5.42 p.m.

Report received.

Clause 1 [Limited liability partnerships]:

Lord Goodhart moved Amendment No. 1:
 

    Page 1, line 20, leave out subsection (5) and insert--
 

("(5) The following provisions of the Partnership Act 1890 shall apply to limited liability partnerships--
(a) section 19,
(b) section 24,
(c) section 25,
(d) section 28,
(e) section 29,
(f) section 30,
(g) section 32,
(h) section 35.
(5A) For the purposes of subsection (5), the sections of the Partnership Act 1890 mentioned in that subsection shall apply
as if--
(a) references to a firm or partnership were references to a limited liability partnership,
(b) references to a partner were references to a member of a limited liability partnership, and
(c) references to the dissolution of a partnership were references to the winding-up of a limited liability partnership.").

The noble Lord said: My Lords, I am afraid I am doing rather a lot of duty this afternoon and
your Lordships will have to hear rather more of me than might have been wished.

I will need to take a few moments in discussing Amendment No. 1. That will at least make it
unnecessary for me to speak at any length at any later

6 Mar 2000 : Column 847

stage of this debate. Amendment No. 1 raises an issue discussed at some length at both Second
Reading and in Committee; that is, what is the nature of a limited liability partnership?

We on these Benches believe that a partnership is a simple, cheap and effective way of carrying
on business. We also believe--though I do not speak for my noble friend Lord Phillips of Sudbury
on this point--that it should be possible for partners to obtain the benefits of limited liability and
avoid joint and several liability. We believe that a limited liability partnership should be just that;
that is, a partnership with limited liability. Statute and common law rules should apply to limited
liability partnerships so long as they are not inconsistent with limited liability and with the legal
personality of an LLP.

That appears to have been the original view of the Government, because the first draft of the Bill
provided that, subject to the terms of any agreement between them, the mutual rights and duties of
the members of an LLP should be governed by the rules and principles of partnership law. I
paraphrase the actual terms of the draft. By the time the Bill was published, that provision had
been omitted.

In the debates at Second Reading and in Committee, it appeared that the Government were
moving away from the concept of an LLP as a partnership with limited liability and were seeing it
instead as what might be called a cheap and cheerful kind of corporate body with no real links
with partnership law. That was most clearly expressed by the Minister in the Committee stage
debate on 24th January at col. 1353, where he said that the Government's objective was to create a
new entity,
 

    "which falls under company law as far as possible and changes company law as little as possible except in respect
    of taxation. It falls under partnership law as little as possible".

That worried us considerably, because we felt that the Government were throwing out the virtues
of partnership law though it was unnecessary to do so in order to achieve the principal objective
of obtaining limited liability. In Committee, therefore, I tabled, in the names of myself and my
colleagues, an amendment in general terms which brought in the rules and principles of partnership
law on the lines of the Government's original proposals in the Bill's first draft.

This time, we have produced a rather more detailed amendment which means that the members of
an LLP continue to be bound by the statutory rules in the Partnership Act 1890, so far as is
consistent with limited liability and the legal personality of the LLP, and subject to any agreement
between the members. This amendment should be read with Amendment No. 8, which preserves
the duty of good faith between the members. That is the most important of the common law rules
governing partnerships. Amendment No. 8 will be spoken to in due course by my noble friend
Lord Phillips.

Before going into detail, I should say that in February of this year the Government published a
consultation paper about regulatory default

6 Mar 2000 : Column 848

provisions governing the relationship between members of LLPs. "Default provisions" means the
provisions which apply if the agreement between the members does not exclude or alter them. I
found the consultation document helpful, and indeed encouraging, because it suggests that the
Government are intending to use their powers under Clause 14(c) of the Bill to bring back
partnership principles to a considerable extent. The dispute therefore to some extent boils down
to an argument as to whether the default provision should be on the face of the Bill or in
regulations.

We have a clear preference for the default provisions being on the face of the Bill. The usual
argument with regulations is the need for flexibility and quick action. But the statutory principles of
partnership law have been established for 110 years, during which time they have seen little change
and there has been little disagreement with the way in which they are stated. There is no reason
why more flexibility or a sudden change is needed now. We therefore believe that these default
provisions should be on the face of the Bill because they have been proved to work for more than
a century and because they lay down what we see as the essential nature of LLPs as partnerships
with limited liability.

Perhaps I may turn to this in a little more detail. The key section in the Partnership Act is Section
24. That contains a number of basic rules of the relationship between partners in a partnership.
Those rules include the equal share of all partners in the capital and profits of the firm in the
absence of any decision to the contrary; the right of all members to take part in the management of
the firm; the fact that consent of all members of the partnership is needed for the introduction of a
new member; the fact that ordinary business decisions are to be taken by the majority of the
partners but no change in the nature of the business can be made without the consent of all
partners; and again, that all partners are to have a right of access to the books of the partnership.

The Government, in their consultation paper, indicated their intention to bring back all of Section
24 for LLPs except for two minor provisions which I have no wish to see returning. They also
propose to bring back Section 25, which provides that there shall be no expulsion of members
unless the agreement so provides, and a modified version of Section 26, which enables a member
to retire on notice to other members if the agreement does not provide otherwise. The
Government are now proposing, by way of Amendment No. 5, to put this particular provision on
the face of the Bill and not in regulations. We welcome that.

The paper also raises a question for discussion without indicating its own preference; namely,
whether Sections 29 and 30 of the Partnership Act 1890 should be brought back. Section 29
requires partners to account to their firms for any benefit derived by them from the use of
partnership property, the partnership name, or a business connection of the partnership without
the consent of other partners. Section 30 requires partners to account to their firms

6 Mar 2000 : Column 849

for profits from any competing business carried on by them without the consent of the other
partners. We strongly believe that both of these provisions should apply to LLPs in the same way
as they now apply to partnerships.

I have to say that the consultation paper was doubtful about the need for a general duty of good
faith. However, I certainly believe that such a duty is needed, although I shall leave it to my noble
friend to speak on that issue.

As I see it, of the statutory provisions involved, the only remaining issue is the failure of the Bill to
include any provision to replace Section 35 of the Partnership Act. Section 35 gives powers to the
court to dissolve a partnership on various grounds, including the incapacity of a member to carry
out his or her partnership obligations, or to dissolve a partnership because of various kinds of
misconduct by a member other than the member who is seeking the dissolution.

Limited liability partnerships are basically a structure for business where it is intended that all the
members shall be involved in the work. I believe that the Bill needs a formal provision to cover a
situation where one member becomes permanently incapacitated or is guilty of serious misconduct
in the management of the business. In substantial LLPs, undoubtedly the members' agreement will
cover that kind of situation. However, there is a need for a default power to cover small LLPs
where a formal agreement and proper advice on the terms which ought to go into a formal
agreement are much less likely to be in place. It is essential to provide something of that kind for a
body where all the members are normally working members.

The consultation paper considers, although without much enthusiasm, the possibility of
introducing into LLPs something along the lines of Section 459 of the Companies Act 1985 which
gives a minority shareholder the power to go to the court for various remedies, including the
compulsory buy-out of his or her own shares if the business is being carried on in a manner
unfairly prejudicial to him or her. I hope that the consultation will come to the conclusion that
something of that kind is needed in the case of LLPs because I believe that it is required, although
possibly in a simplified form. That would avoid the problems of time and cost that have been
thrown up by Section 459. However, I believe that we also need something along the lines of
Section 35 of the Partnership Act--not in an identical form because here I believe that we are less
likely to be looking at dissolution than the continuation of the LLP on the basis of buying out a
member who is incapacitated.

I believe that something of this kind should be included, as well as an extension of Section 459.
Although in general I find the Government's position much more acceptable than it was
previously, I hope that they will now be able to consider taking action along these lines. I beg to
move.

Baroness Buscombe : My Lords, in rising to speak to this amendment, first, I thank the Minister
for

6 Mar 2000 : Column 850

providing me with a marked-up copy of the government amendments together with an explanatory
note. Perhaps I may also thank all noble Lords who have kindly written to me and copied to me
correspondence concerning a number of issues following the Committee stage of the Bill.

A comparison of the Bill in its form at Second Reading with the Bill that we are considering this
evening confirms that we have made considerable progress. However, the consultation paper,
Regulatory Default Provisions Governing the Relationship Between Members, dated February
2000, clearly illustrates the challenge of endeavouring to introduce a new vehicle--a new business
entity--which, in the words of the Minister,
 

    "combines the best of both worlds",

is "an enormous privilege" and, at the same time, recognises the rights of third parties.

Taking this consultation paper together with the correspondence of the noble Lord, Lord
Goldsmith, dated 2nd and 3rd March 2000 and addressed to the Minister, we on these Benches
remain concerned as to how the rights of third parties will be protected. We are concerned in
particular, in the event of a conflict, with how the potential responsibility of a member of an LLP
would be apportioned--I shall quote the noble Lord, Lord Goldsmith--
 

    "in order to split out liability of the members for his own acts as opposed to the liability of others".

Surely that goes to the heart of this business entity.

