Committee for Enterprise,
Trade and Investment
Wednesday 19 June 2002
MINUTES OF EVIDENCE
Limited Liability Partnerships Bill:
Mr P Doherty (Chairperson)
Mr Neeson (Deputy Chairperson)
Dr M Twomey ) Consultant In Partnership Law
The Chairperson: I welcome Dr Michael Twomey, who is a partnership lawyer. We have a relatively short time, so I propose that after you make your submission, we will allow Committee Members to ask questions.
Dr Twomey: As you know, I have commented on the proposed limited liability partnerships legislation. My comments focus on the thrust of the legislation rather than the detail, and I suggest a complete revision of the approach. This might appear surprising, but before I go into some of my reasons, I want to point out that I am not alone in my reservations on the limited liability partnership, which has been introduced in the UK.
The Alberta Law Reform Institute was the first body that had issues with the approach taken in the UK. It considered the GB approach against the Canadian and American approaches, and favoured the latter. I regard Roderick Banks, author of "Lindley and Banks on Partnership", which is the leading textbook on partnership law in the UK, as my contemporary in the UK. He recently sent me an e-mail in which he said:
"I for one am ashamed that this country should have produced such a poor piece of legislation".
He is the leading partnership lawyer in the UK, and that is his description of the Limited Liability Partnerships Act 2000.
I pointed out in my introduction that I am not alone in my criticisms of the Limited Liability Partnerships Act 2000. My basic problem with that Act is that it abolishes the advantages of partnerships. There are three primary advantages to partnerships. First, they are informal and flexible because partners can agree to whatever they want, and they are not subject to literally thousands of provisions of company law. Secondly, they are not required to file accounts, and that is a big issue for many partners. That means that their finances are not subject to public scrutiny and the bureaucracy that is involved in filing annual returns and accounts. The third reason is partnership tax. A partnership is not an entity as a matter of law, and for that reason it does not pay tax. The partners themselves are the only ones who pay tax. Those are the three advantages to partnerships in this and other jurisdictions.
The real aim of this legislation is to address partner liability. That has been brought to the fore through the Enron case in particular, in which the Arthur Andersen partners, who were in no way related to the Enron case, could theoretically be liable to an unlimited degree for their partners’ negligent actions. In other words, not only would the assets of Arthur Andersen be subject to attack, but also the homes, cars and investments of individual partners who were not involved. The legislation is designed to deal with that type of mischief. That problem exists in Great Britain, America and Canada, and we must work out how to deal with that.
The crux of my point is that the manner in which it has been dealt with in Great Britain’s legislation is not ideal; and the manner in which it has been dealt with in Canada and America is preferable. In both of the latter jurisdictions, a shield or protection is provided to a partner in a firm who is not liable for the negligence of his partner. They say that the assets of the firm and the assets of the negligent partner will be available to a third party, but not those of the innocent partner. By making what is effectively a one-paragraph change to their partnership law, those jurisdictions have retained all the benefits of that law. The fact remains that partnerships are not required to file accounts and are not subject to the comprehensive legislation that applies to companies. They also retain their non-entity status, which allows them to be taxed as a partnership.
In contrast, a brand new corporate entity, called a limited liability partnership (LLP), was created in GB. Company law has been completely applied to LLPs, and the provisions of the Act, and of the Bill that has been proposed in Northern Ireland, specifically provide that partnership law will not be applied to LLPs. The only connection between partnerships and LLPs — as proposed in GB and Northern Ireland — is in their name. In every other respect, they are companies not partnerships. The problem, particularly for small businesses, is that LLPs will be subject to current company legislation. That runs contrary to the aim of the company law review group in the UK, which is examining how to make company law simpler and easier for small businesses to use. Company law will be applied to small businesses if they become LLPs.
In essence, the legislative approach to the problem that has been taken in GB is, in my opinion, the wrong one, and I am not alone in that view. A legitimate question could be asked about why GB took that approach, and I outlined the possible political reason in a memorandum that I sent to the Committee. The political reason, which seems to be commonly accepted in GB at present, is that in the mid 1990s the "Big Five" accountancy firms decided to move offshore to Jersey in order to benefit from limited liability. When they did so, the revenue commissioners in GB reacted by saying that they would tax them as though they were companies, and, therefore, be subject to corporation tax. That would have been the first time that a partnership was ever subject to corporation tax. That was the initial response.
