Overall view

(a)  We would not contemplate giving a clean bill of health to a legislative proposal intended to confer favours on one profession or groups of professionals , simply as a response to a threat that they would take their business elsewhere. But, whatever our misgivings as to some of the circumstances surrounding its conception and birth, we are satisfied that in broad terms , and subject to adequate measures of consumer protection, the proposal to introduce limited liability partnerships is well-founded (paragraph 29).

Progress of legislative proposals

(b)  From our scrutiny of the legislative proposals on the creation of LLPs, we consider that, while unlikely to be politically controversial, the Bill merits a Second Reading on the floor of the House; that the committee stage can be expected to be reasonably brief; and that the draft Regulations will require further examination by this Committee before being laid, at which point they will require affirmative resolution. Whatever the perceived urgency in getting the Bill onto the statute book, the due process of parliamentary scrutiny must not be artificially abbreviated (paragraph 4).

Form of legislation

(c)  There does not at first sight seem to be any overriding reason why the Regulations and schedules should not be incorporated into the Bill. The only persuasive argument in favour of retaining the currently proposed division between primary and secondary legislation is the perceived degree of urgency in introduction of the legislation. Revised drafts of the proposed secondary legislation would have to be made publicly available as soon as possible, and in sufficient time to enable outside bodies to offer further comment, and for this Committee to examine them. We would however far prefer that the detailed secondary legislation proposed be incorporated in the Bill. If Ministers wish to maintain the present split between primary and secondary legislation for reasons of the time required for the preparation of the latter, they will have to explain to Parliament the nature and origin of the deadlines to which they are working for Royal Assent and implementation. They will have to be very persuasive to justify the extensive use of secondary legislation as proposed (paragraphs 81 and 82).

Provision of information

(d)  If, as we hope, there is more draft legislation in the offing, of greater complexity and controversy, the strictures of the Modernisation Committee in its 1997 Report on the giving of sufficient notice to Committees must be observed, if the work programmes of committees are not to be unacceptably disrupted. If the Government is serious about wanting to give Parliament and its committees a greater and more constructive legislative role, it must ensure that draft Bills are accompanied or preceded by a full description of the policy background, and of options considered, along the lines of a White Paper. We recommend that departments include in the paper accompanying a draft Bill an explicit indication to potential respondents to the consultation process that copies of their responses will, unless confidentiality is requested, be made immediately available to the relevant select committee. In order to increase accessibility, we recommend that consideration be given to placing the text of responses to draft legislative proposals on the Internet (paragraph 4).

DTI presentation

(e)  The general impression conveyed by the DTI papers, deliberately or not, has been that the proposal is a technical measure intended to bring British commercial law up to date. In our view, DTI Ministers of both administrations have failed to set out a convincing and detailed case for the introduction, without evidence of much prior analysis, of potentially far-reaching legislation. While we believe that there is a good case to be made, it could and should have been more fully and openly exposed in departmental papers (paragraphs 5 and 6).

Other reviews  

(f)  The LLP proposal, which affects both the law of partnership and company law, and which would create an amalgam of the two, has neither emerged from nor been referred to either of the major reviews now underway. It is incumbent on DTI to ensure that the LLP proposal does not limit the scope of the outcome of the reviews underway in company law and partnership law, and that the LLP regime is designed so far as possible to be able to reflect the sort of changes to company and partnership law which may emerge from the reviews (paragraph 10).

Problem

(g)  The fundamental problem which the proposed legislation addresses is the possibility that the assets of a partnership, and the personal assets of each and every partner, can be put at risk as a result of the negligence or incompetence of a single partner, over which the other partners have no control and of which they have no knowledge. We are satisfied that there is a real problem which the legislation attempts to address (paragraphs 12 and 15).

Urgency

(h)  Publication of an objective assessment of the consequences of major professional services firms registering as Jersey LLPs could help justify the relative fast-tracking of the proposed LLP legislation. We accept however that competition from other jurisdictions means that the real problems which require addressing cannot wait for much longer. By mid-1996 it was plain that the option of registration as a Jersey LLP was being very seriously considered by a number of the very large professional partnerships. It was this prospect, combined with the perceived possibility that a successful mega-claim could in due course precipitate the failure of a major firm, that led to the November 1996 decision of the then Secretary of State to bring forward LLP legislation in the UK. Whether Parliament and Ministers like it or not, what is not in doubt is the real possibility of British firms registering offshore; if the Jersey statute proves unattractive there may well be other offshore options on offer (paragraphs 16 and 26).

Quality of work

(i)  It is essential that the introduction of a new corporate vehicle limiting the liability of individual professionals should lead not to a slackening but to an intensification of efforts already underway in many professions to minimise negligent work and to produce a more realistic understanding of what can reasonably be expected from a professional adviser (paragraph 17).

Joint and several liability

(j)  The emergence of the limited liability partnership proposal is therefore a direct consequence of the Law Commission's rejection of reform of joint and several liability, and in particular of the introduction of proportionate liability. There are those who still actively seek the introduction of proportionate liability and who consider that the proposed introduction of limited liability partnerships is an interim solution. Meanwhile, LLPs as well as partnerships will still feel the full effect of their exposure to joint and several liability (paragraphs 21 and 22).

Demand

(k)  Some professionals are evidently satisfied that what is often loosely described as the "partnership ethos" can be maintained within a different legal form: but the reluctance of most professional partnerships to incorporate leaves no doubt that there is now, and presumably has long been, a demand, perhaps not until recently fully articulated, for a new vehicle (paragraph 23).

