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Mr. Gerald Bermingham (St. Helens, South): My sole reservation about LLPs has to do with negligence on the part of professional firms. For example, the negligence policy of a firm of accountants that becomes an LLP may not deal with any negligence created. That has been the case in certain recent takeovers. In the old days, one could at least sue the partners to make up the shortfall on the negligence cover, but that does not seem to be the case now.
Mr. Gibb: The hon. Gentleman raises a point that goes to the heart of the Bill. The aggrieved person can still sue the partner or partners involved in preparing the negligent work. However, why should the law for people in the accountancy or legal professions be different from that covering people in the medical profession, such as nurses? They work for the health service but are not subject to losing all the assets that they have built up over a lifetime.
It is not a matter of fat cats. There are 120,000 chartered accountants in this country. Most of them could never be described as fat cats, and they live under the constant threat that they will lose their lifetime assets because of the negligence of another partner. The Bill goes a long way towards solving that problem, and it is welcome for that reason.
Mr. Bermingham: There is a world of difference between a partnership in a garage business and one involving accountants, estate agents, solicitors or surveyors. The difference is simple: the first provides a service, whereas the professionals provide advice. If the advice is wrong, the damages can be massive. If the service is wrong, the damages are much smaller.
6.15 pm
Mr. Deputy Speaker: Order. I think that hon. Members are straying into Second Reading points. The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) should address his remarks to the amendment.
Mr. Gibb: I am grateful to you, Mr. Deputy Speaker, but I do not believe that the distinction offered by the hon. Member for St. Helens, South (Mr. Bermingham) is valid. Advice and services are very similar, in the sense that one either provides a service or advises someone else about it. That similarity crosses all professional boundaries and is not confined to law and accountancy.
The amendment would reduce the Bill's complexity. Even at this late stage, I hope that the Minister will relent and accept, if not its wording, then at least its principles.
Mr. Burnett: I shall not go over material discussed on Second Reading and in Committee, but I was a senior partner in a large firm for more than 20 years and I know how important it is--for the clients and customers of a partnership, as well as for the members of that partnership--to ensure that the partnership ethos is
preserved. It is important that a duty of good faith should exist between the partners, as that is in the interests of clients and customers.I strongly support the amendment. The Partnership Act 1890 is a good Act, as was said earlier. It provides certainty and simplicity, and will provide some continuity. Simplicity is extremely important, especially for small businesses that cannot afford the advice. They will not necessarily know of the existence of regulations passed by the House.
I hope, even at this late stage, that the Government will remember the interests of small firms and think again on this matter. The fall-back position should be provided by the 1890 Act: it has stood the test of time and is supported by a large body of case law.
Mr. John M. Taylor (Solihull): Is not one of the limitations of the 1890 Act the fact that it presupposes that ownership, profit sharing and decision making are all in step with each other? In a modern partnership, is it not possible that distinctions may need to be made between who owns, who makes decisions, and who makes profits?
Mr. Burnett: As usual, the hon. Member for Solihull (Mr. Taylor) is correct and makes a good point. However, he knows that it is open to the parties who create a partnership under the 1890 Act to vary the profit-sharing and ownership proportions. They can do so with remarkable simplicity. Although they will have to consider the tax implications of such an action, it is the Act's simplicity that is so important.
It is vital that small businesses do not have to fall back on the more tortuous and complicated Companies Act 1985. I understand that there must be intricate provisions under that Act relating to disclosure, and that the Insolvency Act 1986 also has a part to play. Even so, for the reasons that I have given, the 1890 Act is an excellent piece of legislation and should not be rashly discarded in the way that the Government propose.
Dr. Howells: I acknowledge the very proper concern expressed in the amendments in the name of the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb), and the support given by the hon. Member for Torridge and West Devon (Mr. Burnett). I will try to give the amendments the respect that they deserve, because there is no question but that this is an important point. However, I will explain why I will be resisting the amendments--much to the disappointment, I know, of the hon. Member for Bognor Regis and Littlehampton.
Throughout the Bill's passage, there has been a great deal of debate about partnership law and its application, or non-application, to limited liability partnerships. A general application of partnership law to LLPs, very similar to what is proposed in amendment No. 1, was contained in the draft Bill published in September 1998. Subsequently, we took the decision to remove it. Nothing has yet led us to conclude that we were wrong to do so, and we remain opposed to any attempt to reintroduce it. Let me explain why.
