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Lord Goodhart: My Lords, before the noble Lord, Lord Whitty, sits down, is it correct that the position will be that anybody who spends money in support of a specific candidate without the authority of the agent will be committing an offence? There is no possibility, therefore, of third-party spending being used to support a campaign in favour of a specific candidate; it can only be used by single-issue groups or others raising specific subjects rather than those supporting specific candidates.

Lord Whitty: My Lords, yes, in general terms. As in the example which the noble Lord, Lord Goodhart, spelt out of the Bowman case, there are implications as to which candidate one is for and which candidate one is against.

On Question, Motion agreed to.

Limited Liability Partnerships Bill [H.L.]

5.42 p.m.

Report received.

Clause 1 [Limited liability partnerships]:

Lord Goodhart moved Amendment No. 1:

("(5) The following provisions of the Partnership Act 1890 shall apply to limited liability partnerships--
(a) section 19,
(b) section 24,
(c) section 25,
(d) section 28,
(e) section 29,
(f) section 30,
(g) section 32,
(h) section 35.
(5A) For the purposes of subsection (5), the sections of the Partnership Act 1890 mentioned in that subsection shall apply as if--
(a) references to a firm or partnership were references to a limited liability partnership,
(b) references to a partner were references to a member of a limited liability partnership, and
(c) references to the dissolution of a partnership were references to the winding-up of a limited liability partnership.").

The noble Lord said: My Lords, I am afraid I am doing rather a lot of duty this afternoon and your Lordships will have to hear rather more of me than might have been wished.

I will need to take a few moments in discussing Amendment No. 1. That will at least make it unnecessary for me to speak at any length at any later

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stage of this debate. Amendment No. 1 raises an issue discussed at some length at both Second Reading and in Committee; that is, what is the nature of a limited liability partnership?

We on these Benches believe that a partnership is a simple, cheap and effective way of carrying on business. We also believe--though I do not speak for my noble friend Lord Phillips of Sudbury on this point--that it should be possible for partners to obtain the benefits of limited liability and avoid joint and several liability. We believe that a limited liability partnership should be just that; that is, a partnership with limited liability. Statute and common law rules should apply to limited liability partnerships so long as they are not inconsistent with limited liability and with the legal personality of an LLP.

That appears to have been the original view of the Government, because the first draft of the Bill provided that, subject to the terms of any agreement between them, the mutual rights and duties of the members of an LLP should be governed by the rules and principles of partnership law. I paraphrase the actual terms of the draft. By the time the Bill was published, that provision had been omitted.

In the debates at Second Reading and in Committee, it appeared that the Government were moving away from the concept of an LLP as a partnership with limited liability and were seeing it instead as what might be called a cheap and cheerful kind of corporate body with no real links with partnership law. That was most clearly expressed by the Minister in the Committee stage debate on 24th January at col. 1353, where he said that the Government's objective was to create a new entity,

    "which falls under company law as far as possible and changes company law as little as possible except in respect of taxation. It falls under partnership law as little as possible".

That worried us considerably, because we felt that the Government were throwing out the virtues of partnership law though it was unnecessary to do so in order to achieve the principal objective of obtaining limited liability. In Committee, therefore, I tabled, in the names of myself and my colleagues, an amendment in general terms which brought in the rules and principles of partnership law on the lines of the Government's original proposals in the Bill's first draft.

This time, we have produced a rather more detailed amendment which means that the members of an LLP continue to be bound by the statutory rules in the Partnership Act 1890, so far as is consistent with limited liability and the legal personality of the LLP, and subject to any agreement between the members. This amendment should be read with Amendment No. 8, which preserves the duty of good faith between the members. That is the most important of the common law rules governing partnerships. Amendment No. 8 will be spoken to in due course by my noble friend Lord Phillips.

Before going into detail, I should say that in February of this year the Government published a consultation paper about regulatory default

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provisions governing the relationship between members of LLPs. "Default provisions" means the provisions which apply if the agreement between the members does not exclude or alter them. I found the consultation document helpful, and indeed encouraging, because it suggests that the Government are intending to use their powers under Clause 14(c) of the Bill to bring back partnership principles to a considerable extent. The dispute therefore to some extent boils down to an argument as to whether the default provision should be on the face of the Bill or in regulations.

