the LLP. We see significant disadvantages to what is being proposed. The limited liability partnership will be an entity which can be used by professionals and non-professionals alike. It will create a choice of limited liability entity between a company or an LLP. We believe that it is important to ensure a level playing field between the two entities.

Responsibility and the assumption of responsibility to a third party is a general question which runs through the law of tort. Were we to make a statutory provision, as the amendment suggests, we would be freezing the law for members of a limited liability partnership by putting it into statute law whereas common law would continue to evolve. This is particularly dangerous in the context of the ongoing company law review, to which I have referred. It would create the prospect of an undesirable disparity of treatment.

Further, we do not believe that this Bill is the right way to amend the scope and application of the law of tort. We tread on dangerous ground. Should the courts have to consider whether a member of an LLP had been negligent, they would consider, among other things, whether that member had assumed responsibility sufficient to give rise to liability for economic loss flowing from the reliance placed on that. That is the point of Williams v Natural Life to which my noble friend referred. In Williams it was found that there had been no personal dealings between the director and the plaintiffs and no exchanges or conduct between them which could have conveyed to the plaintiffs that the director was willing to assume personal liability to them. indeed, there was no evidence even that the plaintiffs had believed that the director was undertaking personal responsibility towards them. The point here is that the assumption of responsibility was to be determined objectively so that the primary focus had to be on exchanges between the parties.

Clearly, the courts' decision cannot be forecast with absolute certainty, since their decision in any case would depend not only on the general nature of the relationship between the member of an LLP and his client, but also on the exact facts of that relationship, as is made clear from Williams.

I accept that a consequence of relying on common law is the possibility of a greater degree of evolution through the comet on law than where express provision is made in statute. But we see no reason to make special provision for a limited liability partnership where it does not exist in company law.

In the context of the company law review which will undoubtedly have to consider the important issues raised by the amendment, I hope that my noble friend will not pursue an amendment which would lead at least in the short term to an imbalance between the law for companies and the law for limited liability partnerships.

Lord Goldsmith

I confess to being somewhat disappointed and not persuaded by the Minister's reply. I understand that after the Bill becomes law there will be three types of entity: an ordinary partnership; a limited liability partnership; and an ordinary company. In an ordinary company, the shareholders are liable only to the extent of their contributions—the capital—they have put into the company. In an ordinary partnership, the partners are liable for all their assets because of the joint and several liability principle.

I had understood that the principal purpose underlying limited liability partnership was to provide a hybrid in which one did not have all the consequences of an ordinary company but excluded the joint and several liability principle. Therefore, the partner would not be liable for the acts of his partners save to the extent, as in a company, that he had contributed to the assets of the partnership. At present if one sues a partnership, one looks first no doubt to the assets the partnership has built up—its buildings, offices, cash balances, and insurance policies—before turning to the homes and cars of individual partners.

As the noble Lord, Lord Sharman, said, it is understood outside this Chamber that the Bill intends to keep the individual responsibility of the partner as still his personal responsibility. Perhaps that would assist towards maintaining the professionalism and ethos of partnerships to which the noble Baroness, Lady Buscombe, and the noble Lord, Lord Phillips of Sudbury, referred.

One can argue about and differ on the interpretation the courts may give. I have expressed my position in relation to that. In tabling the amendment, I have sought not to change the general law but to give the member of the limited liability partnership the same liability he would have had for his own acts—not others' acts— those circumstances.

Lord McIntosh of Haringey

Before my noble friend concludes his remarks, I repeat the difficulty which we see. I shall be glad to meet him again to discuss the issue—and indeed any other noble Lords who would care to do so before Report stage. Of course, if we were persuaded, we would put forward appropriate amendments.

I do not know whether I am grossly oversimplifying the issue. We seem to be talking about two aspects of common law: the law of contract; and the law of tort. The law of contract applies to the body corporate; and the law of tort remains applicable to the individual members. That is where negligence comes in. That is why there is a sense in which the individual responsibility of a member is reduced: it is reduced only to obligations under the law of tort. But the important point to establish—we have to arrive there in the end—is that the protection of the clients., the customers, is not diminished in total.

Lord Goldsmith

I agree with my noble friend that there are two distinct issues. As regards his first point, I was about to say that I do not intend to press the amendment. I have heard the remarks made by other Members of the Committee and I am happy that the Minister is willing to consider the matter further. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 agreed to.

Clause 8 [Designated members]:

Baroness Buscombe moved Amendment No. 29: Page 3, line 39, at beginning insert— ("( ) Each limited liability partnership shall have a minimum of two designated members who shall be responsible for complying with the administrative and filing provisions of this Act and regulations made pursuant to this Act.").

The noble Baroness said: The amendment seeks to clarify the role of a designated member. As currently drafted, the Bill does not appear to explain what a designated member is. I might sound a little like a rusty record, but I am reading the Bill from the point of view of someone considering establishing an LLP and wanting to know what the parameters are and who deals with what.

Clause 8 launches into provisions for designated members, stating that anyone can become one. An incorporation document specifies who they are, but not what they are. Therefore, the amendment attempts to overcome that by explaining their role and providing that, in any event, there must be a minimum of two in order to ensure proper compliance with the administrative and filing provisions of the Act and regulations made pursuant to it. I beg to move.

Lord McIntosh of Haringey

Clause 8(2) provides that: if there would otherwise be no designated members, or only one, every member is a designated member". That is supposed to mean that there should be at least two designated members. I do not believe that the amendment makes the role of the limited liability partnership any clearer than the current provisions included in the Bill and the regulations. It provides an inaccurate paraphrase of their function because the amendment adds the requirement that designated members should be responsible for complying with the "administrative and filing provisions" as set out in the Act and regulations.

I understand 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 on questioning it appears that the drafting is not uncommon. The reason is that the role and responsibility of designated members is analogous to the phrase "an officer of the company" under the Companies Act. Under that Act, the obligations on an officer of the company appear all over the place in many aspects of company legislation. If we were to say that the role of a designated member is analogous to the role of an officer of the company, we might be trapped into going through company legislation and finding hundreds of instances where we should have to specify what the officer of the company, and therefore the designated member, does. For the sake of saving ink and paper, we did not want to do that.

It is right that in general a designated member has administrative and filing functions, but it would be wrong to limit his role in that way. In some provisions, he is given a task which goes beyond the mere administrative and in which he would take action that is significant for all the members. For example, designated members sign the accounts, appoint the auditors for the first financial year in respect of which auditors are appointed, and may apply to the Registrar of Companies for the LLP's name to be struck off the register.

It would be complicated, and I believe unnecessary, to include this additional provision in the Bill. Despite the clause being counter-intuitive in the sense that it does not spell out the functions, there is a good and rational reason for it and I hope that the noble Baroness will not press her amendment.

