Introduction

52. One of the principal safeguards proposed for those dealing with LLPs is the public filing of financial and other information, along the lines of equivalent requirements on limited liability companies, so that an informed judgement can be made about a firm's financial standing. An LLP is therefore to be required to file -

• an incorporation document, updated by way of regular returns of any material changes
• audited accounts omitting information which for a company would be of interest primarily to shareholders rather than actual or potential creditors.

53. Volume 2 of the 1997 paper set out at length detailed proposals for the accounting requirements for LLP, which by and large reflected those for limited companies. As the DTI summary of responses records, there are some areas of remaining controversy, arising from dispute as to the relevance to the particular circumstances of LLPs and their members of requirements designed for different entities.[81] A number of points of technical detail have also been raised, some of which we list in the Annex.

General

54. In response to the 1997 paper, some respondents expressed reservations about the value in principle of public financial disclosure, questioning whether it offered any real measure of protection to creditors. Arthur Andersen suggested that third parties seeking to make a judgement about the financial standing of an LLP could benefit, as they may do now, from private disclosure.[82] The RICS feared that disclosure could damage small local firms, and proposed instead an annual "financial health" statement. Although repeating these anxieties the second time around, the Institute has "revisited" its earlier view and accepts the principle of disclosure of financial information equivalent to but no greater than that imposed on private limited companies.[83] In 1997 the Law Society considered it "unlikely that clients of an LLP will derive any real benefit from the public filing of the LLPs audited accounts".[84] In oral evidence to us, the society's witness expressed continued scepticism as to the value to clients or others of the public filing of accounts — "I do not think clients are particularly interested in the accounting side of their professional advisers".[85] The BMA also noted in its 1998 response that filing would give health authorities access to information on the profitability of a particular practice.[86] In broad terms, however, it has been accepted that financial disclosure and public registration is a fair price to pay for the benefits of limited liability.[87] It is noteworthy that the absence of any comparable disclosure provisions from the Jersey LLP law was one of the principal criticisms of that law. Many of the larger legal and accountancy partnerships already publish summary financial information. While there are a number of matters of detail, which raise real issues of policy, we endorse the broad principle that LLPs and their members should be required to disclose equivalent financial information to that provided by companies, except where it would be of interest exclusively to shareholders.

Partnership agreement

55. A limited company is required under the 1985 Act to place in the public domain its articles of association, laid out in a standard format. Draft Regulation 6.1.f. establishes that reference in the 1985 Act to the articles of association of a company should be construed as references to a partnership agreement, suggesting at first blush that this agreement would have to be filed. That is not however the intention. Regulation 3 sets out at length the requirements for incorporation which call only for an incorporation document and a registered office address. Many respondents have emphasised the importance to prospective LLP members of the privacy of the partnership agreement, one of the key principles of the LLP being that its internal governance should be a matter for its members. As a result, some suggested that the 1985 Act should be construed without any implied reference to the partnership agreement.[88]

56. The privacy of the partnership agreement is founded on the presumption that matters of the internal management of the LLP, the relations between its members and in particular agreements on the distribution of profits are of no use or legitimate interest to third parties.[89] That is by no means a foregone conclusion. We note for example that in response to the 1997 paper ACCA suggested that an LLP should file a "partnership deed", as containing information which might be useful to those dealing with the firm "such as the particular rights and duties of members and any limitations on their authority". If not in such a deed, ACCA recommended that the firm's profit - sharing agreement should also be filed.[90] In its 1998 submission, ACCA however opposed the filing of the whole of the partnership agreement "since the confidentiality of the agreement is intended to be one of the key features of the LLP".[91] In oral evidence, Mr Brace of ACCA suggested that filing of the partnership agreement "would not add very much to the structure" since an obligation to file it would probably lead members to remove from it all but "the barest minimum" of information.[92] While no doubt a realistic if sceptical assessment, it is hardly persuasive: any more than the argument that it would be an administrative nuisance to file amendments to the agreement.