Turning to Amendment No. 1, I recall expressing concern in the debate on Second Reading as
regards Clause 1(4) in so far as, on the face of the Bill, no reference is made to issues which are
central to partnership law, something one might have expected when discussing a new vehicle
called a "limited liability partnership". Indeed, there is no express reference to the limits of liability.
However, I also recall that the Minister's response to the concern when it was raised in Committee
made it quite clear that, although the taxation of LLPs will be on the partnerships analogy, all other
aspects of the LLP will be on the companies analogy. It is now clear that an LLP will be quite
different from a partnership and that those areas of partnership law which govern the mutual rights
and duties of the members, including key provisions of the Partnership Act concerning
dissolution, joint and several liability and relations with third parties, will not apply to LLPs.

Although to some extent I am reassured by Clauses 5 and 6 of the Bill, assuming that regulations
under Clause 14(c) will contain a number of default provisions modelled on Section 24 of the
Partnership Act 1890, I have considerable sympathy with the amendment. It expressly covers a
number of key issues, including dissolution either by members or by the court; the accountability
of partners for private profits; the duty of a partner not to compete with the business of which he
is a partner; and the disclosure of accounts and information as between partners and

6 Mar 2000 : Column 851

their legal representatives. For that reason, I look forward to the Minister's response to the
proposed amendment.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord and to the noble
Baroness for the way in which they have moved and spoken to the amendment. From the speech
of the noble Lord, Lord Goodhart, it is clear that I shall need to use the long version of my
response rather than the short version. However, I make no complaint about that.

In the debates at Second Reading and in Committee, I made it clear that, although the Bill will
introduce a new business entity, we are not seeking to rewrite company law or partnership law.
We seek to make as few changes as possible, other than those which are necessary to meet the
demand from business and the professions for a new entity of this kind. For that reason, we have
fundamentally resisted attempts both in Committee and, I am afraid, at this stage, to introduce into
the Bill very substantial elements of partnership law, just as we have resisted attempts to amend
company law any more than is absolutely necessary for the purpose of this exercise. I shall return
to the amendments to Clause 5 before I conclude my remarks.

Two amendments were tabled in Committee: one from the noble Lord, Lord Goodhart, and one
from the noble Baroness, Lady Buscombe. Both of them sought to apply, as a default, provisions
of the Partnership Act 1890 and the noble Lord and the noble Baroness argued them with
considerable force. I explained at the time that an LLP is a body corporate that is treated for tax
purposes as a partnership. We strongly believe that it would create substantial uncertainties to
apply partnership law in default to a body corporate. Companies Act provisions are being applied
to an LLP by the regulations made under the Bill and the application of partnership law in general
would lead to confusion as to how the two would interact.

However, we recognise that there is concern among consultees--indeed, that is why we issued a
consultation document on the point--that circumstances may arise where, for example, an LLP
does not have an agreement between its members, or where the agreement may not cover all
situations. That is why in our amendment to Clause 5, which will be debated later, we say that
there will be regulations but that those regulations will apply,
 

    "in the absence of agreement as to any matter, by any provision made in relation to that matter by regulations under
    section 14(c)".

In other words, we are looking to agreement between the members of the limited liability
partnership as the first line of defence and providing for regulations in the absence of that
agreement. This series of default provisions in legislation will allow us the flexibility to modify the
provisions, as necessary, depending on the practical experience of the operation of LLPs.

I know that the noble Lord, Lord Goodhart, was not convinced by my arguments on the previous
occasion. He said that he would bring the matter back on Report; indeed, he has done so. I said in
Committee

6 Mar 2000 : Column 852

that we would consult on the draft provisions, and that is what we are doing. The draft regulatory
default provisions were published in February for consultation. A copy was sent to those who
participated in the Committee stage and is available in the Library of the House.

The document raises three issues: first, whether the LLP regulations should contain such default
provisions, and how they should be drafted; secondly, whether the LLP regulations should
impose a duty of good faith between members; and, thirdly, whether, under minority protection,
Section 459 of the Companies Act should be applied to an LLP. If the amendment before us were
agreed to, it would pre-empt the outcome of that consultation. I cannot see any good reason why
we should do so. Moreover, some of the provisions included in the amendment are, in our view,
inappropriate for application.

I turn now to the details of each of the provisions in the Partnership Act 1890 that Amendment
No. 1 seeks to incorporate into the Bill. Section 19 of the Act provides that mutual rights and
duties of partners may be varied by consent. It is implicit in Clause 5 that an LLP is governed by
agreement between its members. The part of our Amendment No. 7 to Clause 5 that I read out
makes that clear. Indeed, the amendment would make the position even clearer because it provides
that the mutual rights and duties of the LLP, and its members, are governed by an agreement
between members, or between the members and the LLP, or, in the absence of an issue, by the
default provisions contained in the regulations. I cannot agree that it is necessary for Section 19 to
be applied to LLPs.

Section 24 contains the rules as to the interests and duties of partners subject to any agreement
between them. The draft default provisions that we propose to include in regulations are based
primarily on Section 24. We have concentrated on including those areas that were considered by
consultees to be the most appropriate for limited liability partnerships. However, it was not
considered necessary or appropriate to include the two provisions--Section 24(3) and (4)--which
govern the financial relationship between partners and the partnership. We regard this as an area
that should best be left to the members to decide between themselves.

Section 25 deals with the terms on which a partner can be expelled from the firm. This, too, is
included in the draft default provisions. The noble Lord, Lord Goodhart, referred to Section 26,
which is dealt with in Amendment No. 5.

Section 28 requires partners to render to any partner true accounts and full information of all
things that affect the partnership--I love the Victorian language. It is our intention to apply by
regulation Section 238 of the Companies Act 1985 to LLPs. That will require a copy of the LLPs
annual accounts, together with a copy of the auditors' report on those accounts, to be sent to
every member of the LLP and every holder of the LLP's debentures within a month of their being
signed, and no later than 10 months after the end of the accounting period. In addition, the draft
default

6 Mar 2000 : Column 853

provision requires that the books of the LLP should be kept at the place of the LLP and that every
member may have access to, inspect and copy any of them. Therefore, I see no reason for
Section 28 to be applied; indeed, I would go as far as to say that the wording is less robust than
that which we are including in the regulations. Failure to comply with Section 238 would mean that
the LLP and the designated members who were in default would be guilty of an offence and liable
to a fine.

Section 29 concerns the accountability of members for private profit and Section 30 deals with the
duty of a partner not to compete with the firm. We have suggested including provisions along
these lines in the default provisions and we have sought consultees' views. Although the
consultation paper suggests that it might be considered inappropriate to make these variable by an
agreement between the LLP's members, the paper also points out that Section 19 of the
Partnership Act appears to suggest that, even in the case of a partnership, Sections 29 and 30 may
be overridden by consent.

Sections 32 and 35 concern the dissolution of a partnership either by expiration or notice, or by
the court. An LLP will be a separate body corporate. It is our intention to apply to LLPs, by
regulation, the appropriate parts of the Insolvency Act 1986, like those that apply to a company. It
would not be appropriate to apply to a body corporate the dissolution provisions of a partnership;
for example, it could have detrimental consequences if a member of an LLP were able to dissolve
the LLP simply by giving notice to the other members. What if the LLP had entered into contracts
with third parties? The LLP's status as a separate legal entity requires that dissolution is dealt with
formally.

The noble Lord, Lord Goodhart, referred to the possibility of a member being permanently
incapacitated. We believe that the application of the Insolvency Act 1986 would cover the
situation because the legislation deals with such circumstances; for example, in a company with
two members, one may become incapacitated. However, we shall consider that matter further to
ascertain exactly how the partnership provisions and the insolvency legislation interact.

The noble Lord, Lord Goodhart, was good enough to say in his introduction that the difference
between us has very much narrowed as regards whether these provisions should appear on the
face of the Bill or in regulations. In view of the detailed analysis of the 1890 Act and what we
propose to do in regulations, subject to consultation, I hope that I have persuaded the noble Lord
that it would be better to leave such matters to regulation.

6 p.m.

Lord Goodhart: My Lords, although I do not know whether the Minister has persuaded me that
it would be better to leave this to regulations, he has certainly managed to persuade me--if I ever
thought of doing

6 Mar 2000 : Column 854

otherwise--that this is not an issue on which we should force a Division of the House. Following
the publication of the consultation paper, clearly this matter is one that causes us much less
concern than was previously the case. The only issue to which we may return on Third Reading is
the question of what should happen in the event of incapacity, given the fact that an LLP is clearly
intended to be the sort of body within which a small group of people are working together. I
understand that it would not necessarily be appropriate to dissolve the LLP or wind it up, but it
may be desirable to include some kind of default provision that would enable the interest of
someone who has become incapacitated to be bought out--

Lord McIntosh of Haringey: My Lords, before the noble Lord leaves that point I should stress
that I am anxious to avoid conflict on Third Reading. Therefore, perhaps I may write to the noble
Lord on the issue and, if necessary, we can meet to discuss the matter along the lines of the
investigation to which I referred in my response.

Lord Goodhart: My Lords, I am most grateful for those comments. I am happy to accept the
noble Lord's suggestion. In those circumstances, I am happy to beg leave to withdraw the
amendment.

Amendment, by leave, withdrawn.