Baroness Buscombe

I thank the Minister for that explanation, but I remain unconvinced that there is an explanation of a designated member. The difficulty is in the drafting. I agree that the drafting of the amendment is unsatisfactory, but it is important that wherever possible it is clear as to who is what. I am disappointed that the Bill launches into what someone can and cannot do without explaining why a designated member differs from a member. However, I accept the Minister's response and beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 agreed to.

Clause 9 [Registration of membership changes]:

Baroness Buscombe moved Amendment No. 30: Page 4, line 22, leave out ("fourteen") and insert ("28").

The noble Baroness said: The amendment seeks to allow more time when a person becomes or ceases to become a designated member. The Bill currently provides that notice shall be delivered to the registrar within 14 days. Where there is any change in the name or address of a member, notice is to be delivered to the registrar within 21 days.

I propose that in both instances 28 days should be allowed in order to give the LLPs more time to register the change. Some global partnerships have as many as 8,000 members; for example, some of the major accountancy firms. We believe that the 14 and 21 days could be increased to 28 days, providing a more comfortable period within which to register. It was discussed at the Trade and Industry Select Committee (paragraph 59 of its 4th report), which stated that the largest LLPs will have many hundreds of members. I believe that that should read "hundreds of thousands". Each year, one might have 100 new members, 150 moving house and 10 name changes due to marriage or divorce.

The amendment is designed to allow for a little more leeway in registering a change and complying with the Bill. I beg to move.

Lord McIntosh of Haringey

I am pleased to say that I can meet the noble Baroness half way. We will split the difference. I cannot agree to Amendment No. 30 because the 14-day limit on the notification of changes to members is the same as for the notification of changes to directors. It is an important protection for those having business with them that they should be able to know quickly what changes have taken place in the identity of members. We do not see any reason why it should be any different for LLPs and companies.

However, the noble Baroness has a point in Amendment No. 32. Indeed, in our response to the trade and industry committee, we said that we should allow returns to be made within one month of any change and her stipulation of 28 days is closer to one month than ours of 21 days. It is longer than we provide for companies but I take the noble Baroness's point about large partnerships with hundreds of members and I am willing to accept Amendment No. 32.

7 p.m.

Lord Lucas

I should like to return to something the Minister has just said: that the matter of registering members' names and addresses was an important protection for those who deal with an LLP. In what way does Clause 6 not cover that to make such registration unnecessary? There is no obligation on someone dealing with a partnership to inquire into the register at all. As long as he believes the person to be a partner, he is safe. I cannot see what additional protection is afforded by having the register updated so frequently.

Lord McIntosh of Haringey

If I said that, I was giving the wrong impression. I did not say that registration is unimportant; it is clearly important. I said that we must have a better protection and one which is available without the proactive step of going to the register. That is why I said that, for example, on the letterhead and in any business correspondence, the members of a limited liability partnership must indicate that they are members. The fact which matters in that respect is that we are providing in the Bill a better protection than registration. It does not in any way remove the necessity to have an efficient registration system, which is what is provided for here.

Lord Lucas

I understand that, but my understanding of the Bill at present is that having the members' names on the register is not important as part of the protection of third parties and therefore it should be perfectly possible to make that time limit 28 days. Third parties gain nothing by the speedy updating of the register. Twenty-eight days would be quite sufficient because the protection is elsewhere in other clauses of the Bill.

Lord McIntosh of Haringey

The noble Lord may believe that it is belt-and-braces; that nothing is taken away by providing for 14 days. Fourteen days seems to work for limited companies. In a way, it is in the LLP's interest to notify the registrar, but the position must be the same as that for limited companies and there is no reason why it should not be.

Baroness Buscombe

I thank the Minister for his response to Amendment No. 30. I apologise for not making it clear at the outset that I would be speaking also to Amendment No. 32. I believe that the Minister judges from my inexperience here, but he obviously realised that I was referring to both amendments. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 31 not moved.]

Baroness Buscombe moved Amendment No. 32: Page 4, line 25, leave out ("21") and insert ("28").

The noble Baroness said: I beg to move.

On Question, amendment agreed to.

Lord Goodhart moved Amendment No. 33: Page 4, line 42, at end insert— ("(5A) If a limited liability partnership fails to comply with subsection (1), the person who becomes or ceases to be a member or designated member or whose name or address has changed may deliver notice to the registrar. (5B) Any person who delivers a notice under subsection (1) or (5A) which is materially incorrect shall be guilty of an offence unless he had reasonable grounds for believing the notice to he correct.").

The noble Lord said: This is a short point. It is clearly desirable that a former member who ceases to be a member of an LLP should be able to dissociate himself as quickly as possible from his membership. One way in which that is done—an important method—is by having his name removed from the membership list on the register. As now provided under Clause 9, that notice may be given only by the LLP itself. The LLP may, particularly if there is a membership dispute or if the administration of the LLP is in some degree of chaos—which may happen with small organisations—either refuse or fail to give the necessary notice. As the Bill now stands, a former member who wishes the fact that he has left the membership to be recorded on the register would have to go to court to seek an injunction ordering the LLP to give the necessary notice. That would involve time and money, and it would surely be better to give the former member the right to give notice himself personally if the LLP fails to do so.

There is, of course, a risk that someone might give notice of retirement when he was in fact not entitled to retire. The second half of the amendment is intended to cover such a situation, where the proposed amendment to the register is known to be incorrect. I added the words "materially incorrect" to exclude problems with minor errors such as an incorrect postcode given on a change of address. There is nothing more that I can say on the matter; it is a short point, which I ask the Minister to consider. I beg to move.

Lord McIntosh of Haringey

I certainly do not feel strongly about that as an issue of principle. The amendment creates a requirement for an LLP additional to that placed on companies. Under company law, when the details of a director change, the company has the responsibility for informing the registrar. In situations of default, the company and officers are in default and liable to a fine. There is no expectation that the director whose details change needs to inform the registrar and face the risk of a fine if the information is materially incorrect.

If we were to allow a member to inform the registrar of changes there might be confusion both within the LLP and with the registrar, as a member is unlikely to be aware whether or not a registrar had been notified. Therefore, the same notification could go to the registrar twice and a situation could arise where the registrar did not know which to believe; for example, if a member left the LLP and informed the registrar of the fact when the LLP had already done so. That could result in additional work for the registrar and confusion for the outside world. As I said, I do not feel strongly about the matter, but, if the noble Lord has a point, it is one which applies to company law more generally. Since it is not an urgent point, it might be as well for it to be included in the company law review rather than introduced separately for LLPs and not for companies.

Lord Goodhart

I thank the Minister. I accept that this is not the most important amendment that we are discussing today, but it is not right to treat LLPs and ordinary companies on the same footing here, because there is a distinction between membership of a company and directorship in the case of ordinary companies which does not apply to LLPs, where membership and directorship are a single combined function. In those circumstances I believe that there is a justification for treating LLPs differently from directorships. Indeed, there may be cases where a member is more anxious to dissociate himself from a company than a director would be. However, certainly for today I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No.34 not moved.]