57. We note that KPMG's response to the 1998 Paper suggests that, while there is no need for the agreement to be on public record, there should at least be evidence that a valid agreement exists.[93] Mr Banks gave evidence to the effect that there were in his experience many partnerships without a valid agreement.[94] The Law Society noted that an LLP will be under no obligation to have a partnership agreement at all.[95] If there is no partnership agreement the 1890 Act provides outline default arrangements; but these do not purport to replace an agreement. At the very least the certified existence of a valid agreement could usefully form part of the requirements for incorporation. It would be wrong for a third party to deal with an LLP whose members had failed to undertake even that minimum amount of prudent housekeeping. We recommend a statutory requirement, enforced as appropriate, for a valid agreement between the members of an LLP.

58. Beyond that, the question remains as to whether there are some matters contained within a typical partnership agreement which, even if primarily of concern to the proprietors (ie the members themselves), are of sufficient potential significance to a third party as to merit public disclosure. The standard texts on partnership law list a number of usual clauses in such agreements, including the powers and duties of partners and the way in which partnership capital is to be handled. From evidence given to us on the rather variable standards of internal management of partnerships, we are persuaded that there is a case for at least the outlines of an LLP's management structure to be publicly disclosed, so that those contracting with it can have a minimum level of reassurance as to the nature of the organisation with which they are dealing and the position within it of the individuals with whom they propose to do business. Given that the LLP itself is to be a body corporate with unlimited capacity, and that the nature of the beast can only be discovered from the terms of the agreement between its members, it is not unreasonable that the duty of disclosure should lead to some greater openness on how its business is conducted. We therefore recommend that consideration be given to how best to provide for public filing of such information contained in LLP partnership agreements as might reasonably be of valid interest to those doing business with it, such as management and certain financial arrangements.

Reports to registrar

59. Draft Regulation 4 provides for an annual update of the information provided in the incorporation document, and for notice of changes, including changes in the name or residential address of a member, to be sent within 14 days of the change. Several witnesses complained that for LLPs with several hundred members this would be a major administrative headache, and suggested either inclusion of the revised details in the annual update, or at least a longer period before such changes had to be notified.[96] PwC for example described it as a "very significant" administrative burden, since in one year 100 members might join, another 100 leave, 150 move house and 10 change names on marriage or divorce.[97] We have little sympathy with this. It will not be a burden on most LLPs. If there is an administrative burden on multi - member LLPs, it is one of their own making. While we would be prepared to accept the case for a monthly return, we cannot think that a properly managed LLP should find it difficult to have an up-to-date list of the names and addresses of its members.

Residential address

60. There was considerable resistance in 1997 to the proposal that the incorporation document should contain the usual residential address of each member of an LLP, on the grounds that it presented a needless threat to the personal security and privacy of professionals in areas such as insolvency and litigation where personal threats were not uncommon, without providing any useful information to third parties which could not if required be obtained in any event through the legal process. At the time of the consultation, DTI was consulting on the equivalent obligation for company directors. The Government has now announced that it has decided to maintain that requirement, and so that it will be applied to LLP members.[98] While we have some sympathy with the concerns of individual LLP members, we can see no good case for them to be treated more favourably than company directors in respect of the publication of residential addresses.

Naming

61. There are three points of detail raised in connection with the naming of LLPs which raise issues of more than technical concern.

(i)   Under draft Regulation 3.4(1), the name of an LLP must end with either the phrase "limited liability partnership" or the "abbreviation" (in fact an acronym) "llp", or their Welsh equivalents. ICSA raised the inelegance of the coinage of "llp" and its similarity to "11p (eleven pence)".[99] It is noteworthy that throughout the consultation papers and elsewhere, the accepted acronym has been in the upper case, as "LLP". Such use of the upper case is perhaps out of favour, and the public is now well used to "plc". Nevertheless, given the likelihood that thousands of these new bodies may soon be in circulation, it is a matter of more than secondary concern as to how they should by known. We recommend that further consideration be given to the use of LLP as the statutory acronym.

(ii)   Draft Regulation 3(5) excludes the use by an LLP of a name already held by a limited liability company. It is suggested that this is an undue restraint on those partnerships who have for example an incorporated service company of the same name.[100] So long as the Registrar is satisfied that efforts are not being made to deceive third parties, by trading on a separate entity's name and reputation, some latitude should be permitted to permit limited companies and LLPs to share a name.

