§ 12.35 p.m.
§ Lord McIntosh of Haringey rose to move, That the draft regulations laid before the House on 15th January be approved [3rd Report from the Joint Committee].
§ The noble Lord said: My Lords, I should start by explaining why we are considering only one set of regulations today when an earlier Order Paper showed that we would also be looking at the fees regulations. Unfortunately there was an error in the regulations and they had to be withdrawn. A new set of regulations was laid on 14th March and will be considered by the Joint Committee on Statutory Instruments next week. I apologise for the confusion.
§ The Chancellor announced in his Pre-Budget Report that the Limited Liability Partnerships Act 2000 will come into effect on 6th April. It will introduce for the first time in nearly a century a change to business entities in Great Britain. That is the result of over three years of consultation and debate with a wide variety of consultees. Detailed legislative proposals have been in the public domain since 1998, including a draft of what is now the LLP Act and these regulations. The Bill and the regulations were scrutinised shortly afterwards by the Trade and Industry Select Committee. The Bill also received close and thorough scrutiny in the other place and by Members of this House.
§ Firms that decide to become an LLP will enjoy the organisational flexibility and tax treatment of a partnership with the limited liability of a company. That means that the LLP will be a separate legal entity owned by its members. Therefore the LLP will be able to enter into contracts and hold property.
§ It is important to strike the right balance between the interests of those who want to carry on business as an LLP and those who will do business with them. I believe that the LLP Act, together with these regulations, achieves that objective. That is why it is important to apply very substantial parts of companies' legislation to LLPs with those modifications necessary to reflect the differences between a company and an LLP. The LLP does not provide a shield behind which the individual negligent professional can hide. Typically a client will have contracted with the LLP itself and will in the first instance therefore usually look to the LLP for redress under contract law. But this does not preclude action in tort against the negligent member who has assumed personal responsibility for his actions.
§ Let me comment on the legislative structure we have established for LLPs, including these regulations. The LLP Act provides a framework for setting up an LLP. It defines an LLP as a separate legal entity owned by its members; it sets out the mechanics and requirements for incorporation and establishes the relationship that exists between members, and between members and the LLP.1128
§ The Act also prescribes the scheme of taxation. The Parliamentary Under-Secretary of State for Competition and Consumer Affairs made a commitment during consideration of the LLP Bill in the other place to make clear the Government's approach to the taxation of LLPs and I will come back to that in a moment.
§ The aim of these regulations is to ensure that an LLP, as a body corporate, will be subject to similar requirements to those made of companies. But because the internal structure of an LLP is not prescribed like that of a company, it has been necessary to modify existing corporate legislation in its application to LLPs. The modifications we have made to companies legislation is only in relation to LLPs; it is not a fundamental change to company law. That must await the outcome of the independent Company Law Review, which will report to the Government in May.
§ I should comment on two issues relating to the structure of the legislation which were considered when the LLP Bill was before Parliament. The first is the extent to which it relies on the use of regulations. The worry, with which we disagreed, was that there was too great a reliance placed on secondary legislation. When we first decided on how we were going to regulate LLPs, we began from the principle that an LLP was a body corporate and that there should be an equivalent level of regulation applied to LLPs as there is to companies. That is part of the balance to which I referred earlier. What we have is a sensible structure. The essential characteristics, principles and rules for an LLP are set out in the LLP Act. The detail is left to regulation.
§ Most importantly, if we had done it any other way we would have had a structure which was unwieldy and difficult to adapt. The underlying requirements of company law, insolvency law and partnership law are all capable of change. I mentioned earlier the fundamental review of company law. At the appropriate time we shall need to adapt and apply many of the changes flowing from that process for LLPs. Also, the Law Commission has recently completed a consultation on a far-reaching reform of partnership law. We shall have to adapt that to LLPs in due course.
§ Insolvency law does not stand still. The new Insolvency Act 2000 modified the Insolvency Act 1986 and will be applied to LLPs as appropriate by statutory instrument once the secondary legislation has been made. In all three areas of the law, the changes will come before Parliament. Their subsequent application to LLPs then becomes largely a technical job, which is appropriate for secondary legislation.