Clause 9, as amended, agreed to.

Clause 10 [Income tax and chargeable gains]:

Lord Lucas moved Amendment No. 35: Page 5, line 6, after first ("partnership") insert (", or any other activity or function of such a partnership,").

The noble Lord said: In moving the amendment I shall speak also to Amendments Nos. 37 and 38. When I discussed the Bill with the Minister in his office, we covered the subject of tax transparency. Certainly in the publicity about the Bill it has been said to be a vehicle which is tax transparent. However, in the wording of the Bill, the tax transparency is limited to that which a partnership would have because it is limited in the same way as is a partnership to the carrying on of a trade or business.

I discussed with the noble Lord why that might be and what problems that might create; for example, if a large limited liability partnership sold its trade and was left with various assets which were then disposed of, it was said—I believe quite rightly—that that would be very much a borderline case. It was said also that under those circumstances there would be an argument for the limited liability partnership to trip into tax intransparency and become liable to tax on its own account. In addition, it was said that circumstances existed where that kind of transformation would be desirable, such as in the compulsory winding-up of a limited liability partnership. In those circumstances, it would be better if the partnership were dealt with as an entity on its own and subject to its own tax rather than continuing to refer to the members, because they, in a way, would have ceased to be associated with the partnership.

As I said before, I have an interest in seeing whether we can make this a suitable vehicle for venture capital partnerships. Certainly the role of partners who do not undertake the active management of the individual investments in such partnerships is on the borderline between trade and investment. If those partners are going to use this type of provision—which, I believe, would be worth while from the point of view of the United Kingdom economy—it seems undesirable that they should be left in the rather unattractive hinterland between tax transparency and no tax transparency.

Admittedly from a relative state of ignorance, I see no difficulty in expressing the tax transparency the other way round. With these amendments, I have sought to ensure that this is a tax-transparent vehicle except in certain circumstances. Amendment No. 38 serves to illustrate a particular exception which would provide circumstances under which the vehicle was not tax transparent. It seems to me that members, whether of an accountancy firm or of a venture capital partnership, could rest easy knowing that that was a tax transparent vehicle, that they would pay tax as it was due on them through the limited liability partnership, and that they would not suddenly wake up to find that a tax inspector somewhere had decided that they were no longer trading and that under those circumstances the whole tax treatment of their investment had changed. I beg to move.

7.15 p.m.

Lord McIntosh of Haringey

I have two kinds of difficulty with these amendments. One is a technical difficulty and the other is a difficulty of principle. I shall deal first with the difficulty of principle. The purpose of the Bill as a whole is to ensure that businesses which are currently carried on in partnership can continue to carry on those activities without the disadvantage of unlimited liability. The amendment would mean that activities which cannot be carried on in partnership would be able to be carried on through the medium of an LLP. Therefore, they go beyond the scope of the policy that was behind the introduction of the Bill. The noble Lord has been quite open about that point in saying that he is interested in opening up the matter to venture capital partnerships and, I believe, also to property. I believe that he said that at an earlier stage. I may be wrong.

I do not believe that the noble Lord was present when we debated the earlier part of the Bill this afternoon. We carried Amendment No. 5 to Clause 2. The definition of the purpose of an L LP is, carrying on a … business with a view to profit". That is more explicitly in line with the provisions of the 1890 Act than it was before. I am afraid that what the noble Lord proposes in the amendment would extend the availability of LLPs beyond that which was originally intended with partnerships. Therefore, that is the difficulty of principle.

There is quite a big technical difficulty. As Clause 10 is currently drafted, the special tax treatment of LLPs as though they are a partnership is given only when the LLP carries on a trade, profession or business. When those conditions are not met by an LLP, it will be taxed as though it was a company. The amendments would have the effect that LLPs were taxed as partnerships, irrespective of the activities that they carry on. However, they could then encounter the technical difficulties which I shall set out.

From the point of view of calculating and collecting tax, there would be no difficulty. But taxing LLPs as companies is undesirable to those who believe that they may wish to set up LLPs, and we have agreed to tax them, for the most part, as partnerships. However, the reason that there are no technical difficulties in taxing an LLP as a company is important. That is because, by and large, companies can receive any type of income, and the Taxes Acts have evolved to be sufficiently flexible to deal with that. But Taxes Acts have evolved differently to tax partnerships established under the Partnership Act 1890. Because of the way that that Act defines partnerships as, the relationship that exists between persons carrying on business in common with a view of profit", that, with some updating of wording, is what is now in Clause 2. The Taxes Acts have evolved to tax the income, and only that income, that can arise from such a partnership. As a result, the Taxes Acts provide for the taxation of income received by partnerships from carrying on businesses, which is a wide term that includes trades or professions.

Therefore, it we accepted the amendments, the Taxes Acts would have to be extended (by amendment through this Bill) to provide for taxing partnerships that had been established for purposes beyond those for which they currently cater. We should need to have a special tax regime for LLPs based on that for partnerships but covering non-business LLPs and their non-business activities. That would not be easy. We should need to identify, and probably widen, all the current Taxes Acts provisions that deal with partnerships. In addition, further tax rules for non-business LLPs might need to be created.

I do not want to claim administrative convenience as my only objection to the amendment. However, it is quite a serious objection. I believe that such a provision would make a lot of money for professionals in interpreting it and would involve much time for parliamentary counsel in framing it. Therefore, I rely rather on my objection of principle.

Lord Lucas

I am grateful for that explanation. Quite clearly, I am overwhelmed and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey moved Amendment No. 36: Page 5, line 10, at end insert— ("( ) In section 362(2)(a) of that Act (loan to buy into partnership), after "partner" insert "in a limited partnership registered under the Limited Partnerships Act 1907".").

The noble Lord said: In moving Amendment No. 36, I should like to speak also, if I am allowed, to Amendment No. 39 in the name of the noble Lord, Lord Goodhart, because I believe that we are trying to achieve the same objective.

As matters stand at present, a partner who borrows money at interest to provide working capital for him to invest in a partnership in which he is a member can claim tax relief for that interest. That is dealt with in Section 353 of the Income and Corporation Taxes Act 1988 (ICTA). That is a general provision which provides for tax relief to be given in respect of interest paid in certain circumstances. Section 362 of the ICTA provides for relief to be given under Section 353 where interest is paid on a loan to buy into a partnership or by a partner to provide working capital for a partnership in which he is a partner. Section 362 sets conditions that must be satisfied for relief to be available. The particular condition which is the subject of these two amendments is that the individual must have been a member of the partnership, otherwise than as a limited partner".

During consultation, some respondents were concerned that that relief might not be available to members of an LLP in circumstances that would otherwise be similar. Amendment No. 39 proposes inserting a new subsection into Section 362 that would read: For the purposes of subsection (2), an individual who is a member of a limited liability partnership shall be deemed to be a member of the limited liability partnership otherwise than as a limited partner". I do not find that particularly easy to read out and understand.

