SESSION 2001/2002

FOURTH REPORT

COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT

Report on the Limited
Liability Partnerships Bill
(NIA Bill 9/01)

TOGETHER WITH THE MINUTES OF PROCEEDINGS OF THE COMMITTEE
RELATING TO THE REPORT AND THE MINUTES OF EVIDENCE

Ordered by The Committee for the Enterprise, Trade and Investmentto be printed 3 July 2002
Report 4/01R (Committee for Enterprise, Trade and Investment)

COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT:
MEMBERSHIP AND POWERS

The Committee for Enterprise, Trade and Investment is a Statutory Departmental Committee established in accordance with paragraphs 8 and 9 of Strand One of the Belfast Agreement and under Assembly Standing Order No 46. The Committee has a scrutiny, policy development and consultation role with respect to the Department of Enterprise, Trade and Investment and has a role in the initiation of legislation.The Committee has power to:

• consider and advise on Departmental budgets and Annual Plans in the context of the overall budget allocation;
• approve relevant secondary legislation and take the Committee Stage of relevant primary legislation;
• call for person and papers;
• initiate enquiries and make reports;
• consider and advise on matters brought to the Committee by the Minister of Enterprise, Trade and Investment.

The Committee was established on 29 November 1999 with 11 members including a Chairperson and Deputy Chairperson and a quorum of 5.The membership of the Committee is as follows:

Mr Pat Doherty (Chairperson)
Mr Sean Neeson (Deputy Chairperson)Mr Billy Armstrong*
Dr Alasdair McDonnell
Mr Wilson Clyde
Ms Jane Morrice
Mrs Annie Courtney*
Dr Dara O'Hagan
Mr David McClarty
Mr Jim Wells*
Mr Eugene McMenamin*

*Mr Wells replaced Mr Campbell with effect from 3 October 2000.
*Mrs Courtney replaced Ms Lewsley with effect from 29 January 2001.
*Mr Armstrong replaced Mr Shipley Dalton with effect from 24 October 2001.
*Mr McMenamin replaced Mr Attwood with effect from 18 February 2002.

The Report and Proceedings of the Committee are published by the Stationery Office by order of the Committee. All publications of the Committee are posted on the Northern Ireland Assembly website: archive.niassembly.gov.uk

All correspondence should be addressed to the Clerk to the Committee for Enterprise, Trade and Investment, Northern Ireland Assembly, Room 424, Parliament Buildings, Stormont, Belfast BT4 3XX.

Tel: (028) 9052 1230; Fax: (028) 9052 1063; e-mail: committee.enterprise@niassembly.gov.uk

 

TABLE OF CONTENTS

Report

Report on the Limited Liability Partnerships Bill

Appendices

Appendix 1 - Minutes of Proceedings of the Committee relating to the Report

Appendix 2 - Minutes of Evidence

Appendix 3 - Written Submissions

REPORT ON THE LIMITED LIABILITY PARTNERSHIPS BILL
(NIA Bill 9/01)

GENERAL

Introduction

1. The Committee for Enterprise, Trade and Investment met on the dates given below to consider the Limited Liability Partnerships Bill. The Bill was referred to the Committee for consideration in accordance with Standing Order 31(1) of the Northern Ireland Assembly after completing its Second Stage on 21 May 2002.

2. The Committee had before it the Limited Liability Partnership Bill and the Explanatory and Financial Memorandum to the Bill (NIA Bill 9/01) as introduced.

3. The Minister of Enterprise, Trade and Investment made the following statement under section 9 of the Northern Ireland Act 1998:

"In my view the Limited Liability Partnerships Bill would be within the legislative competence of the Northern Ireland Assembly."

Purpose of the Bill

4. The prime purpose of the Bill is to enable all businesses of two or more members to incorporate with limited liability while organising themselves as partnerships, not as companies. The legislation will extend the range of legal organisations available to such businesses in Northern Ireland beyond the limited company and the traditional form of partnership.

Meetings Held

5. The Committee met to consider the Bill on the following dates:

• 19 June 2002: oral evidence from Michael Twomey and Departmental Officials;26 June 2002: further consideration of points raised in oral evidence; and
• 3 July 2002: clause-by-clause scrutiny of the Bill & consideration of Draft Report, Departmental Officials in attendance.

Evidence

6. The Minutes of Evidence for each of the meetings when the Bill was considered formally are given in Appendix 2.

7. The Committee wrote to 9 interested bodies and individuals on 22 April 2002 to seek their comments on the proposed Bill. The respondents were Michael Twomey, the Construction Industry Council, the Association of Consulting Engineers and Kirk McClure Morton. Michael Twomey's submission suggested that the Northern Ireland Assembly should not bring forward legislation to provide a similar form of business association to UK LLP, but should look to the Canadian and American models when bringing in such legislation. This submission is given at Appendix 3. The report does not include those replies that were supportive of the aims of the Bill but did not make substantive comment; however the Clerk can provide a copy on request.

DELIBERATIONS OF THE COMMITTEE

8. The Committee gave detailed consideration to each part of the Limited Liability Partnership Bill over a number of meetings. Michael Twomey and Officials from the Department of Enterprise, Trade and Investment appeared before the Committee on 19 June 2002 to answer questions about the provisions contained in the Bill. The record of the Committee's deliberations can be found in Appendix 1 - Minutes of Proceedings and Appendix 2 - Minutes of Evidence.

9. The main issue that was raised by Michael Twomey during the Committee's Consideration of the Bill was that the Committee should look to the Limited Liability Partnerships Canadian and American models when bringing in such legislation. The Committee considered this issue in great detail. The Chairperson and Deputy Chairperson met with the Minister of Enterprise, Trade and Investment on 25 June 2002 to discuss the points raised by Michael Twomey. The Committee agreed that it would not make any amendments to the Bill with the proviso that a review of Company Law takes place within the next two years.

10. The Committee concluded its deliberations with a clause-by-clause scrutiny on 3 July 2002 when the Bill was formally agreed.

11. The Committee considers that the provisions of the Bill, as introduced, are necessary to enable all businesses of two or more members to incorporate with limited liability while organising themselves as partnerships, not as companies.

