TUESDAY 1 DECEMBER 1998

MR G WARD

  84. Good morning. Some people have been saying that this is really just a bit of an accountants' ramp. It was suggested that the LLP is a result of the profession's failure to get any change in joint and several liability, and that the passage of the Jersey law is being held over the Government as an alternative. If the British Government does not get its act together then the players will take their ball and bat and go to Jersey to play. Is that a gross misrepresentation of the high ideals and purposes of a distinguished respectable profession?

  (Mr Ward) I have heard those things said as well, but they were not said by the Institute of Chartered Accountants in England and Wales. As far as we were concerned, the possibility of limited liability legislation within Great Britain was introduced under the previous government, in fact not at our behest or as a result of any pressure which we put on to anybody at all. Once it was suggested, we actually saw the merits of it and we were happy to support it and endorse it.

  85. It is just a coincidence that some of the major players in the accountancy business, who will doubtless appear in the ranks of your membership, undertook this step to encourage a change in the law in Jersey which could in some people's minds, the cynics perhaps, be a gun at the head of the British Government.
  (Mr Ward) There were some individual member firms who certainly did take action as far as making representations to the legislature in Jersey was concerned in order to introduce limited liability partnerships there. As far as the Institute was concerned, to say that it was a coincidence I believe actually within the Government's publications they have said that the possibility of firms moving to Jersey was one of the things which was in their minds. To that extent then yes, that is right. Certainly our Institute did not apply any such pressure.

  86. In annex C of your memorandum you raise a number of points about who in effect are regarded as an LLP's officers. Is there a danger that members of an LLP are increasingly going to become employees and that designated members will become in effect the directors?
  (Mr Ward) I do not believe that there is a danger of that. The reason behind what we say here as far as designated members are concerned is because we are looking to make it administratively more easy for those who are dealing with the LLP to know who it is that they should be dealing with. We do not see the role of a designated member as being that of the role of a director in a company for example, issuing instructions to other members. It is more a point of reference.

  87. Do you think that will actually hold good in employment law testing?
  (Mr Ward) I am not an expert on employment law but certainly we have not been advised that it would not hold good.

  88. Is the point not that it is professional indemnity insurance levels set by a regulatory body which provide the principal safeguard for creditors now and that without that thought might have to be given again to bonds or guarantees or the equivalent?
  (Mr Ward) As a professional body we do require our members to take out professional indemnity insurance if they are going to be in public practice. That applies irrespective of the way in which they carry out that practice. Whether they are partnerships or whether they are limited liability companies, the same requirements from us do apply and I would expect that we would wish to apply those also if LLPs are introduced to members practising through LLPs.

  89. If those members have moved to Jersey what will happen then?
  (Mr Ward) If those members have moved to Jersey, in fact as far as we are concerned exactly the same requirements would apply because we are looking to apply those requirements to chartered accountants who are carrying out business within the United Kingdom.

  90. You have no real stick to beat them with, do you, if they are not quite operating here, if they are operating offshore as such?
  (Mr Ward) Actually we have had members operating partnerships in Jersey and indeed Guernsey and other Channel Islands for many, many years. The professional rules and regulations which apply to our members, because they are members of our Institute, do not actually introduce any relaxation because they happen to be practising in Jersey or Guernsey compared to practising in Surrey or Kent or Middlesex.

  91. You still have the same control.
  (Mr Ward) We still have the same disciplinary hold on members.

  92. They are worried just the same as they would be in this country.
  (Mr Ward) Yes; indeed.

  93. There is the option of incorporation. As I understand it, only one of the big five has in fact taken that up: KPMG.
  (Mr Ward) Yes; that is right.

  94. Why do you think this has not been the favoured option?
  (Mr Ward) It is a question of the culture of a partnership. It gives two major things. One is that it gives a commonality of interest between the governance of the partnership and the ownership of the capital in the partnership. Actually bringing those things closer together is one of the objectives behind the present company law review actually, looking for increasing that commonality of interests, leads to stronger governance. The second is the motivational aspects of it. In a partnership, in my personal experience and also that of others I have seen, people do pull together more as a unified group than they do within a company. Certainly as far as professionals are concerned, that seems to be an important aspect of the quality of working life.

  95. Could tax be a consideration as well?
  (Mr Ward) One of the major tax advantages which there used to be between partnerships and companies was that partners were able to pay last year's tax out of this year's income. In times of inflation in particular, that was a very favourable thing and that was actually removed recently and as was said in some previous evidence to you, the possibility of removing other advantages has already been introduced by the Inland Revenue. As one looks out into the future, I would not see any strong advantages in one form over another.

  96. Returning once again to section 214A, you have made a pretty trenchant statement here. You recommend that section 214A should be dropped altogether.
  (Mr Ward) Yes, we do.

  97. Surely we do need some proper protection. This is quite an extension of the law which we are proposing here. We are getting rid of the principle of joint and several liability in this way on which people have historically relied and yet if we drop 214A altogether that would leave us open to enormous abuse, would it not? Are not the grounds of reasonableness which is incorporated the right way to go forward? We have discussed what the court might or might not take into consideration.
  (Mr Ward) I agree that there should be proper protection. I believe that section 214 provides that proper protection. My concern under section 214A is that because it requires an immediate estimate to be made of whether or not debts could be paid immediately, people will tend to play safe because they will fight so shy of the consequences of breaching that, that they would rather wind up the partnership.

  98. You think the test is materially different, do you?
  (Mr Ward) Yes, I do. I think it is the important thing for the protection of creditors, it is important for the protection of clients who have work-in-progress with the partnership. It is important from the point of view of the employees of the partnership and of course the partners as well to be given the opportunity responsibly to trade out of problems rather than to have a closure forced on them in the short term.

  99. That certainly exists so far as companies are concerned, that if there is a reasonable prospect of the company being able to trade profitably, then it could be argued that the directors were in breach of their duty if they suddenly decided to invoke insolvency procedures. Will that same thing not apply under 214A?
  (Mr Ward) That thing applies under section 214 but our judgement is that because section 214A is that bit more stringent people would wish to wind up the partnership or withdraw from the partnership.