Hansard, House of Commons Debates, 28 Jun 2000 : Column 929
Orders of the Day
Limited Liability Partnerships Bill [Lords]
As amended in the Standing Committee, considered.
New Clause 2
Returns to registrar
' .--(1) Each limited liability partnership shall make an annual return
to the registrar setting out--
(a) all claims made against the partnership for work performed by it;
(b) a statement by the relevant regulator that the partnership has
complied with the relevant regulatory framework in its
field of business; and
(c) the average rate of pay for the partnership's employees in the
top and bottom quartiles (in terms of remuneration).
(2) Any returns or reports made by limited liability partnerships to
the registrar shall be made available for public
inspection.'.--[Mr. Mitchell.]
Brought up, and read the First time.
4.52 pm
Mr. Austin Mitchell (Great Grimsby): I beg to move, That the clause be read a Second time.
Mr. Deputy Speaker (Mr. Michael Lord): With this it will be convenient
to discuss the
following: New clause 4--Report of regulatory infractions and censures--
' .--Limited liability partnerships trading outside the United Kingdom
shall report to the registrar all infractions of
regulatory rules and all censures by regulators in other jurisdictions.'.
New clause 7--Disclosure of emoluments--
' .--Any limited liability partnership in which the amount of profit
before member remuneration and profit share exceeds
£200,000 shall publish details of director emoluments comparable
in detail to those required of companies by Schedule 6
to the Companies Act 1985.'.
New clause 8--Statement of assets, etc.--
' . Each limited liability partnership shall, when filing annual accounts
with the registrar, submit a statement showing--
(a) the value of the net assets of each partner; and
(b) whether any partner is at that time involved in litigation.'.
Amendment No. 19, in clause 6, page 3, line 35, at end insert--
'(2A) A statement of the scope of authority to act of each member shall
be lodged with the registrar, displayed in all
partnership offices and made available to clients.'.
Amendment No. 24, in clause 9, page 5, line 7, after "days", insert--
'giving full details of the address, financial and property interests
and other trading activities of new designated members,
and, in the case of those ceasing to be designated members, the reasons
why they are leaving'.
Mr. Mitchell: Let me make it clear, as I did on Second Reading, that
I do not like the Bill in any
way. Essentially, it gives a dodgy, dirty deal to fat-cat accountancy
practices, and that should not
be the responsibility of the Labour party and a Labour Government.
I find the speed with which
the deal is being done even more reprehensible, when we are not making
any special
28 Jun 2000 : Column 930
concessions to trade unions or friends of the party. Indeed, many of
our party's friends in local
government, education and the union movement are being treated as the
enemy within, while we
are giving a dirty deal to accountancy houses.
The big accountancy houses have been pushing for this Bill, and have
gone to extreme lengths to
get it. The process was begun by the Conservative Government, and while
it is perfectly right for
a Labour Government to pursue that process, it is not right to introduce
the Bill at this speed and
this early in the legislative programme without countervailing concessions.
As a prelude to the long list of amendments that I shall move, I say
to the House that I am
resentful of the way in which my hon. Friend the Member for Newcastle
upon Tyne, Central (Mr.
Cousins) and I have been treated. We wanted to be on the Standing Committee,
but we were not,
and it would have been appropriate to have argued all this out in Committee
rather than on the
Floor of the House, when another, welcome Bill follows and we are under
great pressure to shut
up. I do not think that things should be done like that. The Hansard
Society is to have a committee
on the scrutiny of legislation, and I shall write a case study in which
the Bill is an example of how
not to scrutinise legislation. Instead of giving you my paranoia, Mr.
Deputy Speaker, I shall deal
with the new clause.
The general principle behind all the new clauses and amendments that
I have tabled is consumer
protection and ensuring that more information can be made available
to the consumers of audit
and insolvency services and all the other services that accountancy
houses provide, because the
Bill will protect accountants from the consequences of their own failure.
If they carry out a bad
audit--which often comes to light only when a firm fails--because they
are so busy selling other
services to the firm that they neglect or dilute the audit, they should
be accountable in full for the
consequences. If an insolvency is protracted, which does not serve
the interests of the creditors
because the insolvency practitioner owes no duty of care to them, they
should also be
accountable in full.
We are making a concession to the big accountancy houses without introducing
any effective,
independent regulation of accountancy and insolvency firms. We promised
in our business
manifesto that we would have full, independent regulation. We are not
fulfilling that commitment;
via so-called independent regulation, we are, classically, merely adding
yet another layer to the
existing chaos of regulation. There are eight regulators for 1,800
practitioners in insolvency. That
is absolutely ludicrous, yet we are adding another layer above those
eight. We are not providing
independent regulation.
Mr. Michael Fabricant (Lichfield): I was listening to the hon. Gentleman's
argument with great
interest, but I left the Chamber briefly to find out how he voted on
Second Reading. Of course he
did not vote because there was no Division. I wonder whether he is
against the principle of the
Bill. I shall ask him a hypothetical question: if there had been a
Division, would he have voted
against the Bill?
Mr. Mitchell: Probably, I would have voted against the Bill on Second
Reading, but there was no
Division.
How would I have pursued the Bill's aims? As I said in my introductory
remarks, during which the
hon. Gentleman left to find out information that was obvious
28 Jun 2000 : Column 931
to everyone else, it was right to pursue the Bill's aims because the
Conservative Government--our
predecessors--had started to develop such legislation. I am a Fabian
in such matters. Festina lente
is the slogan.
Let us make progress with the Bill while introducing corresponding concessions
to protect
consumer interests and a corresponding framework of legislation to
ensure that those accountancy
firms that opt to become limited liability partnerships are accountable.
That is the essence of my
argument. Protection for consumers means providing a duty of care,
which I shall attempt to do
under later amendments, and reversing the Caparo judgment.
The basic principle behind all the amendments and new clauses that I
have tabled, especially in
this group, is that there should be maximum publication and recording
of the available information
because partnerships are inherently secretive organisations. There
can be many variations of
partnership and individual agreements.
Mr. John Burnett (Torridge and West Devon): What makes a partnership
more secretive than
a sole trader?
Mr. Mitchell: I am not comparing partnerships with sole traders. We
are talking about bigger
organisations than sole traders. The accountancy houses were allowed
to set up as limited
companies under the Companies Act 1989, but only one accountancy house
did so. Why? First,
there are tax disadvantages in becoming a limited company. Secondly,
there are publicity
disadvantages; they have to disclose more information. They do not
want to disclose. They are
secretive, powerful organisations.
I want more disclosure. I want more light; it is as simple as that.
The consumer has a right to
know. People who might be affected by the business or insolvency of
limited liability partnerships
have a right to know what their strengths and weaknesses are, so they
should be subject to exactly
the same disclosures as a public limited company, as was provided for
in the Companies Act.
5 pm
Another consideration behind the amendments, particularly this group
of amendments, is the need
to avoid fraud and tax fiddles. It is possible for all kinds of dodgy
organisations to register as
limited liability partnerships. The words "dodgy organisations" bring
to mind Yorkshire Water,
now the Kelda Group. It is attempting to perpetrate what must be a
deceit upon its shareholders: a
process of so-called mutualisation to pass on assets that do not yield
much profit to the
shareholders. It will then offer itself as a management company to
run the assets for a fee.
That must be a monstrous deceit of the consumer. One of my later amendments
seeks to preclude
it all together, saying that publicly regulated utilities should not
have such a facility. I mention that
in passing because the main problem is the use of those organisations
to reduce the tax burden
and to perpetrate fraud and tax fiddles. The transfer to limited liability
status gives rise to that.
I am glad that the Minister, in his many answers to my many questions,
communicated that fact. I
have also written to the Chancellor of the Exchequer about the matter.
Rightly, the tax regulation
differences between partnerships and limited companies is now being
reviewed. They should be
aligned as closely as possible.
28 Jun 2000 : Column 932
Why are we pushing for the legislation to be implemented before that
review has been completed?
People need to know what the tax benefits or disadvantages may be.
In my view, there could be
disadvantages--or there should be--in transferring, so I do not want
the legislation to be
implemented before the tax review has ended.
Mr. Fabricant: The hon. Gentleman is presenting a powerful argument
as to why he opposes the
principle of the Bill. I understand where he is coming from, but I
am a little confused in one
respect. He said in answer to my earlier question that, had there been
a Division, he probably
would have voted against Second Reading. He makes it clear that he
is against the principle of the
Bill. Why, then, did he not call for a Division on Second Reading,
so that he could vote?
Mr. Deputy Speaker: Order. I urge the hon. Member for Great Grimsby
(Mr. Mitchell) not to be
seduced into a Second Reading debate.
Mr. Mitchell: Thank you for warning me, Mr. Deputy Speaker. I was not
going to follow the
hon. Member for Lichfield (Mr. Fabricant) down the path of his ignorance
of parliamentary
procedure and the role of amendments on Report--the stage of the Bill's
proceedings in which I
am participating.
Mr. Fabricant: On a point of order, Mr. Deputy Speaker. I wonder whether
you could explain
something to me and for the benefit of the House: am I not right that
someone can call for a
Division if he is a Member of the House?
Mr. Deputy Speaker: That has nothing to do with the matter that is before the House.
Mr. Mitchell: Thank you, Mr. Deputy Speaker. The hon. Member for Lichfield
should not raise
silly, querulous points during my speech. He would have done better
to use his position on the
Committee to raise some serious points there, instead of fighting to
extend the vested interests and
privileges of the big accountancy houses. That was the essence of what
he was doing on the
Standing Committee, which had only one Division, and in which Opposition
Members promoted
those vested interests. It is a little nitpicking, to say the least,
for him to raise those points with me,
having failed to fulfil his own responsibilities on the Standing Committee.
However, I do not
intend to follow that argument.
I was saying that the measure should not be implemented until the review
of the tax status of
partnerships and companies is completed; only then should it come into
effect. I wish to raise
many points and to warn off the hon. Member for Lichfield (Mr. Fabricant),
who has interjected
three times in an attempt to prolong my speech and who does not seem
able to count, either. I
point out that this argument is, in essence, about the consumer and
about the soul of the Labour
party and the Labour Government.
Conservative Members had their opportunity in Standing Committee and
earlier to represent the
views of the vested interests, and they did that very articulately.
Indeed, Liberal Members, who are
now engaged in hasty consultation at the last minute, also did that.
It was a shame on Second
Reading to hear the Liberal spokesman
28 Jun 2000 : Column 933
speaking for professional vested interests when the only effective opposition
in the House of
Lords came from Liberal Democrats and particularly from Lord Phillips
of Sudbury who appears
on the Jimmy Young show.
Mr. Deputy Speaker: Order. The hon. Gentleman is again distracting the
House from the new
clause that he is supposed to be moving. Will he please address his
remarks to new clause 2 and
to the other new clauses and amendments that we are legitimately discussing?
Mr. Mitchell: I am grateful to you, Mr. Deputy Speaker, for bringing
me back to the path of
virtue.
Mr. Burnett: Will the hon. Gentleman give way?
Mr. Mitchell: I will not give way on this point, because I think I can
anticipate the hon.
Gentleman's objection. It will lead me down a path along which I do
not want to go.
On new clause 2, Ministers said that limited liability partnerships
would be treated as companies.
In fact--and this is the purpose of the new clause--they have been
treated more leniently. When a
company prepares its accounts, it must indicate its contingent liabilities
under accounting standard
SS18, which accounts for contingencies. It is right that companies
should do that, because
anyone to whom a company owes money or supplies services will want
to know its liabilities. To
decide on the financial standing of a company, people need to know
its contingent liabilities. That
protects creditors and suppliers and it provides information to the
public.
It is important to bring LLPs into line with companies, because partnerships
have few assets. All
the assets of a company are in its name, and creditors can try to get
hold of them if it becomes
insolvent. That is not so with a partnership, which tends to have few
assets and the case has to be
pursued against the negligent partner. I hope to come to the issue
of how people will decide who
is the negligent partner and how he will be designated, because such
information should be
available. However, creditors find that much less is up for grabs in
a partnership than it is in a
company. The two entities should be aligned with each other. Initially,
we were told that they
would be, but that has not occurred. New clause 2 would achieve that
aim.
New clause 4 is about compliance with foreign rules. That is important.