12. The Committee considers that no amendments are necessary to the Limited Liability Partnerships Bill.

PAT DOHERTY MP MLA
Chairperson

APPENDIX 1

PROCEEDINGS OF THE COMMITTEE RELATING
TO THE REPORT

WEDNESDAY, 19 JUNE 2002 AT 10.24AM IN
ROOM 144, PARLIAMENT BUILDINGS

Present: Mr P Doherty MP MLA (Chairperson)
Mr S Neeson (Deputy Chairperson)
Mr B Armstrong
Mr W Clyde
Mrs A Courtney
Mr D McClarty
Dr A McDonnell
Mr J Wells

Apologies: Mr E McMenamin
Ms J Morrice
Dr D O'Hagan

In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor)
Mr S Ball (Clerical Officer)
Miss A Fowler (Clerical Officer)

In attendance for public evidence session at 10.36am: Dr M Twomey, Consultant in Partnership Law.

In attendance for public evidence session at 11.12am: Mr M Bohill, Mr J Johnston and Ms J Bryans (Department of Enterprise, Trade and Investment (DETI)).

1. Limited Liability Partnerships Bill

The Committee took Oral evidence from Dr M Twomey and Departmental Officials regarding the Limited Liability Partnerships Bill and answered a number of questions put by the Committee on the implications of the Bill in Northern Ireland.

Mr Clyde joined the meeting at 10.45am.
Dr McDonnell joined the meeting at 10.52am.
Mr Armstrong left the meeting at 11.12am.
Mr Wells left the meeting at 11.26am.

Agreed: That the Chairperson and Deputy Chairperson would meet with the Minister as soon as possible to discuss the Committee's concerns with regard to the Bill.

[EXTRACT]

WEDNESDAY, 26 JUNE 2002 AT 10.40AM IN
ROOM 144, PARLIAMENT BUILDINGS

Present: Mr S Neeson (Deputy Chairperson)
Mr B Armstrong
Mr W Clyde
Mrs A Courtney
Mr D McClarty
Dr A McDonnell
Dr D O'Hagan
Mr J Wells

Apologies: Mr P Doherty MP
Mr E McMenamin
Ms J Morrice

In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor)
Miss A Fowler (Clerical Officer)
Dr P Gilleece (Assembly Researcher)
Ms C McGivern (Assembly Legal Adviser)

In attendance for the public evidence session at 10.42am: Mr M Bohill, Mr J Johnston and Ms J Bryans (Department of Enterprise, Trade and Investment (DETI)).

Mr Neeson assumed the Chair in the absence of the Chairperson.

1. Limited Liability Partnerships Bill

1.1 The Deputy Chairperson reported on the meeting with the Minister of Enterprise, Trade and Investment held on 25 June.

Agreed: To accept the proposals outlined in the Limited Liability Partnerships Bill subject to the proviso that a complete review of company law will be carried out within two years.

Agreed: To inform Dr Michael Twomey of the Committee's decision.

Agreed: To carry out a detailed clause-by-clause scrutiny of the Bill at next weeks meeting.

[EXTRACT]

WEDNESDAY, 3 JULY 2002 AT 10.20AM IN
ROOM 144, PARLIAMENT BUILDINGS

Present: Mr P Doherty MP (Chairperson)
Mr S Neeson (Deputy Chairperson)
Mr B Armstrong
Mr W Clyde
Mrs A Courtney
Dr A McDonnell Mr E McMenamin
Ms J Morrice
Dr D O'Hagan
Mr J Wells

Apologies: Mr D McClarty

In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor)
Miss A Fowler (Clerical Officer)
Mr S Ball (Clerical Officer)
Ms C McGivern (Assembly Legal Adviser)

In attendance for the public evidence session at 10.37am: Mr M Bohill, Mr J Johnston and Ms A Aiken (Department of Enterprise, Trade and Investment).

The meeting went into public session at 10.35am.

1. Minutes of the Last Meetings

Agreed: The minutes of the meetings held on 25 and 26 June.

2. Limited Liability Partnerships Bill

2.1 The Committee carried out a detailed clause-by-clause scrutiny of the Limited Liability Partnerships Bill. The clauses were read along with the related commentary in the Explanatory and Financial Memorandum.

The Long Title was considered.

Agreed: That the Committee is content with the long title as drafted.

Clause 1 was considered.

Agreed: That the Committee is content with the clause 1 as drafted.

The Schedule was considered.

Agreed That the Committee is content with the Schedule as drafted.

Clause 2 was considered.

Agreed: That the Committee is content with the clause 2 as drafted.

Clause 3 was considered.

Agreed: That the Committee is content with the clause 3 as drafted.

Clause 4 was considered.

Agreed: That the Committee is content with the clause 4 as drafted.

Clause 5 was considered.

Agreed: That the Committee is content with the clause 5 as drafted.

Clause 6 was considered.

Agreed: That the Committee is content with the clause 6 as drafted.

Clause 7 was considered.

Agreed: That the Committee is content with the clause 7 as drafted.

Clause 8 was considered.

Agreed: That the Committee is content with the clause 8 as drafted.

Clause 9 was considered.

Agreed: That the Committee is content with the clause 9 as drafted.

Clause 10 was considered.

Agreed: That the Committee is content with the clause 10 as drafted.

Clause 11 was considered.

Agreed: That the Committee is content with the clause 11 as drafted.

Clause 12 was considered.

Agreed: That the Committee is content with the clause 12 as drafted.

Clause 13 was considered.

Agreed: That the Committee is content with the clause 13 as drafted.

Clause 14 was considered.

Agreed: That the Committee is content with the clause 14 as drafted.

Clause 15 was considered.

Agreed: That the Committee is content with the clause 15 as drafted.

Clause 16 was considered.

Agreed: That the Committee is content with the clause 16 as drafted.

2.2 The Committee discussed the content of the draft report on the Limited Liability Partnerships Bill.

Agreed: That the report should include the oral evidence from the Department of Enterprise, Trade and Investment and Dr Michael Twomey together with the written submissions from Dr Twomey.

Agreed: The draft report on the Limited Liability Partnerships Bill and ordered it to be printed.

[EXTRACT]

APPENDIX 2

MINUTES OF EVIDENCE

Wednesday 19 June 2002

Members present:
Mr P Doherty (Chairperson)
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mr Clyde
Mrs Courtney
Mr McClarty
Dr McDonnell
Mr Wells

Witnesses:
Dr M Twomey ) Consultant In Partnership Law

1.

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.

2.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.

3.

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".

4.

He is the leading partnership lawyer in the UK, and that is his description of the Limited Liability Partnerships Act 2000.

5.

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.

6.

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.

7.

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.

8.

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.

9.

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.

10.

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.

11.

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, choose 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 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.

12.

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?

13.

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 affect on consumers.

14.

Mr Neeson: You have dealt with North American models. From a European perspective, what has been the uptake in this type of legislation?

15.

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.

16.