Clause 2 [Incorporation document etc.]:

Lord McIntosh of Haringey moved Amendment No. 2:
 

    Page 2, line 4, leave out ("the form prescribed by regulations") and insert ("a form approved by the registrar").

The noble Lord said: My Lords, Amendment No. 2 is intended to provide the Registrar of
Companies with the same powers of approval as exist for the incorporation document in Clause
2(2)(a). We see no reason to treat the statement of compliance differently from the incorporation
document in this respect.

The noble Lord, Lord Phillips of Sudbury, suggested in Committee that the original wording here
looked a little "futuristic" because it referred to someone,
 

    "who is to be a member".

He thought that this could perhaps be made more straightforward without undermining the effect
of the provision. We agree. I beg to move.

Lord Renton: My Lords, this amendment seems to be very necessary, if I may say so. But, when
turning to Clause 5, we see in the first line the words,
 

    "The provisions of any agreement (express or implied) between the members of a limited liability partnership or
    between the limited liability partnership and the members as to the mutual rights and duties",

and so on. Am I right in thinking that, bearing in mind the way in which Clause 2 is now drafted,
subject to the amendment having been accepted--as we assume that it will be--the idea of an
agreement between the members being implied seems to be most unlikely, and, indeed, I would
have said impossible, bearing in mind

6 Mar 2000 : Column 855

what is put forward in Clause 2? Will the noble Lord be so good as to say, bearing in mind Clause
2, how the words "or implied" in Clause 5 can be consistent?

Lord Phillips of Sudbury: My Lords, I had not intended to comment on this amendment, but as
the noble Lord, Lord Renton, has raised this matter, perhaps it would be more appropriate for me
to raise now the question I was going to raise when Amendment No. 7 to Clause 5 is considered. I
should be grateful if the Minister could elaborate also on the provisions that he expects to be
contained within the incorporation document. I now look at Clause 2(2)(a) which states that the
incorporation document must,
 

    "be in a form approved by the registrar (or as near to such a form as circumstances allow).

All the other requirements vis-a-vis the incorporation document in Clause 2(2) are extremely
straightforward factual matters: name, registered office, the names and addresses of designated
members. However, as regards Clause 5, and in particular Amendment No. 7 to Clause 5,
questions are raised as to exactly what is potentially to be included in the incorporation document.
It seems to me that Clause 5--whether as it now stands, or as it is proposed to be
amended--makes no sense unless Clause 2(2)(a) will involve matters of substance vis-a-vis the
agreement between members.

Perhaps this is rather a fast ball to bowl at the Minister on this clause and perhaps this is a matter
that is better dealt with after this debate, but I thought it appropriate to follow the comments of the
noble Lord, Lord Renton, as his point touches on the one I have tried to explain.

Lord McIntosh of Haringey: My Lords, the simple answer to the point raised by the noble
Lord, Lord Renton, is that the words he referred to would be removed from the Bill by
Amendment No. 7. Amendment No. 7, which stands in my name, seeks to omit Clause 5(1).
Therefore, if it were accepted, there would be no reference to an agreement (express or implied).
However, as a more general point, I think that the noble Lord will acknowledge that the courts
may well find that an agreement between members could be implied from their conduct, even if it
were not written down. I hope that the noble Lord will agree that--

Lord Renton: My Lords, I am most grateful to the noble Lord; I should have noticed that.
However, the point that he has made disposes of the point that I made.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord. If the noble Lord, Lord
Phillips, will allow me, I shall respond to his detailed point about Clause 5 when we reach
Amendment No. 7, to which it properly refers.

On Question, amendment agreed to.

6 Mar 2000 : Column 856

6.15 p.m.

Lord McIntosh of Haringey moved Amendment No. 3:
 

    Page 2, line 6, leave out from ("anyone") to ("that") in line 7 and insert ("who subscribed his name to the
    incorporation document,").

The noble Lord said: My Lords, I believe that I have spoken to this amendment with Amendment
No. 2. I beg to move.

On Question, amendment agreed to.

Lord Goodhart moved Amendment No. 4:
 

    After Clause 3, insert the following new clause--

  WINDING-UP OF A LIMITED LIABILITY PARTNERSHIP FOR INACTIVITY OR INAPPROPRIATE
                                 ACTIVITY

(" . A limited liability partnership may, in accordance with regulations made under section 13, be wound up by the court
on the petition of the Secretary of State or a member of the limited liability partnership if--
(a) it has not for a period exceeding 12 months carried on a lawful business with a view to profit, or
(b) its sole or main activity is an activity which is not the carrying-on of a lawful business with a view to profit.").

The noble Lord said: My Lords, this is a probing amendment which follows from the
Government's amendment to Clause 2 in Committee which requires those who are subscribers to
an incorporation document of an LLP to be people who are associated in carrying on business
with a view to profit. Those words reflect the requirement for the formation of a partnership.

However, what happens if that requirement is satisfied at the time of the incorporation of an LLP
but ceases to be satisfied afterwards? What happens, for example, if the LLP switches from a
lawful business to an unlawful one; or--perhaps this is a little more realistic--what happens if an
LLP starts to operate as a not-for-profit organisation? Is there any sanction for its doing so? If
there is a sanction, what is it? If there is not a sanction, what is to prevent an LLP doing this and
departing from what is clearly the basic intention with which LLPs are allowed to be formed? I
beg to move.

Lord Goldsmith: My Lords, I had not intended to speak on this amendment but, having heard
the comments of the noble Lord, Lord Goodhart, I simply add the following points. If this
amendment is to probe the question of what is to happen in the circumstances that have been
mentioned, I very much hope that the answer will not be that it is intended that members of the
limited liability partnership will be able themselves to wind up the LLP in that event. The reason I
say that is that if the LLP has traded and has incurred liabilities directly to third parties, I should be
concerned if a member of the LLP was able to bring it to an end with a potential detriment to third
parties in that they would not be able to pursue their remedies against the LLP.

From time to time in the field of company law, a company is wound up and then a third party
liability comes to light. The third party may be put to

6 Mar 2000 : Column 857

considerable difficulty, and sometimes finds it impossible, to have the company restored simply
so that the rights against the entity can be pursued. Although I do not for a moment doubt the
desirability of probing the issue, I hope that the answer will not be what is stated in the
amendment. Therefore, I oppose the amendment.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Goodhart, both
for moving the amendment--it enables me to clarify the issue--and for the way in which he moved
it.

First, he is right to say that the amendment arises out of the alterations made in Committee which
changed the definition of the role of an LLP to that of carrying on a lawful business with a view to
profit. Secondly, he is right to say that the amendment deals with a change which takes place in
the lifetime of an LLP--in other words, after incorporation.

Providing for the wind-up of an LLP in the way proposed by the amendment seems unnecessary.
In one case, as my noble friend Lord Goldsmith said, it could be damaging. As to the issue of a
lawful business, the combined operation of the provisions of Section 432 of the Companies Act
1985 and Section 124A of the Insolvency Act 1986 mean that the Secretary of State has the power
to petition the courts to wind up any company whose affairs are being carried out for an unlawful
purpose. It is our intention to apply the relevant provisions of these Acts to limited liability
partnerships by way of regulation, and so the Secretary of State will have identical powers in this
respect. That means that we do not need to make separate provisions on the face of the Bill.

The proposed amendment may provide members with wider grounds to apply for a winding-up
order than those which currently apply to companies. The scope of "lawful business" may
possibly include circumstances where there has been misconduct or fraudulent behaviour. At
present, as insolvency and company law applies to companies, it would be only the Secretary of
State who could apply for a winding up on the ground that it was expedient in the public interest,
based on a report furnished under Section 432 of the Companies Act. As my noble friend Lord
Goldsmith pointed out, we would have some difficulty if either the intent or the effect of the clause
was that a member would have analogous powers to wind up an LLP to those which the Secretary
of State has in the Insolvency Act.

As to carrying on with a view to profit, again, we can see little reason for what is proposed. Once
again, the intended application to LLPs by regulations of appropriate parts of the Insolvency Act
will provide assistance here. It will be possible for an LLP to be wound up by its members
through a petition to the court as a result of our intention to apply in regulations Section 124 of the
Insolvency Act. We see no good

6 Mar 2000 : Column 858

reason to provide separately for members' winding up in the set of circumstances described by
this amendment.

Lord Goodhart: My Lords, I am grateful to the Minister for his explanation. I beg leave to
withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 4 [Members]:

Lord McIntosh of Haringey moved Amendment No. 5:
 

    Page 3, line 10, at end insert ("or, in the absence of agreement with the other members as to cessation of
    membership, by giving reasonable notice to the other members").

The noble Lord said: My Lords, it is the turn of the noble Lord, Lord Goodhart. The noble Lord
argued in Committee that the issue of cessation of membership should be dealt with in the Bill
rather than in regulations. He thought that provision in regulations might be ultra vires and asked us
to look again at the issue. We have concluded that it is more appropriate to include here provision
that, unless otherwise agreed, a member may withdraw from the LLP by giving reasonable notice.