§ The second point, which has been made on the structure of the regulations, is that legislation by reference is unhelpful to users. I sympathise with that argument. However, the alternative would have been to produce a set of regulations that run to hundreds of pages, much of which would reproduce existing law. That would have had the approach of completeness. However, the approach we followed highlights, for 1129 advisers who are familiar with company law, the differences in their application to LLPs. We understand that commercial publishers are likely to produce helpful consolidations of the law as it applies to LLPs.
§ I do not know how much of the detail your Lordships wish me to go into. Perhaps I may talk about three main strands in the regulations and then say a word about taxation. The first strand relates to accounts and audit. Part II of, and Schedule 1 to, the regulations apply Part VII of the Companies Act 1985 and set out the accounting and audit requirements for LLPs. These are broadly in line with the requirements placed on companies which ensure that LLPs have the same level of financial disclosure.
§ The second strand is contained in Part II of, and Schedule 2 to, the regulations, which apply the remaining sections of the Companies Act 1985 together with Part II of the Companies Act 1989 and the Company Directors Disqualification Act 1986 with appropriate modifications. That part of the regulations sets up a regime for the running of LLPs which is closely allied to that of a company.
§ The third strand is contained in Part IV of, and Schedule 3 to, the regulations and applies the first and third groups of parts of the Insolvency Act 1986 to LLPs. Those provide that LLPs are treated similarly to companies on insolvency issues, such as company voluntary arrangements, administration orders, receivership and winding up.
§ I shall pass over issues relating to financial services and LLPs and default provisions. I can comment on those if necessary. I stated that I would confirm the Government's approach to the taxation of LLPs; LLPs are a new business structure. Their tax treatment is an important factor for the businesses that are contemplating using them. There has been consultation over a long period to ensure that the tax treatment of LLPs balances the desires of business with the need to guard against tax loss. Most recently, in the Budget last week, the Inland Revenue published a Budget Note on the taxation of LLPs.
§ The LLP Act introduced new sections into tax legislation to the effect that an LLP carrying on a trade, profession or business with a view to profit will be taxed as a partnership. The LLP structure is available to all businesses, as we recognised that it could be attractive to others and not just professional firms. However, it has never been our intention to allow the formation of LLPs to be driven by their tax treatment, or to open up the likelihood of significant loss of tax revenue. The review of tax treatment that was announced during the passage of the LLP Bill identified that the use of LLPs as property investment vehicles opened up significant scope for tax loss. By "property investment", I refer to a business consisting wholly or mainly in the making of investments in land or buildings.
§ The tax loss would arise if tax-exempt bodies such as pension funds, the pension business of life insurance companies and tax-exempt business of friendly societies were to invest in property via LLPs, instead 1130 of through property investment companies. The proposals concerning property investment out lined in the Pre-Budget Report and confirmed in the Budget Note are to prevent that tax loss and to avoid creating distortions in the investment market. They do not restrict what businesses LLPs may choose to carry on and they will not be relevant to the vast majority of businesses contemplating using LLPs. They will not affect the current arrangements used by pension funds, so there is no question of tax proposals removing a tax break that is currently enjoyed. As primary tax legislation, they will be subject to parliamentary scrutiny.
§ The regulations undoubtedly add a fair number of pages to the legislation on LLPs, but they follow closely from the drafts we exposed for consultation both before and during the passage of the Bill. They strike a balance between the interests of those wishing to form LLPs and those wishing to have dealings with LLPs. I believe that it is the right balance. I beg to move.
§ Moved, That the draft regulations laid before the House on 15th January be approved [3rd Report from the Joint Committee].—(Lord McIntosh of Haringey.)
§ 12.45 p.m.
§ Lord Burnham
My Lords, I thank the Minister for that explanation. Earlier he seemed to be preening himself on the brevity of the regulations but at the end of his comments he seemed to admit that they are not so brief. I make that point because when the Bill, which was a mere 19 clauses, one schedule and 16 pages, left this House, it had several hours at Second Reading, three days in Committee and several more hours on Report and Third Reading in the other place. However, today this draft SI covers 57 pages, 10 regulations and six schedules. It covers the meat of the whole LLP regime, and a substantial part of the regulations which should have been incorporated into primary legislation.