Mr Neeson: In your opening statement you referred to difficulties for small businesses. What type of organisation is targeted by this legislation?

17.

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. An example would be 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.

18.

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.

19.

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 it does to a two-man business. The reason people form a two-man business is because of the fear of limited liability.

20.

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?

21.

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 it 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.

22.

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.

23.

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 it offers 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?

24.

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.

25.

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.

26.

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.

27.

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.

28.

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?

29.

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.

30.

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?

31

.Dr Twomey: I do not believe that two wrongs make a right, if that answers your question.

32.

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.

33.

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 protection that there would be 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.

34.

Mr Wells: Could partnerships move to Northern Ireland for convenience?

35.

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.

36.

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?

37.

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]

38.

Mr Wells: It would still be a United Kingdom LLP.

39.

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.

40.

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. Whilst your comment may have been accurate initially, things have changed, and this is becoming a more popular option using the GB model.

41

.Dr Twomey:Those numbers are not particularly impressive, bearing in mind the number of partnerships and businesses in Great Britain.

42

.Mr Wells: What proportion is that of the total?

43.

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.

44.

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."

45.

I do not understand "subject to regulation". That paragraph confuses me.

46.

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.

47.

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.

48.

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.

MINUTES OF EVIDENCE

Wednesday 19 June 2002

Members present:
Mr P Doherty (Chairperson)
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mr Clyde
Mrs Courtney
Mr McClarty
Dr McDonnell
Mr Wells

Witnesses:
Mr M Bohill )
Ms J Bryans ) Department of Enterprise,
Mr J Johnston )Trade and Investment

49.

The Chairperson:

I welcome the Department of Enterprise, Trade and Investment officials, who have appeared before our Committee before.

50.

Mr Bohill: I will introduce my team. I am Mike Bohill and my colleagues are Mr Johnston and Ms Bryans. I have four key points to make, and then will deal with members' questions as they arise.

51.

The first key point is that an effective framework for corporate law seeks to strike the right balance between four ingredients - regulation, encouraging enterprise, consumer protection and fairness.

52.

The second key point is that the limited liability partnership (LLP) model encapsulated in the Bill is firmly developed within the existing framework, which has served GB and Northern Ireland well for some years. The proposed limited liability partnerships will have exactly the same regulatory obligations as companies. For example, they will have to publish accounts and will be subject to insolvency law. That will maintain fairness to all types of business that enjoy limited liability status.

53.

The third point is that all the key players in the UK, both professional advisers and business representatives, have welcomed the proposals.

54.

The fourth key point is that after its consideration of the Limited Liability Partnerships Act 2000, the Department of Trade and Industry Committee concluded that, in the interests of maintaining a balance of fairness and protecting the public and consumers, it was not reasonable that limited companies should be subject to regulation in order to benefit from limited liability status if that did not apply that to limited liability partnerships.

55.

The Government recognise that the code of partnership law requires updating and modernisation. We will be looking at that over the next few years. It is, therefore, premature to amend existing partnership law in relation only to liability, without considering it in the round.

56.

Local interest in the Bill is positive, and has increased since the Bill was published. We have had a number of enquiries from businesses - most of them small businesses - about the Bill and when it will come into effect.

57.

Finally, limited liability partnership status will be optional. It will be something that a business and a partnership make a choice about. There will be nothing mandatory about it.

58.

Mr Wells: Do you see this as a parity issue?

59.

Mr Bohill: I see the value of having a consistent regime of corporate law throughout the UK. The business community, particularly those businesses that operate both in Northern Ireland and GB, seeks conformity between Northern Ireland and GB and feels very strongly that it would not want to deal with two regimes.

60

.Mr Wells: It would be normal for the Department, when introducing a Bill, to consult widely with all interested parties. I assume that the Department has done that in this case.

61.

Mr Bohill: Yes.

62.

Mr Wells: No doubt you have a huge mailing list of consultees.

63.

Mr Bohill: The list of consultees is at the back of the memorandum. The feedback has been favourable, particularly when the Limited Liability Partnerships Act 2000 was being considered in GB. Bodies such as the Confederation of British Industry (CBI), which is a UK-based organisation, would have consulted the Northern Ireland CBI as part of that process, and it was in favour of it.

64.

Mr Wells: Apart from the one submission that we are dealing with, have you had any other submissions in a similar vein?

65.

Mr Bohill: No, none at all.

66.

Mr Wells: So there is general contentment with this among the business community in the Province?

67.

Mr Bohill: Very much so.

68.

Mr Wells: The Minister has written to us to say that 2,000 limited liability partnerships have been incorporated in England and Wales. The figures that we have been given show that that is quite a small percentage of the potential registrations. Do you feel that that is adequate, or does it show that there is not a great deal of enthusiasm in the rest of the UK for this? What is the likely reaction in Northern Ireland if this legislation goes on the statute books?

69.

Mr Bohill: The Department of Trade and Industry is encouraged by the level of interest in limited liability partnerships. I say that on the basis of direct dialogue with the officials dealing with this. The level of enquiries in Northern Ireland before the Bill was published was running at around two or three a week, and I accept that those are small numbers. That has doubled to six to eight a week since the Bill was published. That interest has come primarily from small businesses, and that is associated with wanting to know when the Bill will come into effect.

70.

Mr Wells: I am happy with that.

71.

Mr Neeson: The whole purpose of devolution is to develop legislation that meets the needs of our region - Northern Ireland. I am wary about having too much parity. While I acknowledge that company law in the UK is different from that in North America, we should give some consideration to some of the points that were put forward by Dr Twomey. The Minister's letter states that the proposal strikes a better balance between the interests of the partnership and the interests of the consumer. Can you explain that further?

72.

Mr Bohill: The Bill will give limited liability status to partnerships. That privilege comes with a price, which is ensuring that consumers and the public are protected. For that reason, the limited liability partnership (LLP) will be subject to the same level of regulation as a company with limited liability protection. It will have to publish its accounts and be subject to insolvency law. That is the right balance to strike. The Department feels that that is a strong feature of the legislation, as it will give consumers and other businesses that are going to do business with limited liability partnerships access to the books and information of that new type of business vehicle.

73.

Mr Neeson: This sort of proposal would not encourage small companies to become involved in LLPs, bearing in mind that the same company law would apply to a multinational organisation and to a two-person business.

74.

Mr Johnston: The burden of regulation on small companies as opposed to medium-sized and large companies differs in that there are lower turnover thresholds for the form of detailed accounts that need to be filed. There is less regulation under limited company legislation for small businesses, and we are also proposing to take that forward as part of the LLP model.