In the United States, the
Securities and Exchange Commission--which is the most effective independent
regulator in the
world and the type of body that we should have in this country--is
making a concerted attempt to
force differentiation in the big accountancy houses between the audit
arm and the service arm. If
the audit arm sells services to its audit clients, that dilutes the
effectiveness of the audit by making
the firm more compliant to the wishes of the directors selling the
services. That creates an
undesirable vested interest if we are to have effective and independent
audits. That shows the
importance of complying with foreign rules. That attempt is being made
in the United States, and it
will come to fruition. Already, the SEC, which is not satisfied with
professional self-regulation as it
exists in the United States, has produced a scathing report on PricewaterhouseCoopers.
28 Jun 2000 : Column 934
The interesting finding from the SEC inquiry was the amount of negligence
that exists. In two
years, there were 8,000 violations of basic principles of accountancy
and audit, particularly
partners and employees of PricewaterhouseCoopers holding shares in
companies that were being
audited by PricewaterhouseCoopers. Eight thousand violations! The report
stated that there were
serious structural and cultural problems in PricewaterhouseCoopers'
compliance in these matters. In other words, the firm did not give a damn.
It was negligent, there was a culture of laxness in the organisation, and
it violated the rules of the industry. That report was an eye-opener to--
Mr. Deputy Speaker: Order. May I gently remind the hon. Gentleman that
he has tabled new
clause 3, which deals with the United States, the Securities and Exchange
Commission and so on?
I am happy for him to pursue his argument now, as long as he does not
repeat it when he comes
to new clause 3.
Mr. Mitchell: The matter is better dealt with now, Mr. Deputy Speaker.
I shall mention it only
briefly later.
That inquiry has extended to other firms, and there is a concerted attempt
to prise the audit arms
apart. We should be inquiring in the same way. In my view, the big
accountancy houses are far
too friendly with Government. I saw in The Observer on Sunday that
since the election,
PricewaterhouseCoopers, Ernst and Young, and Pannell Kerr Foster had
all donated staff to the
Treasury to draw up tax legislation. We do not have panels of criminals
coming in to advise the
Home Office on the criminal law or police methods, but in the case
that I mentioned, the interested
parties are being brought in to advise Government.
Mr. Stuart Bell (Middlesbrough): On a point of order, Mr. Deputy Speaker.
Although my hon.
Friend is perfectly right to put his case, is he entitled to say that
the largest and most reputable
accountancy firms in our country are criminals?
Mr. Mitchell: If my hon. Friend had listened--
Mr. Deputy Speaker: Order. The hon. Gentleman's remarks are not a matter for the Chair. They are a matter for the hon. Gentleman.
Mr. Mitchell: If my hon. Friend had listened, he would know that I said
that we did not get
criminals in to advise the Home Office, and that it was ill advised
to get interested parties in to
advise the Treasury on tax law. The analogy is there. I am aware of
my hon. Friend's interest in
those accountancy houses. The point is valid, because the question
will always be asked whether
we are soft-pedalling on the need to regulate those bodies because
of the services provided to
Government.
Mr. Stephen O'Brien (Eddisbury): I have been listening with care to
what the hon. Gentleman
has been saying. It seems to be a rant against a particular firm, which
does not necessarily do the
House any credit. Would the hon. Gentleman be prepared to repeat what
he has been saying
outside the House, without the cloak of parliamentary privilege?
Mr. Mitchell: What a ridiculous question. If the hon. Gentleman had
said that he had listened
with interest,
28 Jun 2000 : Column 935
I would have been overjoyed. If he is listening with a police notebook
in his hand, the point is
fatuous in the extreme. I have quoted the SEC's report on one particular
company and the facts
about the firms advising the Treasury. That is all that I have done.
That is repeatable inside or
outside the House. It is a matter of public record. I am sorry that
we have to come down to such
silly, nit-picking points in objection to the argument that large blocks
of power need to be
controlled and regulated, which is the responsibility of government.
5.15 pm
Mr. Burnett: I understand what the hon. Gentleman is saying. Does he
believe that the
Government should impose on the Institute of Chartered Accountants
in England and Wales more
stringent rules with which it can govern the affairs of its members?
Mr. Mitchell: I do not believe in professional self-regulation. Chaps
regulating chaps is almost a
British myth. The Institute of Chartered Accountants in England and
Wales is a puny body when
compared with the enormous power of the big five accountancy houses,
whose fees run into a
total of £4.5 billion a year. These are enormous concentrations
of power. A small professional
body cannot effectively regulate them, and so-called independent regulation,
which we are
proposing, will not regulate them properly either.
I shall move on to new clause 7, despite the interruptions from vested
interested on the
Opposition Benches. The Bill introduces some highly desirable changes,
but accountancy houses
enjoy a state guaranteed monopoly on insolvency and auditing. It is
therefore right to regulate. I
am glad that my hon. Friend the Minister gave the commitment that legislation
will include a
requirement for financial disclosure equivalent to that which is required
of companies. The new
clause deals with the disclosure of emoluments. The Minister told us--it
is in the Bill--that limited
liability partnerships will provide information in the notes to accounts
about the aggregate amounts
withdrawn or applied on behalf of members during the financial year.
There is also the requirement
to disclose the earnings of the highest paid member in cases where
profit exceeds £200,000.
The figure of £200,000 comes from schedule 6 to the Companies
Act 1985. That Act requires that
information that is published should include emoluments, gains made
by directors on the sale of
share options and amounts paid to directors under long-tem incentive
schemes. I hope that the
Minister will tell us that the same categories will be covered in the
requirements on limited liability
partnerships, and that his estimate of £200,000 is based on the
categories to which I have referred.
Will LLPs be required to publish these details?
We all know that there is considerable disquiet about fat cats. The
public need to know how much
they are being paid. It is possible for limited liability partnerships
to own limited companies. We
would therefore have the ludicrous situation in which the limited company
would have greater
obligations to disclosure than the LLP parent of that company, which
is exempt from much of that
disclosure. That seems to be wrong.
I know that Opposition Members are not keen on disclosure of public
information, but it is the
public's right to know, especially when incomes have been accrued in
pursuance of a publicly
granted state-conferred monopoly in audit and insolvency.
28 Jun 2000 : Column 936
New clause 8 is about more disclosure of the assets of each partner.
Concessions are conferred
on accountancy and other firms that are trading as LLPs. In the event
of insolvency, the creditors
can call on the assets of an LLP, which as I have said will not be
substantial. It is more the assets
of the negligent partner that are important. I return to the point
which I broached earlier, which is
how the public know which partner is responsible for the negligence.
Who is the negligent partner
against whom actions must be pursued? Knowledge of that might dissuade
some clients from
having dealings with that partner.
Customers should have access to that information. If existing claims
against a partner are such
that a further claim would take all his assets, the public need to
know. How will they learn who is
the negligent partner and whether other allegations of negligence have
been made against individual
partners of a limited liability partnership? People need to know who
they are dealing with and what
their status is.
We are talking about public provision of information to safeguard creditors,
including information
about individual partners' assets, against which claims can be made.
We are limiting liability, so we
need to know what the assets are. In the case of a company, shareholders'
liability is limited to the
extent of the paid-up shares, and the balance sheet lists the assets
and liabilities for anyone to see;
but the balance sheets published by LLPs will not give the creditors
full and fair information. All I
want is parity between the information published by LLPs and by limited
companies. That seems
fair.
Amendment No. 19 deals with registration and is designed to let us know
what authority each
member has to act.
Amendment No. 24 is again a matter of necessary public information for
creditors and potential
creditors about the financial standing of the LLP.
I hope that my hon. Friend the Minister will respond to some of my points
and clarify whether my
arguments are valid.
Mr. Fabricant: The hon. Member for Great Grimsby (Mr. Mitchell) delivered
quite a rant and
proved his inability to count: I intervened twice, not three times.
Some of his arguments, if not
persuasive, raise interesting questions that the Minister should address.
It is a good idea in principle for the liability of large partnerships
to be limited. In this modern age,
partnerships can comprise 50, 100 or even 200 or 300 people--and in
some instances, several
thousand--and it is not practical to expect them all to have joint
and several liability, but I tend to
agree with the hon. Gentleman that, if the state is providing some
protection, it should demand a
quid pro quo and expect certain information from the partnership.
I do not go as far as the hon. Gentleman. Judging from their faces,
not many Government
Members would go that far. It is interesting to note the divisions
on the Government side. The
Government feel--and I agree with them--that there should be some protection
in the form of
limited liability, possibly echoing some of the protections that are
available to companies under the
Companies Acts. Should not limited liability partnerships also have
to meet some of the
obligations of disclosure in annual returns that are presently imposed
on companies
28 Jun 2000 : Column 937
under the Companies Acts? I would welcome an unemotional and non-ranting
answer to that
question--the Minister is known for his unemotional and accurate responses.
Mr. Jim Cousins (Newcastle upon Tyne, Central): I share much of the
frustration and
irritation expressed by my hon. Friend the Member for Great Grimsby
(Mr. Mitchell) at the
circumstances in which we find ourselves. Apparently, the Bill is technical
and rather obscure--of
interest only to a few people who have a particular interest in some
obscure points of law and
commercial practice. Yet it advances an important innovation in British
commercial law, which
could well be taken up by many presently unlimited liability partnerships.
The hon. Member for Lichfield (Mr. Fabricant) said that the Bill was
targeted at the needs of large
partnerships. He and the Government must recognise that a number of
partnerships that are not
large may seek the protection and advantage of limitation of liability.
That ought to give the House
cause for a little caution.
We find ourselves discussing this quite complex Bill, which advances
an important new principle,
between the excitement of a statement on the Post Office, which is
important, and the even greater
excitement of debate on the Fur Farming (Prohibition) Bill. That is
not the ideal circumstance in
which to be discussing such a matter. It inevitably imposes a good
deal of pressure--I do not
suggest in any way that it is external pressure--on those taking part
in the debate.
Mr. Fabricant: Of course the hon. Gentleman is right that small as well
as large partnerships may
seek the protection that the Bill will offer when enacted. However,
given that there is similar
legislation in other parts of the world, does he fear that jobs might
be lost if larger partnerships
centred outside the United Kingdom, in countries that offer partners
protection?
Mr. Cousins: Of course I shall come to that point, although I hope not
to be tempted too wide of
the new clauses and amendments.
The hon. Gentleman asked my hon. Friend the Member for Great Grimsby
whether, in principle,
he accepted the idea of limitation of liability in partnerships. Were
I to be asked that question, my
answer would be yes; I have no difficulty with the limitation of liability
in partnerships.
The Partnership Act 1890 has always been considered to be one of the
most ideal pieces of
legislation. It has endured for more than a century without any tampering
with it, or amending of
its essential form or principles. It has stood the test of time; it
has the clear concept of joint and
several liability.
However, the Act was framed when all partnerships were extremely small,
the people were
individually known to each other, and the reputation, efficiency and
performance of the partners
could be measured and tested by potential and actual partners. Any
problems could be addressed
immediately, simply and directly. We have moved on: we now have partnerships
that consist not
merely of thousands of partners but sometimes tens of thousands of
partners, in which such
disciplines cannot apply.
28 Jun 2000 : Column 938
5.30 pm
It may be right to offer the protection of limited liability to such
partnerships, but--this point has
already been discussed--the limitation of liability being offered here
is not confined to such
circumstances. Small partnerships can also take advantage of it. Therefore,
we are considerably
modifying the structure of the principle advanced in the 1890 legislation,
and we should be
properly cautious about that.
I am prepared to consider the principle of limitation of liability in
partnerships, but we must
consider whether this is the right moment to introduce such legislation.
We still have the unfinished
business of the Caparo judgment, to which my hon. Friend the Member
for Great Grimsby rightly
drew attention. Auditors appear to owe no significant legally meaningful
duty of care to the
shareholders in the enterprises that they serve.
Accountancy was done no favours by the Caparo judgment. It opened a
hole in accountability
and responsibility, which we are still puzzling how properly to fill.
The present proposal to create
an independent regulator for accountancy, but not a statutory one,
in a way seeks to undo the
damage that was done in the Caparo judgment.
One of my anxieties about the Bill is that until we can see the real
strength of the framework being
offered under independent regulation--the proposals that are now being
worked up in front of us
in the area of accountancy--it is difficult to know whether the Bill
is appropriate and soundly
formed. There must be a legitimate anxiety about that.
Furthermore, there have been a number of legal actions. Out of respect
to my hon. Friend the
Member for Middlesbrough (Mr. Bell), I shall not start a cascade of
prominent names and cause
him some agitation that important people in our commercial world might
be denounced. However,
my hon. Friend must recognise that those people are suing each other.