The noble Lord listed the regulations which it is necessary to have at hand for a study of LLPs But it is worse than that. To determine the company law provisions that apply, one must refer not only to Schedules 1 and 2 to which provisions do and do not apply, and which provisions are amended and how, but to Regulation 3 of the regulations which we are discussing today. Regulation 3 states:references to other provisions of the 1985 Act and to provisions of the Insolvency Act 1986 shall include references to those provisions as they apply to limited liability partnerships in accordance with Parts III and IV of these Regulations".We are particularly concerned at the introduction of criminal sanctions in a matter involving commercial affairs by means of secondary legislation. We accept that as a matter of convenience sanctions imposed. by the Companies Act 1985 as amended, which was duly debated in both Houses, could conveniently be included in the regulations if they are merely producing identical provisions to the Companies Act and simply altering the terminology as appropriate. For instance, the word "members" could be substituted for "officers" or "directors".
1131 However, I should like to draw the attention of the Minister to page 23 and the reference to subsection (5) of Section 391A of the Companies Act. The regulation reads:For subsection (5) substitute:`If a copy of the representations is not sent out as required by subsection (4), then unless subsection (6) applies, the limited liability partnership and any designated member in default commits an offence. A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3".But subsection (5) of Section 319A merely provides:If a copy of any such representations is not sent out as required because it is received too late or because of the company's default, the auditor may (without prejudice to his right to be heard orally) require that the representations be read out at the meeting.This is the introduction of a fine and a criminal record when no such sanction applies against company directors. When my honourable friend Nick Gibb raised the matter in another place, the Minister said that he understood that it was currently an offence under the Companies Act and that it was a proper function and a duty to make those representations as appropriate. He therefore did not see that it was a new crime, although it was a reference that was not included in earlier publications. So far as we can tell from the section of the Companies Act I have quoted, contrary to what the Minister said in the other place, it is not an offence under that Act.
I am relying on a copy of the relevant section which my noble friend Lady Miller obtained from the Library on Wednesday. Will the Minister explain the discrepancy before he asks us to approve this new criminal offence without primary legislation?
§ Lord Goodhart
My Lords, these are massive regulations. They include great chunks from both the Companies Act 1985 and the Insolvency Act 1986. Clearly, a consolidated version of both Acts as they apply to LLPs will be required. I hope only that the Minister is right in saying that commercial organisations will produce them. That may well be the case, but in my experience consolidated versions take some months to appear. Therefore, for some time to come it will be necessary to rely on the terms of the regulations—that is, if the LLPs are to be brought into operation in the near future. I should be interested to know the timetable that the Minister has in mind for introducing a state under which the new LLPs can be set up.
I shall be interested to hear the Minister's answers to the questions posed by the noble Lord, Lord Burnham, and I want to raise a number of points of varying importance. I shall begin with the least important. The first, on which I may not have the support of my noble friend Lord Phillips of Sudbury, relates to the impact of the Business Names Act 1985.
An LLP trading under a name other than its corporate name gets the worst of both worlds. Like a company incorporated under the Companies Act, it must include the corporate name on its business stationery. That is fair enough. Like a partnership with 1132 fewer than 20 members, an LLP with fewer than 20 members must include on its stationery the names of those members. Therefore, the stationery must be changed every time a member leaves or joins the LLP. I wonder whether the corporate name would not be sufficient. That requirement hits small LLPs particularly hard and it seems to be raising an unnecessary element of bureaucracy.
Secondly, Sections 288 and 364 of the Companies Act 1985, as modified in relation to LLPs, require details of the usual residential addresses of members to be provided to the registrar. Recent events have shown that in some circumstances it is undesirable that the public should be made aware of home addresses. We have in mind what happened in respect of Huntingdon Life Sciences. A similar problem could arise in some LLPs, particularly solicitors and insolvency practitioners, both professions being likely to make use of LLPs and both often being involved in situations of personal conflict with bankrupts, unhappy opponents of clients or disappointed clients. Those conflict situations could lead to harassment or violence. I wonder therefore whether it would be possible to eliminate the need to deliver the home addresses to the registrar.
The third point relates to the default provisions in Part VI of the regulations. Those are generally welcome, but the list of default provisions does not include any duty on members of an LLP to act in good faith towards each other. It is true that the duty to act in good faith does not appear on the face of the Partnership Act 1890, but it is long established by decisions of the courts to be at the core of the partnership relationship. We believe that it should also be recognised as the core of the relationship between members of LLPs and that can be achieved only by including it in the list of default provisions.
