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Baroness Buscombe: I wish to speak briefly to Amendment No. 16 and then move on to speak to Amendment No. 17. The noble Lord, Lord Goodhart, and I are seeking to achieve similar results here, albeit using different wording. In that sense I concur with much of what the noble Lord has already said as regards Clause 5 of the Bill. However, I shall repeat what I said during the Second Reading debate on the Bill; namely, as presently worded, the members of a limited liability partnership will be subject to company law or employment law if no specific provision is made in this clause to the contrary. That would radically alter the nature of the limited liability partnership.
I appreciate that the Government have sought to clarify this in part, certainly with Amendment No. 12. However, I believe that Amendment No. 17 deflects any possible confusion between whether members are employees or partners while enunciating, by reference to the Partnership Act 1890 and the rules of equity in common law applicable to partnerships, the partnership ethos we are endeavouring to maintain on the face of the Bill. Furthermore, as the noble Lord, Lord Goodhart, has already said, we wish to recognise those areas that should be expressed in terms of default provisions modelled on Section 24 of the Partnership Act 1890; or, if not, we would appreciate the opportunity to review the draft regulations setting out those default provisions.
I shall refer briefly to the Minister's letter to me of 10th January 2000. He kindly clarified a number of issues, in particular in relation to Clause 5 of the Bill. He made it clear that there are a number of areas where the Government, through secondary legislation, would like to ensure that the relationship of the
members of an LLP is clarified: 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 for acting in the business of the LLP; the right to have access to books and records and decisions by a majority vote. In essence, we would appreciate some reassurance in relation to Clause 5 that such provisions will be set out in regulations. To that end, we would be grateful to have sight of those draft regulations before final decisions are made.
Lord Phillips of Sudbury: I should like to make one simple point. The Title of the Bill is thoroughly misleading unless the purport of one of these two amendments is accepted by the Government. The issue of ethos, as the noble Baroness, Lady Buscombe, called it, is crucial. I have been a member of a partnership for over 30 years and I must say to the House that the spirit of a partnership can in fact be far stronger and more effective than the dry, technical provisions of a limited company. For that reason I do not think that this is a minor matter and I agree entirely with my noble friend Lord Goodhart that the amendments are fundamentally important. I hope very much that the Government will listen to the point being made here.
Lord McIntosh of Haringey: I thought that we had covered the point of the Short Title of the Bill during the Second Reading debate. I believe that there are two ways in which the Title may be read. The first is that limited liability with the word "partnerships" tacitly held in brackets provides for limited liability to be applied to partnerships. The second is actual limited liability partnerships; namely, the entity that will be created by the Bill before us. That is a completely new entity embodying elements of a partnership and of a limited company.
However, I appreciate the force of the points that have been made from both of the Opposition Benches and I do not wish in any way to underestimate their importance. However, I must return to what I said in response to amendments tabled much earlier this afternoon. The point of the creation of a limited liability partnership is that it is a body corporate which is treated as a partnership only for tax purposes. In other words, in every other respect it is not a partnership. If the noble Lord, Lord Phillips, who told the Committee that he has been a partner for over 30 years, wishes to continue being a partner with unlimited liability, he is entirely free to do so. It is only because members of many partnerships have expressed a wish for limited liability that we have gone to the extent of putting the Bill forward. The only basis on which we can put the Bill forward is to say that, in return for the benefit of limited liability, a price has to be paid.
The price that has to be paid is the price of transparency and, in general, of the application of as many as possible of the rules applying to limited companies. If a director of a company or a partner in
a partnership does not like it, they are free not to do it. We are not imposing limited liability partnerships on anyone. We are trying to respond to a legitimate request and, at the same time, to protect the public who deal with these new business entities.The attempt to provide a default provision that applies partnership law seems to go against the principles that I set out earlier today, and set out, perhaps not entirely clearly, at Second Reading. If we look at the matter in terms of the professional advisers who will be relevant, I take it that it will be tax lawyers with experience of partnerships who will be advising LLPs, and in all other respects corporate lawyers will deal with the issues which LLPs raise. However, as these amendments are drafted, they would create substantial uncertainties in seeking to apply partnership law by default to a corporate body. We are applying the Companies Act provisions by regulations made under the Bill and the application of partnership law in general would lead to confusion as to how they would interact. For example, the rules for winding-up and insolvency for a company are entirely different from those for a partnership. That is why we have decided not to apply partnership law as a default.