(iii)   A point, not raised so far as we are aware in responses, concerns the position of LLPs in overseas jurisdictions and how they may legitimately be entitled. Draft Regulation 3.8 establishes a penalty for trading as an LLP member unless duly incorporated. There are already US state registered LLPs operating in the UK, and there may in future be others, from Jersey or elsewhere. This may be a matter which requires addressing under regulations which may eventually be made under Clause 13 of the draft Bill. We consider that overseas - registered LLPs should be permitted to carry on business under whatever title or contraction is in common use, so long as some indication is given as to the jurisdiction of registration.

Highest - paid members

62. The 1997 document proposed that, as an equivalent to the disclosure by limited companies of the aggregate and individual pay of directors, LLPs should be obliged to disclose the aggregate of the profit attributable to its members, and the amount attributable to the "highest paid" member. The Government's 1998 proposals were not explicitly set out in the explanatory notes, but are contained in a proposed paragraph 56A Particulars of members of Schedule 4 to the 1985 Act.[101] Where profit for a year exceeds £200,000, "the amount of that profit attributable to the member with the largest share of the profits shall be stated". This provision has been roundly criticised, as unnecessarily intrusive into the internal affairs of an LLP and of no value to creditors. Deloittes suggested that such information was designed to satisfy public curiosity: ICAS that it was a case of public nosiness. Criticism of such disclosure in principle and in detail has continued. The Law Society told us

"Our view is that it is not really a matter for creditor protection. It may be something which is of general interest and public interest possibly ....".[102]

 The APP considered the requirement "unnecessary and irrelevant to creditors".[103] The City of London Law Society noted that a company was not obliged to disclose which of its shareholders received the largest share of the profits. If it were retained, a number of clarifications were called for, and a raising of the disclosure threshold to allow for the conflation in drawings by a member of the equivalent of salary and dividend.

63. We are not persuaded that there are such differences between LLPs and limited companies as to render disclosure of member withdrawals irrelevant to creditors. Creditors may be thought to have a similar interest to those of shareholders, in satisfying themselves that neither aggregate nor individual drawings are excessive in relation to recorded and projected income. Indeed, the absence of any capital maintenance requirement might be thought to make it more rather than less desirable. The willingness or otherwise of members to forego drawings so as to protect or build up an LLP's assets and trading capital could very well be of interest to those doing business. The knowledge that there will be disclosure of such information, which will be closely studied by corporate and private clients, and by banks and other creditors, as well as journalists, may well have a salutary effect on any tendency to extravagant withdrawals, which may in turn prove not unwelcome to a number of less richly rewarded LLP members. We also note that paragraph 56A does not specify that the identity of the member with the highest drawings should be revealed, merely the largest sum withdrawn. There does seem to be some legitimate interest in publication of details of drawings in bands of, say, £10,000, rather than simply the aggregate drawings provided for under paragraph 37A Members interests. This need not require identification of members within a band of drawings. An LLP with three members in which the senior member — as might be a senior partner — drew so much more than the other partners could reasonably ring alarm bells in the minds of potential creditors. Listed companies are obliged to provide full disclosure of directors' emoluments. Requirements for unlisted companies are reflected in the proposals for LLPs. We therefore see no reason for the Department to revisit the issue of disclosure of members' drawings, and consider that the level of disclosure required should be no lower than is presently proposed. We also recommend that the disclosure provisions include information in bands on the levels of withdrawals by members.

Accounting conventions

64. Some respondents to the 1997 paper raised practical issues of accounting practice which require resolution, either through amendments to the draft Regulations, or in many cases through accounting conventions to be developed and enforced through professional practice instructions from the statutory bodies. A number of respondents raised the difficulties in giving a "true and fair view" of an LLP's finances, which in the case of professional partnerships would have to include the question of equity as between the members;[104] the huge potential liabilities represented by annuities to retired partners/members;[105] the desirability of accounting for capital or extraordinary expenditure over several years; and other similar issues. There has also been a certain amount of discussion on the valuation of work in progress. The 1998 Finance Act removed the rather generous "cash basis" on which some partnership profits were taxed: as a result, Mr Llewellyn, Deloitte & Touche's expert in the area, described the matter as a "non - issue".[106] While these are plainly matters for professional guidance, possibly requiring the development of new accounting conventions, they are rather more than technical matters. Any divergence from equivalent accounting conventions applicable to the accounts of limited liability companies should be explicitly set out in the accounts of LLPs. The authorities should give consideration to the case for new accounting conventions to be applied, which should be put out for wide consultation. Given that a number of audit firms may take on LLP status, it is self-evidently important that the conventions to be applied to the auditing of their accounts should not only be fair but be seen to be fair.

