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The noble Lord said: Since this is the first amendment to which I have spoken, I should like to make it clear that, speaking for my party as a corporate body although clearly not for all the individual members of it, we regard this as a good Bill--
Lord McIntosh of Haringey: I would not even describe the Liberal Democratic Party as a "partnership", let alone a "corporate body".
Lord Goodhart: Despite the words of the Minister, we regard this as a good Bill, but a Bill capable of improvement and that is why we tabled a series of amendments to it.
Amendment No. 13 is concerned with the right of an individual member of an LLP to retire from an LLP on giving notice. At present the position under partnership law is that any partner can retire from the firm on giving notice unless the partnership agreement specifies otherwise. Clause 4(3) of this Bill provides that,
The Government's answer in the otherwise helpful letter which the Minister sent to the noble Baroness, Lady Buscombe, and copied to me, was that regulations would be made incorporating certain provisions of partnership law including, in the absence of an agreement to the contrary, the right to withdraw from a firm on notice.
I shall look at the whole question of fall-back provisions when we come to Amendment No. 16. But Amendment No. 13 is essential in any case. The right to withdraw on notice in the absence of a partnership agreement specifying otherwise is a basic principle of partnership law and there is no reason why that should be changed in the case of LLPs. Being locked in for an indefinite period may be all right in the case of a Companies Act company where many shareholders are often just investors, but it is not appropriate in the type of corporation such as an LLP where members are expected to be working members. The right to withdraw should not be left to be dealt with in consequence of regulations and should be brought on to the face of the Bill.
Further, it appears to be possible to read Clause 4(3) as an exhaustive list of the ways in which a person may cease to be a member. If that is so, regulations which authorise someone to retire in the absence of an agreement might themselves be ultra vires. I hope that the Minister will be prepared to look at the issue again. I beg to move.
Baroness Buscombe: I very much took on board the Minister's response to my suggestion on Second Reading that, in the event of a member wishing to retire, notice should be given to the LLP rather than to the other members. I appreciate that it does not make good sense to allow an individual to opt out of his or her responsibilities. In the event, say, of there being fundamental problems with the partnership, that could be avoided simply by a member tendering his or her resignation by notice to the body corporate.
There are concerns in this respect. I hope that the Minister will be able to give us some reassurance that there is a way round the problem by, on the one hand, making sure that people respond to their responsibilities and liabilities and, on the other hand, ensuring that they are not locked in against their will ad infinitum.
Lord McIntosh of Haringey: I certainly recognise that there are concerns, and I am very sympathetic to them. Indeed, I want to see the same result as noble Lords opposite. We want to be sure that we deal with the case where a member wishes to cease to be a member of an LLP but where, due to a disagreement
When the agreement is drawn up the terms and conditions for ceasing to be a member are very likely to be dealt with at that time. Therefore, if there were to be a disagreement, the agreement would come into force. However, I recognise that that is not good enough. There must be some mechanism that comes into play if the LLP fails to have an agreement or has an agreement that does not adequately deal with the departure of a member.
Therefore, we shall be including a default provision, along the lines of Section 24 of the Partnership Act 1890, which will deal with the problem. We shall be including such provision in regulations. This was not published with the draft regulations in July of last year, but our suggestions for that were published on the website in October or November of last year. Such proposals are subject to consultation and are still being consulted upon. We are considering whether something along the lines of Section 24 of that Act would be appropriate for a default, following Section 26, to cover retirement.
If necessary, we can deal with this when we reach Clause 5. However, perhaps I may indicate the areas that we propose to include in default provisions: the right to share equally in capital and profits; the right to be indemnified by the LLP for activities in the course of business; the right to take part in the management of the firm; no entitlement for remuneration; the right to have access to books and records; expulsion and retirement of members; decisions by majority vote; and the application of Section 459 of the Companies Act--protections against unfair prejudice. Members of the Committee should take note that retirement of members is included in that list.
In simple terms, "default provision" means that if the agreement does not contain provision for retirement and for all the other matters to which I referred, the default provisions that will be provided will come into force under the regulations and the member seeking to retire will be protected by them. I hope that the noble Lord will agree that that is a better way to do it than putting the provision on the face of the Bill, as proposed by his amendment. However, it will have the same effect.
Lord Howie of Troon: Before my noble friend the Minister sits down, perhaps he can clear up a slight problem that I have. We are discussing an important amendment and my noble friend said that certain information relating to the matter was published last October or November on the website. However, can he tell the Committee whether it was published anywhere else?
Lord McIntosh of Haringey: No, not to my knowledge. However, I shall check on the position and write to my noble friend.
Lord Goodhart: I recognise the Minister's goodwill and good intentions in the matter. At this point I shall deal only with the question of retirement because the other rather wider questions regarding Section 24 of the Partnership Act can be dealt with when we discuss Amendments Nos. 16 and 17.