75.

A company law review has also been under way for the past couple of years, and proposals on that will come forward in the next few months. We will come back to the Committee about that. It is likely that further deregulation in relation to the burden on small companies will be proposed. That will also extend to small LLPs. The balance is to try to get that right by not over-regulating.

76.

The enquiries that we have received from organisations that want to incorporate as LLPs have been from the small firm sector rather than from medium-sized or large firms. The balance is about right, and it will be reviewed again over the next few months. That is not the last word on it. The Committee will come back to this again.

77.

Mr Neeson: I have one reservation, which is that it complicates things for small businesses. Recently I looked at the possibility of setting up an LLP, but I decided against it because of the complications that were involved.

78.

Mr Bohill: As Mr Johnston said, the degree of regulation is commensurate with the scale of the business. That is the current position, and it will be looked at again further as part of the company law review, which we will be examining in Northern Ireland and Great Britain over the next few months.

79.

Mr Johnston: It is also important to examine it from a small business viewpoint, and also from the consumer's viewpoint, in that we would be extending a privilege if we were to adopt the North American model. Alongside that privilege there has to be some form of balance to ensure that the extended liability parameters are operated correctly, which is not always the case. That measure gets the balance of fairness right.

80.

With regard to take-up, the Department of Enterprise, Trade and Investment estimates that about 55,000 partnerships, which is about 15% of the total, will eventually incorporate. They had a slow start, but it is now building up. In Northern Ireland, about 2,000 firms may move towards the LLP model over the years.

81.

Mrs Courtney: What are the benefits of choosing an LLP?

82.

Mr Bohill: One benefit is the limited liability status.

83.

Mrs Courtney: For the consumer and for the partner?

84.

Mr Bohill: It gives limited liability to the promoters of the business. Business owners will make their own choices. If they find that there is an advantage in moving to LLP status, that option is open to them. It is not mandatory, and businesses will continue to make that commercial judgement for themselves.

85.

Mrs Courtney: When asked if Northern Ireland would have to make radical changes to what exists in Great Britain, Dr Twomey said that only minor amendments would have to be made to partnership law. Did the Department consider making the amendments?

86.

Mr Bohilll: The Department was aware that partnership law is currently the subject of a major review in Great Britain, and its officials knew that to look at one aspect of partnership law was premature. As part of that review there will soon be an opportunity for the Assembly to look at the width, scale and ambit of partnership law.

87.

Mr Johnston: Partnership law is an academic area with lots of debate and argument across the profession in the United Kingdom. Therefore, the Government must get the balance right with regard to taking account of the wide range of views on how partnership law should be developed. It is an area where a balance has to be struck on the way forward between a number of competing academic views. Hence, the Law Society and other bodies are actively involved in that partnership review to make sure that it gives as good a balance as possible.

88.

Dr McDonnell: Why should I form a limited liability partnership? It seems that these partnerships will have the disadvantages of a company and none of the advantages. I empathise with the consumer protection agenda, but I feel that the Department's efforts to encourage enterprise are sometimes strangled by over-regulation. Therefore, a limited liability partnership may be seen as a half-baked company. That is how I think it might look to someone who is trying to set up a small business.

89.

Often, the burden of structure and compliance can far outweigh the benefits to the public or to the individuals in question. That is important to the Committee, because it has to spin out companies from Queen's University, for instance, and the Committee wants to make the process as simple as possible. The Committee also wants to create a cheap and efficient process with the minimum of fuss in order to cover the protections that are required. I get the impression that a limited liability partnership will not have any advantages.

90.

Mr Bohill: Limited liability companies and partnerships are different animals.

91.

Mr Johnston: There is usually is a smaller ownership base in a partnership than in a limited company, and the Bill recognises that. It allows those partnerships that decide to incorporate as LLPs to make their own internal arrangements. In a sense, there are prescriptive constitutional requirements in the way in which limited companies are constituted, because of wider share ownership. The way in which LLPs are organised internally will be down to their own arrangements.

92.

There is an additional clear benefit in that if you are in partnership at the moment, and have a negligent partner, your personal assets are liable. The Bill will protect those personal assets if you are innocent of the actions of your partner. That is a huge benefit. It then seems fair, within the overall body of law, to ask partnerships gaining that benefit to comply with a degree of regulation, because otherwise limited companies could ask for the same form of regulation. Why should they be different if they are under the same kind of limited liability extension? It is a matter of getting the balance right between those different business vehicles.

93.

Dr McDonnell: Will the recording of accounts be as stringent as for a company?

94.

Mr Johnston: There is the same turnover threshold, so the format of the accounts will be the same.

95.

Dr McDonnell: That in turn incurs considerable debt for a low-profit company.

96.

Mr Johnston: The turnover figure at which one is required to file audited accounts is £350,000. That is being looked at again.

97.

Dr McDonnell: You could be spending £4,000 or £5,000 on auditors' fees. I am not opposed, but we need to pare this tightly. You have some familiarity with small American companies, Mr Johnston. We were impressed with their efforts in the area of small business administration, their loan guarantee schemes, and the simplicity of the regulations. That is an appealing culture. We are all rowing in the same direction. We want to ensure that two people in Queen's University or on the University of Ulster campus at Coleraine can create a structure that allows them, for example, to develop a biotechnology project.

98.

Mr Johnston: I do not wish to pre-empt the Minister. He will be coming back to the Committee later in the year to discuss that issue and acknowledge that the law must be modernised to reflect the different types of business structure.

99.

Dr McDonnell: You have not told him what to say to us?

100.

Mr Johnston: No, he is aware of that.

101.

Mr Bohill: The cost of compliance will be a key feature of that review. A couple of strands of that review are going on at the moment.

102.

The Chairperson: Thank you. It has been a good exchange.

 

MINUTES OF EVIDENCE

Wednesday 3 July 2002

Members present:
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mrs Courtney
Dr McDonnell
Ms Morrice
Mr McMenamin
Dr O'Hagan

Witnesses:
Mr M Bohill )
Mr J Johnston ) Department of Enterprise, Trade and Investment
Ms A Aiken )
Ms C McGivern Assembly Legal Services

The Deputy Chairperson:

Welcome Mr Bohill, Mr Johnston and Ms Aiken from the Department of Enterprise, Trade and Investment, and Ms McGivern who will give the Committee legal advice. We are pressed for time because of the Assembly plenary today. If you are happy, let us proceed with the formal consideration of the Bill.

Mr Bohill:

I am content with that.