Such matters may all be
settled out of court. One would not attempt to speculate about that,
but it is entirely possible.
However, if matters do come to court, the rehearsal of the evidence
will provide some important
information which can guide us in legislatures and help us deal with
some of the issues that arise in
partnerships if we begin to limit liability.
Mr. Stephen O'Brien (Eddisbury): I do not dispute what the hon. Gentleman
says about
accountants suing each other, but to put it in perspective, much of
what is happening is probably
driven by the insurance cover that those partnerships have, whereby
they are required to pursue
their interests. The insurers drive them to that. Part of the point
of the Bill is that limited liability
partnerships will, to some degree, obviate the need for that depth
of insurance and the expense of
it, which is ultimately passed on to clients and consumers.
Mr. Cousins: That raises more issues than it tidies up. It may be true
that insurance is one of the
drivers behind large accountancy firms suing each other over responsibility
for the disappearance
of what, it must be recognised, are hugely significant sums of money.
The loss of that money has
damaged thousands of individuals, voluntary organisations--in the case
of BCCI, a large number
of voluntary organisations--and enterprises. We are not talking about
something that is of no
significance; it is of profound significance.
28 Jun 2000 : Column 939
The hon. Gentleman says that partnership firms are suing each other
because of the insurance
driver, and that such legal actions would not otherwise take place.
That worries me. What are we
doing in this legislation, offering an alternative source of cover
to insurance cover that can now be
purchased perfectly properly, and which is the basis of those legal
actions? What will this
legislation cause to be hidden that would otherwise be exposed?
Mr. Fabricant: I am following the hon. Gentleman's argument with
considerable interest, but
surely there is nothing in the Bill that prevents any client of an
organisation that is perceived not to
have acted properly from suing the limited liability partnership?
Mr. Cousins: I have already referred to the great difficulty
there. The pressure for the legislation
began in the accountancy partnerships, and although I entirely accept
that far more than
accountancy partnerships may seek to take advantage of it, in the accountancy
world we come up
against the great problems that my hon. Friend the Member for Great
Grimsby and I have
mentioned--the Caparo judgment and its rather unfortunate inheritance.
Against the background of the Caparo judgment, any legal action against
an accountancy
partnership faces the difficulty of having to overcome the consequences
of that legal decision.
That point does not apply to other kinds of partnership that might
seek to take account of the
legislation. I fully acknowledge that. However, the House knows that
the driving influence in the
introduction of the legislation came from those accountancy firms.
That is a relevant point.
Mr. Burnett rose--
Mr. Cousins: I do not want to take up too much time. I know that
there is a custom whereby
people who want to talk at length always say that they do not want
to detain the House, but on this
occasion I really do not want to detain the House, so I shall be careful
about taking interventions.
The hon. Member for Lichfield (Mr. Fabricant) drew attention to the
fact that there are legal
jurisdictions close to Britain--the one that is always mentioned is
Jersey--in which limited liability
has already been carried into law. The Conservative Government's motive
for wanting legislation
in this form was the fear that people would relocate to such regimes
to take advantage of limited
liability.
All that has been overtaken by other events, in particular concerns
about offshore legal and tax
regimes, which provide unfair competitive advantage. That is a difficult
and complex issue, into
which I do not wish to stray this afternoon, but all will recognise
that the Government have offered
leadership to Europe in striking a deal on the withholding tax only
a fortnight ago, and setting up a
regime based on the exchange of information, which is a real, genuine
and significant breakthrough
in tackling such offshore regimes. Therefore, it might again be wise
to see how all that develops
before we advance as an argument for this legislation the fact that
there may be competitive, more
attractive jurisdictions elsewhere in which people might seek to locate.
That is an argument for a
little caution and delay.
28 Jun 2000 : Column 940
All the new clauses concern disclosure and the importance of making
information available, which
will allow outsiders to form proper judgments about the good conduct
and good management of
any regime which has the advantage of limited liability.
New clauses 2 and 8 advance the principle of openness in the specific
context of financial
information. The creation of limited liability partnership regimes
gives rise to a potential tax
problem. The Government acknowledge that in their correct intention
to remove both the
possibility of improper tax avoidance and the use of a variety of legal
vehicles to take advantage
of tax planning possibilities and thus improperly avoid taxation. I
expected an intervention at that
point, but no one wishes to intervene, so I shall move on.
We are considering an important point. It would be extremely helpful
if my hon. Friend the
Minister could clarify the Government's discussions about the tax regime
that accompanies the
Bill, and the way in which that regime will work. The House would then
be well informed.
New clause 7 attempts to deal with one of the issues that features in
the Government's agenda for
company law reform. Sadly, we shall not legislate on that agenda until
after the next general
election. Again, there is a question of timing. I know that my hon.
Friend the Minister intends the
full force of current company legislation to be exercised over limited
liability partnerships. We
cannot speculate on any future changes--the House is not the right
forum or platform for indulging
in such speculation--but we are all considering the matter, and it
would be helpful if my hon.
Friend could tell us that the Government intended to reflect future
changes in company law in the
liabilities for disclosure affecting limited liability partnerships.
As my hon. Friend the Member for Great Grimsby rightly said, new clause
4 attempts to deal with
what goes on in other jurisdictional regimes. My hon. Friend rightly
mentioned the work of the
Securities and Exchange Commission in the United States, and its attempts
to provide for a
proper relationship between general accountancy work and the specific
work of audit. It ensures
that those two functions are not confused, and that no market abuse
occurs when people use their
economic power in one context to achieve economic advantages by sweeping
up all the audit
work. The Securities and Exchange Commission properly tries to deal
with fair competition and
market abuse.
There is no point in Opposition Members saying that the Securities and
Exchange Commission
will not affect us here; it has already affected us. We are considering
global partnerships that
engage in economic activities all over the world, which are caught
by the actions of the Securities
and Exchange Commission. It is fair to ask how we will tackle those
issues. It would be
unfortunate to be led down a road of competing jurisdictional regimes
with barriers between them,
and all sorts of intergovernmental disputes over the propriety of one
action by a regulator in one
country when compared with the different framework of rules in another
country. We must try to
avoid that.
5.45 pm
The Government have referred a general bundle of issues to the Office
of Fair Trading. It has
been asked to consider the way in which professional partnerships work,
28 Jun 2000 : Column 941
and the way in which demonstrable problems will be tackled. It would
not be proper for my hon.
Friend the Minister to direct the OFT's work; it would be wrong, and
I do not ask him to do that.
However, it would be proper for him at least to direct the OFT's attention
to the matter so that it
could perhaps ascertain methods of avoiding the possibility of conflict
between jurisdictions, and
of attempting to introduce in our regimes governing market abuse and
fair competition some of the
benefits that the Securities and Exchange Commission brings to regimes
in the United States.
I have mentioned important underlying issues, which all give grounds
for caution; they are
reflected in the new clauses. I accept that Back-Bench amendments are
not always framed well.
However, I have outlined the purpose of new clauses 2, 8, 7 and 4.
I hope that I have explained
the reasons for them, and that my hon. Friend the Minister will be
able to assist us in dealing with
them.
Mr. Burnett: I declare at the outset that I am a solicitor and that
I no longer practise. I used to
specialise in taxation and, to some extent, partnership matters.
Any trade or profession can become a limited liability partnership provided
that at least two
persons--that includes companies--come together to form one. As has
been said, the usual rules
for joint and several liability are not applicable to limited liability
partnerships. Nevertheless, it is
worth putting on record that an individual member of an LLP is liable
in tort for his or her actions,
if they are negligent or held to be negligent. The firm and all its
assets are fully liable.
Disclosure should be at the heart of the Bill. I refer the House to
my words on 23 May 2000 on
Second Reading. I said:
Finally, a fundamental principle of the Bill should be that the price for the limitation of liability is full disclosure of the financial affairs of a business and that such information should be readily available to the public.--[Official Report, 23 May 2000; Vol. 350, c. 907.]
I have not changed my mind. It would be in the interests of those who
did not serve on the
Committee, or who have not studied the matter as deeply as others,
and for the convenience of
the House, if the Minister set out clearly the disclosure obligations
in the Bill.
The Parliamentary Under-Secretary of State for Trade and Industry (Dr.
Kim Howells): I
am well aware of the concern of my hon. Friends the Members for Great
Grimsby (Mr. Mitchell)
and for Newcastle upon Tyne, Central (Mr. Cousins) about accountancy
and its regulation in this
country. They have made it clear that they believe that limited liability
partnerships are a
concession to the professions, especially the accountancy profession.
By tabling the new clauses, my hon. Friends are trying to use the Bill
as a means of regulating the
accountancy profession. As I said on Second Reading, I admire their
tenacity and their concern
for the reform of accountancy regulation. However, it is not the Bill's
function to regulate
professional activity. When regulation is believed to be necessary,
the activity, not the LLP as an
entity, will be regulated.
28 Jun 2000 : Column 942
Time and deliberation were mentioned on several occasions. This Government
and the previous
Government have consulted on the detail of the Bill for at least four
years. A long and intensive
debate has therefore taken place about the proposals.
On the issue raised by my hon. Friend the Member for Newcastle upon
Tyne, Central about the
investigation of the professions by the Office of Fair Trading, I share
the views of my hon.
Friends that the issue of auditor independence--in particular, the
extent to which an audit firm
should be able to provide a non-audited service to audit clients--is
important. That applies not
only in the US, where the SEC has made proposals to deal with the issue,
but in this country.
The OFT is conducting a review of the professions that will focus on,
among others, accountants
and solicitors. Iam sure that the review will address the balance between
competition and
regulation in relation to the accountancy profession. That work provides
an excellent opportunity
to examine the concerns that my hon. Friends have raised about the
ability of auditors to provide
non-audit services. The comments of my hon. Friend the Member for Newcastle
upon Tyne,
Central encourage me to ensure that those conducting the review are
fully aware of those
concerns, and I undertake to do so.
It has always been the intention that an LLP will have applied to it,
through secondary legislation,
similar requirements to those that are applied to a company. The amendments,
if they were
accepted, would add a heavy additional burden to LLPs in comparison
with those of a company.
I am strongly of the opinion that that is not the right approach.
New clause 2 would add a substantial extra burden on an LLP in comparison
to a company, and it
would be manifestly unfair to require such extra requirements on an
LLP. There are no Companies
Act requirements for a company to set out any claims made against it
for work done, nor does it
need to have a statement from its regulator stating that it has complied
with the relevant regulatory
framework. In addition, I do not see what would be gained by giving
details of employee pay,
which should be a matter between the employee and the LLP.
Under section 709 of the Companies Act 1985, any person may inspect
the records kept by the
registrar, and that section will be applied to LLPs. New clause 4 would
impose a burden on LLPs
trading outside the UK that goes beyond the requirements imposed upon
a company or a
partnership. It is not the role of the registrar of companies to list
infractions of regulatory rules,
either in the UK or in other jurisdictions. It is a matter of policy
for the regulatory body concerned
to decide whether infractions should be reported. I shall try to return
to that issue, because my
hon. Friends raised some interesting points.
New clause 7 would require an LLP to publish details similar to the
details of director emoluments
that are required by schedule 6 of the Companies Act 1985. That issue
was addressed by the
Trade and Industry Committee, which agreed that there was no reason
why the Department should
revisit the issue of the disclosure of the highest paid members' drawings.
I do not believe that
making available any further details of members' drawings would add
anything. All LLPs will need
to provide information on the aggregate amounts withdrawn or applied
on behalf of members
during the financial year
28 Jun 2000 : Column 943
in the notes to the balance sheet. That is in addition to the requirement
to disclose the earnings of
the highest paid member in firms where profit--before member remuneration
and profit
shares--exceeds £200,000. The disclosure of that information
will allow potential creditors to take
a view on how the LLP is being managed and whether members are making
excessive
withdrawals.
New clause 8 would require the annual accounts of the LLP to include
a statement that would
show the value of the assets of each partner and whether that partner
was involved in any
litigation. I share my hon. Friends' aspirations for greater transparency
and this central issue is
being examined by the independent company law review, which will make--I
trust--some insightful
and radical proposals.
As an LLP is a separate legal entity, we envisage that third parties
will contract with the LLP rather
than the member. For that reason, it is important that potential clients
of the LLP are aware of the
assets of the LLP and it is why we have applied the financial disclosure
requirements for
companies to LLPs. I do not believe that the disclosure of the net
assets of members will add to
creditor protection. Nor do I believe that providing information on
whether a member is involved
in litigation is right, because providing such information could be
detrimental both to the individual
and the LLP. The member should be seen as an individual separate from
the LLP. I strongly
believe that the new clause would be unfair and would go against our
stated policy of having
comparable treatment for LLPs and companies.
