Draft Limited Liability Partnerships Regulations 2001 Draft Limited Liability (fees) Regulations 2001

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Dr. Howells: Fair enough. One politician admitting that he has total confidence in another is very rare in politics, Mr. Cunningham, and usually precedes someone being sacked.

It was a long time ago, but I think that the hon. Member for Bognor Regis and Littlehampton asked a question about legislation by reference. Quite properly, he said that such legislation was hard to understand and would result in increased legal costs, as firms would need to take legal advice to interpret it. I have sympathy with the arguments against legislation by reference, but the alternative would have been to produce a set of regulations that ran to hundreds of pages, much of it reproducing existing law. Legislation by reference also has the advantage of highlighting where the changes to company and insolvency law have been made specifically to deal with LLPs. The approach that we have adopted allows users easily to identify where changes have been made in the legislation as it applies to LLPs and keeps the length of the regulations in balance. In any event, we expect that, if there is demand, commercial publishers will produce a consolidation of the provisions that relate to LLPs.

I think that the hon. Gentleman also asked why so much information was being put into regulations. He said that it would have been better to put it into the Act. Again, it is a fair question. An LLP is a body corporate, and we have always intended to ensure where possible that there is an equivalent level of regulation to that applied to companies. We believe that the regulations achieve that by modifying as appropriate the relevant legislation, including insolvency legislation affecting companies.

I recall that there were protests during the passage of the Limited Liability Partnerships Act 2000 that too much reliance was being placed on secondary legislation. I disagreed strongly and still do. I hope that the hon. Member for Bognor Regis and Littlehampton agrees that we have a sensible structure. The essential characteristics, principles and rules for an LLP are set out in the 2000 Act and the detail. The application of company and insolvency legislation is left largely to regulation. The 2000 Act also makes sensible provision to require that the affirmative resolution procedure is used for many changes that are made to the Companies Act 1985 and the Insolvency Act 1986. It would have been confusing for users if we had replicated in the Limited Liability Partnerships Act 2000, albeit with some modifications, large swathes of current legislation, some of which can itself be changed by secondary legislation.

It is important to adopt the requirements for LLPs as company, insolvency and partnership law change. A fundamental review of company law is in progress, and it seems wise to recognise that the provisions of company law that we are applying to LLPs under the regulations are themselves following the company law review.

In addition, the Law Commission recently produced a report on proposed changes to partnership law. It would be necessary to apply the results of that work. Let us take the example of the new Insolvency Act 2000, which modifies the Insolvency Act 1986 and will be applied to LLPs as appropriate by statutory instrument once the secondary legislation necessary to bring its provisions into force has been made.

The hon. Member for Bognor Regis and Littlehampton asked about legislation by reference, and I have tried to deal with some of his points. I understand that Butterworth's Tolley is in the process of producing an LLP handbook that will incorporate a marker of the relevant legislation. I do not know whether that constitutes an advert for that company, Mr. Cunningham, but if it does, I will gladly take it back. I was going to start talking about brown envelopes then, but I will not.

The hon. Gentleman also asked about the retirement of members. That is covered in section 4(3) of the Act. I hope that that reference satisfies him. He asked what happens if an LLP that gets into difficulties has either no agreement or an inadequate agreement. That question was also raised by the hon. Member for Torridge and West Devon.

A consultation document was published in February last year setting out suggested regulatory provisions that were modelled on section 24 of the Partnership Act 1890. Like that section, the provisions would apply only in so far as there was no agreement on those matters. The provisions deal with such matters as the rights of members to share equally in the capital and profits of the LLP, the right of every member to take part in the management of the LLP, the rights of members when changes in the nature of the LLP's business are being made and the introduction and expulsion of members. The provisions have been placed in these regulations to allow the flexibility to modify them as necessary, depending on practical experience of the operation of LLPs. Should circumstances arise in which there is neither an agreement nor any regulatory default provisions covering the matter arising, the courts would be expected to make a decision having regard to the nature of that entity.