The Deputy Chairperson:

Members will have the opportunity to raise any concerns or suggest any amendments. Members should read the relevant clauses in the Bill along with the related commentary in the explanatory and financial memorandum.

The Bill contains 16 clauses and one schedule. Each clause and related subsections will be considered in turn. The Committee can either agree that it is content with the clause as drafted or recommend to the Assembly that the clause be amended.

The purpose of the Bill is to enable all businesses of two or more members to incorporate with limited liability while organising themselves as partnerships, not as companies. The legislation will extend the range of legal organisations available to such businesses in Northern Ireland beyond the limited company, and the traditional form of partnership. That will provide Northern Ireland business with potential benefits from the limited liability partnerships (LLP) vehicle currently available in GB, and in similar form in other jurisdictions such as the USA, Canada and Australia. It is also intended to reduce the risk of Northern Ireland firms deciding to register in other jurisdictions in order to become limited liability partnerships.

Long title agreed to.

Clause 1 (Limited liability partnerships)

The Deputy Chairperson:

Subsections (1) to (3) provide for a new form of legal identity to be known as a limited liability partnership (LLP). It will be a body corporate, formed on incorporation via clause 3. It will have unlimited capacity and will therefore be able to undertake the full range of business activities which a partnership can undertake.

Subsection (4) specifies that, although in law an LLP will be separate from its members, they may be liable to contribute to its assets if it is wound up. The extent of that potential liability is set out in the Regulations. Subsection (5) states that, except where otherwise provided, the law relating to partnerships will not apply to limited liability partnerships. Subsection (6) gives effect to the schedule, which deals with names and registered offices.

Question, That the Committee is content with the clause, put and agreed to.

Clause 2 (Incorporation document etc.)

The Deputy Chairperson:

Subsection (1) details some of the requirements necessary to set up a limited liability partnership. For example, it specifies that to form such a partnership there must at the outset be at least two people who are associated for the carrying on of a lawful business with a view to profit and who subscribe their names to an incorporation document. The incorporation document must be delivered to the registrar.

Subsection (2) stipulates that the incorporation document must contain various items of information: the name of the limited liability partnership; the address of the registered office; the names and addresses of persons who are to be members on incorporation; and whether all or some of the members are to be designated members. Subsections (3) and (4) stipulate that it is an offence to make false statements or statements believed not to be true when forming the limited liability partnership and lay down what the penalties for the guilty party may be.

Question, That the Committee is content with the clause, put and agreed to.

Clause 3 (Incorporation by registration)

The Deputy Chairperson:

Ms McGivern, I believe that you have a query on clause 3.

Ms McGivern:

The third line in clause 3(1), referring to the registrar, states that

"unless the requirement imposed by paragraph (a) of that subsection has not been complied with, he shall".

However, clause 2(1)(c) provides an exception whereby the registrar may accept the statement. I felt that the provision in clause 3(1):

"unless the requirement imposed by paragraph (a) of that subsection has not been complied with";

should be redrafted so that it is clear that it is subject to clause 3(2). The Department agreed to examine my concern.

Mr Bohill:

With the Committee's agreement we shall consult the legislative draftsman to see whether the clause could be made clearer. If that is so, we shall introduce a suitable amendment.

The Deputy Chairperson:

Will you provide the Committee with a copy of the amendment as early as possible?

Mr Bohill:

Yes.

The Deputy Chairperson:

Subsections (1) to (4) provide for the registration of limited liability partnerships by the registrar of companies and the issuing of a certificate.

Question,That the Committee is content with the clause subject to amendment by the Minister,put and agreed to.

Clause 4 (Members)

The Deputy Chairperson:

Subsections (1) to (3) deal with the membership of a limited liability partnership, including the first members, new members and how members may leave the partnership. Subsection (4) explains the position of members in relation to their status as employees of the company.

Question,That the Committee is content with the clause, put and agreed to.

Clause 5 (Relationship of members etc.)

The Deputy Chairperson:

Subsection (1) deals with the relationship between members. The intention is that a limited liability partnership should have the internal flexibility of a partnership, if members are able to enter into agreements about their mutual rights and duties. The rights and duties of the members of an LLP to one another and to the partnership are governed by the provisions of any agreement between the members. Subsection (2) provides that when a limited liability partnership comes into being it will be bound by the terms of any agreement that is entered into by the subscribers to the incorporation document.

Question, Thatthe Committee is content with the clause, put and agreed to.

Clause 6 (Members as agents)

The Deputy Chairperson:

Subsection (1) provides that each member of a limited liability partnership will be an agent of that limited liability partnership. Therefore, they may represent and act on behalf of the limited liability partnership in all its business - subject to the provisions of subsection (2).

Subsection (2) stipulates that a limited liability partnership will not be bound by the actions of a member where that member has no authority to act for the limited liability partnership, and the person dealing with the member is aware of this or does not know or believe that the member was in fact a member of the limited liability partnership.

Subsection (3) states that transactions with a person who is no longer a member of a limited liability partnership will still be valid transactions with the limited liability partnership, unless the other party has been told that the person is no longer a member, or the registrar has received a notice to that effect.

Subsection (4) ensures that where a member of a limited liability partnership is liable to a person - other than another member of the limited liability partnership - for a wrongful act or omission in the course of business of the limited liability partnership or with its authority, the limited liability partnership will be liable to the same extent as the member.

Question, That the Committee is content with the clause, put and agreed to.

Clause 7 (Ex-members)

The Deputy Chairperson:

Subsections (1) to (3) refer to the situation where a person ceases to be a member of a limited liability partnership, or his interest in the limited liability partnership is transferred to another person. A former member, the member's personal representatives, the member's trustee in bankruptcy or liquidator or the trustees under the trust deed for the benefit of his creditors or assignee may not interfere with the management or administration of the limited liability partnership, but may receive any amount from it to which they are entitled.

Question,That the Committee is content with the clause, put and agreed to.

Clause 8 (Designated members)

The Deputy Chairperson:

Subsection (1) provides that members, subject to the agreement of the members, can be specified as designated members either on incorporation or at a later date and may be removed as a designated member. Subsection (2) requires there to be at least two designated members and provides for the occasion where there are less than two designated members.

Subsection (3) provides that if the incorporation document states that every person who is a member of the limited liability partnership is a designated member then all members who are members from time to time will be regarded as designated members. Subsections (4) and (5) deal with the registrationof designated members with the registrar of companies. Subsection (6) provides that when a person ceases to become a member of the limited liability partnership he will also cease to be a designated member.

Question,That the Committee is content with the clause, put and agreed to.

