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Lord Phillips of Sudbury: My Lords, before the noble Lord sits down, with his great experience of litigation in this field, has he come across many cases of solicitors actually, as he put it, losing their shirt buttons, because I do not know of any?
Lord Goldsmith: My Lords, not solicitors, but I know of accountants who have come close to that. Outside the Chamber I could tell the noble Lord of one such case where the people concerned came close to having to hand in their shirts.
6.23 p.m.
Lord Goodhart: My Lords, I start by asking the Minister whether there is any truth in the rumour that the reason the Government have brought this Bill forward is that they are so concerned about the future of their public private partnership that they wish to incorporate it as a partnership of limited liability. But,
more seriously, I congratulate my noble friend Lord Sharman on a maiden speech which was not only remarkably well delivered but based on an enormous depth of experience. It makes it easy to see why he rose to the very top of his profession.As we have been told, work on this Bill started at the end of 1996 under the previous government and has been taken forward by the present Government. On behalf of my party I am happy to give this Bill tripartisan support--with the exception, of course, of my noble friend Lord Phillips of Sudbury.
I should perhaps begin with a declaration of a lack of interest. I am a member of the Bar. Barristers, of course, do not form partnerships. We cannot be liable for the negligence of other barristers, even if they are members of the same chambers. Therefore, I, like the noble Lord, Lord Goldsmith, am not affected by the Bill.
Looking at the matter from this semi-independent position we certainly accept the need for a Bill of this kind. There has been an enormous increase in litigation over allegations of professional negligence. That is not in itself a bad thing. People who suffer loss as a result of professional negligence are in principle as entitled to compensation as anyone who has been physically injured by a negligent driver. But the consequences can, and are now threatening to, get out of hand. We are now in a situation where the partners in a large international accountants firm can be made personally bankrupt because of the negligence of a colleague many of them may never have met. The people who are at risk are--I say this with all respect to my noble friend--not necessarily either incompetent, greedy or negligent.
This is not a hypothetical issue. In the ADT case--this is a matter of public knowledge--damages of £65 million were awarded against a leading firm of accountants for the negligence of one partner. That was well above the indemnity insurance cover of that firm, and the individual partners were threatened very actively with personal bankruptcy. An appeal was in the end settled for a smaller, but still large, sum.
The risk of bankruptcy has seriously damaging effects. People will not join partnerships, or partnerships will go offshore to places where they can limit their liability. Many other jurisdictions do now allow partnerships to convert into corporate bodies. Limited liability has for 150 years been an essential cornerstone of commerce and industry throughout the world. The reasons why we now have limited liability for business organisations apply equally to professional ones. Limited liability is not just a privilege; it is now an essential tool in the whole organisation of commerce.
I wish to discuss the genesis and content of this Bill in a little more detail. I recognise that the Government have consulted widely on the terms of the Bill. We have had an excellent report from the Select Committee on Trade and Industry in another place. The Government originally proposed that the Bill should apply only to members of regulated professions such as solicitors and chartered accountants. That limitation was
criticised in the course of the consultation. The Government accepted that criticism and I believe that they were right to do so. There is now no limitation on the type of business that can be carried on by an LLP.However, it seems to me that some issues of importance remain. I agree very much with the points made by the noble Lord, Lord Goldsmith, in that regard. It seems to me that the first issue here is whether too much of the Bill has been left to regulations. Much of the meat of the Bill, particularly in the accounting requirements and the insolvency provisions, is to be contained in regulations. The Trade and Industry Committee said that it would prefer these provisions to be in schedules to the Bill rather than in regulations. The Delegated Powers and Deregulation Committee in your Lordships' House, of which I am a member, accepted the Government's proposals to put these provisions in regulations. But it seems to me that this comes close to the borderline and the more I look at some aspects of this Bill the more doubtful I am whether the Delegated Powers Committee was not rather too lenient.
Most of the regulations will simply apply to LLPs the existing statutory rules which apply to companies incorporated under the Companies Act, but there will be power to modify that application. One particular modification contained in the draft regulations has been the subject of considerable debate in the course of discussions. The noble Baroness, Lady Buscombe, has already touched on this. Regulations will apply to LLPs Section 214 of the Insolvency Act 1986. That section makes company directors liable for wrongful trading; that is, the carrying on of business by people who know that the company is hopelessly insolvent. So far so good.
But Section 214 will be extended by the new Section 214A which will be created by the regulations and will apply only to LLPs. The result of that will be that members of LLPs will be liable for the debts of the LLP in circumstances where directors of an ordinary limited company would not be liable for the debts of that company. That may or may not be right. The Trade and Industry Committee agreed with that proposal; the Institute of Chartered Accountants strongly objects to it. Speaking for myself, I have not yet reached a final view on the issue.
But it is clearly an important issue which requires a proper debate in your Lordships' House. Regulations cannot be amended and therefore are not suitable for debate on detailed provisions such as Section 214A. I therefore ask the Government whether they are prepared to put the proposed Section 214A on to the face of the Bill. We could introduce an amendment to do that--we will do so if necessary--but it would be much better if the Government were prepared to do so.