The noble Lord's amendment in Committee specified a particular time period. We have concluded
that reasonable notice is more appropriate than setting a specific time period. Depending on the
circumstances, whatever was included in legislation might be regarded as too long or too short,
and it will, in any case, be possible for members to set a specific period for giving notice by
agreement. I beg to move.

Lord Goodhart: My Lords, I am grateful to the Minister for having taken this point on board.
Obviously I greatly welcome the amendment.

However, there is one point that I should like to follow up, and that is: what are the consequences
for someone who retires on giving notice while the LLP continues in operation? In the case of a
company limited by shares, his or her shareholding would remain in the company except in the
special circumstances where Section 459 of the Companies Act would apply or where the other
shareholders agreed to buy out his or her shares. What will happen in the case of an LLP, where
there are no shareholdings as such? Should there not be some kind of default provision to ensure
that when a member of an LLP retires, the LLP is required to pay out to the retiring member his or
her share in the LLP's property? Otherwise we could run into considerable difficulty.

Let us take the case of three partners who are running a small restaurant business and one of them
leaves. It is clearly inappropriate that that member's interest in the LLP should be simply locked in
for the benefit of the two remaining members. It is not clear on the face of the Bill that there is a
right for the outgoing member to take out his or her interest.

Baroness Buscombe: My Lords, I rise to speak briefly in support of the amendment. I
expressed

6 Mar 2000 : Column 859

concern at Second Reading that the Bill does not expressly provide for a member who wishes to
retire from the partnership. I am pleased that the amendment now covers that point. Although I
suggested that notice be given to the LLP, I accept the Minister's preference for notice to be given
to the other members.

Lord McIntosh of Haringey: My Lords, the noble Lord, Lord Goodhart, has raised an issue
which is, in my limited experience, a current difficulty in company law. If a shareholder director,
for example, wished to leave a company, it could be that an absolute right for him to take out his
shareholding at a previously agreed rate could bring the company to its knees. I have seen
examples of that.

The situation is the same for an LLP as it is for a company; there cannot be any default provision
provided in legislation. It will have to be done by agreement between the members and the buy-out
will have to be negotiated. Any default would be extremely complicated. But the same problem
arises with companies and it would be a pity to attempt to bring something in for LLPs which we
have not been able to do for companies.

Lord Goodhart: My Lords, before the noble Minister sits down, I wonder whether that will be
the case. It seems to me that there is a serious lacuna here. Membership of an LLP is so closely
linked with management that it is very difficult to contemplate circumstances in which a member
who retires from the LLP cannot take out his or her share in it without the agreement of the other
partners.

Lord McIntosh of Haringey: My Lords, that would have to be done by agreement. Anyone
going into an LLP as a member must, at the time of the original agreement, put himself or herself
into a position of being either the person who is leaving or the persons left behind, and take the
steps necessary to protect that position in the future.

It will never be a straightforward issue; it is not a straightforward position for partnerships under
the 1890 Act. The Law Commission is considering partnership law generally and we expect that it
will look at this issue in its consultation paper. If I can add anything to that, I will certainly do so.
However, I do not see any way round that difficulty, whatever the nature of the business entity.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendment No. 6:
 

    Page 3, line 13, leave out ("(rather than members of a limited liability partnership)").

The noble Lord said: My Lords, it is the turn of the noble Baroness, Lady Buscombe. She
suggested in Committee that it might be possible to simplify the wording of Clause 4. We have
looked again and we

6 Mar 2000 : Column 860

have decided that the wording in brackets adds little value and can be advantageously removed. I
beg to move.

Baroness Buscombe: My Lords, I am grateful to the Minister for the amendment. It certainly
simplifies the understanding of the status of members. I simply suggest that the final comma
should be removed. It is a small point, but it affects the intonation and thereby the understanding
of the clause.

Lord McIntosh of Haringey: My Lords, I believe that sufficient discretion is allowed to the
printers to do that without reference to your Lordships.

On Question, amendment agreed to.

Clause 5 [Relationship of members etc.]:

6.30 p.m.

Lord McIntosh of Haringey moved Amendment No. 7:
 

    Page 3, line 16, leave out subsection (1) and insert--
 

("( ) Except as far as otherwise provided by this Act or any other enactment, the mutual rights and duties of the members
of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its members, shall be
governed--
(a) by agreement between the members, or between the limited liability partnership and its members, or
(b) in the absence of agreement as to any matter, by any provision made in relation to that matter by regulations under
section 14(c).").

The noble Lord said: My Lords, we have already anticipated some of the discussion on this
amendment. The noble Lord, Lord Phillips, tabled a probing amendment at the Committee stage
to establish the thinking behind subsection (1). We have looked again at the wording and decided
that there is no need to refer to the incorporation document but that it is beneficial to include
something to point to the importance of agreements between members in determining internal
relations. Of course, we are looking for agreements as far as possible rather than the
implementation of default provisions. In addition, in the light of our consultation on draft
regulations for default provisions governing the relationships between members, we are of the
view that it is helpful to point to the default provisions by amending Clause 5(1)(b) to refer to
"regulations under section 14(c)", which is what we were discussing when we were concerned
with Amendment No. 1.

The noble Lord, Lord Phillips, raised the question of the wording at Clause 2(2)(a). I think I can
deal with it most readily now because the reference is to an incorporation document. If it is going
to be meaningful, it must have information about the agreement between members. The registrar
cannot say what the agreement should contain or what form it should be in, so the incorporation
document is limited specifically to the details set out in paragraphs (b) to (f) and paragraph (a) is
deliberately left so that the members of a partnership can, provided they state the

6 Mar 2000 : Column 861

necessary facts in paragraphs (b) to (f), use their own form. I do not think there is any danger here
of anybody being misled.

Lord Renton: My Lords, I am in favour of this amendment apart from one point on which I
would like the noble Lord's views. Subsection (c), which is an exception to the normal effect of
the provisions, states,
 

    "applying or incorporating, with such modifications as appear appropriate, any law relating to partnerships".

Surely the law relating to partnerships applies in any event and therefore subsection (c) would
seem to be unnecessary. If the noble Lord can say that it is necessary, that is all well and good
but, if the law relating to partnerships prevails, I would have thought it was unnecessary to make a
regulation applying it.

Lord McIntosh of Haringey: No, my Lords, the law relating to partnerships does not apply. The
whole principle of this Bill is that the new business entity called a limited liability partnership is a
corporate body, not a partnership. The only partnership element of it is the tax treatment of the
members of the limited liability partnership. The consultative document which we issued in
February, of which the noble Lord did not receive a copy because he did not take part in the
earlier proceedings on the Bill--he is welcome to have a copy--specifies those elements of the law
of partnership and specifically the Partnership Act 1890, which ought to be applied in regulations.
That is the reason why we have to have Clause 14(c).

Lord Phillips of Sudbury: My Lords, before saying what I was going to say, I come to the aid
of the noble Lord, Lord Renton, because surely Clause 14(c) says that the Government may by
regulations apply or incorporate,
 

    "with such modifications as appear appropriate, any law relating to partnerships".

Therefore, they could incorporate sections from the Partnership Act if they were so inclined.

Lord McIntosh of Haringey: My Lords, I apologise for intervening. I thought I had looked
around but I am sure the House will allow the noble Lord, Lord Phillips, to intervene now. Yes
indeed, that is exactly what we have been debating.

Lord Phillips of Sudbury: Mr Lords, perhaps I may come back to the amendment itself. At the
previous stage, I said quite frankly that I was confused by the purport of subsection (1) of Clause
5 and, to be frank, although it is an improvement in that I think I understand what it is saying. I
have a question for the Minister. If one were to leave out Clause 5 entirely, would it not be
harmless as regards the Bill? That is to say, as Clause 5 currently stands with the amendment now
proposed in it, is not all of that necessary and is it not essential law that would be implied in the
complete absence of Clause 5? If that is not the case, both I and the House would like to know
what purpose it serves

6 Mar 2000 : Column 862

and, in particular, I would like some reassurance that both parts of Clause 5 as now proposed to
be amended will not and could not prejudice innocent third parties.

I should like to add one other point. I assume I am right in interpreting the amendment as applying
to agreements between all the members from the limited liability company and not some of the
members. I should be grateful if the Minister would confirm that as well.

Lord Hope of Craighead: My Lords, before the Minister replies to the noble Lord's question,
perhaps I may raise a point which arises out of a matter raised with the Minister by the noble
Lord, Lord Renton. It relates to the omission of the words "express or implied" which qualified
the word "agreement" in the provision which is being taken out of the Bill. With great respect, it
suggests to me that, if the word "agreement" is left unqualified, then it leaves open, by reference to
what is commonplace in partnership law at the moment, the argument that an agreement has been
created by implication. In the ordinary course of events, that would not give rise to concern but,
when one sees the default provision in paragraph (b), one may have cases where, in order to
escape from the default provision, a party seeks to rely upon an implied agreement. Experience
tells one that, in general, litigation finds it more difficult to cope with cases where implied
agreements are sought to be spelled out of the evidence than express agreements. If it is intended
to restrict the kind of agreement which is now referred to in the clause, will the Minister think a
little more about whether it would be desirable to write into the Bill words to the effect that the
agreement should be express or, even better, in writing between, as has been suggested, all the
members or between all the members and the LLP? I raise the issue simply because it was a matter
of concern to the noble Lord, Lord Renton, and it could have some bearing on the extent to
which litigation is either generated or avoided.

