HL Deb 19 December 2002 vol 642 cc865-72

4.34 p.m.

Lord McIntosh of Haringey

rose to move, That the draft regulatory reform order laid before the House on 24th October, Session 2001–02, be approved [29th Report, Session 2001–02, from the Regulatory Reform Committee].

The noble Lord said: My Lords, this is the first order from the Department of Trade and Industry to be brought forward under the Regulatory Reform Act 2001. The order is designed to remove the 20 member limit which at present applies, with some exceptions, to partnerships, limited partnerships, unregistered companies and associations, formed for the purpose of gain.

The impetus for the order came from recommendations of the Law Commission and the Scottish Law Commission that the 20 partner limit for partnerships be abolished. The 20 member limit was enacted in the 19th century in response to a problem of the day and reflected the business and legal environments at that time. The limit was intended to prevent abuses by certain deed of settlement companies which were common in the 18th and 19th centuries.

The membership of a deed of settlement company could be large and could change often. To sue a deed of settlement company under common law, the aggrieved party had to be able to name all the shareholders. This was exploited by the unscrupulous who set out to defraud the public. By constructing a large partnership with a fluctuating membership, they made it virtually impossible for an aggrieved party to sue. This difficulty was the basis for the size restriction that was first introduced in the Joint Stock Companies Act 1844.

Following the fusion of equity and common law in 1873, aggrieved parties could sue partnerships in England and Wales in the firm's name. They no longer had to be able to name all the members. The situation is slightly less straightforward in Scotland, however— the differences would not cause procedural differences for the plaintiff.

My department consulted extensively on this proposal. It received overwhelming support. Respondents agreed that, although specific exemptions can be made to the 20 member limit (and a large number have been made over the years), it does impose burdens. It prevents the expansion of business through the introduction of new partners, restricts the development of multidisciplinary and international partnerships, restricts the use of joint ventures, especially in the private equity and property sectors, and imposes legal complexity and administrative costs.

This order will increase the freedom of businesses to organise in the way most appropriate to their circumstances, facilitate the introduction of new partners and the development of multidisciplinary partnerships, result in cost savings to business and remove the need for increasingly complex applications for exemption.

The committee concluded that the proposal to remove the 20 member limit removed a burden within the meaning of the Regulatory Reform Act 2001 and did not create a new burden. The department also demonstrated to the satisfaction of the committee that the proposal will neither confound any reasonable expectations nor reduce any necessary protection. I thank members of the Select Committee on Delegated Powers and Regulatory Reform for the time they spent scrutinising the proposal and for recommending the proposal to the House.

The committee in the other place also considered that the proposal removed a legal burden from members of partnerships, and those wishing to enter into partnership arrangements, and agreed that it was not necessary to replace the limit with any other protections. I confirm that the regulations conform with the European Convention on Human Rights. I commend the order to the House.

Moved, That the draft regulatory reform order laid before the House on 24th October, Session 2001–02, be approved [29th Report, Session 2001–02, from the Regulatory Reform Committee].—(Lord McIntosh of Haringey.)

Lord Hodgson of Astley Abbotts

My Lords, once again I am grateful for the Minister's explanation. Before I make my remarks I have an interest to declare as I have been, and at this moment remain, a limited partner in at least three parallel partnerships of the sort described in the briefing. I have therefore seen at first hand the administrative complexities as well as the need to use offshore vehicles and other cost ineffective devices which the old regulations impose. It seems to me, therefore, extremely welcome that we should be considering their removal.

The Minister mentioned the private equity industry which has been greatly affected by the 20 partner limit. The private equity industry in the UK has been a great success. It has assisted in the development of the entrepreneurial culture in the country and added yet another area of expertise to the formidable range already available in the City of London.

I wish to raise three small points. First, does the deregulation apply to Northern Ireland? I think not. If not, why not? Secondly, if and when the order goes through what is the position of parallel partnerships? Are they permissible or impermissible?

Thirdly, I have a familiar moan about the density and incomprehensibility of the parentage of the legislation. The notes to page 2 of the regulation state that the regulations have as their parent the Companies Act 1985, the Financial Services and Markets Act 2000, the Banking Act 1979 and the Trade Union and Labour Relations (Consolidation) Act 1992. That makes the legislation extraordinarily dense and difficult to understand and, although I do not know how, I hope that we can find a way to make it more comprehensible to the man or woman in the street.