The final and most important defect is complicated and needs some explanation. I raised the matter at the Third Reading of the Bill. Members of LLPs may cease to be members in a number of ways, in particular by death or retirement. When someone ceases to be a member, the question arises of what happens to their interest in the assets of the LLP. In a great majority of cases, that will in practice be covered by the terms of the agreement. But that will not always be the case; there will be some inadequately drafted agreements, informal agreements, which do not provide for that. The question is: what happens if the agreement does not provide for it?
The default provision in the case of partnerships is that the departure of a member causes a dissolution and that the outgoing member is thereupon entitled to his or her share of the assets of the dissolved partnership, leaving the other members of the partnership free to reform the partnership between themselves if they want to. The default provision in the case of a company with share capital is quite different. The member has share capital, remains a member as long as he or she holds those shares but can of course sell them.
1133 It is true that in some cases, particularly in small companies, the shares are in practice unsaleable and in that case the shareholder is locked in. However, if that shareholder is treated in an unprejudicial way, he or she can apply to the court for a remedy under Section 459 of the Companies Act 1985. Therefore, if the company is profitable but the directors distribute all the profits and pay no dividend on the shares, the shareholder can go to the court to ask for an order for his or her shares to be bought out.
However, there is no answer to the question of what happens to the proprietary rights of the outgoing member of an LLP. My view is that the property is the property of the LLP and must remain the property of the LLP after the retirement. In the absence of a right in the agreement to take out the retiring or deceased member's share of the assets, that member has no such right and loses his or her interest in the LLP without any compensation.
We welcome the fact that after some uncertainty about the matter, Section 459 is to be applied to LLPs by the regulations. But Section 459 can be relied on only by current members of an LLP and cannot be the basis of a claim by a former member that he is being treated unfairly by not being paid out any of his asset interests in the LLP.
It is difficult to know what the default provision ought to be. If there is a right to an immediate pay out in default, that may destroy a viable business. If the right to a pay out is deferred until the dissolution of the LLP, the outgoing member may be locked in and unable to get access to the assets for a very long time.
Plainly, the confiscation of a proprietary interest on retirement or death and its transfer to other members cannot be the right answer. The difficulty of finding the best answer does not excuse the Government's failure to provide an answer at all. We suggest that the best answer may be a default provision: first, that the departure from membership does not deprive the outgoing member of the right to his or her share in the assets of the LLP; secondly, that the payment of that share should be made on terms, and at a time, which is just and equitable; and, thirdly, that in the absence of agreement between the parties a county court should have power to decide what is just and equitable. I accept that that solution is itself not free from difficulty because it would mean uncertainty and perhaps an increased need to go to court. Nevertheless, it is plain that something needs to be done on this important issue and that no answer to this undoubtedly very difficult question is contained in the regulations as they now stand.
§ 1 p.m.
§ Lord Phillips of Sudbury
My Lords, I very much associate myself with the observations of both the noble Lord, Lord Burnham, and my noble friend Lord Goodhart about the length and complexity of the regulations. They are five times as long as the principal Act and several times longer than the Partnership 1134 Act 1890. Having said that, it would be churlish of me to fail to commend those responsible for this monumental task of micro-surgery. However, I believe that, while logical in one way, the manner in which legislation is currently undertaken, with massive regulatory underpinning, encourages a complexity of law which in the wider cultural context becomes completely self-defeating.
I thank the Minister for complying with his undertaking to me in this House on 6th March by amending Section 351 of the Companies Act to require those LLPs which do not set out in their title the fact that they are limited liability partnerships to do so, albeit in smaller print on their notepaper and so on. Naturally, that leads me not to associate myself with the remarks of my noble friend Lord Goodhart. I understand the excesses of violence which disfigure our times, but I believe that to retreat behind a wall of anonymity—many large LLPs will be magnificently anonymous—is too high a price to pay for what is an extremely rare but real risk to operators of businesses.
I should like to make two points on Part VI which contains the default provisions that will apply to LLPs unless the members otherwise agree. My first point concerns paragraph 7(7) which governs the right of members to access the hooks and records of the limited liability partnership. That is a very important provision. I believe that the vast majority of LLPs will not have comprehensive agreements which cover these matters. There could be an ambiguity here. The first part of paragraph 7(7) states:The books and records … are to be made available for inspection at the registered office of the [LLP] or at such other place as the members think fit and every member of the limited liability partnership may when he thinks fit have access to and inspect and copy any of them".It could be read as indicating that the only books and records to which members of an LLP have right of access to inspect and copy are those books deposited at the registered office. I believe the intent is that a member shall have right of access to inspect and copy partnership books and records wherever they are. If the Minister agrees with that, it would be helpful if he said so.