I see no reason why a statement of the authority to act of each member
needs to be lodged with
the registrar of companies and to be made available to clients, as
suggested in amendment No. 19.
It goes beyond what is required of directors of a company or of partners
in a partnership. The Bill
states in clause 6 that every member of the LLP is an agent of the
LLP. A potential client will be
able to find out who the members and designated members are, and details
of the financial
background of the LLP and any charges on the LLP will be available
from Companies House. I
am happy to inform my hon. Friends that we require designated members
to give details of their
addresses when they are appointed as designated members. That follows
the requirements for the
appointment of directors.
On the question of taxation, which my hon. Friends raised, I said on
Second Reading that even
though we believe that it is right to tax LLPs as partnerships, we
are aware that, in some cases, the
primary or only attraction of LLP status might be the tax treatment.
As a result, we are considering
the issue carefully with the Inland Revenue. Depending on our conclusions,
legislation may be
brought forward in the Finance Bill in 2001. We would, however, consult
widely before legislating.
I emphasised that our intention was not to undermine the commercial
certainty of the taxation
treatment of LLPs for those businesses for which LLP status was intended,
and I recognise that
that might happen. I know that my hon. Friends are concerned about
that point--both about the
possible deterrent factor it might have, and about the uncertainties
that would exist for those who
take the plunge to become LLPs. I share the concerns that they have
raised about companies that
wish to become LLPs and about the need for greater clarity about the
taxation
28 Jun 2000 : Column 944
implications of such a transformation. Indeed, the hon. Member for Bognor
Regis and
Littlehampton (Mr. Gibb) raised similar points in Committee.
I am of the view, therefore, that it is appropriate to await the outcome
of the review before
commencing the LLP legislation, so that anyone wishing to become an
LLP may be certain of
what tax treatment it can expect. I do not expect that, in practice,
that will cause delay, because
our expectation was that LLPs would not be available before early 2001.
Clearly, were there to be
legislation in next year's Finance Bill, we would need in any case
to be certain of our intentions by
that stage.
My hon. Friend the Member for Great Grimsby raised concerns about the
prospect of water
companies using LLPs as a means of running not-for-profit mutualised
companies. That is a novel
idea that has suddenly emerged on the scene since several water companies
decided that they
cannot make profits out of supplying water. My hon. Friend expressed
concern about the
intention of the owners of one particular company--Yorkshire Water--to
split it in two and sell its
physical assets to a non-profit-making mutual company. In that context,
a statutory undertaking
under the Water Industry Act 1991 must be a company limited by shares
and could not be a
limited liability partnership. It is perhaps also worth noting that
anyone wishing to become an LLP
must be carrying on a lawful business with a view to making profit.
An LLP is therefore not
available as an option for non-profit-making organisations.
6 pm
The hon. Members for Lichfield (Mr. Fabricant) and for Torridge and
West Devon (Mr. Burnett)
raised the general question of disclosure, and my hon. Friends the
Members for Newcastle upon
Tyne, Central and for Great Grimsby made a number of valuable and interesting
proposals in
respect of disclosure requirements for limited liability partnerships.
It is, however, difficult to
accept those proposals simply in relation to LLPs without considering
corresponding application
to companies.
It is our aim, as far as is possible, to keep the disclosure requirements
for LLPs in line with those
for companies and--I hope that this addresses the point raised by my
hon. Friend the Member for
Newcastle upon Tyne, Central--to ensure that changes in circumstances
and what those changes
might generate in terms of demands for disclosure are allowed for within
the remit and the report
of the independent company law review.
As I said earlier, the provision of information by companies is one
of the key themes of the
company law review that the Government set up two years ago. The review
has already published
proposals which would change quite radically some of the disclosure
requirements. This therefore
provides the best opportunity for many years for my hon. Friends' ideas
to be considered.
It is our intention that changes which are made to companies following
the company law review
should then be applied to LLPs to the maximum extent possible. Given
those reassurances, I very
much hope that my hon. Friends will withdraw their amendments.
Mr. Mitchell: I am grateful to my hon. Friend the Minister and I shall
try to save what is left of
my career by gibbering that gratitude to him for a little while. He
has
28 Jun 2000 : Column 945
given us some substantial assurances. First, I particularly like the
assurance that the Kelda
Group--formerly Yorkshire Water--will not be able to get away with
what I thought was a possible
subterfuge by registering as an LLP. I am grateful for that assurance,
although it was not made in
relation to this group of amendments.
Secondly, I am grateful for my hon. Friend's substantial assurance that
the Bill will not come into
effect until the tax review is completed. That is important as it will
enable people thinking of setting
limited liability partnerships to know from the recommendations of
that review what the tax regime
will be. That is a substantial advance in our argument.
My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins)
and I have been
entertaining the House with our nice guy, nasty guy double act--
Mr. Cousins: On a point of order, Mr. Deputy Speaker. I think that my
hon. Friend meant to
imply that I was the nice guy.
Mr. Deputy Speaker: That is not a matter for the Chair.
Mr. Mitchell: Of course my hon. Friend is the nice guy.
Thirdly, my hon. Friend the Minister's assurances on disclosure and
bringing partnership law and
safeguards into line with those that apply to limited companies through
the company law review
has given us the incentive to make submissions along the lines of the
arguments that we have put
before the House. We shall consider doing that in respect of both sets
of provisions. That is
another substantial point.
Fourthly, my hon. Friend assured us that the Office of Fair Trading
review will be looking at these
matters and I am sure that it will take into account fair competition
considerations in respect of the
sale of other services.
We are grateful to my hon. Friend the Minister for those substantial
advances and we feel that we
have achieved something in very difficult circumstances. Although Opposition
Members tried to
heckle us--in particular, they tried to heckle me rather than my statesmanlike
hon. Friend--we were
only doing the job of scrutiny that the Opposition singularly failed
to do. Instead, they simply
pressed for further concessions for the vested interests.
We have been doing a job of scrutiny under a handicap. As the Bill originated
in the House of
Lords, it will not be returning there for further amendment. I am grateful
for the four substantial
concessions that my hon. Friend has given us and I realise they are
all that we shall get at this
stage. I do not think that it should have been done in this way, but
as it has we are grateful to my
hon. Friend for the concessions that he has made. As I am a realist,
I shall withdraw the motion
and give notice that my hon. Friend and I shall not be moving any of
the other amendments in our
names. I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.
28 Jun 2000 : Column 946
Mr. Deputy Speaker: As the hon. Member for Great Grimsby has said that
he does not intend
to move his later amendments, we now move on to amendment No. 1, in
the name of the official
Opposition.
Clause 5
Relationship of members etc.
Mr. Nick Gibb (Bognor Regis and Littlehampton): I beg to move amendment
No. 1, in page
3, leave out lines 22 and 23 and insert--
(b) subject to paragraph (a), by the rules and principles which would
apply if the law relating to partnerships applied to
them.'.
Neither of these are relevant interests, but I remind the House that
I am a chartered accountant, so
I ask hon. Members to go easy on the language that they use against
chartered accountants and
others. Also, I do not currently practice, but I contribute six or
seven articles a year to
Accountancy Age.
Having sat through the debate on the new clauses tabled by the hon.
Members for Great Grimsby
(Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins),
I feel as though I am
intruding on private grief. If the Labour party can tear itself apart
on a relatively technical measure
like this one, one can only wonder what machinations, discussions and
divisions are taking place
behind the scenes on issues of wider concern, such as Labour's failure
to deliver on the national
health service, education and crime.
Mr. Cousins: I assure the hon. Gentleman that we have had a most comradely
exchange with the
most comradely outcome. I should like to put that on record.
Mr. Gibb: I am grateful to the hon. Gentleman for that intervention.
I am sure that it was
comradely, but none the less Labour Members were split.
This is an important Bill which has had several layers of scrutiny.
As the Minister said, it began life
under the Conservative Government, but when it eventually began its
passage through the other
place, despite scrutiny and a report by the Select Committee on Trade
and Industry, it still
contained a number of problems.
The hon. Member for Great Grimsby was wrong to say that the Opposition
did not give the Bill
considerable scrutiny. My noble Friend Baroness Buscombe and I discussed
our concerns in
great detail with the Minister, Lord McIntosh, and owing to pressure
in the other place by my
noble Friend and a reasonable approach taken by the Minister, many
of our concerns were dealt
with by Government amendments. Indeed, had the Government taken such
an approach on some
of their more controversial legislation, they would not be in their
current position in regard to
credibility with the public.
There are nevertheless some remaining concerns which we raised in Committee
and which the
Government have not dealt with adequately. Our first concern is that
of the so-called default
provisions. Clause 1(5) of the Bill states:
except as far as otherwise provided by this Act or
any other enactment, the law relating to partnership does not
apply to a limited liability partnership.
The reason for that provision is, according to the Government, that
as an LLP is a legal person in
its own right and is therefore a body corporate; in general,
28 Jun 2000 : Column 947
partnership law should not apply; and company law should apply instead.
However, the very
essence of an LLP remains that of a partnership.
It was in order to retain the partnership ethos that professional firms
have sought this form of
incorporation rather than becoming companies proper. An LLP will still
have what is in effect a
partnership agreement regulating all the internal relations of a partnership;
but particularly for
smaller, less well advised partnerships which seek to become LLPs,
it could well be that the
internal partnership agreement will not have clauses that deal with
every eventuality to be faced by
a partnership in business.
In the past, this would not have mattered. The Partnership Act 1890--and
the century of case law
since--have filled in the gaps regarding almost every conceivable eventuality.
Future case law,
based on precedent and the principles established in earlier cases,
would deal with future
eventualities. Those matters may include the right of partners to examine
the books and records,
the right to take part in the management of the partnership, and questions
regarding the expulsion
of members.
Those issues may be dealt with adequately in the partnership agreement,
but they may not be.
Short agreements for smaller partnerships drafted when it was understood
that general partnership
law would apply may well not include many important provisions.
The amendment would provide that the law with regard to the internal
arrangements of an LLP
should default to general partnership law. Its wording has simply been
lifted from an earlier draft
of the Bill. The removal of the provision from the final Bill has aroused
widespread concern.
That concern was such that the Government entered into a separate consultation
exercise on the
specific question of the default provisions. The views of many consultees
were summed up in the
Government's response document. One paragraph voiced the general concern,
stating that
in the absence of an adequate agreement between the
members of a Limited Liability Partnership, the relationship
between members would be uncertain; there was a
strong desire that partnership law should govern the rights and
duties of the members of the Limited Liability Partnership
. . . partnership law is well understood by partnerships
and practitioners, with the principles established
over many years.
That was also the view of the Law Society, which stated:
The Society was concerned with clause 1(5) which
disapplies partnership law from limited liability partnerships
unless otherwise provided in the Bill. The Society
has always considered there to be the need for some default
provisions that would operate in the absence of
agreement to the contrary within an LLP and which would cover
certain basic matters relating to the mutual rights
and duties of the members of an LLP.
The Law Society accepted that the Government had amended the Bill to
insert one or two of the
partnership law provisions in the regulations. However, it is inevitable
that some areas will not be
covered by the exhaustive and specific list that the Government have
included in the regulations
and, as always with this Government, it is small business that will
suffer. Big, well advised
partnerships will be fine, but yet again the Government are creating
a complex regulatory regime
that puts a premium on being well advised.
The hon. Member for Great Grimsby complained about advisers' incomes,
but the pressure for
greater regulation is created by him and those who share his philosophy.
28 Jun 2000 : Column 948
Someone has to read, understand and remember the regulations for which
the hon. Gentleman
continually presses. That will lead to greater demand for expert advice,
and therefore higher
salaries for those prepared to do that work.
The amendment would reduce the premium for expert advice by making the regime simpler.
Mr. Gerald Bermingham (St. Helens, South): My sole reservation about
LLPs has to do with
negligence on the part of professional firms. For example, the negligence
policy of a firm of
accountants that becomes an LLP may not deal with any negligence created.
That has been the
case in certain recent takeovers. In the old days, one could at least
sue the partners to make up the
shortfall on the negligence cover, but that does not seem to be the
case now.