Lord McIntosh of Haringey: My Lords, perhaps I may respond first of all to the noble Lord,
Lord Phillips. The reason for having Clause 5 in the Bill is in order to make it clear that an
agreement between the members or between the limited liability partnership and its members has
primacy and that there should be provision in the absence of any agreement. If we did not have
that, the status of the regulations to be made under Clause 14(c) would not be clear. The new
amendment first of all gives power to apply the default provision which was not explicit before
and, secondly, makes it clear that agreement between members is subject to any other enactment.
On those grounds, we believe that Clause 5 is necessary.

Secondly, the noble Lord asked whether it applied between the limited liability partnership and all
its members, or between all its members or some of its members. Paragraph (a) provides that it is,
 

    "between the members, or between the limited liability partnership and its members".

6 Mar 2000 : Column 863

My understanding is that that does not apply to "some" of its members.

The noble and learned Lord, Lord Hope, raised the issue of express or implied agreements. He is
right that litigation is easier for express agreements than for applied agreements. It is intended to
have--and it is necessary--implied agreements in certain circumstances. For example, it is difficult
to set out explicitly in advance an agreement on sharing profits, because that might change from
time to time and there might be a formula which would bring about an implied agreement. For that
reason one still has to have the possibility of implied agreements, although it is not necessary to
refer to it on the face of the Bill. What is being proposed here is no different from the law on
partnerships which has worked for 110 years. We do not see any reason to suppose that it will be
more difficult.

On Question, amendment agreed to.

Lord Phillips of Sudbury moved Amendment No. 8:
 

    Page 3, line 25, at end insert--
 

("(3) Every member of a limited liability partnership shall have a duty of good faith to every other member and also to the
limited liability partnership provided that in the event of a conflict between those duties his duty to the limited liability
partnership shall prevail.").

The noble Lord said: My Lords, I rise to move the amendment standing in my name and in the
those of my colleagues. We believe that the public interest would be served by retaining on the
face of the Bill a good faith obligation. We feel that with some strength, notwithstanding the clarity
of the Minister's statements today and at previous stages that the Government want this to be
clearly a corporate animal and not a partnership one.

Perhaps I may refer to the consultation paper of last month, which covers this point. I wish to
congratulate the author on his helpful piece of paper. It must be a new way of dealing with
legislation to scotch amendments put forward in this House by saying, "I have now produced a
new consultation document so you are in baulk". We cannot buy that, especially since at the
previous stage one of my amendments to do with the change of name of LLPs was swept from
court on the ground that a prior and existing consultation on company law was going on. If we
continue with that thesis and Ministers are quick on their feet in setting up internal consultation
groups, there will be very little left for us to talk about. Therefore, I shall not pay any attention to
the paper except to say that it is jolly good and I shall refer to some of the points in it.

The author's arguments against including a duty of good faith are, first, that the application of a
duty by statute will require a formulation that may well prevent the duty between members
developing in the future. The formulation in my amendment would not do that and is precisely
intended to hitch the wagon, so to speak, to the common law definition of good faith. Secondly,
he says that the express application would be unusual. Well, as the French would say, tant pis.
We believe that it is necessary. Thirdly, he says that it is not expressly mentioned in the
Partnership Act 1890. That

6 Mar 2000 : Column 864

is so, but the Partnership Act 1890 was itself only a consolidation of existing common law. Here,
given that we are moving completely away from the Partnership Act 1890, there will be no implied
duty of good faith unless it is expressly written into the Bill. That is why the amendment is before
us. Fourthly, he makes the point, which the noble Lord, Lord McIntosh, himself made several
times in previous debates, that it could be confusing. One could have parallel fiduciary
duties--partners to each other and partners to the LLP. However, the amendment is perfectly clear
that if there is such a conflict, the duty to the LLP prevails.

We then come to considerations with which the noble Lord, Lord McIntosh, dealt in a letter which
he kindly wrote to me dealing with this matter and in which he said that he was not convinced that
there was the need to encourage greater vigilance in selection and working with other partners in
the case of an LLP. He made the point that the reputation of an LLP is very much bound up in the
name and that anyone breaking the rules would find himself in extremely difficult circumstances in
getting a job if he had had to leave. The world we live in is very different from the world that
prevailed even 20 years ago. Reputation within and between partnerships is now a fragile strand.
Partnerships are now so large and the rate at which membership of those partnerships changes is
growing apace. To rely on the drumbeat of the market place in upholding standards within
partnerships is no longer sufficient.

Perhaps I may offer one brief anecdote. Not long ago I met two partners from a large law firm. I
knew them both. Then, suddenly, two others materialised from the other direction. I knew one of
them. I said, "Of course you know each other". They said, "Well, no". I said, "Let me introduce
you. You are members of the same partnership". These partnerships are very large and never the
twain shall meet. We feel that it is in the public interest to retain this aspect of partnership.

It was Lord Lindley who, in the case of Blisset v. Daniel in 1853, put it rather well. He said that,
 

    "if any dispute arise between partners ... he [the partner concerned] will be required to show, not only that he has
    the law on his side, but that his conduct will bear to be tried by the highest standard of honour".

There are those in the House and outside who are anxious about the impact of the Bill on the
highest standards, which we would say do currently prevail within the old partnership structure.
The fact that they prevail is intimately bound up with the joint and several liability and the duty of
good faith that exists partner to partner and the mutual confidence and trust which that engenders.
We very much hope that the Government will not be sidetracked by the old argument about
whether we have here a corporate animal or a partnership animal. We accept that a corporation is
being created by the Bill. But it is important that that one very particular aspect of partnership
law--the duty of good faith between partners--should continue. I beg to move.

Lord Renton: My Lords, this is an interesting but slightly puzzling amendment. Although the

6 Mar 2000 : Column 865

partnership is to be incorporated, its decisions will, the provision states,
 

    "in the event of a conflict",

of the kind mentioned, depend on a majority of the partners. It seems to me that that will arise
rather frequently. After all, in any partnership there will, before decisions are reached, be a good
deal of discussion and perhaps not complete agreement between the partners. We should legislate
on the assumption that that is what will normally happen. When it does happen, the view of the
majority should prevail. That is another, and perhaps better, way to express it.

Perhaps I may have the attention of the noble Lord who moved the amendment. I should like to
draw attention to two drafting points which are so minor that I hardly dare to mention them. First,
in common English the expression "every other member" means "every alternative member". That
cannot be what the noble Lord means. If the amendment said "each other member", the noble
Lord would have it right. Secondly, I was brought up to avoid ever using the expression "and
also" because that is merely repetition. Therefore, the word "also" could be omitted.

Baroness Buscombe: My Lords, I rise to speak in support of the amendment, although in light
of the observations of my noble friend Lord Renton perhaps I should add "in principle". In so
doing, I thank the noble Lord, Lord Phillips of Sudbury, for his correspondence on the point. I
have reread the reference to a duty of good faith between members in the Minister's letter to me
dated 10th January 2000. In that letter he states that the difficulty lies in how to define it since there
is no express duty set out in the Partnership Act 1890 and, instead, it has been developed under
general law.

Given that partnership law is to apply only to LLPs in a very limited way--namely, for the
purposes of taxation--it cannot matter that it is not expressly referred to in the Partnership Act. I
believe that the expression and status of a duty of good faith as between members themselves and
members and the LLP will assist in protecting the interests of third parties. I also agree with the
observations of the noble Lord, Lord Phillips of Sudbury, about standards in that regard.

The amendment complements the remainder of Clause 5 and is of assistance when considering the
apportionment of liability, to which I referred at the beginning of the debate. If a partnership wants
to convert to an LLP and, in so doing, retain the partnership ethos--something which has not so
far been expressed this afternoon--surely a duty of good faith, although not expressed in
partnership law, is central to maintaining that ethos.

Lord McIntosh of Haringey: My Lords, the amendment would apply a duty of good faith
between members in addition to an existing duty between the

6 Mar 2000 : Column 866

members and the limited liability partnership. I recognise that the amendment has been drafted so
as to provide that the duty which exists between the members and the LLP prevails if there is any
conflict. That was one problem which arose in Committee which we do not face now. However, I
am still not convinced of the necessity or desirability of imposing such a duty between members.

The consultation paper published by the Government on 16th February, which set out draft
regulatory default provisions governing the relationship between members, raised the issue of a
duty of good faith. If I am accused of consulting, I plead guilty. If the noble Lord suggests that I
used the argument about consultation to stop him tabling and speaking to amendments, or even
voting on them, I plead not guilty. I recognise that he is fully entitled to put his point of view
regardless of the consultation document. I admit that, in response to the noble Lord, Lord
Goodhart, I said that Amendment No. 1 would scupper the consultation process. However, the
noble Lord is not obliged to pay attention to anything that I say; he can proceed as he wishes.