This is saying that in considering a claim by a member of a limited liability partnership to relief for interest, the restriction of relief for a limited partner does not apply as partners in LLPs are deemed not to be limited partners in relation to their membership of the limited liability partnership. Our amendment proposes to modify the reference in Section 362(2) by inserting after the words "limited partner", in a limited partnership registered under the Limited Partnerships Act 1907". In other words, otherwise than the limited partner, which is the threatening bit, it is made clear that it applies only to the 1907 Act and not to the 2000 Act.

I know that our amendment is not very clear but it is slightly shorter and it achieves the same effect as Amendment No. 39. Therefore, I urge the Committee to accept our amendment.

Perhaps I may take this opportunity to say something about a proposed amendment to the tax provisions that we shall be making on Report. In the consultation process, we discussed a number of issues relating to the tax provisions, one of which resulted in Amendment No. 36. However, it became clear that there is a possibility that LLPs may be used for a particular form of tax avoidance.

That avoidance would take the form of loss relief being available to the partners in excess of the loss that they might have to bear. That is because loss relief is available for a loss "incurred" which may not always be the same as a loss "borne". Legislation already exists in Section 117 of the Income and Corporation Taxes Act 1988 to stop that happening with limited partnerships under the 1907 Act. The amendment will ensure that loss relief will not be available to members of a limited liability partnership beyond the loss that they could have to bear.

The provision has been discussed with consultees who are content that it is justified. I commend Amendment No. 36 to the Committee.

On Question, amendment agreed to.

[Amendments Nos. 37 and 38 not moved.]

Clause 10, as amended, agreed to.

[Amendment No. 39 not moved.]

Clause 11 agreed to.

Clause 12 [Stamp duty]:

Lord McIntosh of Haringey moved Amendment No. 40: Page 5, line 46, leave out from ("partnership") to end of line 4 on page 6 and insert ("in connection with its incorporation within the period of one year beginning with the date of incorporation if the following two conditions are satisfied. (1A) The first condition is that immediately before its incorporation the person—

  1. (a) is a partner in a partnership comprised of all the persons who subscribe their names to the incorporation document (and no-one else), or
  2. (b) holds the property conveyed or transferred as nominee or bare trustee for one or more of the partners in such a partnership.
(1B) The second condition is that—
  1. (a) the proportions of the property conveyed or transferred to which the persons mentioned in subsection (1A)(a) are entitled immediately after the conveyance or transfer are the same as those to which they were entitled immediately before its incorporation, or
  2. (b) none of the differences in those proportions has arisen as part of a scheme or arrangement of which the main purpose, or one of the main purposes, is avoidance of liability to any duty or tax.
 (1C) For the purposes of subsection (1A) a person holds property as bare trustee for a partner if the partner has the exclusive right (subject only to satisfying any outstanding charge, lien or other right of the trustee to resort to the property for payment of duty, taxes, costs or other outgoings) to direct how the property shall be dealt with.").

The noble Lord said: Clause 12 deals with stamp duty. The purpose of Clause 12 is to ensure that the transfer of the business and partnership assets of an existing partnership to a limited liability partnership would be free from stamp duty. Without a special exemption, it is possible that a stamp duty liability could arise on such a transfer. The exemption is consistent with the principle behind the tax clauses as a whole which ensure that LLPs are taxed as partnerships and that conventional partnerships can convert themselves into LLPs without incurring one-off tax charges.

In practice, it is unlikely that all a previous partnership's property will be conveyed or transferred to the limited liability partnership on incorporation. It is likely that transfers of some assets will take place after completion of the formal incorporation procedures. As it was introduced, Clause 12 did not take account of that and we thought it necessary to bring forward an amendment to ensure that that procedural issue is dealt with.

There may also be genuine reasons for changes in membership of the partnership between incorporation of the limited liability partnership and the conveyance of property; for example, death, incapacity or retirement. We believe that such changes should not cause the withdrawal of relief provided that they occur within a reasonable time, which we take to be a year, and have no avoidance motive. I beg to move.

On Question, amendment agreed to.

Clause 12, as amended, agreed to.

Lord Goodhart moved Amendment No. 41: After Clause 12, insert the following new clause—

INSOLVENCY: CONTRIBUTION BY MEMBER TO PARTNERSHIP ASSETS WHERE PROPERTY WITHDRAWN

(" . In the Insolvency Act 1986. after section 214 insert—

Contribution by member to assets of limited liability partnership where property withdrawn.

214A.—(1) This section has effect in relation to a person who is or has been a member of a limited liability partnership where, in the course of the winding up of that limited liability partnership, it appears that subsection (2) of this section applies in relation to that person.

(2) This subsection applies in relation to a person if—

  1. (a) within the period of two years ending with the commencement of the winding up, he was a member of the limited liability partnership who withdrew for his own benefit property of the limited liability partnership, whether in the form of a share of profits, salary, repayment of prepayment of interest on a loan to the limited liability partnership or any withdrawal of property, and
  2. (b) it is proved by the liquidator to the satisfaction of the court that at the same time of the withdrawal he knew or had reasonable grounds for believing that the limited liability partnership—
    3. 1397
    1. (i) was at the time of the withdrawal unable to pay its debts within the meaning of section 123 of the Act, or
    2. (ii) I became so unable to pay its debts after the assets of the limited liability partnership had been depleted by that withdrawal taken together with all other withdrawals (if any) made by any members contemporaneously with that withdrawal or in contemplation when that withdrawal was made.

(3) Where this section has effect in relation to any person the court, on the application of the liquidation, may declare that that person is to he liable to make such contribution (if any) to the limited liability partnership's assets as the court thinks proper.

(4) The court shall not make a declaration in relation to any person the amount of which exceeds the aggregate of the amounts or values of all the withdrawals referred to in paragraph (a) of subsection (2) made by that person within the period of 2 years referred to in that paragraph.

(5) The court shall not make a declaration under this section with respect to any person if it is satisfied that, after each withdrawal referred to in subsection (2), he had reasonable grounds for believing that there remained a reasonable prospect that the limited liability partnership would avoid going into liquidation.

(6) For the purposes of this section a limited liability partnership goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of winding up.

(7) In this section "member" includes a person in accordance with whose directions or instructions (otherwise than by way of advice given by him in a professional capacity) the members of the limited liability partnership are accustomed to act.

(8) This section is without prejudice to section 213."").

The noble Lord said: With certain changes, this amendment brings a clause onto the face of the Bill which at present appears in draft regulations published by the Government.

We do not object to the application of existing corporate insolvency rules to LLPs by way of regulations. But this clause creates a new and distinct form of liability which applies only to members of LLPs. We do not disagree with that in principle but we believe that a matter of such importance should be on the face of the Bill.