The secondary response was to placate the big firms, and say that they would provide LLPs, because that has happened in the USA and will also happen in Canada. However, because the UK Government felt that they were forced into that, it seems that the sting in the tail came when they provided LLPs that were partnerships only in name — they have effectively applied all company law to LLPs. Certainly, there is a feeling in GB that the reason for that was political. The GB LLP does not follow the format of the Jersey LLP that was proposed, which was supposed to mirror the American situation.
Finally, there is anecdotal evidence that indicates that LLPs are not as popular in GB as had been anticipated. For example, the biggest law firm in London, Clifford Chance, chose not to incorporate as an LLP, but instead chose to become an LLP based in America, which begs the question as to why it did that. I believe the reasons are quite clear. It wanted to remain a partnership, and it wanted to retain the three advantages of being a partnership that I have outlined in the paper. It did not want to be subject to company law, as if it was a company. If it wanted that, it could incorporate — that possibility is always open. That is perhaps the most striking evidence that the LLP legislation does not achieve what it could have achieved.
Mr Neeson: The legislation is quite complicated, and I am extremely grateful to Dr Twomey for coming today. It has been suggested that the draft Bill that you have put forward does not offer the same level of consumer protection and does not strike the necessary balance between the interests of the partnership and the interests of consumers. How do you react to that?
Dr Twomey: My draft Bill was proposed in relation to Southern Ireland, and I would not necessarily suggest that it should be used here. That draft Bill was, in effect, drafted and prepared by the Law Society in Ireland with my input, and presented by one particular interest group. I do not represent an interest group before this Committee; I have an interest in partnership law and specialise solely in that. From that perspective, I do not necessarily suggest that you adopt a particular Bill. I suggest, since Southern Ireland has no LLP legislation, that you operate or adopt the principles that have been adopted in both Canada and America, and that would have no adverse effect on consumers.
Mr Neeson: You have dealt with North American models. From a European perspective, what has been the uptake in this type of legislation?
Dr Twomey: The LLP movement is new. It began in America in the early 1990s when law firms in Texas were sued in relation to one partner’s negligence in a big transaction, and all the other partners lost their personal assets. That led to the desire for protection from unlimited personal liability for partners who were in no way negligent. Once it began, it spread like wildfire in the United States and then to Canada. The creation of a Jersey LLP, as a result of pressure, led to the GB LLP response. LLP legislation is really in the very early stages, and those countries are the only ones with LLP legislation. Colleagues in Australia and New Zealand have confirmed that they do not yet have it. A momentum is building, and that will probably increase because of the Enron/Andersen situation in which partners are concerned. They do not mind their partnership assets or the personal assets of a negligent partner being available to a third party. However, losing their personal assets because of someone else’s negligence, even if they are not involved, has become an issue. That is the reason for it, and this development is in its early stages.
Mr Neeson: In your opening statement you referred to difficulties for small businesses. What type of organisation is targeted by this legislation?
Dr Twomey: There are two main areas for discussing this legislation now. One is that large, professional firms are lobbying for it, and, the other is that small businesses are now subject to company law, which is acknowledged as inappropriate for them. If properly drafted, LLP legislation is the ideal format and structure for a small business. Examples are consultancy, communications and media businesses where an injection of capital is not necessary, and where shares are not issued. Limited liability partnership is ideal in those circumstances. Admittedly, the big firms have brought pressure, and we are discussing it today because the big accountancy and law firms introduced it in the USA, Canada and Great Britain.
There will be little or no objection to this legislation from the Law Society of Northern Ireland or accountancy firms in Northern Ireland, because they see it as a form of limited liability protection. They are not looking at the broader picture. We are talking about legislation that would provide some form of limited liability, but would be designed for small businesses. It would allow small businesses to operate without having to be subject to company law, the filing of annual returns and reports, or corporation tax. It encourages small businesses and start-up ventures. That is why I feel that it is wrong to blindly follow Great Britain legislation without thinking long and hard about what it is designed for and who it is aimed at — as distinct from who is lobbying for it and where it goes.
