Limited Liability Partnerships

Mr. Mitchell: To ask the Secretary of State for Trade and Industry what consultations he has had with the Insolvency Service about the potential for disqualified and failed directors creating
limited liability partnerships for new operations. [124451]

Dr. Howells: The Insolvency Service have been closely involved at every stage in the development of limited liability partnerships. The Government's proposals include the application,
by secondary legislation, of existing safeguards and sanctions relating to disqualified directors.
This will ensure that those who have been disqualified on the basis of unfit conduct under any of
the provisions of the Company Directors Disqualification Act 1986 will also be prohibited from
being a member of, or being in any way, whether directly or indirectly, concerned with taking part
in the formation or management of a limited liability partnership, unless they obtain leave of the
court to so act.

Mr. Mitchell: To ask the Secretary of State for Trade and Industry what consultations he has
had with the (a) FSA, (b) Competition Commission and (c) Office of Fair Trading about their
role in regulating limited liability partnerships. [124450]

Dr. Howells: There have been discussions at official level with other Departments and the FSA.
To date we have not discussed the detail either with the Office of Fair Trading or the Competition
Commission.

The Limited Liability Partnerships Bill creates a new legal entity, the limited liability partnership.
Other Departments will consider the limited liability partnership in the context of their policy areas
and decide what, if any, amendments to existing legislation are required. Clause 15 of the Bill
contains regulation-making powers which may be used to apply to LLPs any law relating to
companies, other corporations and partnerships. Clause 16 contains a power to make
consequential amendments. Other Departments will give consideration to whether it is appropriate
to make amendments to their primary legislation under these powers or under any other legislation
which the relevant Department is itself bringing forward.

Mr. Mitchell: To ask the Secretary of State for Trade and Industry what proposals he has for
stopping (a) convicted fraudsters, (b) directors censured by his Department and (c) directors of
failed companies setting themselves up as limited liability partnerships; what regulatory framework
such partnerships will operate under; and what sanctions can be operated against such
partnerships. [124368]

Dr. Howells: We will be applying to limited liability partnerships, under powers contained in
clauses 14 and 15 of the LLP Bill, large portions of the Companies Act 1985 and the Insolvency
Act 1986, with appropriate modifications. This will provide the general regulatory framework.

7 Jun 2000 : Column: 256W

In addition, the Company Directors Disqualification Act 1986, which provides for the
disqualification of a person from being a director of a company in certain circumstances, will also
be applied to the members of an LLP.

The Company Directors Disqualification Act gives the court a power to disqualify persons on a
variety of grounds, including on conviction of an indictable offence, persistent breaches of
companies legislation, fraud in a winding up and participation in wrongful trading. In addition, the
court will be under a duty to disqualify a person where it is satisfied that his conduct as a member
of an insolvent LLP renders him unfit to so act. Simply being a director of a failed company (or,
in future a member of a failed LLP) will not, though, necessarily result in disqualification--the
intention is to punish abuse of limited liability, not the mere fact of failure.

The application of the Company Directors Disqualification Act to LLPs will ensure that any
director who is disqualified under the provisions of the CDDA would not be eligible to be a
member of an LLP or take part in the promotion, formation or management of an LLP. In a similar
way a member of an LLP may be disqualified from acting as a director of a company.

Mr. Mitchell: To ask the Secretary of State for Trade and Industry what consultations he has
had with (a) the Consumers Association and (b) trading standards authorities about the
possibilities of fraud arising from (i) fraudsters and (ii) disqualified and failed directors setting up
limited liability partnerships. [124449]

Dr. Howells: No such consultations have taken place. Secondary legislation will apply to LLPs
appropriately modified parts of the Insolvency Act 1986 and the Companies Act 1985. This will
include the wrongful and fraudulent trading provisions, and powers of investigation. The
Company Directors Disqualification Act 1986 will also apply, such that disqualified directors will
not be eligible to be members of an LLP and vice versa. In these cases the regulation of an LLP
will be the same as that of a company.

Mr. Mitchell: To ask the Secretary of State for Trade and Industry what proposals he has for
ensuring that limited liability partnerships set money aside for legal claims against the partnership.
[124366]

Dr. Howells: After considerable consultation, and taking account of the views of the Trade and
Industry Committee, the Government concluded that LLPs would not be required to maintain any
kind of fund or insurance to protect against claims. The main reasons for reaching this conclusion
were:

the lack of justification for requiring a higher level of funding than is required of private companies;

the difficulty of setting an appropriate level which is high enough to safeguard the interests of third parties, but does not discourage firms from either setting up in business or trading through difficulties;

 the general availability of LLPs makes it difficult to design a regime which could adequately distinguish between the many types of business which might become LLPs and the different liabilities they might face;

 it is more appropriate to regulate an activity, rather than an entity, so as to tailor the regulation effectively. For    example, where professions require professional indemnity insurance, the level of

7 Jun 2000 : Column: 257W

 insurance required will vary depending on the profession. A general requirement made of LLPs would conflict with any existing requirements.

More detail on this matter is set out in the Government Observations on the Fourth Report from
the Trade and Industry Committee (Session 1998-99) on the draft Limited Liability Partnership Bill
(HC 529).