I turn now to the question that the hon. Member for Bognor Regis and Littlehampton raised about offences. That issue was debated at length during the passage of the Limited Liability Partnership Bill through the House. We made it clear then that we intended to apply to members of an LLP existing criminal offences, which are punishable by imprisonment when applied to company directors. It is right to try to ensure a level playing field between companies and LLPs in those circumstances so that one is not treated more leniently than another. The Act gives the power to create new criminal offences in the regulations, which would be punishable by imprisonment or trial on indictment. However, we do not at this stage intend to create any new offence that would be applied to members of LLPs that does not already exist in the current legislation for company officers.

I hope that that gives the hon. Gentleman some comfort. I am sure that the Committee will understand that we think it important to preserve the flexibility for creating offences in the future and for deciding how they should be punished. This is a new entity and there may be abuses that we have not envisaged.

Mr. Gibb: The Minister has created a new criminal offence on page 23 of the regulations. Can he explain that point?

Dr. Howells: Is the hon. Gentleman referring to subsection (5)?

Mr. Gibb: Yes.

Dr. Howells: Subsection (5) says:

    ``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.''

I understand that that is currently an offence under the Companies Act and that it is a proper function and a duty to make those representations as appropriate. I therefore do not see that it is a new crime, although it is a reference that was not included in earlier publications. The hon. Gentleman is right in that sense.

I can give the hon. Gentleman the comfort that any new regulations made under the Limited Liability Partnerships Act 2000 that created a new offence, would be subject to the affirmative resolution procedure. He asked where regulation 7(8) came from. It came as a result of the consultation process. He asked whether the Trade and Industry Committee said in its report that it wanted to examine revised drafts of the legislation. It did indeed. Were we to continue with our proposed approach in the regulations, we would need to make revised drafts publicly available in sufficient time and for outside bodies and the Committee to examine them. Such a revised draft was published in July 1999. The Department wrote to the Clerk to the Committee at that time, providing a copy of the revised regulations and inviting the Committee to discuss any aspect of them. The Committee has not returned its decision. I hope that the hon. Gentleman will accept that as an answer; I shall not go to the Committee if it does not come back to me.

The regulations have, however, been subject to several consultations. There were two main consultations in 1998 and 1999 and, in addition, a further consultation was undertaken in February 2000 that dealt specifically with the relationship with the members of LLPs. That consultation proved invaluable in providing the important default provisions listed under part VI.

The hon. Gentleman asked whether LLPs would be allowed to use merger and acquisitions accounting. We have applied in the regulations those parts of the Companies Act 1985 that allow for merger and acquisition accounting to be used in consolidated accounts. There has been some modification to the appropriate sections so as to allow for the different structure of LLPs and companies. The modifications simply remove sub-paragraphs (1)(a) to (c) of schedule 4A(10) of the Companies Act 1985; those sub-paragraphs referred to shares, which LLPs will not have. That leaves sub-paragraph (d), which requires that the adoption of the merger method of accounting accords with generally accepted accounting principles, which require that the conditions for accounting and acquisition as a merger are based on the relevant accounting standard, with supplementary guidance provided by the proposed statement of recommended practice—SORP. We are confident that those measures achieve the desired result of allowing LLPs to use acquisition or, in appropriate situations, merger accounting in the consolidated accounts.

The hon. Member for Bognor Regis and Littlehampton asked why there had been a delay in producing the statement of recommended practice. We are pressuring the steering group responsible for preparing the SORP and the Accounting Standards Board to finalise the draft SORP so that interested parties can use it for comment. At present, those bodies are discussing several outstanding issues. We emphasise the importance for those considering forming an LLP of having guidance on detailed accounting requirements.

The hon. Gentleman also asked why section 257 of the Companies Act 1985 did not apply to LLPs. That section provides a power to make further regulations; it is not required because the LLP legislation contains such a power for LLPs. He asked, too, what the significance was of the wording used in the clawback provisions, such as ``knew'' or ``ought to have concluded''. The LLP member will be judged against the criteria of what would be reasonable with regard to the standards of the average director. If his knowledge was ``higher than average'', the court would be likely to apply a higher test. That approach is consistent with that for companies and rightly allows the court to judge each case on its merits.

The hon. Member for Bognor Regis and Littlehampton also asked about profit and loss format—tax disclosure. I confirm that that will not include members' tax liability.

I have answered all the questions asked by hon. Members. As we have time, I am willing to listen to more questions from the hon. Member for Torridge and West Devon.

5.50 pm

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