I have been on the other side, but I am not in a partnership. My interest is in relation to partnership law and its role in business. The big issue has always been making partnerships more attractive to small businesses so they are not required to form companies and be subject to the same law that applies to British Airways, for instance. Thousands and thousands of pages of company law apply in exactly the same way to British Airways as they do to a two-man business. The reason people form a two-man business is because of the fear of limited liability.
Mrs Courtney: When I first read about the idea of limited liability partnerships, it seemed good for small companies. However, Dr Twomey’s input has made things clearer for the Committee. Companies must issue their accounts every year under company law. However, under limited liability partnerships, they are not obliged to file accounts on a yearly basis. Does that mean that the partners, under company law, are protected, but in a partnership an individual could be protected?
Dr Twomey: In relation to accounts, my understanding of the LLP legislation is that LLPs would be required to file accounts in the same way as a company. In broad terms, even though we call this an LLP, it will be treated under company law as if it was a company. In effect, where the word "partner" or "member" appears in the GB legislation, it should be treated as if it was a director or a shareholder of a company. Company law is applied to this new structure called an LLP, and my point is that to call it a limited liability partnership is a misnomer — it is a company.
In relation to your point about liability, it is ironic that very few small companies will convert to LLPs. If they go from being a small company to an LLP, they will increase their exposure to liability. Under this LLP legislation, a partner in an LLP remains personally liable for his own actions and his own negligence. In a company, the director can always hide behind the company. LLPs do not offer more attractive liability protection from that perspective. That is not its intention, but it is worth pointing out that the liability protection of an LLP is not the same as in a company.
Mrs Courtney: On first reading I thought that they offered further protection, but, having listened to you, I am now in two minds as to whether or not they offer that protection. You mentioned the Enron situation and that Andersen would be the innocent partner. They are now open to scrutiny because they became a limited liability. Is that the reason?
Dr Twomey: No. The reason I mentioned the Andersen case is that that illustrates what this legislation is attempting to achieve. Its purpose is to protect an innocent partner in a firm that has been sued because the other partner has been negligent. There are two ways to deal with that, the first being the method used in the United States and Canada. It consists of an extra paragraph in their partnership law saying that, in such a situation, the innocent partner is not liable. That route is preferable.
To achieve that aim in Northern Ireland, a brand-new, hybrid partnership company structure is proposed. It would be subject to company law and be treated in exactly the same way as a company. However, I question why they do not simply form companies, if that is the route they wish to take, because you lose all the advantages of partnerships. For small businesses this is an opportunity to create a friendly, informal, flexible structure with some protection from unlimited liability. That is the appeal of partnerships as distinct from companies. If we introduce this legislation, those advantages will be lost.
Mr Wells: I thank you for your submission, which has given us a completely new insight into what would otherwise have been a rather humdrum piece of legislation. It is very interesting that you picked up on the matter and took the time to make a submission.
You mentioned Arthur Andersen and Enron; and there is a direct link between the two. The allegation is that Andersen staff shredded records relating to the Enron fiasco. Andersen directors were paid fabulously well for looking after that company. One might say that the problem happened on their watch. Many of us would maintain that, since they had not taken steps to stop junior staff acting as they did, it was perfectly right that they be held liable. All the Andersen directors were getting multi-million-pound share options and payments. Commensurate with that huge pay is huge risk, and I see nothing wrong with the directors being sued over the Enron affair, which has destroyed many people’s lives, including some in the United Kingdom.
We are an integral part of the United Kingdom, and much of the legislation we pass is parity legislation, which brings Northern Ireland into line with the rest of the country. Is what you propose not quite a radical change from that which pertains in the rest of the United Kingdom? Might that not be quite difficult for us, as an Assembly, to implement, given that this is a parity issue?