This is a matter which affects not only Members of your Lordships' House, learned in the law and
in accountancy as they are, but the outside world. Therefore, it is proper to seek outside views on
issues which are raised in this House. I should have thought that noble Lords would be pleased by
that rather than the reverse. We explained in the paper that, even though it was not expressly set
out in legislation, we believed that it was reasonable to expect that a member would owe a
fiduciary duty to the LLP because he would be the firm's agent. The paper went on to say that it
was doubtful that any similar duty would be owed between the members, but that there were a
number of dangers in imposing a duty. The most important of these is that at present there is no
statutory definition of "good faith".

It is generally recognised that a duty of good faith includes the following factors (which are a
summary of paragraph 20 of the consultation document): first, a duty of honesty and good faith
owed to each fellow member. I am not sure that that deals with the question whether it should be
"each" or "every". Good faith also includes: a requirement for openness; a duty to act in favour of
the firm; fair treatment of a minority within the firm; and a duty not to compete with the firm.
Those are generally accepted factors in the context of partnerships, although they do not feature in
the Partnership Act 1890. Why should we assume that reference to a duty of good faith with
regard to limited liability partnerships will result in the same conclusions as exist for partnerships?
Moreover, why should we assume that in future what is applicable to partnerships should now be
applicable to LLPs? In any case, there will be nothing to prevent members agreeing between
themselves in their agreement that they owe particular duties to each other.

We are doubtful about the desirability and necessity of imposing a duty of good faith. However,
this is an issue on which we have gone out to consultation and it may be that we shall be
persuaded otherwise by the

6 Mar 2000 : Column 867

results. It is open to the noble Lord, Lord Phillips, to press his amendment if he wants to do so,
but we may still be persuaded when the results of the consultation are known. At the moment,
however, we are not inclined to pre-empt the results of the consultation and to agree to the
amendment.

The noble Lord, Lord Phillips, referred to partnerships where there were hundreds of members
who did not know one another. I do not believe that that affects the duty of good faith between
members. I do not see how the duty of good faith, which from the factors that I have cited
appears to be intensely personal, will apply any more or less according to whether the partners
know each other. Surely the important fact is that in large partnerships the members owe a duty to
the firm, which is much more effective.

The noble Lord, Lord Renton, referred to majority decisions. We have provided for such
decisions by agreement in the default provisions which will be part of regulations. I hope that that
answers the noble Lord's point.

I understand the concern of noble Lords, but it arises from a desire to bring into legislation
partnership principles which should apply only to taxation and, as far as possible, to little else.
That is the principle on which we have drafted the legislation. We cannot believe that it will be
helped by introducing the principle of good faith as is proposed in the amendment.

Lord Renton: My Lords, with the leave of the House, can the noble Lord point to where majority
decisions are expressly mentioned?

Lord Macintosh of Haringey: My Lords, they are to be provided for in regulations under
Clause 14(c).

Lord Phillips of Sudbury: My Lords, I am grateful for the Minister's response. The definition of
"good faith" is classic common law. The common law has done the job of defining that
expression in relation to partnerships, and could do it eminently well in regard to companies. That
would be a much better way to proceed than is trying to define it and set it in concrete.

The noble Lord referred to partners being able voluntarily to write into their partnership
agreements good faith obligations. Our whole approach is based on the public interest in not
leaving yet further matters to the partners of very privileged animals: LLPs. I very much hope that
the Government will reconsider the arguments expressed this afternoon. I do not believe that the
public interest will be served other than by allowing the good faith obligation to prevail in limited
liability partnerships. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

7 p.m.

Clause 6 [Members as agents]:

Lord McIntosh of Haringey moved Amendment No. 9:
 

    Page 3, line 32, leave out ("or believes").

6 Mar 2000 : Column 868

The noble Lord said: My Lords, the issue of the word "or believes" arose in Committee. By
removing the words "or believes" from Clause 6(2)(b), the amendment narrows the test of
authority in Clause 6(2)(b) so that an LLP is bound by the actions of its member except where the
person dealing with that member knew that he had no authority. The amended wording follows the
precedent of Section 5 of the Partnership Act 1890.

The effect is to strengthen the position of persons dealing with an LLP, so that the LLP will be
bound by a member's actions unless the member had no authority to act, and the person dealing
with that member knew that he had no authority or did not know or believe him to be a member of
the LLP.

We have concluded that this strikes a better balance between the interests of the third party and
those of the member in the light of discussion on this point in Committee, and particularly the
comments from my noble friend Lord Goldsmith, to whom I wrote about this and another issue
which arose in the debate on Clause 6. I should like, if I may, to touch upon that other issue. It
was whether the common law could be relied upon in all cases to achieve the liability of a member
for his own negligence; and whether the Explanatory Notes to the Bill accurately reflected the
position. I do not think it appropriate or necessary to return here to anything that was said in
Committee, which drew out cogently the potential for uncertainty, other than to point out that it
would be outside the scope of the Bill to amend the general law on the duty of care, and that any
other attempt to create greater legislative certainty would seem likely to cause as many problems
as it would solve.

However, I should like to note that we shall be revising the Explanatory Notes on this point before
they go with the Bill to another place. We shall draw on the detail which was contained in the
correspondence that I have had with my noble friend Lord Goldsmith, which has been copied to
other Members who have taken part in these proceedings. I beg to move.

Lord Goldsmith: My Lords, I welcome the amendment. I also welcome, and am grateful to the
Minister for, the indication of the intention to revise the Explanatory Notes to deal with the other
point that I made in Committee.

Throughout, my contributions to the debate have been from concern for the protection of third
parties who deal with this new entity. I formed the conclusion that it was not technically possible
to table an amendment as regards the personal liability of members, the point to which I referred in
Committee. I do not repeat it. However, I believe that it is an indication, as is this amendment, of
the need for people to know what they are dealing with.

On Amendment No. 9, the onus must be on the limited liability partnership to draw clearly to the
attention of any third party a limitation on the authority of any member with whom it deals. That is

6 Mar 2000 : Column 869

why I welcome the amendment. It provides clearly that nothing less than knowledge on the part of
the third party that the member did not have authority will do.

For the same reasons, at Second Reading I suggested that the courts should be vigilant to ensure
that the device of the LLP was not misused. It should not be a trap for the unwary who may not
understand that the body with which they are dealing, although it includes the word "partnership",
is not the same as a partnership which carries with it personal liability and responsibility.

I am grateful to the Minister for having indicated changes that may be made to the Explanatory
Notes. I support the amendment.

Lord McIntosh of Haringey: My Lords, I am grateful to my noble friend for his comments. Of
course, it does not remove unlimited liability under all circumstances. That still exists when an act
is in bad faith. However, my noble friend's general point is legitimate. I commend the amendment.

On Question, amendment agreed to.

Clause 10 [Income tax and chargeable gains]:

Lord McIntosh of Haringey moved Amendment No. 10:
 

    Page 5, line 27, leave out from ("section") to end of line 35 and insert ("118 insert--

                           "Limited liability partnerships

Treatment of limited liability partnerships.
118ZA. For the purposes of the Tax Acts, a trade, profession or business carried on by a limited liability partnership with
a view to profit shall be treated as carried on in partnership by its members (and not by the limited liability partnership as
such); and, accordingly, the property of the limited liability partnership shall be treated for those purposes as partnership
property.
Restriction on relief.
118ZB. Sections 117 and 118 have effect in relation to a member of a limited liability partnership as in relation to a limited
partner, but subject to sections 118ZC and 118ZD.
Member's contribution to trade.
118ZC.--(1) Subsection (3) of section 117 does not have effect in relation to a member of a limited liability partnership.
(2) But, for the purposes of that section and section 118, such a member's contribution to a trade at any time ("the
relevant time") is the greater of--
(a) the amount subscribed by him, and
(b) the amount of his liability on a winding up.
(3) The amount subscribed by a member of a limited liability partnership is the amount which he has contributed to the
limited liability partnership as capital, less so much of that amount (if any) as--
(a) he has previously, directly or indirectly, drawn out or received back,
(b) he so draws out or receives back during the period of five years beginning with the relevant time,
(c) he is or may be entitled so to draw out or receive back at any time when he is a member of the limited liability
partnership, or
(d) he is or may be entitled to require another person to reimburse to him.

6 Mar 2000 : Column 870
 

(4) The amount of the liability of a member of a limited liability partnership on a winding up is the amount which--
(a) he is liable to contribute to the assets of the limited liability partnership in the event of its being wound up, and
(b) he remains liable so to contribute for the period of at least five years beginning with the relevant time (or until it is
wound up, if that happens before the end of that period).
Carry forward of unrelieved losses.
118ZD.--(1) Where amounts relating to a trade carried on by a member of a limited liability partnership are, in any one or
more chargeable periods, prevented from being given or allowed by section 117 or 118 as it applies otherwise than by
virtue of this section (his "total unrelieved loss"), subsection (2) applies in each subsequent chargeable period in which--
(a) he carries on the trade as a member of the limited liability partnership, and
(b) any of his total unrelieved loss remains outstanding.
(2) Sections 380, 381, 393A(1) and 403 (and sections 117 and 118 as they apply in relation to those sections) shall have
effect in the subsequent chargeable period as if--
(a) any loss sustained or incurred by the member in the trade in that chargeable period were increased by an amount equal
to so much of his total unrelieved loss as remains outstanding in that period, or
(b) (if no loss is so sustained or incurred) a loss of that amount were so sustained or incurred.
(3) To ascertain whether any (and, if so, how much) of a member's total unrelieved loss remains outstanding in the
subsequent chargeable period, deduct from the amount of his total unrelieved loss the aggregate of--
(a) any relief given under any provision of the Tax Acts (otherwise than as a result of subsection (2)) in respect of his total
unrelieved loss in that or any previous chargeable period, and
(b) any amount given or allowed in respect of his total unrelieved loss as a result of subsection (2) in any previous
chargeable period (or which would have been so given or allowed had a claim been made)."").