Clause 9 (Registration of membership changes)

The Deputy Chairperson:

Subsections (1) and (3) require a limited liability company to notify the registrar of companies about changes to its membership. Subsections (4) to (6) provide that, where subsection (1) is not complied with, the limited liability company and all designated members commit an offence, what defence is available and the punishment liable to guilty parties.

Question, That the Committee is content with the clause, put and agreed to.

Clause 10 (Insolvency and winding up)

The Deputy Chairperson:

Subsections (1) to (3) require the Department to make Regulations regarding the insolvency and winding up of limited liability companies and overseas limited liability companies.

Question, That the Committee is content with the clause, put and agreed to.

Clause 11 (Application of company law etc.)

The Deputy Chairperson:

This clause allows the Department to make Regulations applying or incorporating the law relating to corporations, companies and partnerships, with appropriate modifications, to limited liability partnerships.

Question, That the Committee is content with the clause, put and agreed to.

Clause 12 (Consequential amendments)

The Deputy Chairperson:

Subsections (1) and (2) allow for statutory provisions, in particular those affecting companies, corporations or partnerships, to be amended in consequence of the provisions in the Bill or of any Regulations which may be made under it.

Question, That the Committee is content with the clause, put and agreed to.

Clause 13 (General)

The Deputy Chairperson:

Subsections (1) to (6) make general provision about Regulations under the Bill, and in particular allow Regulations to provide that failure to comply with their requirements is a criminal offence. The clause provides that the Regulations require the negative resolution procedure.

Question, That the Committee is content with the clause, put and agreed to.

Clause 14 (Interpretation)

The Deputy Chairperson:

The clause sets out the meaning of certain terms used in the Bill.

Question, That the Committee is content with the clause, put and agreed to.

Clause 15 (Commencement)

The Deputy Chairperson:

Subsections (1) and (2) provide for the Department to make an order, or orders, bringing the Bill into operation.

Question, That the Committee is content with the clause, put and agreed to.

Clause 16 (Short title)

The Deputy Chairperson:

This clause gives the short title of the Bill.

Question, That the Committee is content with the clause, put and agreed to.

Schedule

The Deputy Chairperson:

Part I of the schedule deals with names. Paragraph 1 amends the Companies (Northern Ireland) Order 1986 to include limited liability partnerships as a legitimate type of business. Paragraphs 2 and 3 deal with the rules governing the name to be given to a limited liability partnership.

Paragraphs 4 to 6 cover changing the name of a limited liability partnership, notification of the name change and its effects. Paragraph 7 makes it an offence to use the term "limited liability partnership" improperly. Paragraph 8 gives guidance on determining whether a company's name is the same as another for the purposes of Part I of the schedule.

Part II concerns registered offices. Paragraphs 9 and 10 deal with the need to register an office and how one should go about changing a registered office address.

Question, That the Committee is content with the schedule, put and agreed to.

 

APPENDIX 3

WRITTEN SUBMISSIONS

DR MICHAEL TWOMEY

2 May 2002

BACKGROUND

Dr. Michael Twomey is the only lawyer specialising exclusively in partnership law in Ireland, north or south.He is the author of the only book on partnership law in Ireland (Twomey, Partnership Law (2000, Butterworths), which deals with the law in the Republic of Ireland and Northern Ireland.He has a Ph.D. in partnership law from University College Dublin and is a former Visiting Researcher in partnership law in Harvard Law School. In addition to his practice as a partnership lawyer, he lectures in partnership law in Trinity College Dublin.He is a member of the Law Society's Working Group on Limited Liability Partnerships, the Business Law Committee of the Law Society and the Association of Partnership Practitioners (UK).

He has spoken extensively in Ireland and abroad on partnership law, including delivering a paper on the reform of partnership law to a conference held by the Law Commission of England and Wales and the Scottish Law Commission.

RESPONSE TO DR TWOMEY'S SUGGESTED REFORMS OF PARTNERSHIP LAW TO DATE

UK Law Commission & Scottish Law Commission

In the Joint Consultation Paper on Limited Partnerships Act 1907 (2001) the UK Law Commission and the Scottish Law Commission quote extensively from and rely on the analysis of partnership law contained in Twomey, Partnership Law (2000, Butterworths) to support its proposal for the reform of partnership law in the United Kingdom. (See Law Commission Consultation Paper No 161 at paragraphs 1.8, 2.17, 3.18, 3.38, 4.3, 4.12, 4.23, 4.42, 4.43, 5.23, 5.32, 5.33, 5.34)

Irish Parliament

The publication of Twomey, Partnership Law (2000, Butterworths) led to a debate about the reform of partnership law in Dáil Eireann. The Opposition called for the book to be referred to the Company Law Review Group as a matter of priority so as to consider both the flaws in partnership law highlighted by the book and the response to such flaws suggested therein. In response, the deputy Prime Minister agreed that the book deserved "serious consideration by the Department [of Enterprise, Trade & Employment] and the Company Law Review Group" and she undertook to ask the Company Law Review Group for its opinion: (Dail Debates, 12 October 2000 at p 78-79)

SUBMISSION OF EVIDENCE

As a member of the Law Society's Working Group on the introduction of Limited Liability Partnerships, I recently had cause to consider in detail the introduction of limited liability partnerships in the United Kingdom in comparison to the manner of their introduction in the United States of America and Canada.I do not propose to go into my research in any detail at this juncture. However, in summary my analysis of the differing regimes led me to conclude that the manner in which LLPs were introduced in the United Kingdom leaves a lot to be desired. This is because they create what is in effect a company in everything but name, which is taxed as a partnership. Such a 'partnership' is subject to the complexity of company law and therefore deprives this so-called partnership of all the reasons and advantages for business people to choose partnerships in the first place. Anecdotal evidence of the very limited use of such LLPs in the United Kingdom, since the enactment of the Limited Liability Partnerships Act 2000, supports the view that such LLPs have all the disadvantages of being a company and none of the advantages of being a partnership. Indeed I am of the view that the Limited Liability Partnerships Act 2000 will not be used by partnerships or business people to any significant extent, but will be overtaken by legislation that resembles the approach taken in Canada and America. In effect, I believe that the UK parliament will, in time, be forced to bring in US/Canadian style LLPs, because of the ineffectiveness of the UK LLP. It is particularly interesting to note the decision by Clifford Chance (the London solicitors' firm) to form a US LLP (rather than a UK LLP), even though it practices out of London.The approach in the United Kingdom contrasts with the Canadian and American approach that was to simply grant varying degrees of protection from unlimited liability to existing partnerships. This simpler approach retains the advantages of the partnership structure and I would be strongly of the view that this is the preferred approach for Northern Ireland to take in relation to LLPs.In conclusion therefore I would suggest that the Northern Ireland Assembly should not bring forward legislation to provide a similar form of business association to the UK LLP, but should look to the Canadian and American models when bringing in such legislation.Finally, in view of my conclusion that the UK approach to limited liability partnerships was not the correct approach to take, I drafted a proposed Limited Liability Partnerships Bill for the Law Society of Ireland, which was sent for consideration by the Department of Enterprise Trade & Employment in Dublin. This bill proposes to amend the Partnership Act 1890 with a view to granting protection from unlimited liability to existing partnerships, rather than creating a UK style LLP. If relevant to the Enterprise, Trade & Investment Committee, I can arrange for a copy of this bill to be forwarded to it.