Dr Twomey: In many ways it is not a radical change, since Great Britain accepts the principle that it wishes to offer protection from unlimited personal liability to partners in the situation you have described. The question is how that is to be implemented. I suggest that, rather than doing it by creating a brand-new structure, it could be achieved by a minor amendment to Northern Ireland partnership law. Since you are achieving the same aim, I do not accept that what I suggest is that radical or different from what is being done in Great Britain.
Mr Wells: Can you envisage a situation whereby, if the law in Northern Ireland were perceived to be stronger or weaker than that of the rest of the United Kingdom, companies might have office nameplates on buildings in Belfast or outside to avail of what they might consider less stringent legislation?
Dr Twomey: I do not believe that two wrongs make a right, if that answers your question.
Mr Wells: When you go to Jersey, you find offices the size of a broom cupboard, which seem to be the headquarters of about 20 separate companies. In other words, they are flags of convenience — set up because the background regulatory regime is much less stringent. I should not like to think that we in Northern Ireland might be seen as a soft touch for companies with dubious financial practices.
Dr Twomey: Northern Ireland would not be seen as that, because companies would not choose a partnership as an ideal form of business. Company status gives them greater protection than a partnership, or even than the LLP. I pointed out earlier that the liability protection for an LLP, in whatever form, is less than would exist in a company. A business will not move to Northern Ireland to become a partnership because that does not offer the same protection as a company.
Mr Wells: Could partnerships move to Northern Ireland for convenience?
Dr Twomey: That would apply to professional firms, such as accountancy, which are not allowed to incorporate. Any business that is allowed to incorporate will do so.
Mr Wells: If Northern Ireland is perceived as a soft touch in its regulations compared to the rest of the United Kingdom, will we have a situation where a partnership will deliberately move its head office to Belfast?
Dr Twomey: I would not describe what I suggest as Belfast being perceived as a soft touch, and I would take issue with that. All I suggest is that exactly the same aim be achieved, but achieved by amending partnership law rather than creating a brand new structure. If a partnership in London decided that it did not want to be a United Kingdom LLP, but wanted to be a Northern Ireland LLP — [Interruption].
Mr Wells: It would still be a United Kingdom LLP.
Dr Twomey: Sorry. If it did not want to be a Great Britain LLP, but wanted to be a Northern Ireland LLP, then it would form a partnership in Northern Ireland. However, as it would not be carrying out business there, it would still be subject to the law in Great Britain. It would be liable as a partnership in London, and could not use Northern Ireland as a soft touch.
Mr Wells: That is a useful point. In your evidence you said that the take-up of LLP status in GB has been very low. We wrote to the Department in advance of your visit, so we have taken your evidence seriously. The Department indicated that was the case initially, but that things have turned. To date, there have been 2,200 registrations already, and it now averages 60 registrations a week. Although your comment may have been accurate initially, things have changed, and this is becoming a more popular option using the GB model.
Dr Twomey: Those numbers are not particularly impressive, bearing in mind the number of partnerships and businesses in Great Britain.
Mr Wells: What proportion is that of the total?
Dr Twomey: The Department of Trade and Industry in Great Britain and the memorandum to this draft Bill have indicated a low take-up of partnerships. From reading the explanatory memorandum, it is around 15%, and that is not a high take-up. However, if there were a conversion of the existing partnership law in Northern Ireland, a lot more than 15% would take it up.
Mrs Courtney: The letter from the Department states that it understands why you support the American model. However, the Department has a different starting point for the Northern Ireland Bill
"in that this Bill has been framed to complement our existing corporate law and to give a degree of protection to consumers by requiring those partnerships seeking limited liability to be subject to regulation."
I do not understand "subject to regulation". That paragraph confuses me.
Dr Twomey: I have not read that comment, so I am not sure what point is being made. Once the Department has made its submission, I will be happy to take comments and clarify any relevant points.
The Chairperson: Thank you, Dr Twomey, for your submission. We may find reason to write to you with further questions as we pursue the matter.
Dr Twomey: I have no personal interest in the matter. I have had a sad research life for the past three or four years, where I have done nothing else but research partnership law. I have an interest in it, and my contemporary, who specialises exclusively in partnership law and is the author of the leading textbook in the UK, shares my views on the legislation. We have an objective view, rather than having the views of any interest group.