The noble Lord said: My Lords, Amendment No. 10 is horribly long and technical and makes
heavy reading. (I was going to enter a bet to see how many people had read it!) For that reason, I
shall deal with the amendment in instalments by reference to each of the four new sections that it
proposes inserting in the Income and Corporation Taxes Act 1988.

The first new section is Section 118ZA of the ICTA. This section is largely the same as Section
111A of the ICTA that was previously inserted by Clause 10. The only change that has been made
to that provision is to insert the words "with a view to profit" which we debated in Committee,
after the requirement that an LLP must be carrying on a trade, profession or business if it is to be
taxed as a partnership. In this way we are seeking to ensure that an LLP that is taxed as a
partnership would otherwise have been capable of operating as a partnership under the 1890 Act.

As the effect of this clause is that LLPs will be taxed as partnerships I should like to take this
opportunity to say something about this tax treatment. The limited liability partnership is a
response to the desire, particularly from professional partnerships, for an entity which will allow
them to operate with limited liability, while maintaining a partnership ethos--that is, the flexibility to
organise their own internal structure, and to participate in the ownership and

6 Mar 2000 : Column 871

running of the business. For these reasons, such an entity may also prove attractive to start-up
businesses, and to multi-disciplinary businesses. We concluded, in the light also of the views of
the trade and industry committee, that it would be wrong to try to restrict this combination of
limited liability and partnership structure to the professions, even if it were possible to find a
satisfactory legal definition.

We have become aware, however, that taxing LLPs as partnerships might mean that there is scope
for them to have alternative uses for which they were not intended, where the primary or only
attraction may be their tax status. We shall be looking further into these issues with the Inland
Revenue with a view to bringing forward legislation in the Finance Bill 2001, which should be in
time for the availability of limited liability partnerships. Clearly, this will only be after appropriate
consultation. There is no intention to undermine the commercial certainty of taxation as a
partnership for those businesses for whom the entity was intended, and clearly this will be
uppermost in our minds in whatever option we propose. I wished to put that on the record.

The next new section of the Taxes Act that is inserted by the amendment is Section 118ZB. This
and the remaining aspects of this amendment make up the proposed amendment to which I
referred at Committee stage, at col. 1395 of the Official Report of 24th January. The effect of the
amendment is to make the provisions of the existing Sections 117 and 118 of ICTA applicable to
members of LLPs with detailed modifications that I shall explain.

Sections 117 and 118 are anti-avoidance provisions that were introduced in 1985. They currently
apply only to limited partnerships under the 1907 Act that carry on a trade. They operate to
restrict tax relief claimed under specified provisions. Section 117 applies to individual partners;
and Section 118 applies to corporate partners respectively. We propose that the extension of
Sections 117 and 118 will apply only to claims made by members of trading LLPs and not claims
by professions.

The reason that they are being extended to LLPs is that without doing so there would be the same
scope as for the 1907 Act limited partnership for using LLPs as vehicles for tax avoidance. This
avoidance would involve people buying into LLPs to claim tax relief for losses substantially in
excess of their capital contributions; or interest could be artificially manufactured on loans to buy
an interest in the LLPs and relief claim for that interest. The particular claims for tax relief by
members of LLPs to which Sections 117 and 118 will apply are the same as the particular claims
by partners in the 1907 Act limited partnerships. These are claims to tax relief against income
other than profits from the trade of the LLP for interest paid on loans to buy into or provide
working capital for the LLP and for trading losses of the LLP. There is no restriction by these
sections of tax relief for interest paid or trading losses that are set against the partnership profit.
Any amount by which the loss is restricted can be carried forward and set against the members'
future shares of the LLP profits.

6 Mar 2000 : Column 872

The claims to these tax reliefs are limited by Sections 117 or 118 to a specified amount which, for
limited partnerships, is the partner's capital contribution plus any undrawn profit. That limit would
not have worked for LLPs which will be structured differently. Because of this, the new Section
118ZC, which this amendment inserts, defines the limit which reflected our policy of allowing
claims by members in LLPs up to the amount of money that they stood to lose if the LLP was
wound up because it was insolvent. The effect of this provision is to set a limit on claims based
on any capital that the member has subscribed to become a member, plus any undrawn share of
profit and any further amounts that he or she has undertaken to contribute in the event that the
LLP is wound up. The provision includes certain conditions that ensure that relief cannot be
obtained on the basis of money that has been temporarily lodged with or committed to the LLP
and then withdrawn after the tax relief has been given.

The provisions of new Section 118ZD cater for the situation where a member of an LLP who has
had a claim to loss relief restricted by Sections 117 or 118 later makes a further capital
contribution. Where this happens, he or she can claim relief for any balance of the loss that was
not relieved in the period of the original claim and has not, in the mean time, been set against the
LLP's trading profit. This claim is made on the basis that the loss arose in the year of the further
contribution. This provision was introduced in response to comments by the bodies which were
consulted. I beg to move.

Lord Goodhart: My Lords, I rise to say that I am a member of the Tax Law Review Committee.
It is currently undertaking the tax law rewrite project, putting tax law into reasonably
understandable English. All I can say is that the Minister has made our task considerably more
difficult!

Baroness Buscombe: My Lords, I rise to speak briefly and simply to the amendment. I want to
raise three concerns on which we would appreciate the Minister's response. First, if a member
borrows to provide funds to an LLP, we see no reason why interest on the loans should not be
available for off-set against income from sources other than the LLP as that interest will have been
funded from sources other than the LLP.

Secondly, we agree with the principle that tax relief for losses incurred by the LLP should be
restricted to cash lost by the member, but presently there is concern that the provision fails to
achieve this because of the treatment of profits undrawn at the date of the loss and the treatment
of subsequent profits retained to replace lost capital.

Thirdly, it is proposed that transparency for capital gains tax purposes is lost if the LLP ceases to
carry on a trade or business, with potentially serious consequences if, for example, the LLP
ceases one trade and commences another. Does not the Minister agree that it would make sense
for the transparency to

6 Mar 2000 : Column 873

remain for assets held on the date of cessation at least for a sufficient period to allow for their
orderly disposal?

Lord McIntosh of Haringey: My Lords, I apologise for challenging the Tax Law Review
Committee. I fear that there will be more challenges before it has completed its work.

The noble Baroness, Lady Buscombe, raised three technical questions. I hope that she will be
satisfied if I write to her on those issues. I commend the amendment to the House.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendment No. 11:
 

    Page 5, line 42, at end insert ("with a view to profit").

The noble Lord said: My Lords, in moving Amendment No. 11, I shall speak also to Amendment
No. 12. These amendments would achieve two objects. Amendment No. 11 links the partnership
tax treatment allowed by new Section 59A of the Taxation of Chargeable Gains Act 1992 to
Section 59 of that Act. The words,
 

    "with a view to profit",

refer back to the Partnership Act 1890 definition of "partnership" used in Section 59 of the
Taxation of Chargeable Gains Act. Only business carried out with a view to profit should be
treated as partnerships for tax purposes. That is consistent with our debate in Committee.

Amendment No. 12 makes it clear that the tax referred to in new Section 59A of the Taxation of
Chargeable Gains Act 1992 is tax in respect of chargeable gains. I beg to move.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendment No. 12:
 

    Page 5, line 44, after ("tax") insert ("in respect of chargeable gains").

On Question, amendment agreed to.

7.15 p.m.

Lord McIntosh of Haringey moved Amendment No. 13:
 

    Page 6, line 8, at end insert--
 

("(2) Where subsection (1) ceases to apply in relation to a limited liability partnership with the effect that tax is assessed
and charged--
(a) on the limited liability partnership (as a company) in respect of chargeable gains accruing on the disposal of any of its
assets, and
(b) on the members in respect of chargeable gains accruing on the disposal of any of their capital interests in the limited
liability partnership,
it shall be assessed and charged on the limited liability partnership as if subsection (1) had never applied in relation to it.

6 Mar 2000 : Column 874
 

(3) Neither the commencement of the application of subsection (1) nor the cessation of its application in relation to a
limited liability partnership is to be taken as giving rise to the disposal of any assets by it or any of its members."
( ) After section 156 of that Act insert--
"Cessation of trade by limited liability partnership.
156A.--(1) Where, immediately before the time of cessation of trade, a member of a limited liability partnership holds an
asset, or an interest in an asset, acquired by him for a consideration treated as reduced under section 152 or 153, he shall
be treated as if a chargeable gain equal to the amount of the reduction accrued to him immediately before that time.
(2) Where, as a result of section 154(2), a chargeable gain on the disposal of an asset, or an interest in an asset, by a
member of a limited liability partnership has not accrued before the time of cessation of trade, the member shall be treated
as if the chargeable gain accrued immediately before that time.
(3) In this section "the time of cessation of trade", in relation to a limited liability partnership, means the time when section
59A(1) ceases to apply in relation to the limited liability partnership."").