In the Government's letter of 10th January to the noble Baroness, Lady Buscombe, to which reference has already been made several times, reasons are put forward as to why the new Section 214A of the Insolvency Act should not be on the face of this Bill. The argument seems to me to be extremely weak. It says, for example, that putting a new Section 214A on the face of the Bill would result in the new clause appearing in the Insolvency Act when that Act contains no other reference to LLPs. That is perfectly true but my answer to that would be: so what?

The argument that new Section 214A means that the Bill would then have to define a "shadow member" is the feeblest argument of its kind that I have ever come across. I draw attention to what seems to be a satisfactory form of words to cover that particular problem in subsection (7) of the amendment.

I suggest also to the Minister that the powers in Clause 13(1) are not sufficient to support the creation by regulation of the new Section 214A. The power in Clause 13(1) is to apply the provisions of the Insolvency Act with such modifications as appear appropriate. Therefore, I ask of what is Section 214A a modification? It is not a modification of Section 214 because that is incorporated quite independently by a separate regulation. It seems clear to me that Section 214A is not a modification of any existing provision of the Insolvency Act but is a wholly new provision. Therefore, it cannot be included by virtue of the regulations which give power only to modify existing provisions. Therefore, I believe that the Government should look again at that matter.

As regards the drafting, the amendment is different from the draft regulations in two respects. The first is subsection (7) to define "shadow member", which I have already mentioned. The other, which is rather more substantial, is a change to the proposed subsection (5). That is raised in answer to what seems to me to be a fair point put forward by the Law Society.

Section 214A applies if the member who makes the withdrawal knew or had reasonable grounds for believing that the limited liability partnership was insolvent when he made that withdrawal. Subsection (5) then disapplies the section if there was in fact a reasonable possibility of avoiding insolvent liquidation; for example, by trading out or by raising fresh capital.

The subsection (5) test is wholly objective, even if the relevant facts are not known to a member. So let us assume that a firm of solicitors suffers loss as a result of a claim against it of professional negligence. As a result of that claim, the firm is just insolvent and its members are willing and able to raise enough capital to cover that loss.

But unknown to the members, there exists another and very large liability of the firm for professional negligence where the claim is not made until after the withdrawal. The partner, other than the individual one at fault, has no way of knowing that such a claim exists because, ex hypothesi, it has not yet been made. But objectively, of course, if one looks at the facts, there is no prospect of avoiding the liquidation.

It seems to me that in such a circumstance, it would be wrong to penalise a withdrawal. Therefore, I suggest that the wording of my version of subsection (5), which makes it dependent on what is or should be known to the partner making the withdrawal, is better than the wholly objective test applied in the Government's version of subsection (5). I beg to move.

7.30 p.m.

Lord McIntosh of Haringey

I should make it clear that I do not base my resistance to the amendment on the amendments to Section 214A introduced by the noble Lord. On the face of it, they appear to be helpful and we shall consider them along with the other representations that have been made when considering the form that this provision shall take in regulation. My resistance is only on the issue of whether the matter should be in regulation or on the face of the Bill.

At Second Reading the noble Lord, Lord Goodhart, said that he wanted a debate on this matter and now he has it. He has conducted it well and I congratulate him on it. However, on a wider basis, we want to resist attempts to include this matter and matters like it in the Bill rather than in the regulations. We believe that it would be peculiar to include on the face of the Bill this provision alone of all the insolvency provisions that we intend to apply. The noble Lord rightly referred to Clause 13(1). As we made clear during the course of consultation and as I explained at Second Reading, we intend to apply to limited liability partnerships, with appropriate modifications, the Insolvency Act 1986.

Whether this amendment is a modification is a matter of semantics. Clearly, the proposed new clause is linked to Section 214 of the Insolvency Act, and if it were put on the face of the Bill it would cause a muddle. There would be some primary legislation and some secondary legislation and this element would be set apart in the Bill from the remainder which will be in regulations. In case the response of the noble Lord to that is to suggest that we should include all the insolvency provisions on the face of the Bill, that would make the Bill very long and, more seriously, it would create insolvency legislation for LLPs that would be separate from that for companies.

We believe that there is a greater advantage in having the existing Insolvency Act modified in its treatment of LLPs. Of course, the Insolvency Bill will come before Parliament in the course of this Session. One reassurance I can give the noble Lord is that the regulations will be subject to the affirmative resolution procedure.

The insolvency regulations will not rewrite the Insolvency Act of 1986 for all purposes. They will make amendments only in so far as the Act is applied to LLPs. Putting Section 214A into the Bill, as this amendment does, the Insolvency Act would be amended for all purposes. That would look odd, as none of the other amendments to the Act exist for all purposes. It is sensible to keep all the insolvency provisions together.

We do not disagree with the noble Lord on an issue of principle. We are grateful to him for his suggestions about the wording and we shall certainly take account of them. However, as a matter of drafting and as a matter of consistency in legislation, it is better that the matter should be dealt with by regulation rather than on the face of the Bill.

Lord Lucas

On a matter of semantics, can the Minister enlighten me as to the limitation of the word "modifications"? There must be an ultra vires question here somewhere? Where is the borderline?

Lord McIntosh of Haringey

That is an interesting point of semantics. I would be interested to have the views of "grammarians" on whether a modification can take the form of an addition rather than of a change that involves subtraction. I shall not get involved in this matter on the Floor of the House, but I shall gladly write a learned letter to all interested noble Lords.

Lord Goodhart

I am grateful to the Minister for his reply. The basis for treating Section 214A differently from anything else is that it is unique in that it creates a new form of liability which has no parallel in the existing liabilities under the Insolvency Act. Therefore, it seems to me to justify different treatment. I suggest that there really is a potentially serious problem here as regards vires under Clause 13(1) of the Bill. There is a legitimate question of whether this constitutes a modification. It is not for me to get the Government's legislation right.

Lord McIntosh of Haringey

This is a revising Chamber!

Lord Goodhart

The noble Lord would be well advised to consult the Parliamentary Counsel Office as to whether this is in fact within the powers granted by Clause 13(1). I welcome what the Minister has said about my amendment to Section 214A and I shall wait with interest to see whether it bears any fruit. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Sharman moved Amendment No. 42: After Clause 12, insert the following new clause—

("Insolvency: preferential debt liability

INSOLVENCY: LIABILITY FOR PREFERENTIAL DEBTS

.—(1) Subject to subsection (2), the members of a limited liability partnership or overseas limited liability partnership which has been wound up (including persons who ceased to be members before the commencement of the winding up) shall be liable for its preferential debts (within the meaning given by section 386 of the Insolvency Act 1986) so far as such debts have not been discharged in the winding up.

(2) Subsection (1) shall apply in relation to any member only to debts incurred while he was a member.").

The noble Lord said: The purpose of the amendment is to draw attention to an anomaly which appears to arise as a result of the combination of the application of the tax law to a limited liability partnership as though it were a partnership and insolvency law to a limited liability partnership as though it were a corporation.