As the hon. Gentleman informed us, the main point is that an LLP is a body corporate, while a partnership is not. That is a fundamental difference. So because a
limited liability partnership will be a legal entity separate from its members, its clients will be able to enter into contracts with the LLP itself, not the members. An LLP will also be able to hold property. In addition, because of its separate legal status, an LLP will continue until it is formally wound up, no matter what changes occur in its membership.A partnership, however, exists only because the partners are carrying on business together, and it has no separate life of its own. Contracts are between third parties and the partners themselves, and changes in partners will cause the partnership to dissolve, although the partners can make specific arrangements to prevent that from happening.
Many of the provisions of the Partnership Act 1890 would be inappropriate for an LLP. Sections 1 to 4 deal with the nature of the partnership. They are of no relevance to limited liability partnerships, because the nature of an LLP is set out in the Bill. Sections 5 to 18 deal with the relations of partners to persons dealing with them. Again, they are of no relevance to limited liability partnerships because clause 6 deals with this for LLPs. Sections 19 to 31 deal with the relations of partners to one another. Only eight of those sections are appropriate to LLPs. The others deal with partnership property, for example, which is inappropriate for an LLP because property can, and is likely to, be held by the LLP, not the members. They deal also with retirement, which is dealt with in clause 4.
Sections 32 to 44 of the 1890 Act deal with the dissolution of a partnership and its consequences. These sections would be inappropriate for an LLP, because it will be a separate body corporate, and winding up will be dealt with by application of insolvency legislation, as the hon. Gentleman hinted. Finally, sections 45 to 50 are supplemental.
So of the 50 sections of the 1890 Act, only eight are relevant or appropriate to LLPs. We intend to apply appropriately modified versions of these eight sections to LLPs by way of regulation to govern the relationship between members where there is no agreement. Yet the amendment suggests that all 50 sections are relevant, when clearly they are not.
The amendment would also apply the general law relating to partnerships. Again, that has been developed with regard to partnerships, not bodies corporate. In particular, over the years the general law has developed the duties owed between partners. We believe that application of these duties to an LLP would be problematic. The existence of the limited liability partnership as a separate legal entity means that members will owe duties to the LLP itself. That is not the case in a partnership. Thus a general application of partnership law could leave members of an LLP facing concurrent duties--duties owed to the LLP, and duties owed to each other. There would be no indication of which duty took priority were there to be a conflict.
The hon. Gentleman helpfully set out in Committee the extent to which the Government have fuelled the debate.
Initially, in response to consultee concerns, we established a small working group of officials and representatives from the profession to consider the options. Discussion ranged over all the points that I have raised, and the conclusion was that the preferred solution was to apply default provisions dealing with the eight relevant sections of the 1890 Act that I have mentioned instead of a blanket application of partnership law.We went out to consultation on this in February. I am sure that the hon. Gentleman remembers that full well--we said it often enough. The response was in favour of the approach that the Government have adopted. The consultation paper also dealt with the question of whether we should impose a duty of good faith as between members. As I explained in some detail in Committee, we eventually decided against such a duty, although nothing in the legislation would prevent members of a limited liability partnership including such a duty in their membership agreement if they so wished.
Finally, perhaps I might comment on the two main arguments made by those in favour of a general application of partnership law. First, they argue that partnership law is well understood and that the Partnership Act 1890 is a model of simple and elegant legislation. However, as I have said, partnership law is not just the 1890 Act, but an extensive body of general law. This is not simple, even for experts. There are a number of complicated and sometimes vexed issues, which is why the Law Commission is currently reviewing partnership law.
Next, it is argued that it is difficult to see how the expressed intention to create an entity that combines partnership ethos with limited liability can be achieved without applying partnership law. However, the LLP legislation remains silent on the relationship between members, so as to ensure that there is freedom for members in each LLP to develop provisions appropriate to their specific circumstances. It is that flexibility which those partnerships that are planning to convert to a limited liability partnership are keen to see preserved in the new entity, and we believe that that is what will preserve the partnership ethos.
I remain unconvinced that amendment No. 1 is necessary or suitable. I very much hope that the hon. Gentleman will see fit to withdraw it.
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