As far as concerns retirement, it seems to me that this is in a rather special position as it is of particular importance. Unless the partnership agreement provides for the contrary, someone going into an LLP needs to be quite certain that he can get out of it. I wonder whether the Minister will agree to look again at the question of possible difficulties with vires because of the likely interpretation of Clause 4(3) as being an exhaustive list of the circumstances in which it is possible to cease being a member of the partnership. However, subject to that, I am happy to beg leave to withdraw my amendment.
Amendment, by leave, withdrawn.
Lord Lucas moved Amendment No. 14:
The noble Lord said: In these amendments I am seeking to explore the way in which a third party who wishes to deal with a member of a limited liability partnership, or someone he believes to be a member--
Lord McIntosh of Haringey: The noble Lord referred to "these amendments". We had not proposed to group this with any other amendments, but I am happy to do so if the noble Lord so wishes. Without trying to put any pressure on him, and unless he is thinking of pressing his amendment to a Division, I wonder whether it might be easier if we dealt with this amendment and Amendment No. 25 when we reach Clause 6?
Lord Lucas: I apologise to the Committee. I should have said at the beginning that I intended to speak to Amendment No. 25 when moving this amendment. That is what is on my grouping list. I apologise for arriving here in some haste, almost late, and therefore not being as clear as I might have been.
The two amendments certainly go together because they both bear on the substance of Clause 6 and the question of how a third party dealing with a member of an LLP is able to treat that person and, indeed, what assumptions he is allowed to make about the powers that that person has to bind the partnership. As the Bill stands--and we shall deal later with some proposed government amendments--Clause 6 falls into two principal sections; namely, subsections (2) and (3).
Under Clause 6 (2), which relates to the ordinary circumstances of dealing with a member of an LLP, "the person" who is dealing with someone has the right to treat him as an "agent" in all respects of the limited liability partnership if he believes him,
How does a person establish that someone is a member of a limited liability partnership? There will be a list at the registrar's office, but those concerned are not being asked in this subsection to look at that list. Indeed, they are allowed a more generous interpretation; namely, a belief. However, when we turn to subsection (3), which is where a partner has ceased to be a partner, the third party is supposed to consult the registrar to make sure that the person with whom he is dealing, and whose word he is about to rely on, is still a member of the partnership.
This is a very odd dichotomy of systems to find within one clause of the Bill: we have the ordinary circumstances under which a person can act on the basis of reasonable belief; but if the person with whom he is dealing happens to have retired as a partner and he does not know, he will not be able to act on the basis of reasonable belief because a notice has been delivered to the registrar which he is supposed to have seen. I find that an odd combination. I think that it ought to be made consistent by requiring that a limited liability partnership has at its offices a list of members which includes any restrictions on the ability of those members to bind the partnership. I hope that that is what these two amendments achieve, but I should not be at all surprised to be told that they do not achieve that effect.
Amendment No. 14 requires the list to be kept and for data to be held as to how each member may be able to bind the partnership. In a big accountancy partnership, this is likely to be quite fluid and quite detailed. Different members will have different capacities. It is not something which would easily be held by a registrar. My view is that it is quite sufficient if it is held at the partnership. It also then becomes something which is easily and commonly available to anyone dealing with that partnership and something which under Clause 6(2)(b) he might reasonably be supposed to have consulted in coming to the belief that a person was entitled to act for the partnership on the particular matter that he was discussing with that person.
Amendment No. 25 constitutes another way of looking at this matter. If we are to have Clause 6(3) as it is at present, it should not be possible for this third party access, which relies on dealing with someone, to be cut off at a moment's notice just because a document has been delivered to some remote registrar. There must be a time delay. If someone is to have the whole basis of his or her dealings with a firm regulated by what has been filed with a registrar, he must be sure that if he looked at the information the registrar had a
Therefore, the proposal in Amendment No. 25 is that if the Government insist on this dichotomy, there must at least be some protection for third parties so that they do not continually have to go back and forwards to the registrar. As I say, I have difficulties with that concept. A list at the limited liability partnership's offices would be commonly available to people to use under subsections (2) and (3) of Clause 6. We would then have just one method of establishing whether a person was entitled to bind the partnership. However, I do not lay any great store by the wording that I have chosen to achieve either of the aims I have mentioned.
The noble Lord, Lord McIntosh, will know that my particular interest in this clause comes from a wish to see this Bill in a form which can be used to fund venture capital funds, which are commonly made up of a group of institutions or rich individuals and a single managing partner. We need to find a practical way of informing a member of the public who is about to deal with someone who is a member of such a limited liability partnership that an individual may not be entitled to bind the partnership in all respects. That member will have an active role in the management of the partnership but it will not be the universal role that the managing partner would take. He or she would not, for instance, be authorised to make investments on behalf of the partnership.