We have a clear preference for the default provisions being on the face of the Bill. The usual argument with regulations is the need for flexibility and quick action. But the statutory principles of partnership law have been established for 110 years, during which time they have seen little change and there has been little disagreement with the way in which they are stated. There is no reason why more flexibility or a sudden change is needed now. We therefore believe that these default provisions should be on the face of the Bill because they have been proved to work for more than a century and because they lay down what we see as the essential nature of LLPs as partnerships with limited liability.

Perhaps I may turn to this in a little more detail. The key section in the Partnership Act is Section 24. That contains a number of basic rules of the relationship between partners in a partnership. Those rules include the equal share of all partners in the capital and profits of the firm in the absence of any decision to the contrary; the right of all members to take part in the management of the firm; the fact that consent of all members of the partnership is needed for the introduction of a new member; the fact that ordinary business decisions are to be taken by the majority of the partners but no change in the nature of the business can be made without the consent of all partners; and again, that all partners are to have a right of access to the books of the partnership.

The Government, in their consultation paper, indicated their intention to bring back all of Section 24 for LLPs except for two minor provisions which I have no wish to see returning. They also propose to bring back Section 25, which provides that there shall be no expulsion of members unless the agreement so provides, and a modified version of Section 26, which enables a member to retire on notice to other members if the agreement does not provide otherwise. The Government are now proposing, by way of Amendment No. 5, to put this particular provision on the face of the Bill and not in regulations. We welcome that.

The paper also raises a question for discussion without indicating its own preference; namely, whether Sections 29 and 30 of the Partnership Act 1890 should be brought back. Section 29 requires partners to account to their firms for any benefit derived by them from the use of partnership property, the partnership name, or a business connection of the partnership without the consent of other partners. Section 30 requires partners to account to their firms

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for profits from any competing business carried on by them without the consent of the other partners. We strongly believe that both of these provisions should apply to LLPs in the same way as they now apply to partnerships.

I have to say that the consultation paper was doubtful about the need for a general duty of good faith. However, I certainly believe that such a duty is needed, although I shall leave it to my noble friend to speak on that issue.

As I see it, of the statutory provisions involved, the only remaining issue is the failure of the Bill to include any provision to replace Section 35 of the Partnership Act. Section 35 gives powers to the court to dissolve a partnership on various grounds, including the incapacity of a member to carry out his or her partnership obligations, or to dissolve a partnership because of various kinds of misconduct by a member other than the member who is seeking the dissolution.

Limited liability partnerships are basically a structure for business where it is intended that all the members shall be involved in the work. I believe that the Bill needs a formal provision to cover a situation where one member becomes permanently incapacitated or is guilty of serious misconduct in the management of the business. In substantial LLPs, undoubtedly the members' agreement will cover that kind of situation. However, there is a need for a default power to cover small LLPs where a formal agreement and proper advice on the terms which ought to go into a formal agreement are much less likely to be in place. It is essential to provide something of that kind for a body where all the members are normally working members.

The consultation paper considers, although without much enthusiasm, the possibility of introducing into LLPs something along the lines of Section 459 of the Companies Act 1985 which gives a minority shareholder the power to go to the court for various remedies, including the compulsory buy-out of his or her own shares if the business is being carried on in a manner unfairly prejudicial to him or her. I hope that the consultation will come to the conclusion that something of that kind is needed in the case of LLPs because I believe that it is required, although possibly in a simplified form. That would avoid the problems of time and cost that have been thrown up by Section 459. However, I believe that we also need something along the lines of Section 35 of the Partnership Act--not in an identical form because here I believe that we are less likely to be looking at dissolution than the continuation of the LLP on the basis of buying out a member who is incapacitated.

I believe that something of this kind should be included, as well as an extension of Section 459. Although in general I find the Government's position much more acceptable than it was previously, I hope that they will now be able to consider taking action along these lines. I beg to move.

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