The noble Lord said: My Lords, Amendment No. 13 has two closely related purposes. First, it
clarifies the tax treatment both of LLPs and of LLP members where the LLP is in liquidation.
Neither the coming into operation of Section 59A at the start of a business of an LLP, nor its
ending at liquidation, causes a charge to arise on the members. In liquidation, the "transparent"
treatment of the LLP members as partners can no longer apply as the assets of the LLP vest in the
liquidator who disposes of them to meet the claims of creditors. It would be unrealistic for the
Inland Revenue to attempt to tax the LLP members on disposals of assets by the liquidator.
Instead, any tax due on such disposals will be met by the liquidator under the normal corporate
regime for liquidations. The LLP members will continue to be taxed under the rules for
individuals, but their asset will be an interest in the LLP which may give rise either to a chargeable
gain or an allowable loss on a disposal following liquidation.

The second purpose of the amendment is to ensure that any gains which LLP members have
deferred while the partnership tax treatment was in force are brought back into charge when the
LLP goes into liquidation. Under Sections 152 to 154 of the Taxation of Chargeable Gains Act,
LLP members will be able to defer gains realised on the disposal of business assets where the
proceeds from the disposal have been used to acquire assets used in the trade carried on by the
LLP. New Section 156A of the Taxation of Chargeable Gains Act 1992 inserted by this
amendment ensures that immediately before the LLP goes into liquidation a member who has
deferred gains in this way becomes liable to pay the tax due on the deferred gain. Although the
assets concerned are then under the control of the liquidator, it would not be appropriate for the
charge to fall on them. This is because claims for this relief would have been made by the LLP
members on an individual basis and the gains concerned may have arisen on assets outside the
LLP. This measure is necessary to ensure that tax that has been deferred is brought back into
charge on the members who would have originally been liable to that tax. I beg to move.

On Question, amendment agreed to.

6 Mar 2000 : Column 875

Clause 12 [Stamp duty]:

Lord McIntosh of Haringey moved Amendment No. 14:
 

    Page 6, line 32, leave out ("immediately before its incorporation") and insert ("at the relevant time").

The noble Lord said: My Lords, in moving Amendment No. 14, I shall speak also to Amendments
Nos. 15 to 17. It may be that some property of the former partnership is transferred to the LLP
after incorporation, but before it acquires the former partnership's business. During this interim
period, the previous partnership may continue trading and hence acquire new assets, such as
debts due from its customers or clients. The technical changes made by these amendments put
beyond doubt that, as intended, such assets will come within the scope of the relief, provided that
the conditions are met. I beg to move.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendments Nos. 15 to 17:
 

    Page 6, line 35, leave out ("subscribe their names to the incorporation document") and insert ("are or are to be
    members of the limited liability partnership").
 

    Page 6, line 43, leave out ("immediately before its incorporation") and insert ("at the relevant time").
 

    Page 7, line 5, at end insert--
 

("( ) In this section "the relevant time" means--
(a) if the person who conveyed or transferred the property to the limited liability partnership acquired the property after its
incorporation, immediately after he acquired the property, and
(b) in any other case, immediately before its incorporation.").

On Question, amendments agreed to.

Lord McIntosh of Haringey moved Amendment No. 18:
 

    After Clause 12, insert the following new clause--

                  CLASS 4 NATIONAL INSURANCE CONTRIBUTIONS

(". In section 15 of the Social Security Contributions and Benefits Act 1992 and section 15 of the Social Security
Contributions and Benefits (Northern Ireland) Act 1992 (Class 4 contributions), after subsection (3) insert--
"(3A) Where income tax is (or would be) charged on a member of a limited liability partnership in respect of profits or
gains arising from the carrying on of a trade or profession by the limited liability partnership, Class 4 contributions shall be
payable by him if they would be payable were the trade or profession carried on in partnership by the members."").

The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendment No.
19. These are both technical amendments. Between them, they ensure that members of LLPs who
are taxed on their share of the LLP profits as though they were partners in a conventional
partnership will also be charged Class IV national insurance contributions on that profit share.
That reflects the position for self- employed people and partners generally. The new clause has
been welcomed by consultees. I beg to move.

On Question, amendment agreed to.

6 Mar 2000 : Column 876

Clause 18 [Commencement, extent and short title]:

Lord McIntosh of Haringey moved Amendment No. 19:
 

    Page 9, line 36, leave out (" 12") and insert ("(Class 4 national insurance contributions)").

On Question, amendment agreed to.

Schedule [Names and registered offices]:

Lord Phillips of Sudbury moved Amendment No. 20:
 

    Page 10, line 13, at end insert--
 

("( ) When the name of the limited liability partnership ends with the abbreviation "llp" or "LLP" any notepaper, invoice,
circular or other communication in whatever medium shall legibly state thereon that it is "a limited liability partnership".").

The noble Lord said: My Lords, I should apologise at once for chickening out of an attempt to
table an amendment to incorporate the Welsh version as well. However, I hope that if the
Government accept this amendment, they will bring in the necessary linguistic means to complete
its effect. Before I go any further, I add my thanks to those of the noble Baroness, Lady
Buscombe, for the assistance given by the Government to myself and colleagues on these
Benches in arriving today with as much help as they have been able to give.

This amendment is simple but important. I believe that it is necessary on grounds of public
protection. The word "limited" in relation to a limited liability company and the requirement for
any but a public company to have the word "limited" or the letters "Ltd" after its title are, I
believe, now generally understood by the public. However, it takes an awfully long time--not
merely decades--for the man and woman in the street to latch on to even the simplicities of
company law. I believe, too, that the word "partnership" is broadly understood, as is the
difference between "partnership" and "company".

We have two particular problems: first, the limited liability partnership is a brand new corporate
animal; and secondly, it has a kind of hybrid feel to it. One of the drawbacks in terms of public
understanding of what is going on is that the word "partnership" remains in the Bill's title and the
letters "LLP" contain, obviously, the word "partnership". Indeed, it is predictable that members of
LLPs will refer to themselves as partners. They will talk about "the partnership". They will say,
"My partner did this" or "My partner did that".

I believe that, at least for a period--perhaps 10 years, but perhaps permanently--if LLPs do not set
out in full the words, "limited liability partnership", after their name, they should be required to put
the words in full at the bottom of their notepaper, etc, in much the same way as they are required
to do for their registered company, the place of incorporation, their registered number, and so on.
Without it, I believe that there will be serious confusion. By means of this Bill we are bestowing a
tremendous privilege upon firms which translate from partnerships into LLPs. Therefore, in order
to protect the public,

6 Mar 2000 : Column 877

I believe that the least requirement on those firms should be the provision set out in the
amendment.

I wish to make one other point. Today, the talk has been largely about the large professional
partnerships. I have absolutely no doubt that they will not be a problem in terms of this
amendment. Indeed, most of the firms that I am aware of which are likely to use this route are
already so well off that the chances of them going bust and leaving Mrs Smith and Mr Jones short
of a penny or two is fanciful. I am concerned about the many, many companies that will in future
be formed as LLPs rather than limited companies. The very fact that, constitutionally speaking,
they are a light structure--that is, that the requirements for registration and the formalities of
running an LLP are so much lighter than for a limited company--is in my view likely to make them
a favourite resource for companies in the future. I refer to the small companies which give trouble
and which in large numbers lead men and women to lose money that they can ill afford.

For a long time, I have been in the lucky position of giving advice to the public through BBC2. It
is a very good vantage point from which to see the real problems that afflict so-called ordinary
people. Should anyone have any doubt, believe me, a very serious problem of cynicism exists
towards the law in relation to the effectiveness of the wrongful trading provisions. Quite simply, it
does not work. The complexity and cost of pursuing directors to make them personally liable for
debts for which, patently, they should be personally liable is such that it is rarely done. In that
respect, prevention is a good deal better than cure. I believe that this small amendment, which, I
suggest, will cause no problem to a bona fide LLP, will go some way towards addressing the
problem that I have tried to describe. I beg to move.

Lord McIntosh of Haringey: My Lords, I am aware of the concern expressed by the noble
Lord; that is, that some people will be unfamiliar with the concept of LLPs. I share that concern.
We have always intended to apply Sections 351A and 351B of the Companies Act 1985, which
require LLPs to mention on all business letters and order forms the place of registration, the
registration number and the address of the registered office. However, I can say to the noble Lord
that we shall amend that by inserting a new subsection (c) to require firms which use the
abbreviation "LLP" after their names to mention on their business letters and order forms that they
are limited liability partnerships. Therefore, those who do business with an LLP will be given
notice that they are dealing with an entity of that kind. I hope that that will satisfy the noble Lord.

Lord Phillips of Sudbury: My Lords, I am most grateful to the Minister for agreeing to that. I
beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6 Mar 2000 : Column 878