I turn to paragraph 7(9) which is really an anti-competition provision. Unless he has consent, a member cannot carry on any business which competes with that of the LLP. In normal legal circles the notion of carrying on a business carries a proprietorial connotation and does not cover a situation where one is an employee of a business. I believe that that leaves this provision rather lamely placed, because anyone can circumvent it simply by arranging for his wife or friend to set up a limited company of which he or she becomes an employee. In that way one simply bursts through the provision. That lends support to the point raised by my noble friend Lord Goodhart about the absence of any reference to good faith. I believe that a good faith provision would plug the hole that exists in the current wording of paragraph 7(9). If the Minister is minded to comment on that, I should be grateful.
1135 Finally, paragraph 10 of Part VII—miscellaneous—deals with subordinate legislation specified in Schedule 6. It stipulates that that schedule,shall apply as from time to time in force to limited liability partnerships".Does the phrase "as from time to time in force" mean "as from time to time in force and as may have been amended"? If it is not too much to ask, clarification from across the Floor of the House would be of considerable help to all concerned.
§ Lord McIntosh of Haringey
My Lords, I am grateful to all noble Lords for the care that they have taken to scrutinise these regulations and the detail in which they have responded to them. I accept that these are long regulations. I do not believe that I ever preened myself on their brevity, as the noble Lord, Lord Burnham, suggested. In my introduction I explained why the regulations had to be long. I said that since limited liability partnerships were being brought within the context of existing company and partnership law, without changing them more than absolutely essential for the purpose, it had to be done by reference to company and partnership law rather than by incorporating whole chunks of either, or indeed insolvency law, into the regulations.
I was asked by the noble Lord, Lord Goodhart, how soon it would be before we would have a consolidated document. I understand that Butterworths Tolley is well on the way to producing a limited liability partnership handbook which it hopes to publish in late April of this year. I hope that that will ease the problem for those who find this a difficult area. I acknowledge that there are elements of difficulty.
The noble Lord, Lord Burnham, was particularly concerned by the incorporation of criminal offences and penalties by secondary legislation. That was also of concern to the Delegated Powers and Deregulation Committee. It is a fact that offences are covered in the regulations. We intend to apply to members of limited liability partnerships existing criminal offences which are punishable by imprisonment when applied to company directors. At this stage we do not intend to create any new offence for members of limited liability partnerships that do not already exist for officers of a company. The criminal offence created under Section 391A(5), to which the noble Lord, Lord Burnham, referred, is already an offence under the Companies Act. It is not a new crime, although it was not included in the earlier publications.
Many of the comments made by the noble Lord, Lord Goodhart, refer to matters that he disagreed with when we were dealing with the original legislation. Although I enjoyed listening to them again, it is a little abusive of our procedures when we are considering regulations. Of course he is still worried and he is entitled to be, but unless a change of policy is introduced by the regulations it is not entirely appropriate to go over the ground again.
§ Lord Goodhart
My Lords, I thank the Minister for giving way. The noble Lord is being unfair. I 1136 acknowledge that I am raising issues that I raised when the Bill was being debated, but what we were talking about at Third Reading was what should go into the default provisions. Now that we have seen the default provisions and certain matters which we regard as omissions from them, it is perfectly legitimate to raise those issues again in this context.
§ Lord McIntosh of Haringey
My Lords, it is indeed. I did not mean that I was not going to respond to all of the noble Lord's points; I am simply saying that some of them are not to be found in the regulations. I cut out from my opening speech the page or two relating to default provisions. I shall now have to put them back in again.
Before I leave the issue of the new offence under Section 391A(5), perhaps I may say that we have had to make appropriate modifications to companies legislation in its application to LLPs. One of the occasions is Section 391A(5) which deals with effective circulation of an auditor's report on his removal from office. In these circumstances, it will be agreed that whether one is a company or an LLP it is desirable that the members receive a copy of the auditor's report.