Mr. Gibb: The hon. Gentleman raises a point that goes to the heart of
the Bill. The aggrieved
person can still sue the partner or partners involved in preparing
the negligent work. However, why
should the law for people in the accountancy or legal professions be
different from that covering
people in the medical profession, such as nurses? They work for the
health service but are not
subject to losing all the assets that they have built up over a lifetime.
It is not a matter of fat cats. There are 120,000 chartered accountants
in this country. Most of
them could never be described as fat cats, and they live under the
constant threat that they will
lose their lifetime assets because of the negligence of another partner.
The Bill goes a long way
towards solving that problem, and it is welcome for that reason.
Mr. Bermingham: There is a world of difference between a partnership
in a garage business and
one involving accountants, estate agents, solicitors or surveyors.
The difference is simple: the first
provides a service, whereas the professionals provide advice. If the
advice is wrong, the damages
can be massive. If the service is wrong, the damages are much smaller.
6.15 pm
Mr. Deputy Speaker: Order. I think that hon. Members are straying into
Second Reading points.
The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) should
address his remarks to
the amendment.
Mr. Gibb: I am grateful to you, Mr. Deputy Speaker, but I do not believe
that the distinction
offered by the hon. Member for St. Helens, South (Mr. Bermingham) is
valid. Advice and services
are very similar, in the sense that one either provides a service or
advises someone else about it.
That similarity crosses all professional boundaries and is not confined
to law and accountancy.
The amendment would reduce the Bill's complexity. Even at this late
stage, I hope that the Minister
will relent and accept, if not its wording, then at least its principles.
Mr. Burnett: I shall not go over material discussed on Second Reading
and in Committee, but I
was a senior partner in a large firm for more than 20 years and I know
how important it is--for the
clients and customers of a partnership, as well as for the members
of that partnership--to ensure
that the partnership ethos is
28 Jun 2000 : Column 949
preserved. It is important that a duty of good faith should exist between
the partners, as that is in
the interests of clients and customers.
I strongly support the amendment. The Partnership Act 1890 is a good
Act, as was said earlier. It
provides certainty and simplicity, and will provide some continuity.
Simplicity is extremely
important, especially for small businesses that cannot afford the advice.
They will not necessarily
know of the existence of regulations passed by the House.
I hope, even at this late stage, that the Government will remember the
interests of small firms and
think again on this matter. The fall-back position should be provided
by the 1890 Act: it has stood
the test of time and is supported by a large body of case law.
Mr. John M. Taylor (Solihull): Is not one of the limitations of the
1890 Act the fact that it
presupposes that ownership, profit sharing and decision making are
all in step with each other? In
a modern partnership, is it not possible that distinctions may need
to be made between who owns,
who makes decisions, and who makes profits?
Mr. Burnett: As usual, the hon. Member for Solihull (Mr. Taylor) is
correct and makes a good
point. However, he knows that it is open to the parties who create
a partnership under the 1890
Act to vary the profit-sharing and ownership proportions. They can
do so with remarkable
simplicity. Although they will have to consider the tax implications
of such an action, but it is the
Act's simplicity that is so important.
It is vital that small businesses do not have to fall back on the more
tortuous and complicated
Companies Act 1985. I understand that there must be intricate provisions
under that Act relating
to disclosure, and that the Insolvency Act 1986 also has a part to
play. Even so, for the reasons
that I have given, the 1890 Act is an excellent piece of legislation
and should not be rashly
discarded in the way that the Government propose.
Dr. Howells: I acknowledge the very proper concern expressed in the
amendments in the name
of the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb), and
the support given by the
hon. Member for Torridge and West Devon (Mr. Burnett). I will try to
give the amendments the
respect that they deserve, because there is no question but that this
is an important point.
However, I will explain why I will be resisting the amendments--much
to the disappointment, I
know, of the hon. Member for Bognor Regis and Littlehampton.
Throughout the Bill's passage, there has been a great deal of debate
about partnership law and its
application, or non-application, to limited liability partnerships.
A general application of
partnership law to LLPs, very similar to what is proposed in amendment
No. 1, was contained in
the draft Bill published in September 1998. Subsequently, we took the
decision to remove it.
Nothing has yet led us to conclude that we were wrong to do so, and
we remain opposed to any
attempt to reintroduce it. Let me explain why.
As the hon. Gentleman informed us, the main point is that an LLP is
a body corporate, while a
partnership is not. That is a fundamental difference. So because a
28 Jun 2000 : Column 950
limited liability partnership will be a legal entity separate from its
members, its clients will be able
to enter into contracts with the LLP itself, not the members. An LLP
will also be able to hold
property. In addition, because of its separate legal status, an LLP
will continue until it is formally
wound up, no matter what changes occur in its membership.
A partnership, however, exists only because the partners are carrying
on business together, and it
has no separate life of its own. Contracts are between third parties
and the partners themselves,
and changes in partners will cause the partnership to dissolve, although
the partners can make
specific arrangements to prevent that from happening.
Many of the provisions of the Partnership Act 1890 would be inappropriate
for an LLP. Sections
1 to 4 deal with the nature of the partnership. They are of no relevance
to limited liability
partnerships, because the nature of an LLP is set out in the Bill.
Sections 5 to 18 deal with the
relations of partners to persons dealing with them. Again, they are
of no relevance to limited
liability partnerships because clause 6 deals with this for LLPs. Sections
19 to 31 deal with the
relations of partners to one another. Only eight of those sections
are appropriate to LLPs. The
others deal with partnership property, for example, which is inappropriate
for an LLP because
property can, and is likely to, be held by the LLP, not the members.
They deal also with
retirement, which is dealt with in clause 4.
Sections 32 to 44 of the 1890 Act deal with the dissolution of a partnership
and its consequences.
These sections would be inappropriate for an LLP, because it will be
a separate body corporate,
and winding up will be dealt with by application of insolvency legislation,
as the hon. Gentleman
hinted. Finally, sections 45 to 50 are supplemental.
So of the 50 sections of the 1890 Act, only eight are relevant or appropriate
to LLPs. We intend
to apply appropriately modified versions of these eight sections to
LLPs by way of regulation to
govern the relationship between members where there is no agreement.
Yet the amendment
suggests that all 50 sections are relevant, when clearly they are not.
The amendment would also apply the general law relating to partnerships.
Again, that has been
developed with regard to partnerships, not bodies corporate. In particular,
over the years the
general law has developed the duties owed between partners. We believe
that application of these
duties to an LLP would be problematic. The existence of the limited
liability partnership as a
separate legal entity means that members will owe duties to the LLP
itself. That is not the case in a
partnership. Thus a general application of partnership law could leave
members of an LLP facing
concurrent duties--duties owed to the LLP, and duties owed to each
other. There would be no
indication of which duty took priority were there to be a conflict.
The hon. Gentleman helpfully set out in Committee the extent to which
the Government have
fuelled the debate.
28 Jun 2000 : Column 951
Initially, in response to consultee concerns, we established a small
working group of officials and
representatives from the profession to consider the options. Discussion
ranged over all the points
that I have raised, and the conclusion was that the preferred solution
was to apply default
provisions dealing with the eight relevant sections of the 1890 Act
that I have mentioned instead of
a blanket application of partnership law.
We went out to consultation on this in February. I am sure that the
hon. Gentleman remembers
that full well--we said it often enough. The response was in favour
of the approach that the
Government have adopted. The consultation paper also dealt with the
question of whether we
should impose a duty of good faith as between members. As I explained
in some detail in
Committee, we eventually decided against such a duty, although nothing
in the legislation would
prevent members of a limited liability partnership including such a
duty in their membership
agreement if they so wished.
Finally, perhaps I might comment on the two main arguments made by those
in favour of a general
application of partnership law. First, they argue that partnership
law is well understood and that
the Partnership Act 1890 is a model of simple and elegant legislation.
However, as I have said,
partnership law is not just the 1890 Act, but an extensive body of
general law. This is not simple,
even for experts. There are a number of complicated and sometimes vexed
issues, which is why
the Law Commission is currently reviewing partnership law.
Next, it is argued that it is difficult to see how the expressed intention
to create an entity that
combines partnership ethos with limited liability can be achieved without
applying partnership law.
However, the LLP legislation remains silent on the relationship between
members, so as to ensure
that there is freedom for members in each LLP to develop provisions
appropriate to their specific
circumstances. It is that flexibility which those partnerships that
are planning to convert to a
limited liability partnership are keen to see preserved in the new
entity, and we believe that that is
what will preserve the partnership ethos.
I remain unconvinced that amendment No. 1 is necessary or suitable.
I very much hope that the
hon. Gentleman will see fit to withdraw it.
Mr. Gibb: That was a useful exchange of arguments that we first rehearsed
in Committee. I
cannot claim to have heard the four concessions from the Minister which
the hon. Member for
Great Grimsby (Mr. Mitchell) imaginatively construed from the Minister's
first response. I had
hoped that the Minister might, at the last moment, have given small
businesses some concessions,
so he will not be surprised to hear that I am disappointed, although
not surprised, at his response.
On that note, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Deputy Speaker: As the hon. Member for Great Grimsby (Mr. Mitchell)
does not intend to
move several of his amendments, we now proceed to amendment No. 7.
28 Jun 2000 : Column 952
Clause 15
Application of Company Law etc
Mr. John Burnett (Torridge and West Devon): I beg to move amendment
No. 7, in page 10,
line 15, after "to", insert--
'bodies corporate recognised by the Law Society under section 9 of the Administration of Justice Act 1985,'.
Mr. Deputy Speaker: With this it will be convenient to discuss the following
amendments: No.
8, in page 10, line 17, after "to", insert--
'bodies corporate recognised by the Law Society under section 9 of the Administration of Justice Act 1985,'.
No. 4, in page 10, line 22, at end insert--
'(2) For the purposes of this section any law relating to bodies corporate
recognised by the Law Society under section 9
of the Administration of Justice Act 1985 shall be deemed to be a law
relating to companies or other corporations'.
Mr. Burnett: We discussed in Committee a new clause that contained proposals
fairly similar to
those in amendments Nos. 7, 8 and 4. Unfortunately, due to a technical
hitch, I am now told that
solicitors might not be able to set up as LLPs--at least, not as soon
as other professions. The
Minister was helpful in Committee, and was anxious that solicitors
were not discriminated against.
There is a large body of legislation that makes reference to solicitors
which will need amending in
the light of this Bill. The Law Society was led to believe that this
could be achieved by making
regulations under clause 15, and that is what I have sought to do.
However, I understand that the
Law Society has been told that the Minister's Department believes that
it may lack the power to
make these regulations.
This has led to some confusion, and the Government clearly still intend
solicitors to take
advantage of this new business entity. Indeed, the Minister assured
me in Committee that solicitors
would not be penalised or discriminated against in any way. I hope
that the Minister can put my
concerns at rest.
6.30 pm
However, there is still concern in the Law Society about how the Government
will ensure that
solicitors are not discriminated against. The Minister suggested in
Committee that it might require
primary legislation, but what chance is there of a dedicated solicitors
Bill before this Bill comes
into force in 2001? I understand that another option might be to use
orders under the regulatory
reform Bill, but that Bill is still in draft. When can we be certain
that it will receive Royal Assent in
any event? It may be that the necessary changes can be made by using
existing powers within the
body of legislation affecting solicitors and their practices, such
as the Solicitors Act 1974 and the
Administration of Justice Act 1985. However, the Law Society is doubtful
whether that can be
achieved, and I believe that the Department of Trade and Industry also
has concerns.
It is surely the neatest solution to use clause 15 to make the necessary
changes, in accordance
with the three amendments that we are discussing. Even though the DTI
recently voiced doubts,
the Law Society still believes that the powers in the Bill are adequate,
although I understand
28 Jun 2000 : Column 953
that we are waiting for parliamentary counsel to confirm that. I hope
that the Minister will let us
have his views on that point. The amendment would simply make the power
more explicit.
I know that the Minister is extremely concerned about this problem.
He assured me in Committee
that no discrimination or prejudice would be suffered by the solicitors'
profession as a result of
the introduction of this legislation. In other words, all trades and
professions should be treated
equally and must equally be able to become LLPs in 2001. Many thousands
of individuals who
make a great contribution to the United Kingdom economy wait to hear
from the Minister his
response to the group of amendments.
Dr. Howells: I rise with appropriate gravity, knowing that thousands
of solicitors out there are
hanging on my every word. I restate my determination that solicitors
will not be discriminated
against when it comes to their ability to form LLPs. I am sure that
the hon. Gentleman will be
pleased to hear of the progress that we have made on this issue since
we discussed it in
Committee. I said then that my Department was working with the Law
Society and the Lord
Chancellor's Department to examine the detail of the legislation governing
solicitors and consider
whether primary legislation was unavoidable and, if so, to determine
what specific changes needed
to be made.