I accept the point that has been made that it is possible to construct scenarios in which people with malice aforethought could seek to take advantage of the change. However, I have heard of no evidence that such schemes could not have been introduced under the old parallel partnership route but were not. I see no reason why that should be different in future. This is a deregulatory measure that will cut costs and increase the United Kingdom's competitiveness, and we therefore support it.

As this is the last of the orders and I have kept noble Lords here for the best part of an hour, I take the opportunity to wish happy Christmas to the noble Lord, Lord Grocott, the Captain of the Gentlemen-at-Arms, to the noble Lord, Lord McIntosh, who I see from my grey book I should properly call the Captain of the Yeomen of the Guard, and to the noble Baroness. Lady Blackstone.

4.41 p.m.

Lord Phillips of Sudbury

My Lords, I must declare an interest as a partner of 30 years' standing and as one who has sued many partnerships on behalf of clients. I would not say that that was a mug's game, but it is the most difficult form of legal suit to entertain and pursue, except perhaps as regards an unincorporated association. I might even have been sued as a partner, but I do not think so.

I broadly welcome the measure. I do not seek to prevent its passage, as that would be fruitless, but I do seek to persuade the Minister and the Government of the need for parallel regulations for public disclosure by the large partnerships that will flourish in the wake of this change. In doing so, I am supporting the representation referred to in the statutory statement prepared by the Department of Trade and Industry in relation to this deregulatory measure. One representation is anonymous and the other is advanced by the well-known firm of solicitors named William Sturges. Both representations were to the effect that, without a measure of public disclosure, the prospects for the sort of anti-social activities that originally gave rise to the limit of 20 partners will be created once again.

I noted the Minister's description of those partnerships. He referred to large partnerships with "fluctuating partners" under the settlement partnerships. I put it to the House that, although the vast majority of partnerships are thoroughly proper, well conducted and many, if not most of them, are professionally regulated, many are not.

Partnerships have always been concentrated in the service area, as they are not suitable vehicles for large asset-carrying and creating entities. In the context of much of today's financial services business, which is extremely fast-moving and global, there are many types of partnership that will be able to be formed in the wake of this measure that will, I fear, try to play fast and loose with the public. I am sure that I do not need to enumerate the many scandals, large and small, that have afflicted the financial services sector in recent times.

The Government should by all means proceed with this deregulating measure, but could they actively review the representations by William Sturges and the anonymous firm? In that way, there could be only a short delay between the coming into effect of the delimited number and the bringing into effect of publicity requirements. At the moment, partners do not need to disclose any of those pieces of information that are necessary for companies. There is no register of directors or of partnerships. They do not need to produce an annual report or to lodge any form of annual accounts or their constitution so that people can see where governance lies. There is no need to specify the executive partners. In fact, anyone seeking redress against a partner is, frankly, up against it if those partners are trying to evade their responsibilities. I say that in the firmest possible way and with a great deal of personal professional experience.

The document produced by the DTI is, dare I say, a bit naïve with regard to the current reality. For example, it suggests that if one does not know the name of the partners, one should ask the solicitor, authorised to accept service on behalf of the partnership firm". The solicitor acting for the partnership firm does not have to accept service; he can simply say, "I am not authorised to accept service". Where is one then? The document goes on to say that "effecting personal service" can be done preparatory to suing, by leaving the notice with either a partner or a manager/ controller of the firm at the firm's principal place of business". If the partnership has gone out of business, it will not have a principal place of business. The problem is to know who the partners are. We come back to the Minister's historic opening remark about fluctuating large partnerships. I fear that a great deal of that sort of thing will go on.

The DTI statement suggests, sending or transmitting a copy of the notice to … a partner's usual or last known address". The problem is that we may not know the partners. One cannot get at the personal assets of a partner if one does not know who the partner is or where he lives. This is a simple but important point.

All noble Lords would deplore any misuse of this development for improper purposes. I therefore hope that the Government will accept that we should introduce regulations that more nearly equate the public disclosure responsibilities for companies with those for large partnerships. I suggest that those publicity requirements should be confined to partnerships of more than 20. Subject to that, I welcome the order.

4.45 p.m.

Lord Fraser of Carmyllie

My Lords, I join my noble friend on the Front Bench in welcoming this broadly deregulatory measure. I also acknowledge that he appreciated the existence of the separate legal persona of a partnership in Scotland. Many of the difficulties that have been set out probably do not exist north of the Border. There may be problems with ever-larger partnerships south of the Border. I have never seen any magic in the figure of 20 but something of an issue may arise if partnerships are allowed to expand indefinitely.