Under the company structure, when the directors fail to circulate the report, there is provision for it to be read out at the meeting of the company which considers the removal of the auditor. But LLP legislation is silent on its internal structure, so it was not possible to have a comparable decision. Because it is important that the auditor's representations are made known to the members of the LLP, the regulations require the designated members to circulate the representations and impose an offence if they fail to do so.
§ Lord Phillips of Sudbury
My Lords, I am obliged to the Minister for giving way. Perhaps I may give solace to the noble Lord, Lord Burnham, on his point. The provision is a toothless tiger in any event because it makes liable to a prosecution only,any designated member in default".Section 8 of the principal Act requires one of these LLPs to have only a single designated member. Indeed, the single designated member could be a limited liability company. Unless the single designated member is also "in default", there will be no one who can be prosecuted under the provisions. The same applies to a great many of the provisions of the Act.
§ Lord McIntosh of Haringey
My Lords, I cannot accept that. We had a great deal of discussion about a designated member when the Bill was passing through this House. We made very clear our reasons for saying that there must be at least one designated member, because there must be someone who can be held responsible for the formal procedures of the business and for making the returns necessary. So there will always be a designated member. That designated member can be pursued if, as I have just said, he is in 1137 default of, in particular, this obligation to circulate or make available the report of the auditor on his removal from office. That is adequate protection.
§ Lord Phillips of Sudbury
My Lords, I thank the Minister for giving way again. The answer is whether or not the Minister is right in assuming that if an LLP has a single designated member and there is default in circulation of the auditor's report, that designated member will automatically, and in all circumstances, be deemed responsible under the amendment to Section 391A. I was rather thinking that where it says,any designated member in default",that implied some personal responsibility on behalf of the designated member. If I am wrong, then the Minister is right. None the less, the point remains that only one member of a partnership of 500 could ever be responsible under these criminal provisions, and that member could be a limited company.
§ 1.15 p.m.
§ Lord McIntosh of Haringey
My Lords, the point is that it is not less than one person. It would be unenforceable if 500 members of a limited liability partnership were all jointly and severally responsible for any default. It must be necessary for there to be one identifiable person as the designated member. It applies to this obligation, as to all the other obligations as in the filing of returns of accounts and so on. It does not make any difference whether that person is a limited liability company or not. That person can still be pursued if' he does not do what is required.
I was asked by the noble Lord, Lord Goodhart, about the commencement of the regulations. I thought that I had made it clear in my opening speech that we have set out 6th April 2001 as being the commencement date. That date has been chosen to enable those wishing to take up LLP status to be aware of any amendments that may be made to the tax treatment of LLPs in the light of the tax review that was carried out last year by the Inland Revenue.
Ministers in another place gave a commitment not to commence the LLP legislation until the outcome of the review was known, so that anyone wishing to become an LLP would be certain of the tax treatment they could expect. That is what is secured by this commencement date.
There was some discussion on the issue of usual residential addresses. There is agreement in this matter between the noble Lords, Lord Goodhart and Lord Phillips. I am not in a position to arbitrate on that matter, except to say that we intend in subsequent regulations to apply to LLPs the provisions of the Criminal Justice and Police Bill which relate to directors' home addresses, assuming that these are agreed by Parliament.
The noble Lord, Lord Goodhart, again raised the issue of a duty of good faith. That issue is not particularly raised by the regulations rather than by the Bill. We considered carefully, and we have listened to all the arguments on this point, whether there should be a statutory duty of good faith between 1138 members. We sought views in our February 2000 consultation document. The responses were evenly divided, with comments for and against. We decided that there was no advantage in imposing a statutory duty.
The elements traditionally thought of as making up a duty of good faith include a duty of honesty and good faith owed to each partner; a requirement for openness; a duty to act in favour of the firm and not against it; the fair treatment by partners of a minority within a firm; and a duty not to compete with the firm or make a profit at the expense of other partners. That matter will be adequately catered for by the default provisions under regulations 7 and 8 and will offer a safety net where there is no agreement between members, either generally or on a specific issue. Even if there is no statutory requirement for a duty of good faith, that will not prevent. members of an LLP from agreeing to owe a duty of good faith to each other if they wish.
I know that will not satisfy the noble Lord, Lord Goodhart. The noble Lord was not satisfied with it before, but it is the way the Bill has been constructed. The regulations simply follow on from that.