On the basis of the analysis carried out by the Law Society and the
Lord Chancellor's Department
to date, we believe that the vires contained in the Bill are wide enough
to make the amendments
that have been so far identified by regulation to ensure that solicitors
may make use of LLPs.
Assuming that no further amendments are considered necessary that differ
in kind to those already
identified, the amendments will be included in the regulations to be
made under the Limited
Liability Partnerships Bill when it receives Royal Assent. I see no
advantage in the amendments
tabled by the hon. Member for Torridge and West Devon (Mr. Burnett),
and I invite him not to
press them.
Mr. Burnett: I am much comforted by the Minister's words. I am grateful
to him for the attention
that he has given to this important matter. I note his comment that
his Department, the Lord
Chancellor's Department and the Law Society believe that the vires
are wide enough in the Bill as
drafted, and in the regulation provisions in clause 15. On that basis,
I am happy to beg to ask
leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Gibb: I beg to move amendment No. 2, in page 10, line 22, at end
insert--
'(2) Section 458 of the Companies Act 1985 (punishment for fraudulent
trading) shall apply to limited liability
partnerships.'.
Mr. Deputy Speaker (Mr. Michael J. Martin): With this it will be convenient
to discuss the
following amendments: No. 3, in page 10, line 22, at end insert--
'(2) No regulations made under subsection (1) above shall enable indictable
criminal offences punishable by imprisonment
to be made applicable to limited liability partnerships, other than
those which are contained in the Companies Act 1985
and Insolvency Act 1986 as at 1st June 2000.'.
28 Jun 2000 : Column 954
No. 11, in clause 17, page 10, leave out lines 31 and 32.
No. 6, in schedule, page 15, line 15, leave out--
'incorporated as a limited liability partnership with that name,'
and insert--
'a limited liability partnership or oversea limited liability partnership,'.
Mr. Gibb: During a debate earlier this afternoon, we heard from the
hon. Members for Great
Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins)
about the vast
salaries that some lawyers and accountants are able to command, but
I should tell them that they
are responsible for those high salaries. The growing body of rules
and regulations emanating from
this place that have to be obeyed by people in the real world is the
cause of those high salaries.
The left-wing interventionist philosophy of the hon. Gentlemen and
their party creates the pressure
for the vast majority of regulations.
When I started work as a tax adviser in 1986 at KPMG, or Peat Marwick
Mitchell and Co., as it
was then, the tax legislation was contained in one volume of "Butterworths",
and it was not a
particularly thick volume. Now there are three volumes, each bigger
than the 1986 one and printed
on thinner paper. The tax practice grew hugely during that period as
the volume of tax legislation
increased, and the same has happened to company law and no doubt a
whole host of other areas
of law. I know that most of the increase took place under the Conservative
Government, but the
pressure for regulation tended to come from the left-wing philosophy
in our political regime, albeit
that much of the tax legislation was introduced in order to close loopholes.
The consequence is that the demand for people who have read, learned,
remembered and
understood our legislation is increasing. Although the supply of people
prepared to do that kind of
work has increased to a degree, the work is painstaking and not terribly
exciting. So demand has
outstripped the supply and the people with experience and ability are
now commanding high
salaries. The responsibility lies not with the City firms--with KPMG
or PricewaterhouseCoopers,
which the hon. Member for Great Grimsby kept going on about--but with
us in this place.
We pushed through vast volumes of new rules and tried to make it even
easier for ourselves by
pushing large chunks into secondary legislation, which often are not
debated. When they are
debated, it is done upstairs in Committee without the possibility of
tabling amendments. We are
becoming a conveyor belt, mass-producing legislation that we expect
people to obey. We deem
them to have knowledge of all the laws that we pass. Then some Members
of Parliament have the
audacity to complain that society is devoting too many resources to
reading and applying that
legislation.
The Bill is a classic example of how a simple 19-clause Bill can spawn
a volume of regulations.
Four clauses of the Bill simply empower the Government to create new
swathes of regulations
contained in a volume the size of the copy that I have here. Clause
16 is a classic Henry VIII
clause, and it even provides power to make regulations that themselves
can amend primary
legislation. There will be no First or Second reading, no tedious Committee
stage, Report or Third
Reading. The primary legislation will simply be amended by a statutory
instrument rubber-stamped
by a Committee upstairs.
28 Jun 2000 : Column 955
Throughout the Committee proceedings, when the Opposition have raised
concerns--the hon.
Member for Torridge and West Devon (Mr. Burnett) shares our concern--about
the quantity of
secondary legislation, the answer from the Minister was that it was
better to use secondary
legislation because it was easier to amend. That is the point. We must
make it harder, not easier to
amend and create new regulations. Some £10 billion of additional
regulatory burdens have been
piled on to industry in just the past three years. Small business in
particular is drowning under the
deluge of paperwork. We are becoming a nation of inspectors and regulators
instead of
shopkeepers and entrepreneurs.
The House of Lords Select Committee on Delegated Powers and Deregulation
carried out its
duties well when it examined the Bill. It alerted Parliament to the
fact that clause 16 is a Henry VIII
provision, and we ought to take notice of that, not simply ignore it,
as the Government did in
Committee. The Select Committee was set up to highlight Henry VIII
provisions.
The report also highlighted the Committee's concerns about the use of
secondary legislation to
create new serious criminal offences. In paragraph 8, the Committee
says:
The draft regulations create offences punishable
on summary conviction by a fine but the power is wide enough to
allow the regulations to provide for imprisonment
or for trial on indictment. If, as seems likely, the intention is to
provide only for summary trial and a fine, the Committee
is of the opinion that it would be better for this limitation to
appear in the Bill.
In other words, the Committee assumed that the power was intended to
create only minor
offences. Its members felt that that was acceptable, but they were
alarmed that the way in which
the clause was drafted could enable the creation of more serious offences.
They thus
recommended that the Government should change the clause so as to reduce
the power and to
confine it only to minor criminal offences.
The Government refused to do so, however. They insisted on the need
to incorporate all the
existing criminal penalties under the Companies Acts and under insolvency
legislation in the LLP
regime. That may be fair enough, but it should be done through primary
legislation, not by
statutory instrument. The amendments would do precisely that; they
would incorporate in primary
legislation the serious criminal provisions that the Government want
to include.
In Committee, something more sinister was revealed: clause 17 is not
merely about incorporating
in the LLP legislation the criminal provisions under existing company
and insolvency law; it is also
about enabling new criminal offences to be created by secondary legislation.
The Minister said
that
it is important to preserve the flexibility to create
offences in future and to decide how they should be punished . . .
There may be new crimes for which we shall have
to formulate new punishments.--[Official Report, Standing
Committee F, 15 June 2000; c. 63.]
There we have it: new crimes and punishments created by secondary legislation.
That is wrong.
The Minister knows that it is wrong. The House of Lords Committee on
Delegated Powers and
Deregulation knows that it is wrong. That Committee was set up in 1992
with a specific
28 Jun 2000 : Column 956
responsibility: to point out to Parliament when such matters are wrong.
The Minister should take
note of the Committee's views and accept our amendments.
Mr. Stuart Bell: I declare an interest as a barrister at law, as an
adviser to Ernst and Young and
as a contributor to Accountancy Age.
Amendment No. 6 is technical; it may seem minor, but it is important
for those firms affected by
the provisions and by those with whom they do business. It will mean
that the British branch of an
oversea limited liability partnership will be able to continue to use
a name that concludes with the
words "limited liability partnership", "LLP" or their Welsh language
equivalents. As drafted, the
Bill would make it an offence for people to describe themselves as
a limited liability partnership or
LLP unless they were incorporated in this country.
The pace of change in the global village is such that, sometimes, the
drafting of legislation has
difficulty keeping up. That is the case for the Bill. Its present wording
would cause problems for
all those LLPs that are registered in another jurisdiction, but have
a place of business in the UK. It
is to the credit of the Government, of Ministers and of the Department
of Trade and Industry that
they realised that such problems would be caused. I hope that they
will look benevolently on my
amendment.
It is thought that, for example, there are at least 30 United States
law firms with LLP status that
have an office in London. Their LLP status shows why the Bill is welcome;
it allows British firms
to compete on the same basis. The presence of such firms in London
demonstrates the dynamism
of the international market for legal services.
It must be right, however, that all those doing business with firms
whose partners have limited
liability should be aware of that fact. The thrust of the policy behind
the Bill is that a firm's status
should be disclosed, together with the fact that its liability is limited.
Under clause 14, the
Secretary of State will have power to regulate overseas LLPs. Furthermore,
the DTI has suggested
that, in due course, it will hold consultations on appropriate provisions.
It would be quite inconsistent with such powers and with such an intention
to forbid the use of the
LLP title from the outset. Fortunately, the solution is simple; it
is to be found in the amendment.
The amendment ensures that an oversea LLP will not be prohibited from
describing itself as such.
A definition of "oversea limited liability partnership" is to be found
in clause 14(3): it is
a body incorporate or otherwise established outside
Great Britain and having such connection with Great Britain,
and such other features, as regulations may prescribe.
The practical effect of that is that regulations will determine precisely
which LLPs will be entitled
to the benefit of the amendment. I know that those firms with limited
liability that have a place of
business in the United Kingdom are also subject to regulations under
clause 14.
6.45 pm
The amendment reflects the on-the-ground reality of international law
practice and recognises the
realities of the globalised economy. I am grateful to the Minister
and to his Department for
acknowledging that. The amendment also serves the public interest by
communicating to the
public
28 Jun 2000 : Column 957
the status of business organisations. In those circumstances, I hope
that the Minister and the
whole House will welcome the amendment and further its passage onto
the statute book.
Mr. Burnett: I speak to amendments Nos. 2, 3 and 11, tabled by the hon.
Member for Bognor
Regis and Littlehampton (Mr. Gibb) and his hon. Friends. As the hon.
Gentleman was kind
enough to point out during his speech, Liberal Democrat Members deprecate
the use of regulation
to introduce so many of the provisions under the Bill; such power is
utterly unsatisfactory. Most
pernicious of all are new regulations that could deny individuals their
liberty. They should not be
incorporated in law except through primary legislation. That must be
clear to all Members of the
House.
Dr. Howells: I shall deal with amendments Nos. 2, 3 and 11, before dealing
separately with
amendment No. 6, proposed by my hon. Friend the Member for Middlesbrough
(Mr. Bell).
In Committee, the hon. Member for Bognor Regis and Littlehampton (Mr.
Gibb) expressed
concern: first, that we were intending to apply to members of an LLP
existing criminal offences
that apply to company directors and are punishable by imprisonment;
and, secondly, that those
offences were to be imposed by secondary legislation. He expressed
further concern that the
power in clause 17 was wide enough to allow the creation in regulations
of new offences that may
also be punishable by imprisonment.
If I understand the hon. Gentleman correctly, amendment No. 2 is intended
to probe why we have
not included in the Bill all the offences punishable by imprisonment.
Any alternative interpretation
does not seem feasible. It is our intention to include section 458
of the Companies Act 1985 in
regulations alongside other offences, and I cannot imagine that there
is anything so special about
that section that it should appear in the Bill when other sections--such
as section 450, which
makes it an imprisonable offence to destroy, mutilate, falsify, or
alter documents--remain in
regulations. Nor can I imagine that the intention is to place section
458 in the Bill as the only
provision punishable by imprisonment. How would we justify providing
that, in some
circumstances, members of an LLP would face a lesser penalty than directors
of a company for
the same offence?
Why, then, have we not put imprisonable offences in the Bill? Because
we do not consider it
appropriate. As I have made clear, our intention is that the members
of an LLP should face the
same penalties as members of a company; that seems a reasonable policy
objective. The offences
arise from various provisions throughout the companies and insolvency
legislation. We see no
reason to place those provisions in the Bill while others are confined
to regulations. In considering
the legislation, Parliament concluded that the level of penalty was
appropriate to a body corporate
with limited liability and to its directors. We see nothing about the
limited liability partnership to
suggest that application of those penalties to members of an LLP is
inconsistent with Parliament's
intentions.
