High-flying partners call for LLP safety net

IT IS the disaster scenario. A partner is found to be negligent, and the firm's other partners – who had nothing to do with the original case – discover their personal assets are liable as compensation.

Professional partnerships – particularly the big accountancy firms, but also law firms – have for some time been seeking legislation to protect them from this situation through the creation of limited liability partnerships (LLPs).

LLPs protect partners' personal assets – but not those of the firm – from actions taken against another partner who has assumed a duty of care.

Firms are likely to receive this protection later this year, when the Limited Liability Partnership Bill becomes law. However, The Lawyer last week reported that the Commons Trade & Industry select committee had recommended a number of amendments to the Bill that will make LLPs less attractive to law firms.

The committee went beyond government proposals by recommending personal financial guarantees from individual partners, disclosure of individual partners' earnings in bands of £10,000 and the publication of information that is usually confidential in partnerships, such as partners' addresses.

Stephen Netherway, senior solicitor in the insurance and reinsurance group at Cameron McKenna and author of Limited Liability Partnerships for Professional Practices, says LLPs will not appeal to all firms. Netherway argues that many will find the start-up costs prohibitive, because they will have to dissolve their existing partnership and transfer their assets to a new structure. And having to provide the necessary information would impose an administrative burden. For example, if a partner changed address and did not report it within a short period of time, this would constitute an offence.

But for big firms, which have the resources to deal with these problems and are exposed to large claims, LLPs are an attractive option.

Linklaters & Alliance and Clifford Chance have both expressed an interest in LLP status.

Both have been involved in large negligence cases. Linklaters and SG Warburg were sued by Irish company Yeoman in 1994 for £115m damages, for negligence relating to a property claim. In the same year, in what is thought to be the largest claim against a UK law firm, Clifford Chance was sued for £610m by four Canadian banks that blamed the firm for losses in connection with Canary Wharf. Clifford Chance eventually settled for about £10m, plus costs.

But perhaps the biggest incentive for firms to become LLPs stems from overseas competition. LLPs are available in 49 of the 50 US states, and almost all the US firms practising in London are LLPs.

The big five accountants' US offices are also registered as LLPs. It was the threat to move their UK offices offshore to Jersey – where LLPs have been available since last year – that prompted the Government to introduce the Bill.

Tina Williams a partner at partnership law specialist Fox Williams, says that not only do most US LLPs protect partners' assets completely, but they do not require financial disclosure either.

The US outfits are already poaching top partners from City firms by offering high salaries. Partners faced with the choice of practising at a US LLP, or the type of LLP proposed by the committee, may be doubly tempted by the financial security the US firms provide.

Both Netherway and Richard Linsell, head of the professions group at Rowe & Maw, believe this to be the case. Linsell, who gave evidence to the committee, questions the committee's motivation, pointing out that according to recent figures UK law firms accounted for £893m in exports in 1997.

“LLPs are about globalism, and being grown-up about business,” he says. “If UK firms are to compete globally, they must have a level playing field.”

He also thinks the committee – which believes that without its extra safeguards for creditors, firms will let standards slip – misunderstands the nature of partnerships, in which partners invest substantial assets and from which they are owed large sums in earnings. He rejects the idea that firms will act more recklessly as LLPs than they do as partnerships.

Williams agrees, saying the US model is more realistic. “They are less hung up on creditor protection and they are not so hung up on the issue of professional standards being affected. They have been more sensible about it than we have.”

Linsell believes that, once legislation is in place, LLPs will take on their own momentum. If one of the top five firms transferred to an LLP, he says, this would put pressure on the others. “The pressure would come from the bottom,” he says. “Over the next five years, those coming into partnership in firms that deal with significant high-risk transactions will look to their counterparts in firms that are LLPs and ask 'why aren't we?'”

As accountants, surveyors and architects become LLPs, the professional culture will change so that LLPs become the accepted way of doing business, Linsell claims.

Despite misgivings about the detail, law firms will be thinking seriously about this option to limit the chance of professional “Armageddon”.

Are limited liability partnerships worth it?

Advantages

Liability is limited to the assets of the LLP and any member who may have assumed a duty of care.

An LLP maintains a separate legal personality. This ensures continuity of property, meaning firms do not have to go through conveyancing every time a new partners joins.

An LLP has the financial and tax advantages of a partnership.

Although the partnership is still subject to negligence claims, LLPs can help avoid “Armageddon claims”, where the damages claim is well above the level of professional indemnity cover.

Banks can fix charges on the assets of a partnership and, due to obligations on financial disclosure, creditors will know how healthy an LLP is.

Disadvantages

There are large start-up costs because firms must dissolve their existing partnership and transfer their assets to a new structure.

Extra administrative work is required to prepare the LLP's equivalent of an annual return and to carry out other administrative requirements such as keeping the names and addresses of partners up to date.

Under the committee's recommendations, partners will be required to offer personal guarantees in case the LLP fails.

This may scare some partners off.

LLPs could arguably make legal professionals less careful than they ought to be because they will no longer be terrified of ending up bankrupt.