Draft Limited Liability Partnership Bill

1. The Limited Liability Partnership Bill was introduced into the House of Commons in July this year in response to the growing concerns surrounding large accountancy firms moving their business operations offshore. Large accountancy practices had expressed their unhappiness about organising their affairs by way of partnership, especially since a partner is liable under the Partnership Act 1890 for his own acts as well as for those of his colleagues. It is unrealistic to assume that each partner can stay informed about his fellow partners’ actions, let alone control them.

2. Thus, the Bill sets out to create a new institution, the limited liability partnership (LLP), in which obligations accrue to the name of the partnership rather than the joint names of its individual members. The only personal liability that an individual partner has will be in respect of his predetermined contributions to partnership funds. This is somewhat similar to a shareholder in a limited liability company. However, unlike a company, the LLP will be more flexible in terms of decisionmaking, and board meetings, minutes books and annual or extraordinary general meetings are not required. In addition, the LLP will enjoy the tax status of a partnership and limited liability of its members.

3. The Bill is not without its weaknesses, however. One weakness which has been observed is the fact that the accounting requirements contained in Part VII of the Companies Act 1985 are proposed to apply to the LLP. Not only are these rules some of the most demanding in Europe, they will also prove expensive to comply with for small and medium-sized LLPs. For example, the LLP must submit an annual return to Companies House and maintain a list of accounts according to Companies Act formulae. Annual accounts must be prepared, and if the turnover of the LLP exceeds £ 350, 000 annually, the accounts must be professionally audited.

4. These additional requirements have made a further restriction on the management freedom of LLPs necessary. Each LLP will have to appoint a ‘designated member’ who will be responsible for administrative obligations and may incur criminal liability in certain circumstances. On the subject of liability, it is worth noting that an LLP member will enjoy less limited liability than a company director. In the ordinary course of events, a company director is not liable to a third party for his negligent acts or omissions in the course of his duties. His liability is to the company of which he is a director. The position is reversed in relation to an LLP member. The claw-back provisions of the Insolvency Act 1986 will also apply to LLPs. Thus, a liquidator will be able to set aside any transactions (drawings of salary or repayment of money owed) within two years prior to insolvency where the member knew, or had reasonable grounds for believing, that the LLP was or would thereby become insolvent.

5. Indeed, limited liability is often highly illusory or perhaps even over-rated, especially when one considers that banks often require personal investment guarantees from directors in order to lift the corporate veil which protects company officers. The same will undoubtedly apply to LLPs.

6. In conclusion, the value of this new institution has been weakened by the proposed incorporation of the accounting requirements. That is its single most noticeable weakness; otherwise, it could be said that the Bill is long overdue and will hopefully have the effect of appeasing those businesses which are considering moving their operations overseas.