I shall now discuss amendment No. 3. I realise that the intention is
to restrict our powers to
imprison members of a LLP to those offences that are contained at present
in
28 Jun 2000 : Column 958
the Companies Act 1985 and the Insolvency Act 1986. The hon. Member
for Bognor Regis and
Littlehampton would prefer it if, every time that the Government wanted
to legislate to make an
offence punishable by imprisonment, they could do so only by introducing
primary legislation.
That is a reasonable case to make.
I shall now discuss amendment No. 11. It is clause 17 which provides
that regulations may, in
particular, make provisions for dealing with non-compliance with any
of the regulations, including
the creation of criminal offences. However, amendment No. 11 would
remove that provision in its
entirety.
The House of Lords Select Committee on Delegated Powers, which the hon.
Gentleman
mentioned, drew the attention of the other place to the powers to create
offences by regulations,
and invited it to consider whether the Bill should be amended to provide
that such offence should
be punishable, on summary conviction, by a fine.
We explained in our response that it was our intention to apply to limited
liability partnerships the
same offences applying to companies. We noted that the creation of
new offences would be
subject to affirmative resolution, and our intention to apply existing
offences for companies in the
first set of regulations would mean that these would also be subject
to affirmative resolution.
While we have no intentions at this stage to apply to LLPs anything
other than the offences
applying to companies, the power is wide enough to create new offences,
as I think that our
response indicated quite clearly. We believe this to be a prudent provision
for the future, and
consistent with similar provisions in existing legislation.
I cannot agree that amendments Nos. 2, 3 or 11 are either appropriate
or necessary. In addition, if
we look at their practical effect, we can see that they would be highly
problematic. Amendment
No. 3 is to clause 15, and to regulations made under subsection (1)
of that clause, yet it is the
power in clause 14 which provides for the Government to make regulations
on the insolvency and
winding up of limited liability partnerships or oversea LLPs. Were
we to accept these
amendments, we would be prevented from making any provision for non-compliance
with
regulations on the insolvency and winding up of LLPs. That cannot be
right.
I shall now discuss amendment No. 6. I am very grateful to my hon. Friend
the Member for
Middlesbrough for raising this point. Our attention has been drawn
very recently to the
inconsistency between the drafting of this paragraph, and our statement
to the Select Committee
on Trade and Industry in June 1999. We told that Committee that company
legislation which
requires that oversea companies prominently display the company's name
and the country in
which it is incorporated will also be applied to oversea-registered
LLPs by regulation, and that this
includes the requirement to display that information on letterheads
and on all notices and other
publications of the LLP. That remains our intention.
The question then arises as to why we need additionally to prevent the
use of the phrase "limited
liability partnership" at the end of the title of an oversea-registered
LLP. That would cause
particular difficulties for existing oversea LLPs, many of whom will
be required by the legislation
of the jurisdiction in which they are registered, to include those
words.
28 Jun 2000 : Column 959
We have concluded that it is unnecessary both to restrict the use of
the words "limited liability
partnership" in the title of oversea LLPs and to require that they
display their place of registration
on all their publications. The latter should prove wholly sufficient
to notify clients that they are
dealing with an oversea entity.
Therefore, while I ask the hon. Member for Bognor Regis and Littlehampton
to withdraw
amendment No. 2 and not to press amendments Nos. 3 and 11, I will agree
to amendment No. 6,
tabled by my hon. Friend the Member for Middlesbrough--a rare event
indeed in the progress of
the Bill.
Mr. Gibb: I will accede to the Minister's request that I ask the leave
of the House to withdraw
amendment No. 2 and refrain from pressing amendments Nos. 3 and 11,
but he was slightly
disingenuous when he knew very well the purpose of the amendments.
It was not intended to
restrict the use of prison in dealing with people who commit serious
company law or insolvency
law offences. The purpose of the amendments is to point out the very
real concerns, raised by the
House of Lords Select Committee on Delegated Powers, that it is not
proper--it is not right--for
new serious criminal offences punishable by prison to be introduced
into our legal system by
means of secondary legislation.
The salient question is not whether the affirmative or negative resolution
procedure is used, but
whether the new crimes are created by secondary legislation, which
cannot be right. Such a
measure should go through the full procedures of the House--First Reading,
Second Reading,
Committee stage, Report stage and Third Reading--and then pass on into
the Lords, so that there
is a full chance of the whole nation being aware of the creation of
those new criminal offences.
The provisions are very wrong. It is a sad day when our House is rubber-stamping
and
mass-producing this kind of criminal legislation through secondary
legislation. I beg to ask leave
to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule
Names and registered offices
Amendment made: No. 6, in page 15, line 15, leave out--
'incorporated as a limited liability partnership with that name,'
and insert--
'a limited liability partnership or oversea limited liability partnership,'.--[Mr. Stuart Bell.]
Order for Third Reading read.
6.55 pm
Dr. Howells: I beg to move, That the Bill be now read the Third time.
The Bill will introduce, for the first time in nearly a century, a new
vehicle for carrying on a
business. It is the result of three years of consultation and debate
with a wide variety of interested
and learned individuals. Detailed legislative proposals have been in
the public domain since
September 1998, and these were scrutinised shortly afterwards by our
own Select Committee on
Trade and Industry. Since then, the Bill has received close and thorough
scrutiny in the other
place and by Members of this House.
28 Jun 2000 : Column 960
The Bill before you today, Mr. Deputy Speaker, is in very good shape,
and I take the opportunity
to thank all those, on both sides of the House, who participated in
the many lively and interesting
debates that we have had on the detail to ensure that this is the case.
6.56 pm
Mr. Gibb: We have now reached the final stage of the Bill's long journey
to the statute book. It is
one of the few Bills that the Government have managed to get through
both Houses without its
becoming logjammed in the congestion that they have created in the
other place, so this is quite a
novel occasion.
The Bill started life under the Conservative Government, in response
to some genuine concerns on
the part of the accountancy and legal professions, which were finding
it increasingly difficult to
retain some of their best people because those people were refusing
to accept the risks of
becoming a partner.
Listening to some of the members of the Labour party and their deep-rooted
prejudices and
hostility to accountants has been quite a revelation. There are 114,000
chartered accountants in
this country, who work hard for a living, like anyone else. Some are
paid well; others are not. But
why should that particular line of work expose participants to the
risk of losing a lifetime's savings
as a result of the negligence of a fellow partner? That approach does
not apply to doctors or
nurses in the national health service--no one could say that the work
of a chartered accountant is
more important than that of a doctor or a nurse--or to teachers, or
even to bankers in the City of
London, so why should it apply to accountants and solicitors?
The Bill simply addresses that historical anomaly and, if anything,
it is likely to ease the upward
pressure on salaries as firms of solicitors and accountants find it
easier to recruit and to retain key
staff.
Mr. Fabricant: Is it not also the case that people using those services
will also find that their fees
are reduced, as was pointed out earlier in our debates this evening,
because there will be less need
for firms to take out indemnity insurance, which can be so costly nowadays?
Mr. Gibb: My hon. Friend makes a very valid point, and I hope that the
hon. Members for Great
Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins),
who tabled several
amendments, will take it on board.
The Bill was one of the first to undergo the new procedure of being
examined by a Select
Committee before beginning its passage through Parliament. The Select
Committee report was of
a very high quality and certainly resulted in the removal from the
Bill of a raft of the more
unacceptable and unworkable provisions. However, it is disappointing
that the Committee has not
been given the opportunity to examine in more detail the whole volume
of draft regulations which
were re-published in almost final form in May 2000. Given that the
meat of the Bill is contained in
those regulations, I believe that the experiment of having a Bill scrutinised
by a Select Committee
has not been completed, given that it has not yet looked at those regulations.
The Committee
requested to look at those regulations. I hope that before
28 Jun 2000 : Column 961
those regulations are laid before Parliament, a report will be prepared
on the volume of draft
regulations that the Government have published.
The new draft Bill that followed the Select Committee report went through
a further consultation
process. However, the final Bill, which started life in another place,
gave rise to a number of
concerns. My noble Friend Baroness Buscombe highlighted on Second Reading
our concern over
the disapplication of partnership law and the absence of a default
to that law on issues on which
the partnership agreement is silent. The Government have dealt with
that matter in part, although
not satisfactorily.
The Government took on board and dealt satisfactorily with our concern
about the absence of
provisions to deal with a member wishing to retire from a limited liability
partnership. We were
also concerned about an ambiguity in the Bill: whether members of an
LLP could be construed as
employees. That would have significant tax and employment law consequences
for that member.
Again, Lord McIntosh took on board Opposition concerns and amended
the Bill to make it clear
that members of an LLP were not to be employees.
We were concerned about the taxation provisions in the Bill and whether
converting from a
partnership to an LLP would trigger a capital gains and a stamp duty
charge. We secured
assurances and amendments on that matter in another place. Other issues,
such as insolvency and
acquisition accounting were also raised and dealt with. Indeed, if
Ministers were as responsive to
Opposition concerns in this House as they seem to have been, on occasion,
in another place, they
might not now be developing a reputation for being out of touch and
arrogant.
Having said that, the Opposition are pleased that we have ensured that
this legislation, which is
important for commerce, will go on to the statute book in a better
form than it would otherwise
have done. We remain concerned about the absence of a general default
clause and alarmed at the
extensive regulatory powers contained in the Bill, in particular clause
16--the Henry VIII
clause--and the power to create new serious crimes and punishments
by secondary legislation,
which is contained in clause 17.
Those important reservations aside, the Bill is welcome. As my hon.
Friend the Member for
Lichfield (Mr. Fabricant) just intimated, it will do much to ease concerns
among professional firms
and we can only hope that that may lead to industry facing smaller
increases, or even reductions,
in professional fees.
7.2 pm
Mr. Burnett: We support the Bill, although some other improvements should
have been made. I
am encouraged by what the Minister said about its applicability to
solicitors.
We discussed clause 7 at length in Committee-- the provisions that relate
to ex-members. The
Minister criticised that clause in Committee, at least by implication,
because he considered it to be
inflexible. On report, I tabled amendment No. 5, but it was not selected.
I hope that the Minister
will think again about that matter. The amendment would have made it
clear that clause 7(2) was
intended to have a similar effect to section 31 of the Partnership
Act 1890, which the Minister
conceded was
28 Jun 2000 : Column 962
important and prayed in aid for flexibility. Such an amendment would
preserve flexibility with
regard to the arrangements for the internal management of a limited
liability partnership, which is
important.
There are to be further consultations and regulations in respect of
taxation. I draw the Minister's
attention to the roll-over relief provisions that impact unsatisfactorily
on LLPs. Roll-over relief has
been an aspect of capital gains tax since the inception of that tax
in 1965, I believe. At present,
gains on the sale of an asset used in a trade can be rolled over into
partnership property--that is,
an existing 1890 Act partnership. There are special rules if the property
is a wasting asset. Where
that roll-over has taken place, the gain is not recaptured if that
1890 partnership comes to an end,
provided that the assets are not disposed of. One pays the tax, including
the tax on the rolled-over
gain, when the asset is sold. If one partner leaves and sells his interest,
the gain crystallises at that
point and only in relation to that proportion of the asset that is
sold. If an 1890 partnership ceases
trading and the asset is owned in the same proportions as it was owned
in the partnership when it
was functioning, the rolled-over gain does not crystallise--it does
not do so until the asset is sold.
I hope that the Minister will confirm that that capital gains tax treatment
should apply to LLPs as it
does to existing partnerships. It is important because there will be
no cash to pay the tax until the
asset is sold and that will affect small businesses in particular.
We talked about that in our debates
on report. Small businesses do not have the benefit of high-powered
and expensive lawyers and
accountants to advise them--we must remember that any trade or profession
can become an LLP.
First, the small business will not have the cash to pay the capital
gains tax. Secondly, small
businesses require simplicity. If they cease trading as an LLP, they
do not know that rolled-over
gains will necessarily have to be payable in those circumstances.
Roll-over relief is important for small businesses--it is important
for all businesses--and that is
reflected in the fact that the relief for assets used in a trade which
has not altered since the
inception of capital gains tax in 1965. It is important because it
encourages investment, which will
encourage jobs. I hope that the Minister will think again about those
two matters: clause 7 and the
roll-over relief.
Finally, we support the Bill and we wish it a swift Royal Assent so
that it can become the law of
the land in short order. No body of individuals, no profession and
no individual trade should be
excluded or prejudiced because they cannot become an LLP at the same
time as all the other
organisations, trades or professions.