After very considerable thought and after the steps that I described in relation to earlier amendments, we have decided that the most practical option is to have this set of default provisions in the regulations which would apply subject to any agreement, express or implied, between the members. In other words, they would come into effect if an agreement did not cover the point. The noble Baroness, Lady Buscombe, read out the list of areas which we propose to include; as indeed I did in response to an earlier amendment. I said that they are available on the website. They are. I shall take them off the website and send them in hard copy to everyone taking part in this debate, and by e-mail to the noble Lord, Lord Lucas, who does not like to see things in hard copy. He has proper concern for the forests of Scandinavia. Whether we can go further right now in providing drafts of the regulations, I do not know. We will certainly have them available before Royal Assent. But we are in the middle of consultation on them and it might be misleading to send draft regulations now. I will do my best. If we can get draft regulations to noble Lords before Report stage we will certainly do so. I can confirm that they cover the points made. I can confirm that we intend that they should be applied and that they should be available to be debated by Parliament as early as possible. I cannot agree with the noble Lord, Lord Goodhart, that they should be on the face of the Bill. Indeed, the noble Baroness, Lady Buscombe, recognised that she might not be able to persuade us of that. We think it is better to provide flexibility for the amendments in case they need to be amended after the Bill has been enacted. A limited liability partnership is not a partnership, and it would be wrong to restrict its future evolution.
I want to say a few words about good faith, as the noble Lord, Lord Goodhart, quite legitimately referred to that. Although he described what I said at Second Reading as "fanciful", nevertheless I am going to have to repeat it. Even though no express duty of
good faith is included in the Bill, we believe that as a LLP is a body corporate and the members are agents, the courts would find that a fiduciary duty existed between members and the LLP. If the rules and principles of the Partnership Act were applied to LLPs and the courts were to find that a fiduciary duty existed between members and the LLP, it would mean that an individual member was faced with parallel fiduciary duties: duties that were owed to the LLP and duties owed to fellow members. In such an event the Bill would not be able to provide a mechanism to decide which duty would prevail, even when there was a conflict.That could result in particular difficulties with regard to the duty contained in the Partnership Act to account for private profits. To whom should the account be made; to the LLP or other members? There would be the potential for double jeopardy and the need to prioritise between the rights of the members and the rights of the LLP.
I know that I have not convinced the noble Lord, Lord Goodhart, on that point. Perhaps it is a subject that we can discuss between now and Report stage. But that is the considered view of the Government. It is also our considered view that we can best deal with these matters by regulation, as I suggested, rather than on the face of the Bill. I invite the noble Lord not to press his amendment.
6 p.m.
Lord Goodhart: I have to say that I find the Minister's response somewhat unsatisfactory. I am concerned particularly that the Government have approached this matter on the footing that a LLP is essentially a company similar to the Companies Act companies rather than anything which is in the nature of what we now know as a partnership. It seems to me that it would have been much better to approach the issue from the other direction, and to say that there are partnerships which need protection in the form of limited liability, and that that limited liability should be given to them in a way that does as little damage as possible to existing partnership law.
I accept that the provisions for the winding-up of partnerships are fundamentally inconsistent with the idea of limited liability and that one needs to incorporate the provisions from the Insolvency Act relating to winding-up. I accept also that, given the existence of limited liability, there has to be a great deal more transparency in connection with the financial information about the firm. But it does seem to me that there are a great many principles in partnership law which can, and should, be applied to relations, particularly to the relations between the members of an LLP. I think it is important to preserve what both the noble Baroness, Lady Buscombe, and my noble friend Lord Phillips said about the ethos of the partnership system. I fear very much that that will be lost when we come to LLPs.
I should say that the argument that flexibility is necessary in this case is not correct. It seems to me that what we are looking at is principles of partnership law
that have been established, at least since the Partnership Act 1890, and in many cases earlier. Those principles are well-established. It is easy to identify those which are appropriate to LLPs and to weed out those which are not. Certainly I would not expect to see the regulations which apply to parts of partnership law have any need of change. In that case it would have been appropriate for the Government to have introduced these default provisions on the face of the Bill rather than by way of regulation. There is of course a problem with timing. I can understand that it is not easy for the Government, having reached where they are, to go back and have a different approach. It would certainly be much easier for us if we were at least able to see what the Government are actually proposing and not merely what they are consulting about. That is why I regret that it is suggested that the draft regulations will not be available until possibly Royal Assent.Having said that, at this stage I shall certainly ask leave to withdraw the amendment. We shall have to consider whether, either in this or another form, the amendment should be brought back on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 6 [Members as agents]:
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