Sixth Standing Committee on Delegated Legislation
Tuesday 13 March 2001
[Mr. Jim Cunningham in the Chair]
Draft Limited Liability Partnerships Regulations 2001
The Minister for Competition and Consumer Affairs (Dr. Kim Howells): I beg to move,
That the Committee has considered the draft Limited Liability Partnerships Regulations 2001.
The Chairman: With this, we may consider the draft Limited Liability (Fees) Regulations 2001.
Dr. Howells: As ever, it is a pleasure to serve on a Committee under your chairmanship, Mr. Cunningham. We are debating two sets of regulations, which need to be approved to enable the Limited Liability Partnerships Act 2000 to come into force.
Hon. Members may recall that my right hon. Friend the Chancellor of the Exchequer announced in his pre-Budget report that the Limited Liability Partnerships Act 2000 would come into effect on 6 April. From that date, firms in Great Britain will have an additional choice of corporate vehicle through which to carry on business. Those firms that choose to use LLPs will enjoy the organisational flexibility and tax status of a traditional partnership but, unlike a partnership, its members will have limited liability. The new Act gives firms greater flexibility to operate in the competitive environment that business faces today, at home and abroad. The advent of the proposal is a milestone, as it is the first time since the passing of the Limited Partnership Act in 1907 that there has been a fundamental change to business entities in Great Britain.
I shall set out, as briefly as I can, the provisions contained in the LLP regulations. It may help hon. Members to understand the structure and content of the regulations if I first explain the history behind their development. In 1998, the Department of Trade and Industry published a consultation document that set out a draft of what is now the Limited Liability Partnerships Act 2000, together with a draft of the regulations. More than 5,000 copies of that document were distributed. It was also subject to detailed pre-legislative scrutiny by the Select Committee on Trade and Industry, which considered both the Bill and the accompanying regulations in detail. We took careful account of the comments made by the Trade and Industry Committee and a revised draft Bill and regulations were published in 1999 for further consultation.
Throughout that lengthy consultation process, many valuable contributions were made, including comments and suggestions from professional associations and individual experts who offered their advice based on many years of practical experience. The regulations before us today are the beneficiary of that careful process, which has helped greatly to ensure that LLPs are a viable option for new and existing firms in Great Britain.
The Act provides a framework for setting up an LLP; among other things, it defines an LLP as a corporate entity separate from its members, sets out the mechanics and requirements for incorporation and determines the relationship that exists between the members, and between the members and the LLP. It also outlines the scheme of taxation that will apply to the members of an LLP. I undertook earlier to clarify the Government's approach to the taxation of LLPs; I will return to the matter later.
The regulations are in seven parts, with six schedules. They apply large parts of the Companies Acts 1985 and 1989 and the Insolvency Act 1986 to LLPs, with appropriate modifications. The necessity to modify the existing corporate legislation applied by these regulations to LLPs is born of the fact that, although an LLP is a corporate entity, its internal structure is that of a partnership. Modifications have been made simply to allow LLPs to operate within the framework of the corporate law that has been applied to them.
The common thread that runs through the regulations is parity of treatment for companies and LLPs wherever possible. There are three main strands to that proposal, the first of which is accounts and audit. Part II and schedule 1 of the regulations apply part VII of the Companies Act 1985 to LLPs and impose accounting and audit requirements on LLPs similar to those currently placed on companies. The requirement to disclose financial information has long been accepted as the quid pro quo for limited liability. The aim is simply to give those who deal with LLPs the opportunity to make the same judgment about an LLP's financial standing as they presently can for a company.
Part II also requires LLPs to file annual accounts with Companies House and to disclose similar financial information to that currently disclosed by companies. The regulations allow, as for companies, exemptions from some accounting requirements for small and medium-sized LLPs. They also apply the same audit requirements as for companies. In other words, current audit thresholds will apply and the general rule will be that LLPs with a turnover of up to £1 million will not be required to have an audit.
The second principal strand applies to LLPs, with appropriate modifications, much of the remainder of the Companies Act 1985
Mr. John Burnett (Torridge and West Devon): I apologise for interrupting, but I did not hear the exempt account figure. Would the Minister kindly supply it to the Committee again?
Dr. Howells: Of course, I would be delighted. I said that current audit thresholds would apply and, as a general rule, that LLPs with a turnover of up to £1 million would not be required to have an audit.