The position of preferential creditors in both cases—I apologise for being somewhat technical—is complex on the bankruptcy of a partnership. Nevertheless, preferential creditors—unpaid VAT and PAYE and particularly employees—rank ahead of all other debts. If one looks at a limited company that becomes insolvent—I stress that I am talking of a situation in which there is no evidence of wrong-doing and of circumstances in which Section 214A would not apply—the pool of assets is available to the creditors in total, but the preferential creditors rank first and tax on the profits earned previously are unsecured and rank behind the preferential creditors.

In the case of a limited liability partnership, because it is taxed as a partnership with fiscal transparency, the tax arising on the profits which have been earned remains the liability of the individual partners and they, quite rightly, may well withdraw funds from that partnership to satisfy that liability. The result is that the total pool of funds available in the insolvency may have been diminished by withdrawals to satisfy what would be unsecured creditors, thereby diminishing the claim of preferred creditors.

I am particularly concerned about the position of employees in such a situation. The employees could see themselves disadvantaged. At present, when a partnership suffers insolvency the employees have a right of claim against the individual partners' assets, which provides some recompense, but in the case of insolvency law applying to a limited liability partnership as if it were a corporation, employees would be in a different and a somewhat disadvantaged position. I beg to move.

Lord McIntosh of Haringey

I am anxious to achieve the same kind of result as that achieved by the amendment, but I do not think that this is the right way to do it. First, the noble Lord referred to employees and to the fact that certain debts of insolvency are ranked as preferential; in other words, payable before non-preferential debts as set out in Schedule 6 to the Insolvency Act 1986. They include debts due to the Inland Revenue, as the noble Lord said, but also to employees by way of remuneration.

This amendment would make all members and former members of an LLP liable for the preferential debts incurred during their membership. I do not believe that they should be liable to make those payments. It would be against the principle of limited liability which is at the heart of the Bill. In other words, it would extend the privileges of preferential creditors over those of non-preferential creditors and I am sure that that is not what the noble Lord wishes to do. Also, it means that LLPs would be treated differently from companies for insolvency purposes. There really should be consistency in the law in this area and members of an LL P should not be in a worse position than their company counterparts. It would make it a less attractive vehicle.

I question also the fairness of the amendment. If we take into account the position of the unsecured creditors, what justification can there be for government departments, which would be the major beneficiaries of the amendment together with employees' remuneration, being repaid in full when it is likely that unsecured creditors will receive little or nothing? Though I am sure the amendment is moved with the best of motives, I do not believe it will achieve the objectives required. I hope therefore that the noble Lord will not press it.

Lord Sharman

I am grateful to the Minister for his explanation. The whole principle of preference in insolvency is to place one class of debtors—or creditors, depending on which side of the fence one sits—ahead of the others. That is precisely what the law sets out to do. The preferential creditors, so far as they are government departments, are government departments where the entity collects money on behalf of the Government. They are not debts to the Government for income or corporation tax; in that sense they are VAT and PAYE. It is important therefore that we should not, as we have with this legislation, effectively place in regard to a pool of assets unsecured creditors ahead of preferred creditors. I recognise from the Minister's explanation that this is an immensely complex subject. I do not propose to press the amendment. I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Clause 13 agreed to.

Clause 14 [Application of company law etc.]:

Lord Goodhart moved Amendment No. 43: Page 6, line 34, at end insert— ("( ) requiring limited liability partnerships and oversea limited liability partnerships or any category of limited liability partnership or oversea limited liability partnership to effect and maintain policies of insurance on such terms and for such amount as may be specified against such risks as may be specified (including risks of negligence by a member, agent or employee of the limited liability partnership or oversea limited liability partnership),").

The noble Lord said: Amendment No. 43, somewhat unusually, proposes to give an additional power to the Government. Solicitors and chartered accountants are required by their professional rules to carry professional indemnity insurance. Personal liability of partners arises only if the damages exceed the insurance cover or there is some non-disclosure which entitles the insurers to disclaim.

That means that victims are unlikely to obtain compensation unless the claim against the partners is extremely large. But a requirement to carry professional indemnity insurance does not apply to all businesses or professions which are likely to be carried on as LLPs. There is therefore a risk of moral hazard. If the members of the firm know that in the event of a large claim they can simply wind up the firm and start again, they may be tempted to reduce their insurance cover or indeed not to insure at all. This may or may not turn out to be a problem. But the Government should have reserve powers to require LLPs to comply with minimum insurance requirements for professional negligence.

That would not be appropriate across the board. For example, it would not be appropriate for an LLP which is running a corner shop. But, in general, firms offering skilled services to the public should insure against the negligence of their members or employees. There should therefore be a flexible power for the Government to say that in certain categories, where adequate insurance is not a requirement of their professional bodies, the carrying of insurance is a necessary condition for obtaining limited liability. The Government should therefore have the power to insist on insurance being carried. I beg to move.

Baroness Buscombe

I should like to speak briefly in support of this amendment. It is a good thing to require the members to carry professional indemnity. I hope that the knock-on effect will be a reduction in fees on the part of professional firms which now claim that the extent of their fees is in relation to the high cost of indemnifying their partners because there is no limited liability.

7.45 p.m.

Lord McIntosh of Haringey

I am interested to find both opposition parties in favour of giving more power to government. Adam Smith would turn in his grave, if not Friedrich von Heich.

Unfortunately, the amendment would go a lot further than giving power to government. It would place responsibilities on government which would be impossible to achieve. The amendment would provide that the regulations should not just say that insurance shall be provided; that is one thing. By the way, this is all kinds of indemnity insurances, not just professional indemnity insurance. It would also say that the regulations should set the appropriate levels for the insurance and define the risk which should be covered. It asks not only that the Government should intervene but also that the Government should go into the insurance business by defining risks and setting appropriate levels for insurance. After all, what may be appropriate for one business is not necessarily appropriate for another.

In any case, who is to say that insurers will find that all the risks are insurable. For example, a small architectural practice winning a major contract for a bridge or building would find it impossible to obtain insurance for that. It may be impossible to obtain insurance for new areas of professional activity.

If we are talking of professional indemnity—that is what the noble Baroness, Lady Buscombe, is talking about, even if the amendment is not—surely it is right for the professional body to insist on the professional indemnity insurance rather than the Government to ensure it through legislation. There are no other examples of business entities being required to provide indemnity insurance.

For professions where professional indemnity is required, cover is required no matter what entity the professional operates through, and there is no reason to think that it will be different for LLPs. We have been told by consultees that the experience of the construction industry is that there is no reduction in insurance cover when firms change from a partnership to a company. Insurance policies are carefully worded. It is not necessarily the case that the insurer would pay out in every situation, particularly where the situation was simply business failure. To include a provision of this kind would give a false sense of security to those who deal with LLPs, quite apart from my major objection of turning the Government into an insurance company.