7.7 pm
Mr. Mitchell: I had not intended to take part in this debate, but the
hon. Member for Bognor
Regis and Littlehampton (Mr. Gibb) provoked me to do so by arguing
that Labour Members were
attacking accountants. We were not attacking accountants; we were primarily
attacking the power
of the big five accountancy houses, which inflict damage on the rest
of the profession by their
failures, by the sort of cases that come up against them and by stealing
business from smaller
accountants. We should protect the smaller accountants. We should use
the power of
Government and Parliament as a countervailing power against the over-weaning
dominancy of the
big accountancy houses, which are now such a power in the land.
28 Jun 2000 : Column 963
In the United States, the Securities and Exchange Commission is attacking
such power
assiduously. The difference between the two countries is that the Bill
is another milestone on the
rise to power of such companies. In that situation, it is right to
insist on concessions in return for
the privilege of limited liability partnership that is being given--concessions
on consumer
protection, protection for stakeholders and more effective regulation.
In this country, those
concessions come later, and I hope that they will do so.
The Bill does not show the House at its best. All the speeches, apart
from those of my hon.
Friends the Minister for Competition and Consumer Affairs and the Member
for Newcastle upon
Tyne, Central (Mr. Cousins) and myself, were a defence of professional
privilege and attitudes,
even those of the Liberal Democrats--that party should be speaking
for the people, but its
members concentrated on the purpose and privileges of solicitors and
the professions, not on
countervailing their power. That does not show scrutiny at its best.
In conclusion, to recoin an old Irish joke, like the man in Little Grimsby
who asked the way to
Great Grimsby and was told, "I wouldn't start from here," I would not
start from here.
Unfortunately, we are doing so. It is right now that we should ensure
the proper regulation of the
powerful accountancy houses and of the profession. It is right now
to enhance the power of
stakeholders in response to the privileges that are being conferred
on the accountancy profession.
It is also right to argue that audit work should be split from the
sale of other services. That is the
next agenda on reform, and I hope that we go on to undertake it. In
conclusion, I thank my hon.
Friend the Minister for a sterling performance: he has listened, responded
and treated all the
arguments with respect, intelligence and courtesy, and I congratulate
him on that.
7.10 pm
Mr. Fabricant: I support the Bill and, as the Minister knows, I served
on the Committee that
considered it. The Bill had its genesis in the last Parliament, and
it is right and proper that the
present Government should continue with the measure.
The hon. Member for Great Grimsby (Mr. Mitchell) gave a long catalogue
of complaints against
the larger accountancy firms. Even if he were right, I can see no reason
why that should inhibit the
Bill's passage, as the Bill relates to a very different issue. Certain
concerns were raised by my hon.
Friend the Member for Bognor Regis and Littlehampton. I am especially
concerned that, in this
Bill, as in other Government Bills, there is yet again, a blank cheque
in relation to secondary
legislation. Something that is important and ought to be included in
the Bill is going to be left to
delegated legislation.
On this occasion, the issue is the level of offences and the penalties
that will accrue to them. That
is particularly strange, as I pointed out in Committee, because clause
9(6) deals with the level of
offence. It states:
A person guilty of an offence under subsection (4)
is liable on summary conviction to a fine not exceeding level 5 on
the standard scale.
The Government are therefore able to state what the level of offence
should be. It is inconsistent
and wrong that they choose not to do so with other offences which are
named, quite rightly, in the
Bill.
28 Jun 2000 : Column 964
Government Members have expressed concern about the principle of the
Bill, which is the
removal of joint and several liability of partners. However, as the
Liberal spokesman, the hon.
Member for Torridge and West Devon (Mr. Burnett), pointed out, along
with my hon. Friend the
Member for Bognor Regis and Littlehampton, nothing under the law on
civil torts prevents a
prosecution against a particular partner for duties that are not carried
out in accordance with the
law. That is right and proper, and that facility will not be removed
by the Bill's enactment.
The Bill is needed. The movement since 1890 towards a global economy
means that a partnership
alone is not enough in this day and age. The hon. Member for Great
Grimsby highlighted the
growth of the larger accountancy firms. I agree that that has happened
in the United States of
America, which has protection similar to that proposed in the Bill.
We need that protection here in
the United Kingdom. As I said in Committee and earlier today, there
must be equity between the
protection afforded in overseas countries and that offered in the UK.
With those reservations, I join my hon. Friend the Member for Bognor
Regis and Littlehampton in
wishing the Bill a fair passage. Despite our reservations about it,
it will be good for business and,
more important, good for British jobs.
7.14 pm
Mr. Stuart Bell: I shall briefly commend the Bill and add to the comments
of the hon. Member
for Bognor Regis and Littlehampton (Mr. Gibb). It is perfectly right
to say that the Bill owes its
origins Lord Freeman, who was Minister at the time. It was quickly
taken up by the Labour party
in opposition, and in our manifesto we said that we would introduce
a Bill on limited liability
partnerships. We also made a commitment to independent regulation,
to which I shall return in a
moment.
I commend the hon. Members for Bognor Regis and Littlehampton and for
Torridge and West
Devon (Mr. Burnett) and Opposition Back Benchers. I have forgotten
which queen said that when
she went to her grave and they opened her heart, they would see Calais
written upon it. [Hon.
Members: "Mary Stuart."] I thought it was, but I did not dare say so
on the spur of the moment,
in case I would stand corrected later. I commend my hon. Friends the
Members for Great
Grimsby (Mr. Mitchell) and for Newcastle upon Tyne, Central (Mr. Cousins),
as I have a feeling
that, when the LLP graves of the accountants and solicitors are opened
up, they will see "Great
Grimsby" and "Newcastle, Central" engraved inside. Anyone wishing to
know what my hon.
Friend the Member for Great Grimsby will do for an encore on independent
regulation was given a
reasonable impression tonight.
Finally, I commend with the utmost sincerity my hon. Friend the Minister
and his staff at the
Department of Trade and Industry, who have lived with the substance
of the Bill for four
years--one year in opposition and three in government. The Bill has
followed the new
parliamentary procedures introduced by the new Labour Government, has
gone through a Select
Committee and pre-legislation Committees and, after three years, has
emerged as better legislation.
This is a great day for parliamentary procedure, the Ministry, the
Government and the House of
Commons. I commend the Bill to the House and, as the hon. Member for
Lichfield (Mr.
Fabricant) said, I wish it a safe passage.
28 Jun 2000 : Column 965
7.16 pm
Mr. Stephen O'Brien: As I did at the beginning of Second Reading and
in Committee, I declare
an interest as fellow of the Institute of Chartered Secretaries and
Administrators and as a
parliamentary adviser to that body. I have been a non-practising solicitor
since 1988.
I welcome the Bill and I pay particular tribute to the way in which
it was handled in the other place
before it came here. I pay special tribute to my colleague Baroness
Buscombe who made a
number of points that helpfully illuminated ways in which the Bill
could be improved and in which
the Houses of Parliament could introduce legislation that would be
welcome and, we hoped,
would improve company competitiveness and international location, so
that companies that need
to compete can make sure that they reside appropriately in this country.
I made a number of points on Second Reading and in Committee, many of
them born out of my
personal business experience, in so far as I have dealt with--indeed,
I have established--an LLP in
overseas territories and was responsible for it. I therefore have some
experience which I have tried
to bring to the attention of the House. I certainly wish to support
fully all the points made by my
hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb)
and to back his careful,
well-judged scrutiny of the Bill, especially the default provisions
and, indeed, the Henry VIII
clause.
It is disappointing, however, that the Government's approach to retaining
that clause in the Bill has
left a residual doubt about whether there will be proper scrutiny of
potentially serious provisions
that could be added later and which would have a direct effect on the
competitiveness and
effectiveness of this form of corporate entity. Above all, there is
a need to take account of what
the hon. Member for Great Grimsby (Mr. Mitchell) said and to ensure
that there is total
transparency and disclosure, which is the price to be paid for conferring
limited liability on what
were unlimited corporate entities.
I fully acknowledge that the Government have acknowledged the matters
that I have raised, but it
is disappointing that they have not acted on a couple of important
points that highlight the
concerns of those with experience of these issues. I shall re-emphasise
a couple of those points,
and I crave the indulgence of the House to place them on the record.
First, the Bill has focused,
quite understandably, on large professional partnerships, and I fear
that implications about the way
in which the new corporate entity will be used have been missed.
Again, from my experience, I think that it is clear that the Bill will
be a very attractive vehicle for
overseas partnering and joint ventures, often in this country. Certainly
that is the way in which a
similar measure was applied in California and other states in the America.
It carries certain tax
advantages and also rightly reflects the business relationship in manufacturing
companies, with
which I am familiar.
Despite raising those issues in earlier debates, I have not heard a
reply from the Minister, and I
note that he has been well supported by a raft of advisers here--they
are sitting in the box--and in
Committee. I asked whether advice had been fully taken on the experience
of those
28 Jun 2000 : Column 966
overseas territories in which there are joint ventures for manufacturing
companies, and it would
have been helpful to have heard a reply.
Dr. Howells: I assure the hon. Gentleman that we took advice. I understand
the point that he
makes, and I hope that a wide range of LLPs will be formed.
Mr. O'Brien: That is somewhat reassuring, and I thank the Minister for
letting me know that that
advice has been taken. It would be helpful to share it a little more
fully later.
Such entities will be attractive to property companies, which, as we
know, have particular risks
and liabilities. The contractual and relationship issues in business
are often represented by those
concerned with property valuations and the title to ownership, and
LLPs will hold a significant
attraction to property ventures. There is a demand in property companies
to examine--again,
reflecting experience abroad--whether it would be appropriate and sensible
for their
competitiveness to create a mechanism by which a particular partner
in such a property LLP could
opt out of being bound. At the moment, all LLP members will be entitled
to buy because of the
way in which LLPs are structured. That is a matter of serious debate
because of the nature of
accountability and transparency, but is also goes to the heart of the
way in which property risk is
assessed and represented. Although I mentioned that in Committee, I
wanted to place it on the
record again now.
The Minister generously suggested that I had made some constructive
points during the
consideration of the Bill. I am not flattered because I realise that
that is part of the hon.
Gentleman's customary generosity. I am concerned that the points that
I made on clause 8 were
not taken up. The concern is that there has been an attempt to retain
the partnership ethic, by
which all members take responsibility, under the requirements of clause
8, unless at least two
designated members have been appointed.
Although I can understand the mindset that has driven that provision,
I am concerned especially
about those LLPs that will not have the appropriate expertise, such
as firms of accountants or
solicitors, which, again, have driven the thinking on the provision.
Given the importance of the
compliance and governance needed to deliver the very transparency and
accountability that is at
the heart of the Bill, it would have been appropriate to examine more
closely the possibility of
having a partnership secretary, company secretary, or a designated
person.
There is a distinction to be drawn between members, who clearly carry
the overall business
responsibility and accountability, and those who are required to deliver
compliance and
governance. As the Minister has said, nothing precludes an LLP appointing
such a person as an
employee. However, it would have been better to have stated that in
the Bill, if for no other reason
than that similar provisions exist under the Companies Acts for company
secretaries in plcs. That
confers the necessary status and authority in the corporate entity
to command the necessary
respect around the board table--or, in this case, around the LLP members
table--where advice,
high technical competence or a degree of conscience are required of
the corporate entity to ensure
governance. That is the case not least because things are not always
28 Jun 2000 : Column 967
rosy in partnerships; there will be disputes and factions. At times,
it is helpful if such a person sits
at the high table with the status and professional expertise to take
the necessary action. It is
disappointing that that point has not been taken more seriously.
That said, I have thought carefully about the Bill and whether I should
have tabled amendments in
Committee and on Report. I chose not to do so because the Bill is part
of a wider issue; a major
consultation exercise is being undertaken on company law reform. That
consultation has run
somewhat parallel to the Bill, but has preceded it because of the way
in which the legislation has
come about. In that context, I hope and request that the Minister and
his officials in the
Department will carefully consider the points that I made about clause
8; they are even more
important because of that company law reform.
We should take advantage of all that has been learned about governance
during the past 10 years,
not least from the Cadbury report and the ensuing developments. We
should at last put the
genuine expectations about what is required of companies on a much
more sound footing, and
perhaps frame them in statute. We should ensure that they have the
requisite person in place to
ensure good governance. I shall defer pressing that point until we
debate company law reform. I
thank the Minister for the courtesy with which he has treated the points
that I have made. I, too,
agree that the process has been worth while.
Question put and agreed to.
Bill accordingly read the Third time, and passed, with an amendment.
28 Jun 2000 : Column 968