Overseas experience

(l)  Given that LLPs have been in operation in business environments similar to that of the UK for some years, it would be helpful for Parliament to have available an analysis of the lessons learned in practice from US and other LLPs, equivalent to the detailed consideration given by the Law Commission to experience in comparable jurisdictions in its review of the law on joint and several liability; we recommend that such a paper be provided (paragraph 25).

Eligibility

(m)  Our interpretation of the responses to the 1998 paper is that the weight of informed opinion has swung firmly against any restriction on eligibility. If there were an overriding reason to support restriction of eligibility to regulated professions either permanently or for the "inaugural phase" referred to by the Department, we are confident that the problems could be overcome. We can see no good reason to restrict eligibility for LLP status to regulated professions, nor for the sort of two-stage process of opening up LLPs apparently envisaged. We have some sympathy with the sense of anxiety at launching a new corporate vehicle more or less explicitly provided for one relatively narrow and circumscribed class of business into the rough seas of all business activities. If Ministers are unwilling to do this, however, it must be questioned if the vehicle should be launched at all. We recommend that there be no restrictions on eligibility for limited liability partnerships (paragraphs 33 to 38).

Professional indemnity insurance

(n)  In broad terms, as is recognised by the proposed terms to be met for recognition as a regulatory body, a third party's sense of reassurance in dealing with professionals may have as much to do with confidence in their level of professional indemnity insurance as with the maintenance of professional integrity and competence. Those professionals now required to take out professional indemnity insurance will continue to be under that obligation, under whatever corporate regime they trade. We would welcome specific assurances from those professions currently requiring professional indemnity insurance that required levels will be at least maintained and preferably increased for those operating through LLPs (paragraphs 35 to 37).

Regulation

(o)  The gradual erosion of some of the traditional ethos and practices represented by professionals acting in partnerships, and of the public perception of professions as having an ethical and even vocational significance, lends weight to the move towards introduction of a more independent and transparent system of professional regulation (paragraph 39).

Funding

(p)  We are 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. There is much to be said for making levels of creditor protection in relation to an LLP better, rather than merely no worse, than those in partnerships or companies. We recommend consideration of the introduction of a voluntary scheme of minimum funding in the event of insolvency, to be disclosed as part of the incorporation process in the first instance and thereafter in the annual returns to be made (paragraphs 45 and 46).

Insolvency

(q)   A balance has to be struck between due protection for creditors, and in particular for involuntary creditors, and providing sufficient incentive to members of an LLP not to desert a firm facing difficulties. The detailed provisions for clawback may well require some adjustment: but we share the view of many that some such provision as is set out in s214A, equivalent to the payment of unlawful dividends, is indeed required. We recommend that the Department consider the case for a statutory provision to enable the court to pursue money transferred to a spouse or others as a means of avoiding clawback. We look forward to the production of revised proposals on insolvency which retain the basic principle of parity with the companies regime, combined with the clear message that members of an LLP have responsibilities towards potential creditors which if necessary can and will be enforced (paragraphs 47 and 51).

Disclosure

(r)  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 (paragraph 54).

Agreement

(s)  We recommend a statutory requirement, enforced as appropriate , for a valid agreement between the members of an LLP. We 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 (paragraphs 57 and 58).

Returns

(t)  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. 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 (paragraphs 59 and 60).

Names

(u)  We recommend that further consideration be given to the use of LLP as the statutory acronym; that some latitude should be permitted to permit limited companies and LLPs to share a name; and 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 (paragraph 61).

Earnings

(v)  The knowledge that there will be disclosure of 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 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 (paragraph 63).

Accounting conventions

(w)  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 (paragraph 64).

Simplified accounts

(x)  We would welcome production of a full explanation of the proposed scope of the simplified accounting requirements to be applied to small LLPs (paragraph 65).

Auditing

(y)  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. We will be examining the Department's proposals for application of Chapter V of Part XI of the 1985 Act with care (paragraph 66).

Merger accounting

(z)  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 (paragraph 66).

Taxation neutrality

(aa)  Unfortunately Clause 10 as drafted is almost self-evidently inadequate. It is desirable that the proposed extension to LLPs of the tax treatment currently afforded to partnerships be set out in sufficient detail to avoid any doubt as to which provisions are to apply, and to assist the legislature to arrive at a clear view as to whether there are any which should not apply (paragraph 68).

Overseas LLPs

(bb)  We seek a clearer exposition from the Government of its intentions on Clause 13, and on the Inland Revenue's views on the taxation of offshore and genuinely overseas LLPs (paragraph 70).

LLP management

(cc)  We do not favour the idea that members of an LLP should feel less fully responsible for the general affairs of the LLP, than they would be as partners in a partnership. It cannot be right that LLP members should have all the benefits of unregulated internal management and none of the penalties thereof (paragraph 73).

Disqualification

(dd)  A clarification would be helpful of whether disqualified directors are debarred from LLP membership, and disqualified LLP members are ipso facto disqualified from being directors.

Employees

(ee)  The Department should set out the effect of the proposed legislation on employees, so as to satisfy Parliament that they would not be disadvantaged (paragraph 75).

Europe

(ff)  Parliament would be assisted by some assessment of the extent to which European law could bear on the proposed LLP, and the prospects for it being used as a vehicle by those outside the UK (paragraph 76).