Lord Goodhart

I am grateful to the Minister for his reply, even if it was somewhat unhelpful on this subject. There are of course precedents for insurance being required—not indemnity insurance but, for example, liability insurance against injury to employees is a government requirement. The reason we provided for this to be in regulations is that it gives a great deal of flexibility to government to make the decisions and say what level of insurance should be required. It seems to me that there may be a breach of the provision which a future government will be unable to do anything about. However, I do not intend to press the matter. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Buscombe moved Amendment No. 44: Page 6, line 43, at end insert— ("(2) Regulations under this section shall in relation to the acquisition of, or merger with, a business by a limited liability partnership, make provision enabling the limited liability partnership to elect to account for that acquisition either using merger accounting or acquisition accounting methods, as its members see fit.").

The noble Baroness said: This is a probing amendment. Its purpose is to access the draft regulations to ensure that they distinguish between accounting practices for limited liability partnerships and those for mergers and acquisitions of a business.

As I stated at Second Reading, the merging and accounting provisions set out in paragraphs 10 and 12 of Section A of Schedule 4 to the Companies Act 1985 deal with equity shares being purchased for equity consideration. Such an exchange—share for share—cannot exist in a partnership and the Minister has already made clear that we will assume that no shareholders exist.

However, having said that, this amendment recognises that distinct merger and accounting methods do exist. Perhaps I may make a brief reference to the Minister's letter to me of 10th January wherein he makes it clear—we discussed this point—that it is the Government's intention to ensure that LLPs are able to make use of merger accounting provisions. Clearly, a completely different kind of scrutiny is required for merger and for acquisition accounting. Therefore, we feel it important that this should be made clear. I beg to move.

Lord McIntosh of Haringey

This Bill is certainly an educational process for me because I had no idea that there was any difference between merger and acquisition accounting. Indeed, I have had to learn about it from scratch. Therefore, anything I get wrong is entirely my fault and not that of my advisers. Because merger accounting is generally done by agreement, my understanding is that the result of the merger accounting process is that the profits are likely to be higher and that net assets are likely to be rather lower than under acquisition accounting.

In any case, even if I am not right about that, there is a difference in the reported value of the LLP and the way in which it would be presented in the best light according to which method of accounting is appropriate. Because the reported value of a business can be different according to which accounting measure is used, the choice of merger or acquisition accounting is a very hot topic. It is a matter that has to be defined in great detail in legislation.

Our draft regulations include conditions that would need to be complied with before merger accounting could be used. Perhaps I may point out to the noble Baroness, Lady Buscombe, that my letter to her did not say tout court that merger accounting could be available; it said that it could be available under certain conditions. The conditions are based on those that apply to companies with provision for appropriate adaptation when one of the parties is not a company. These conditions are supplemented by additional conditions in an accounting standard.

Given the significant difference in results and financial position of an LLP that could arise from giving it the choice of accounting methods, I am sure that Members of the Committee will agree that it would not help to make comparisons between the accounts of different LLPs. It would also enable LLPs to have the opportunity to select the method that portrayed them in the best light. We are convinced that there should be some regulation of the accounting method to be used by LLPs for business combinations. The most important argument here is that this choice is not available to companies; that it is not available for very good reason; and that there would need to be a very good reason why the LLPs concerned should be able to choose between the two accounting methods. I hope that the noble Baroness will not pursue the amendment.

Baroness Buscombe

I agree with the Minister in that I, too, have found this to be something of a learning curve. I should like to have the opportunity of reading his response in Hansard tomorrow and of revisiting this matter. However, in the light of what the noble Lord said, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 14 agreed to.

Clause 15 [Consequential amendments]:

Lord Lucas moved Amendment No. 45: Page 7, line 2, at end insert— ("( ) Regulations may provide for the manner in which the accounts of a limited liability partnership are to be consolidated in the accounts of a member who is a body corporate.").

The noble Lord said: My interest here is to gain some elucidation from the Minister as to how the Government see these new animals being consolidated, or otherwise, in the accounts of other corporate bodies that hold a share—if one might use that general term—in these limited liability partnerships. Is it intended that they should always be accounted for as investments, or will there be occasions when the credits and debits (or, as we accountants call them, the figures on the side nearest the window and those on the side nearest the door) should be shown in full in the "parent" body corporate's accounts? Alternatively, will there be occasions when there is no necessity to publish separate accounts for an LLP because it is regarded as being a subsidiary of a body corporate? I am just hoping that the Minister will be able to give me some indication of the direction in which the Government are thinking on these matters. I beg to move.

Lord McIntosh of Haringey

I hope that I have understood the amendment properly. However, having listened to the noble Lord, I am not sure that I have. The amendment is not about the accounts of the limited liability partnership; it is about the accounts of the member who is a body corporate. The first thing to be said is that we are dealing here with a special case. Not all LLPs will have bodies corporate as members. Indeed, I imagine that most of the professional LLPs will not have bodies corporate as members. Therefore, the amendment will not apply.

However, where there is a corporate body that is a member of an LLP, regulations will provide for the way in which the accounts of the LLP are consolidated in the accounts of the member who is a body corporate. At present, the accounting treatment to be used by the corporate member would vary according to its relationship and interest in the LLP. As a company, the treatment of its accounts is governed by the Companies Act. Therefore, as with companies, if the LLP is a subsidiary, the corporate member would usually consolidate the accounts of the LLP in its own group accounts, in accordance with the provisions of the Companies Act. If the relationship is less than a subsidiary—for example, if it is an associated company, an investment or a general investment—different accounting treatments would be appropriate.

However, whatever the relationship with the corporate member, the LLP would still have to prepare its own accounts for its members and for filing at Companies House. Therefore, I do not believe that there is any need to provide in regulations for the accounting treatment to be used by the corporate member. There is no proposal to change the provisions of the Companies Act. I suggest that we leave the law as it stands.

Lord Lucas

I am grateful to the Minister for that explanation and beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 15 agreed to.

Clause 16 [General]:

Lord McIntosh of Haringey moved Amendment No. 46: Page 7, line 16, after ("regulations") insert ("(whether or not together with other provisions)").

The noble Lord said: In moving this amendment, I shall speak also to Amendment No. 47. I find the drafting of these amendments extraordinarily difficult. It is to some extent helped by the marked copy of the Bill, which I have provided for noble Lords. I should point out here that the amendments were instigated by parliamentary counsel, not by the department. The intention behind them is to ensure that there is no risk of any subordinate legislation requiring both the affirmative and the negative procedure.

The amendment makes it clear that the regulations made under Clause 16(4) and which require the affirmative resolution can be made if what is approved in draft is an instrument containing them, together with regulations that require only the negative resolution procedure. The amendment also makes it clear that an instrument that has been laid in draft and approved under the affirmative resolution procedure does not require to be approved under the negative resolution procedure. I should tell the Committee that I have not come across this problem before. But if parliamentary counsel think that it is a problem, clearly we must take it seriously. I beg to move.

On Question, amendment agreed to.

8 p.m.

Lord McIntosh of Haringey moved Amendment No. 47: Page 7, line 31, leave out ("subsection (4) applies to the regulations)") and insert ("a draft of it has been approved by a resolution of each House of Parliament)").