Small firm exemptions

65. We were heartened to hear evidence to suggest that LLP status might be attractive to a wide range of smaller partnerships and even smaller limited liability companies.[107] It is not wholly clear to us how the smaller companies accounting exemptions under the 1985 Act will be applied to LLPs. Some of the exemptions may not be appropriate for LLPs: and there are obvious difficulties in definition when dealing with an entity which could as logically be quantified in terms of its members as of employees or turnover. We would welcome production of a full explanation of the proposed scope of the simplified accounting requirements to be applied to small LLPs .

Omissions

66. There are at least three significant matters which have been raised in evidence, where it is unclear how far disapplication of provisions of the 1985 Act has been deliberate or accidental.

(a)   appointment etc of auditors: Chapter V of Part XI of the 1985 Act is neither expressly disapplied nor applied. This is generally assumed to be an error. The issue of how LLPs are to appoint auditors, particularly those who are to audit the statutorily laid accounts of what may well be a number of the largest audit practices, is a sensitive one.[108] We will be examining the Department's proposals for application of Chapter V of Part XI of the 1985 Act with care.

(b)   Merger accounting: Paragraphs 10 and 11 of Schedule 4A to the 1985 Act are expressly disapplied, thereby ruling out for LLPs the possibility of merger accounting as introduced by the 1989 Companies Act. Given the likelihood that LLPs will want to merge, and the potential liabilities which would arise if such mergers were treated as acquisitions, it is a matter of importance. The APP suggested — perhaps optimistically — that the disapplication had been inadvertent, and warned that if it were maintained the take - up of LLP status would be "severely reduced".[109] Given that the facility for merger accounting exists for companies, subject to rules, the onus is on the Department to justify any disapplication to LLPs.

(c)   Revaluation reserve: Paragraph 34 of Schedule 4 to the 1985 Act is disapplied, thus apparently preventing creation of a revaluation reserve. The LSCA note that a surplus arising from revaluation of fixed assets will have to be credited somewhere on the accounts.[110] In the absence of a capital maintenance requirement, it is clear that any provision for a revaluation reserve would require modification: but it remains unclear how such surpluses are to be treated.

There are a number of other minor but not insignificant matters which have been raised in relation to Schedule 2, some of which we list in the Annex. Unless this and other Schedules are included in the Bill, there will be no opportunity for formal Parliamentary scrutiny. Whatever decision is taken we intend to examine the next set of proposals.

82  1997, No. 98 Back

83  Ev, p75: Qq201ff Back

84  1997, 39, para 2.3 Back

85  Q182 Back

86  1998, 44 Back

87  See 1998, VI, 10 for DTI summary Back

88  Ev, p19, 3.3.2.a.iii: p67 Back

89  Q59 Back

90  1997, Q3 Back

91  Ev, p, 57, 2.2 Back

92  Qq155 - 7 Back

93  1998, 5.1 Back

94  Q69:Also Lindley and Banks, p 167, where a well drawn agreement is described as indispensable.  Back

95  Ev, p67,4 Back

96  Ev, p3.b.v: Ev, p2 Back

97  PWC, p8: also KPMG, 6.5 Back

98  1998, VI, 9 Back

99  1998, 35 Back

100  Ev, p18, 3.1.(b) Back

101  1998, IV, p35 Back

102  Q182: Ev, p7 Back

103  Ev, p18, 2.d.iv Back

104  Eg Ev, p16 Back

105  Qq 179, 201 etc Back

106  Q61: but see also KPMG 6.16 Back

107  Eg Qq4: 108ff: 218 etc: Ev, p84 2b Back

108  We note that the last set of accounts of KPMG plc were audited by Grant Thornton. Back

109  Ev, p17, 3.2.c: p40 (ICAEW): also KPMG, 6.19: E&Y, 3.3 Back

110  LSCA, Appendix, 10: also E&Y, 6.4 Back