I had moved on to the second principal strand and said that much of the remainder of the Companies Act 1985, together with part II of the Companies Act 1989, would apply. Part III of, and schedule 2 to, the regulations can best be described as imposing good housekeeping requirements on LLPs. The resulting regime for the carrying on of business through an LLP closely resembles that provided for companies under the Companies Act 1985.
It would be a lengthy and, dare I say, even less exciting speech than the one that I am making, if I were to set out every detail in part III, so I shall mention only those aspects that are most likely to interest hon. Members. For example, outside every place of business and on all letterheads and order forms, an LLP will be required to show its name and demonstrate that it is a limited liability partnership. Each LLP will have to provide an annual return giving details of its registered office and its membership. To give a third example, LLPs and their members' affairs will be liable to investigation in the same way as companies and their directors may be investigated, including for fraud or unlawful conduct.
Part III also applies the provisions of the Company Directors Disqualification Act 1986 to LLPs, which reflects the fact that members of an LLP have the privilege of limited liability and it is in the public interest that such privilege is not abused. Members of an LLP will be subject to the same sanctions as currently apply to company directors whose conduct results in their disqualification. Any person disqualified under these provisions would be unable to be either a member of an LLP or a company director.
The third main thread of the regulations applies parts of the Insolvency Act 1986 to LLPs. Part IV of, and schedule 3 to, the regulations provide that LLPs are treated similarly to companies on insolvency matters, including voluntary arrangements, administration orders, receiverships and winding up. I should make it clear that significant modifications are needed to allow for the different structure of LLPs. In particular, I draw the Committee's attention to the addition of new section 214A to the Insolvency Act. There was considerable discussion on this when the Bill was before Parliament. It provides that withdrawals made by members in the two years prior to the commencement of a winding-up are subject to clawback if it can be proved that at the time of the withdrawal the member knew or had reasonable belief that the LLP was or would be made insolvent. That is an important protection for creditors in the event that an LLP goes into insolvent liquidation while providing sufficient incentive for members not to rush to wind up an LLP that faces difficulties but to trade through the difficulties.
Finally, on the subject of insolvency, the Committee will know that the Insolvency Act 2000 amends the Insolvency Act 1986 in its application to companies, and in particular company voluntary arrangements and the disqualification of directors. Our intention is to make regulations under the Limited Liability Partnerships Act later this year to apply the provisions as appropriate to LLPs. Those must await the full picture of the amendments to be made in relation to companies.
I now turn to some specific issues. The first is the use of LLPs for businesses that will fall to be registered under the Financial Services and Markets Act 2000. Part V of the regulations applies to LLP provisions contained in Parts XV and XXIV of the Financial Services and Markets Act 2000. They allow the Financial Services Authority to request the courts to wind up or initiate other insolvency proceedings against LLPs that are authorised by them. They also allow the authority to be heard by the court if insolvency proceedings are commenced by third parties. The purpose is to put LLPs operating in the financial services sector on the same footing in respect of insolvency proceedings as other types of business organisation such as companies and partnerships.
This is perhaps a suitable opportunity to comment on the use of the LLP form for businesses that will require authorisation once the Financial Services and Markets Act 2000 comes into force. That raises issues that need to be thought through carefully, given that the LLP is a new business form, that the Financial Services and Markets Act is also new, and that there have been huge changes in the financial services business in recent years. Against that background, the Treasury will be consulting shortly on the extent to which there are grounds initially for caution in allowing all businesses that will require authorisation under the FSMA to adopt the LLP form until the full implications of regulating such businesses are clear. That is with a view to bringing forward regulations under the FSMA later in the year. I should emphasise, for the avoidance of doubt, that if there are restrictions, they will not affect those regulated professionals who might be authorised persons under the FSMA. The most obvious examples of such regulated professions are firms of solicitors and accountants, but other examples are actuaries, chartered surveyors or insolvency practitioners.
The second issue is default provisions. Part VI of the regulations provides for a set of default provisions that govern the mutual rights and duties of members, and the mutual rights and duties of the LLP and the members. In plain English, the default provisions will apply where there is no existing LLP agreement or where such an agreement does not deal adequately with a particular circumstance. The essential rule in such circumstances is that profits are shared equally among members and that every member is entitled to take part in the management of the LLP. The provisions are modelled on section 24 of the Partnership Act 1890 and were the subject of a specific consultation in February 2000. The proposals reflected here received a favourable response. They provide an important safety net by bringing certainty where no LLP agreement exists.