I hope that, in the wake of a welcome deregulatory measure, we do not find ourselves subsequently encumbered with too many requirements about the increased size of a partnership, which would transform the order from a deregulatory measure to one that would impose greater burdens on those who were in a position to decide that they wanted to increase their partnership in a natural manner from more than 20 to 22, 24, 26 or whatever the figure may be. I understand that there might be some cause for concern about a really large partnership.

Lord Phillips of Sudbury

My Lords, I add to my earlier comments one quick point on which I hope the Minister will reflect. The key statement that I cannot understand in the DTI statement—a formal statement under the deregulation legislation—is in paragraph 3. It states: The Committee considered that, by removing the 20 member limit, the proposal would remove the legal burden from members of partnerships". I do not believe that it will remove any burden at all. Perhaps the Minister will explain that. It may dilute the personal liability of partners under partnerships but that is not remotely the same as removing them. Indeed, as partnerships get bigger, the liabilities will tend to grow proportionately.

Lord McIntosh of Haringey

My Lords, I am grateful to all noble Lords who have taken part in the debate and have welcomed these regulations. I shall try to deal in turn with the points raised. First, the noble Lord, Lord Hodgson, asked whether the regulations applied to Northern Ireland. They do not. This is a devolved matter and Northern Ireland has separate companies legislation. He also asked me about parallel partnerships. As I understand it, parallel partnerships were a device to get round the limitation to 20 members and, therefore, there will no longer be a reason for them.

The noble Lord said that the originating legislation was dense and incomprehensible. Indeed, it was. That is why for a number of years we have undertaken a comprehensive review of companies legislation. As the noble Lord will be aware, in the summer we published a draft companies Bill. When it arrived on my desk, being of the order of 10 centimetres thick, I immediately sent it back again. I said that, when the consultation was complete, I would take delivery of a copy but that I had no intention of looking at it at that time.

The intention of the exercise, with the support of the Law Commission, is that we should revise all that.

That will not necessarily cover the noble Lord's point about the Trade Union and Labour Relations (Consolidation) Act, but it is a very minor point so far as concerns these regulations.

The points raised by the noble Lord, Lord Phillips, are wide-ranging and concern the whole issue of registration and disclosure requirements. I do not complain about that. I can see that, if there is no limit on the numbers, then the argument for disclosure is different. However, this was a matter of very detailed consultation, and my understanding is that the substantial majority of respondents opposed setting up a register of partnerships. I also understand that the Law Commission report will not recommend such a register. Of course, once the Law Commission publishes its report, there will be further consultation and the Government will consider all the views, including those of the people who disagreed with the overwhelming majority.

The noble Lord talked about fluctuating partners and deed of settlement companies, but that was during the 18th and 19th centuries before the passage of the 1844 Act. The ability to sue the firm is the key element here. That applies now to partnerships. One does not have to identify all the partnerships in order to sue the firm. One can sue them at their place of business. As the noble Lord, Lord Phillips, rightly said, that does not help if they have gone out of business. But protection against those who have gone out of business is hardly affected by the number of partners.

Lord Phillips of Sudbury

My Lords, I am obliged to the Minister for giving way. The fact that one can sue a partnership as a firm does not help one to get at the personal assets that are needed to satisfy one's claim. That is the problem.

Lord McIntosh of Haringey

My Lords, it depends on the constitution of the partnership. However, surely in most cases the partners are jointly and severally liable. But, again, I suggest that this goes beyond the issue of 20 members and, therefore, beyond this set of regulations. The Law Commission is considering the issue of partnerships as legal entities as part of its reform of partnership law. The points raised by the noble Lord, Lord Phillips, can certainly be made in that respect.

He also asked me to comment on a statement by the committee. The Government are not responsible for what the committee says. I do not have the information in front of me, but I assume that he means the committee of the other place or of this House that was considering the regulations. We are not responsible for what such a committee says.

In terms of protection for investors, the interest in partnerships is regulated. Unlimited and limited partnerships are classed as unauthorised collective investment schemes and are subject to the financial promotion rule in Section 238 of the Financial Services and Markets Act 2000. That means that they can be sold only to sophisticated investors who are well able to look after their own interests.

The noble and learned Lord, Lord Fraser, reasonably said that if we get the matter wrong there will be problems in the future and the net effect will not be deregulatory. That is why we are undertaking a review of company law and why we have published a draft companies Bill. There will also be an opportunity for representations to be made to ensure that that does not take place.

On Question, Motion agreed to.

House adjourned for the Christmas Recess at four minutes before five o'clock until 7th January next.