The next issue--again this has been touched on by the noble Baroness--concerns the application of existing partnership law. The title of the Bill is misleading. The Bill does not allow partnerships to limit liability while continuing as partnerships. The Bill creates a new kind of corporate body into which some existing partnerships will convert.
Partnership law--on this point I very much agree with my noble friend Lord Phillips of Sudbury--has proved a flexible and effective way of carrying on certain kinds of business, particularly in the professions. It has two defects which will be cured by the Bill: one is unlimited liability and the other, which applies in England but not in Scotland, is the lack of separate legal personality.
The earlier draft of the Bill contained a provision that the neutral rights and duties of the members of an LLP should be governed, subject to the provisions of any agreement between the members, by the rules and principles which would apply if the law relating to partnerships applied to them. No such provision appears in the present Bill. I ask the Minister, why not?
Partnership law provides a useful and necessary default code on many matters not covered by an agreement. The noble Baroness gave a list of the issues which are covered by partnership law and would need to be covered in the case of LLPs. I would add the principle of the duty of partners to act with good faith towards each other, which is perhaps the central principle of the whole of partnership law. I very much hope that will continue to apply to LLPs. It seems to me that the relevant provisions in partnership law are much more appropriate for LLPs than the equivalent provisions in company law.
The Law Society and the Institute of Chartered Accountants are both concerned about the removal from the draft Bill of the provision to which I earlier referred. Unless the Government can produce a convincing reason to the contrary, I believe that the provision of the previous draft should be brought back.
I have two final points, both relating to the consequences of insolvency. The first concerns the importance of professional indemnity insurance, which provides an indemnity against liability for professional negligence. This means that the firm and its partners--other than the one or ones guilty of negligence--are not at risk of insolvency for liability within the cover provided by the insurance. A number of professions, including solicitors and chartered accountants, require indemnity insurance under their professional rules. But not all LLPs providing services will be covered by the rules. Of course, professional indemnity insurance can be very expensive and there may be a temptation to say, "Now that we have limited liability, let us save money by cutting back on insurance". That would be extremely unfortunate.
Self-regulation is best, but the Government should give themselves a reserve power to impose a professional indemnity insurance requirement on classes of LLPs which are not required to do so by a professional body or where the professional body's requirements are insufficient.
There is another problem. Professional indemnity insurance does not help the ordinary creditors of the
LLP or the partnership. At paragraph 45, the Trade and Industry Committee said:
- "We are none the less uneasy at the prospect of introduction of this new vehicle destitute of either minimum capital requirements or guarantees from members, and dependent on the perceived likelihood--or hope--that there will be some LLP assets available to creditors".
I am particularly concerned about the position of employees of LLPs. It is more difficult to state the problem than to provide the answer. I wonder whether, for example, the Government have considered the possibility that if the assets of an LLP are insufficient to meet in full debts due to or in respect of employees--which are preferential debts in insolvency law, and that includes four months' salary or wages--the members of the LLP should continue to be personally liable for that balance, even though their liability for other debts is limited. That is put forward merely as a suggestion, not as a firm proposal. The Government should look at such issues during the course of the Bill.
Having said that, I am happy to conclude by repeating our general welcome for this Bill in principle.
6.36 p.m.
Lord McIntosh of Haringey: My Lords, I am grateful to all noble Lords who have taken part in the debate. I am particularly happy to join in the congratulations given to the noble Lord, Lord Sharman, for an excellent maiden speech. It was not only well informed but delivered with almost no notes. That is the true test of a maiden speech. His speech was very largely in support of the Government. All maiden speeches should follow that rule.
I was slightly taken aback by the noble Lord, Lord Goodhart, saying that the title of the Bill was misleading. It depends on how one reads it. He read it as being a "Limited Liability for Partnerships Bill", whereas we read it as being a "Limited Liability Partnerships Bill"--in other words, a description of an entity which will be created as a result of the Bill. If we take our interpretation, on the whole it would be agreed that the short title of the Bill properly describes that new entity and, therefore, is not misleading.
The noble Baroness, Lady Buscombe, started by describing the Bill as unnecessarily complex. She then went on to list a whole range of things which she thought ought to be in the Bill because they were included in partnership law and appeared to be being dropped from partnership law. The noble Lord, Lord Goodhart, made the same point with a rather different emphasis.
There is no diminution of the responsibilities of partners in partnerships. We are attempting to create a new business entity which, in effect, combines the best of both worlds. It gives what everyone has acknowledged is the enormous privilege of limited
liability, but it demands in return many of the obligations--indeed almost all of the obligations--required of companies. It does so in such a way that everyone who has been consulted--and they have been not only professional firms and still less only large ones--believes it appropriate. If we were to include all the obligations of partnership as the noble Baroness, Lady Buscombe, would wish us to do, the Bill would be very much longer and more complex than it is now. I am not sure that we would achieve her objective--
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