We argued at the time that there was no benefit in having the default provisions appearing on the face of the Act rather than in regulations. That would not have given them more certainty or made them more enforceable. The provisions will be variable by agreement between the members. They are not a rigid statutory requirement. If we had them in primary legislation, it would be difficult to amend them if they needed adjustment in circumstances which we did not anticipate. I shall not read out the two pages on default provisions from my original speech because I think that I have answered that point.
The noble Lord, Lord Goodhart, asked what would happen if a person ceased to be a member. Any member's account balance will be repayable. That will be a matter for discussion between the personal representative of a deceased member and the limited liability partnership itself.
§ Lord Goodhart
My Lords, is that a reference to an account balance on dealings between the member and the LLP or is it an account balance in the sense of the proprietary interest of the member in the LLP itself? If the latter is the case, what provision would ensure payment of it?
§ Lord McIntosh of Haringey
My Lords, I was just about to come on to that point. Property that is in the name of the LLP will remain the property of the LLP, although an outgoing member may have an equitable claim against the remaining members, depending on what contribution he has made to the LLP. My first answer is about the more limited case of the account balance with the LLP; my second answer is the wider definition.
Perhaps I may move on to the points raised by the noble Lord, Lord Phillips. He asked about the availability of the books and records of a limited 1139 liability partnership. I can confirm that Regulation 7(7) provides the default position that a member of an LLP may have access to the books and records of the LLP. But I can go further than that. Section 222(1) of the Companies Act 1985, which is applied to LLPs, permits the members of an LLP to have access to the accounting records of a company. That is a statutory, not a default, provision.
The noble Lord asked about regulation 7(9) on employees. Regulation 7(9) requires a member of an LLP to account to the LLP for profits made in carrying on any business "of the same nature" as the LLP if he does so without the consent of his fellow members. That would cover the situation where a member of an LLP sets up a competing business or consultancy. It is also arguable that it would cover the situation where a member's wife or husband sets up a company and the member works for it. However, if this issue proves to be a problem in practice, it could be looked at again in the future.
Regulation 7(9) is only a default provision. It derives from the Limited Liability Partnerships Act, which is the subject of the second review.
§ Lord Phillips of Sudbury
My Lords, I am grateful to the noble Lord for giving way. His answer has not covered my point on the difference between someone with a proprietorial interest in a competing business and someone who is purely an employee of it. Regulation 7 does not cover that.
§ Lord McIntosh of Haringey
My Lords, I am not sure what the noble Lord, Lord Phillips, wishes to achieve. Is he afraid that employees are not covered, or does he wish to have them not covered?
§ Lord Phillips of Sudbury
My Lords, I shall say what I would have preferred and what I think would have been more comprehensive. If a member of the limited liability partnership was competing with his partners, whether as a proprietor or as an employee of a competing business, that would be a default provision. The spirit of this point is that someone will not compete against his own partnership. This would be a way of doing that which would not be caught by regulation 7.
§ Lord McIntosh of Haringey
My Lords, that is why I made the point about a husband or wife setting up another business and the wife or husband working for it, presumably as an employee. Of course, this is part of partnership law, which is the subject of separate review. If any review of partnership law were required, it would be made in due course to apply also to limited liability partnerships. In any case, it is only a default provision, so an LLP can make sure that it covers the point of an employee if it were thought to be necessary.
The noble Lord's final point concerned regulation 10. He asked whether "shall apply as from time to time in force" includes "as and when amended". The answer is yes.
1140 Perhaps I may briefly return to the point made by the noble Lord, Lord Goodhart, about the account balance. The answer to the first definition is that it is the balance between the member and the LLP and not the proprietary interest. I hope that I made that point clear.
§ Lord Goodhart
My Lords, before the noble Lord sits down, the suggestion that there should be some kind of unspecified equitable right on an outgoing member to recover the value of his property from the LLP is a very unsatisfactory way of dealing with this problem. It is not at all clear what the basis of that equity would be. I wonder whether, even at this late date, the Government would be prepared to consider introducing further regulations to clarify that point.
§ Lord McIntosh of Haringey
My Lords, legislation inevitably relies on elements of the common law. I have already said that there is pursuit in tort for certain failings, if I may use a non-legal word. To introduce the common law of equity here would not be unreasonable. If it does not work, we may have to do something else about it. But that is why these are regulations and not primary legislation.
§ On Question, Motion agreed to.