On Question, amendment agreed to.

Clause 16, as amended, agreed to.

Clause 17 [Interpretation]:

Lord McIntosh of Haringey moved Amendment No. 48: Page 7, line 39, at end insert— (""business" includes every trade, profession and occupation,").

The noble Lord said: This was spoken to with Amendment No. 5. I beg to move.

On Question, amendment agreed to. Clause 17, as amended, agreed to. Clause 18 agreed to.

In the Schedule:

Lord Phillips of Sudbury moved Amendment No. 49: Page 9, line 41, at end insert ("but shall for a year after the change show the replaced name (prefixed by the words "formerly registered in the name") on all invoices, contracts, accounts, notepaper and such other documents of the partnership and representations and in such media and manner as the Secretary of State may by regulations prescribe").

The noble Lord said: Amendment No. 49 is in the same vein as some of the earlier amendments concerning requirements for registration particulars of members of LLPs. This amendment is also designed to protect members of the public against the shenanigans—as I am afraid there will be—of those who seek to abuse the LLP status.

I cannot help resisting the earlier remark of the Minister about Adam Smith turning in his grave. Before Adam Smith reached his grave, limited liability was extremely rare indeed. I think that he would be turning in his grave over and over again at some of the consequences that are likely to flow from this Bill.

Lord McIntosh of Haringey

But was it not Adam Smith who also said that all professions were a conspiracy against the laity?

Lord Phillips of Sudbury

That is precisely why I have opposed this Bill stock, root and branch. I am a great admirer of my own profession. I am afraid that this measure is a conspiracy against the public interest from start to finish. However, I am more concerned with the small traders who will take advantage of the special privileges of this Bill. Let us make no bones about it; this will provide your two-man cowboy building outfit with a uniquely flexible and light framed means of screwing the public, to put it in Anglo Saxon terms. One of the most common methods of doing that is by changing the name of the entity concerned. It is all very well to say that people should search in the register before they get Mr Brown and Mr Trant to build their porch. But we all know that they do not. We all know that the general public will get nowhere near this register. We all know that the great firms of accountants and solicitors will be impeccable in the way they use the provisions of this Bill. I am solely concerned with those who will not.

The amendment is self-explanatory. The Government may think that the requirement period of a year after the change of name is too long, but I think that the principle is a sound and common-sense one. The fact that it may not be required in other parts of the corporate law at present does not impress me at all. The fact that there may be great machinations afoot to change the law of limited liability companies does not impress me at all. We have here a particularly privileged entity that we are in the course of creating which will—I am sure that all Members of the Committee will agree with me—be used wholesale by small traders. The amendment is the only practical way that I can think of alerting members of the public with no business access or particular knowledge to whom they are dealing with. I beg to move.

Lord McIntosh of Haringey

I am a paid up member of the conspiracy theory party. I agree with the noble Lord, in that I think that it is much more likely that there is conspiracy than cock-up in most aspects not just of history but of public policy. However, I think that on this occasion the noble Lord goes a little too far. I am sorry that he rejects the notion which he knows perfectly well will form my answer; namely, that if the provisions of his amendment do not apply to limited companies, there is no good reason why they should apply to limited liability partnerships.

Lord Phillips of Sudbury

I thank the Minister for giving way. Does he not agree none the less that one of the commonest ways of defrauding the High Street public is by changing the names of limited liability businesses? Is not that reason enough for considering this amendment?

Lord McIntosh of Haringey

It is certainly an argument for bringing forward one part of the company law review. Indeed, there are occasions—for example, in corporate governance—where we believe that it may be necessary to bring forward issues which form part of the company law review. We have never set our face against urgent matters having to be dealt with in a shorter time-scale than is permitted by the company law review. However, I do not think that the matter we are discussing is one of them. I do not think that the differences between LLPs and limited companies are sufficient to justify the special treatment which is proposed by this amendment.

Limited liability partnerships as bodies corporate are governed almost entirely by company law rather than by partnership law. The only exception concerns the tax treatment. All of the abuses which the noble Lord describes are possible, as he rightly says, as regards limited companies. That is true whether they are phoenix limited liability companies or phoenix limited liability partnerships. The main features of a phoenix limited liability partnership would be that an LLP would go into liquidation and a successor company continue the business with the same members, the same trading address and the same assets. These are offences when committed by companies, and they will be offences when committed by LLPs.

An insolvency practitioner who holds office as liquidator is required to report these offences to the Director of Public Prosecutions. If there is evidence that there has been fraudulent or wrongful trading, there is the power to apply to the court for an order that those responsible should make a personal contribution towards the assets of the limited liability partnership. If the DPP forms the view that the conduct of a member has been such as to make him unfit to be involved in the management of an LLP, he is required to make a report to the Secretary of State who will then have the power to apply to the court for a disqualification order if he thinks that it would be in the public interest to do so.

The noble Lord is sceptical as regards the efficacy of some of these provisions. I do not know whether the events I have described happen more often in Sudbury than in other parts of the country. I would not dream of casting any aspersions on the worthy burghers of Sudbury and I do not think that the noble Lord practises there anyway! Despite the noble Lord's rejection of this argument in advance, the argument must be that the provision should be the same for companies as for LLPs.

Lord Phillips of Sudbury

I am grateful for at least some of the Minister's remarks. I shall report his remarks to the mayor and corporation of Sudbury. However, to be serious, I must say that it is disappointing to hear the Minister concede that there is a real problem here with limited liability companies and then effectively to say that the Government are not prepared none the less as regards a new limited liability animal to do something about it. It could take years for any changes pursuant to the present review to come into effect.

Although there are statutory protections 'with regard to wrongful trading, phoenix company provisions and the rest of it, the Minister must accept that this area of law is singularly ineffective. It is honoured in the breach. One of my jobs is that of legal adviser on the "Jimmy Young Show". Over 25 years I have heard of hundreds of thousands of cases of abuse in relation to small, local companies that get nowhere near the attention of the DTI and get nowhere near being addressed by the various provisions to which the Minister refers.

It depresses me that in this House we are so far out of touch with public opinion, if I may put it this way, at the bottom end of the social spectrum. People are ripped off, day in, day out, by the easy availability of limited liability for off-the-shelf companies and the protections provided for them, and with no real remedies.

I shall withdraw my amendment, but I urge the Minister to consider that it is not too late to review this issue. I hope that he will do so.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey moved Amendments Nos. 50 and 51: Page 11, line 10, leave out ("trades or"). Page 11, line 15, after ("name,") insert ("commits an offence. (2) A person guilty of an offence under sub-paragraph (1)").

The noble Lord said: I spoke to Amendments Nos. 50 and 51 with Amendment No. 5. I beg to move them en bloc.

On Question, amendments agreed to.

Schedule, as amended, agreed to.

House resumed: Bill reported with amendments.

House adjourned at eleven minutes past eight o'clock.