I wish to confirm that I am available to give oral evidence to the Enterprise, Trade & Investment Committee, should this be appropriate.

DR MICHAEL TWOMEY

FURTHER SUBMISSION BY:
DR MICHAEL TWOMEY

22 May 2002

LIMITED LIABILITY PARTNERSHIPS BILL, 2002

__________________

A BILL TO PROVIDE PROTECTION TO PARTNERS FROM UNLIMITED LIABILITY
IN CERTAIN SITUATIONS AND FOR RELATED MATTERS.

PART I

Preliminary

Short title. 1. - This Bill may be cited as the Limited Liability Partnerships Bill, 2001.

Commencement. 2. - This Bill shall come into operation on such day as the Minister shall fix by order.

Interpretation. 3. - In this Bill unless the context otherwise requires -

"1890 Act" means the Partnership Act, 1890;

"limited liability partnership" means a partnership that is registered under section [8] of this Bill;

"limited partnership" is a partnership formed pursuant to the Limited Partnerships Act, 1907;

"Minister" means the Minister for [ ]

"registrar" means the registrar of limited liability partnerships as defined in section [11] of this Bill.

Savings 4. - Subject to the provisions of this Bill, the 1890 Act and the rules of equity and of common law applicable to partnerships, except so far as those rules are inconsistent with the express provisions of the 1890 Act, shall apply to limited liability partnerships.

PART II

Formation

Restriction on

business 5. - A limited liability partnership may be registered under this Bill if it is carrying on or proposes to carry on a business, trade or profession which the Minister has not by regulation proscribed and subject to such conditions as the Minister may prescribe.

Liability of

partners 6. - (1) Notwithstanding the provisions of the 1890 Act and the [Bankruptcy Legislation], a partner in a limited liability partnership shall not be personally liable, directly or indirectly, by way of contribution or otherwise for any debts, obligations or liabilities of the partnership or any other partner, solely by reason of being a partner or being represented as a partner under section 14(1) of the 1890 Act.

(2) Subsection (1) does not affect the liability of a partner in a limited liability partnership for that partner's own negligence nor does it affect the availability of the property of the limited liability partnership to meet the debts, obligations or liabilities of that partnership.

PART III

Administration

Name. 7. - Every limited liability partnership shall use the words "limited liability partnership" or the abbreviation "llp" at the end of its name, and those words and those abbreviations may be used interchangeably.

PART IV

General provisions as to registration

Manner and

particulars of

registration. 8. - (1) To register a limited liability partnership two or more persons must send by post or deliver to the registrar a statement signed by all the proposed partners containing the particulars set out in subsection (4).

(2) To register an existing partnership (other than a limited partnership) as a limited liability partnership the existing partnership must send by post or deliver to the registrar a statement signed by all the partners containing the particulars set out in subsection (4).

(3) Subject to any agreement between all the partners, the registration of an existing partnership as a limited liability partnership does not cause the dissolution of the existing partnership and the limited liability partnership so registered continues as the same partnership as before the registration.

(4) The particulars required under this section are:

1. The name of the limited liability partnership;
2. The general nature of the partnership's business;
3. The principal place of business of the partnership;
4. The full name of each of the partners;
5. The term, if any, for which the partnership is entered into, and the date of commencement;
6. A statement that the partnership is a limited liability partnership.

(5) Registration of a limited liability partnership is effected on the issue of a certificate of registration by the registrar, which he shall send by post to the limited liability partnership.

Registration of

changes. 9. - If during the continuance of a limited liability partnership any change is made or occurs in any of the particulars contained in the statement registered pursuant to section [8], a statement signed by the limited liability partnership, specifying the nature of the change shall within one month of the change be sent by post or delivered to the registrar.

Making false

returns. 10. - Every partner who makes signs sends or delivers for the purpose of registration under this Bill any false statement know by him to be false, shall be guilty of an offence.

Registrar. 11. - The registrar of limited partnerships under the Limited Partnerships Act, 1907 shall be the registrar of limited liability partnerships.

Register to be

kept 12. -On receiving any statement made pursuant to section [8] or section [9] of this Bill, the registrar shall cause the same to be filed in a register to be kept for this purpose.

Inspection of

statements

registered. 13. - (1) Any person may -

(a) inspect the documents kept by the registrar on payment of such fee as may be fixed by the Minister;

(b) require a certificate of the registration of any limited liability partnership or a copy or extract of any other document, to be certified by the registrar, on payment for the certificate, certified copy or extract of such fees as the Minster sees fit.

(2) A certificate of registration, or a copy of, or extract from, any document kept by the registrar for the registration of limited liability partnerships, certified to be a true copy under the hand of the registrar, assistant registrar or other officer authorised by the Minister (whose official position it shall not be necessary to prove), shall in all legal proceedings be admissible in evidence as of equal validity with the original document.

Regulations 14. -(1) The Minister may make regulations for the purpose of giving effect to this Bill including regulations prescribing forms to be used for any purpose under this Bill.

(2) Notwithstanding the terms of section [8(2)], the Minister may by regulation provide for the registration of limited partnerships as limited liability partnerships.

(3) Every regulation made under this Bill shall be laid before each [Assembly] as soon as practicable after it is made and, if a resolution annulling the regulation is passed by either House within the next 21 days on which that House has sat after the regulation is laid before it, the regulation shall be annulled accordingly, but without prejudice to the validity of anything previously done under it.

(4) Any regulation under this Bill may contain such consequential, supplementary and ancillary provisions as the Minister considers necessary or expedient.

PART V

Miscellaneous

Offences. 15. -Where a limited liability partnership contravenes any of the provisions of this Bill, any partner who is in default shall be guilty of an offence.