As I said, the big accountancy partnerships commonly have great variations in what an individual partner can do. From my discussions with them it would appear that if there is an easy way in which they can make that information available in a standard form that does not involve having to do it through a registrar, they would feel happy with such a change to the Bill. I look forward to what the Minister may say on these points. I beg to move.
Lord McIntosh of Haringey: I hope that there is less difference between us on this matter than I had originally suspected. I am grateful to the noble Lord for discussing Amendment No. 25 with Amendment No. 14. I had not recorded that provision in the groupings. I hope that he will forgive me if I say that there is a difficulty here in that he keeps referring to Clause 6 of the Bill as it stands; I have tabled amendments which seek to make substantial changes to Clause 6. I have sent the noble Lord a marked copy of the Bill showing the effect of those changes. I believe, and hope, that the changes that we seek to make to Clause 6 of the Bill--which, of course, we cannot debate yet--will address some of the points that the noble Lord makes.
My understanding has been that the intention behind Amendment No. 14 is to make it easier to allow for "passive" members of a firm, who will not bind the
Clause 6--this is absolutely fundamental to the Bill--determines that all members are agents of the entity. I understand the concern that a passive member may, inadvertently or otherwise, bind the limited liability partnership when it may not wish to be bound. However, the amendments that we are discussing would provide poorer protection for the third party than we intend.
As I said, agency is fundamental to the principles of a limited liability partnership. It is a necessary protection for creditors that their position should not vary depending on which member they deal with, unless they know that a member does not have authority to act in a particular matter, which is, of course, what our proposed new drafting of Clause 6 allows for. We do not believe that this is an unreasonable requirement--the third party should not be expected to be pro-active; in other words, to go and search the register in order to establish the authority or otherwise of a member. It would, in any case, be possible for the members of an LLP to safeguard their position further by contractually agreeing that a fellow member will not take any action which would bind the firm, and so provide that a member would be contractually liable to the firm if he breached that position.
I believe that Amendment No. 25 expresses a concern that a passive member may, inadvertently or otherwise, bind the limited liability partnership when it may not wish to be bound. However, as I said, agency is fundamental to the principles of a limited liability partnership. We think that it is far more important that the member should have the responsibility of saying to the person with whom he is dealing that he is a member of the partnership, rather than requiring the person outside to refer to the list in the registered office.
The noble Lord said that although third parties are not expected to be pro-active in establishing the authority or otherwise of a member, they are expected to be pro-active in discovering whether someone is an ex-member. We believe the need for this apparent disparity to be clear when one imagines the situation in which a third party may be dealing with an ex-member of a limited liability partnership. If the ex-member was purporting to the third party that he was still a member of the firm, he would be being dishonest, presumably for his own gain. The question here is whether it is right that a limited liability partnership should be bound by the ex-member's actions in such circumstances. We concluded that the limited liability partnership should not be so bound. It would create a risk that any ex-member purporting still to be a member of an LLP could bind that firm by his actions. However, in the situation where a third party is dealing with a bona fide member of an LLP, it is right that the firm should be bound by its member's actions unless the third party is told the extent, or otherwise, of that member's authority.
The noble Lord proposes a "cooling-off" period of 21 days during which an ex-member may still be treated as a member by a third party if he so claims himself to be. I think that that is unfair. The firm can have no control over a person once that person has ceased to be a member and any "cooling-off" period would, in practice, give carte blanche to an ex-member to undertake any act in the name of his old firm. I still hope and believe that we are not that far apart on this issue provided it is understood that the fundamental principle of the Bill is agency; in other words, interaction between the members of the limited liability partnership.
("( ) Subject to any agreement with the other members to the contrary, a member of a limited liability partnership may cease to be a member on giving not less than 28 days notice to the limited liability partnership.").
"A person may cease to be a member of a limited liability partnership (as well as by death or dissolution) in accordance with an agreement with the other members".
Presumably that agreement can either be a membership agreement which specifies the circumstances in which a member can retire, or it could
be an ad hoc agreement when one member wishes to go and the other members consent to his or her going. But what is the situation if there is no agreement which allows a member to retire and the other members do not consent to that specific member going? That member will be locked into a business, perhaps for life, in which he or she no longer wishes to participate. That cannot be right.
Page 2, line 38, at end insert--
("( ) A limited liability partnership shall maintain at its registered office a current list of the members of the partnership which shall include an explicit description of any limitations on the authority of each member to act for the limited liability partnership in any matter.").
"to be a member of the limited liability partnership".
There will be legal precedents that I do not pretend to be expert in as to what substance lies behind "belief", and that is what I am addressing in Amendment No. 14.
5.30 p.m.
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