Offences by

body corporate. 16. -Where an offence under this Bill is committed by a body corporate and is proved to have been committed with the consent or approval of, or to have been facilitated by any wilful neglect on the part of, any person being a director, manager, secretary, member of any committee or management or other controlling authority of such body, that person shall also be guilty of an offence.

Penalties. 17. -(1) A person guilty of an offence under this Bill shall be liable -

1. on summary conviction to a fine not exceeding £1,500 or to imprisonment for a term not exceeding one year or to both, or
2. on conviction on indictment, to a fine not exceeding £25,000 or imprisonment for a term not exceeding 2 years or to both.

(2) If the contravention in respect of which a person is convicted of an offence under any provision of this Bill is continued after the conviction, he shall be guilty of a further offence on every day on which the contravention continues and for each such offence shall be liable on summary conviction to a fine not exceeding £250 or, on conviction on indictment, to a fine not exceeding £25,000.

Expenses. 19. -The expenses incurred by the Minister in the administration of this Bill shall, to such extent as may be sanctioned by the Minister for Finance, be paid out of moneys provided by the [Assembly].

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Acts referred to

Limited Partnerships Act, 1907

Partnership Act, 1890

FURTHER SUBMISSION BY:
DR MICHAEL TWOMEY

13 June 2002

INTRODUCTION

Limited liability partnerships ("LLP") were introduced in the majority of American states between 1991 and 1994. In 1998, some Canadian states begun to follow suit. First, Ontario introduced the LLP, while in 1999, Alberta introduced the LLP. In 2002, the United Kingdom introduced the Limited Liability Partnerships Act 2000.

Aim of LLP's

The main rationale for these legislative developments in America, Canada and the UK is the same, namely to provide some protection to partners from unlimited personal liability for the actions of their co-partners. Thus, where one partner in a partnership is negligent and causes loss to third parties, it is regarded as justifiable that he would be personally liable to an unlimited degree for those losses. Indeed, it is also regarded as justifiable that the assets of the partnership would be available to meet those losses. However, it is no longer regarded as justifiable in these jurisdictions that the 'innocent' partners in the firm, who had no role or involvement in the negligence, should be personally liable to an unlimited degree for the negligence of their partner. It is felt that an 'innocent' partner's liability should be restricted to losing all his partnership assets, but that it should not extend to his personal assets, i.e. his home, car, investments etc. Hence the primary aim of the LLP legislation in America, Canada and the UK has been to provide a liability shield to partners in these circumstances. It is probably safe to assume that this is also the reason that the Northern Ireland Assembly is now proposing the introduction of LLPs.

THE DIFFERENT APPROACHES

Form of LLP legislation

While the justification for the introduction of this protection to partners in firms is the same in all the three jurisdictions, the manner in which they have gone about introducing this protection is very different. In America and Canada, the same type of approach has been taken while in Great Britain, a very different approach has been taken. It is now proposed that Northern Ireland follows the UK model.

The question for present consideration may be posed as follows:

In its desire to offer some protection to partners from unlimited personal liability for the actions of their co-partner, should Northern Ireland follow the UK model or the American/Canadian model (the "North American" model).

THE NORTH AMERICAN MODEL v THE UK MODEL

The US position

In considering the US approach, it is relevant to bear in mind that the legislation governing partnerships in Northern Ireland is the Partnership Act 1890. Its equivalent in America is known as the Uniform Partnership Act. Indeed, when the Uniform Partnership Act was first enacted, it was for all intents and purposes copied from the Partnership Act 1890 and it retains many of the provisions of the Partnership Act 1890. The introduction of LLPs in the US was completed recently by the amendment of the Uniform Partnership Act. This amendment had the effect of granting some protection to partners from unlimited personal liability for the actions of their co-partners, subject only to the partnership being a limited liability partnership.

This amendment is contained in s 306(c) of the Uniform Partnership Act and it states:

"An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner."

The only requirement therefore for a partner to have some protection from unlimited personal liability for the actions of their co-partners is for the partnership to be a limited liability partnership. In many cases, this is simply achieved by a basic form of registration.

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[i]  Indeed, it could be argued that the wording "while the partnership is a limited liability partnership" is unnecessary. If that wording were not contained in the provision, then all partnerships would benefit from limitation of liability, and not just those partnerships that register.

 

[ii]  The words in italics are the existing terms of s 9 of the Partnership Act 1890, which is in force in Northern Ireland.

 

[iii]  Furthermore, the manner in which this goal has been achieved is highly questionable. What has been done is that there has been created a brand new body of law (running to hundreds of pages) for this new structure. However, to add to the potential difficulties, this new law has not been drafted for this new entity de novo but was enacted by the dubious practice of "adaptation", i.e. where laws drafted for one area of law are simply adapted in toto for a different area of law. Thus for example, Acts (such as the Companies Act, 1985, the Company Directors Disqualification Act 1986 and the Insolvency Act 1986) which were designed for the company structure where management (directors) and ownership (shareholders) are separated are now applied with little or no modification to the partnership structure where management and ownership are vested in the one group of people (partners).

 

[iv]  Indeed it is to be noted that the fact that private companies are so heavily regulated in the UK is already a cause of concern there (see the English Company Law Review Steering Group, Modern Company Law for a Competitive Economy - Final Report (2001) p 37 para 2.34), so one wonders why the UK authorities would make LLP's subject not to the informality of the partnership regime but subject to a regime which has been criticised as over-regulated.

 

[v]  Note that while the first advantage is lost, i.e. the LLP under the UK Act is treated as an entity, the Act seeks to row back on the effect of this provision by providing that the UK LLP will nonetheless be taxed as a partnership. The fact that a statute creates an entity called a limited liability "partnership" yet provides in section 1(5) that the law of partnership will not apply to it and then applies all of company law to that creation and follows up by stating in s 10(1) that it will be treated as a "partnership" for the purposes of the Income Tax Acts illustrates what type of muddled thinking was behind this very flawed Act.

 

[vi]  The Act only came into force in April of 2001.

 

[vii]  Partnerships are see-through for tax purposes, i.e. the partnership is not taxed, since it is not regarded as an entity as a matter of law, but only the partners are taxed. In contrast, a company is an entity as a matter of law and so a company pays corporation tax.

 

[viii]  Note that at that stage the UK Act had not been enacted and so the Alberta Law Reform Institute considered the UK proposals. However, these proposals were in much the same form as the subsequently enacted Act.

 

[ix]  At p lxxxix of Limited Liability Partnerships and other Hybrid Business Entities (March 1998) issued by the Alberta Law Reform Institute.

 

[x]  9 December 1999 (Hansard 991209-10- Col 1435).