Partnerships: Limited thinking

The Companies Act 2006 promises some big changes for limited-liability partnerships. Tina Williams and Daniel Sutherland report

Corporate lawyers have been in a flurry, attending seminars, reading articles, updating precedents and generally getting ready for the upheavals the Companies Act 2006 will bring to their clients.

Of course, as lawyers rarely practise in limited companies, most of these solicitors are unlikely to be overly concerned with how the new act will impact their own working lives. Solicitors who are partners in traditional partnerships may even consider themselves almost immune from change, given that the Partnership Act has remained essentially as enacted for more than 100 years. However, members of limited-liability partnerships (LLPs) should be aware that the Companies Act 2006 will soon affect them personally.

In many ways, LLPs are more akin to companies than partnerships. As well as sharing the all-important trait of a separate legal personality, LLPs and limited companies are both subject to provisions of the Companies Act 1985.

In fact, the 1985 act is core to the administration of LLPs, setting out various disclosure requirements, enabling disgruntled members of LLPs to raise claims of unfair prejudice and imposing the requirement to publish accounts. It is telling that the Limited Liability Partnerships Act 2000 contains a mere 19 sections, whereas 206 clauses of the Companies Act 1985 apply to LLPs.

Consultation and timetable

Given that the Companies Act 1985 forms such a large proportion of LLP legislation, the Department for Business, Enterprise & Regulatory Reform (BERR) has, of course, considered how the 1985 act’s replacement, the Companies Act 2006, should affect LLPs. Between February and May this year BERR consulted on the approach to take when applying the new act to LLPs and set out the two basic options: either apply the 2006 act only as far as necessary, or apply it as far as possible. These approaches can be summarised as ‘if it ain’t broke, don’t fix it’ versus ‘keep it simple, stupid’.

Both approaches have their pitfalls, but freezing the law for LLPs in its present state would cause sufficient problems, so simply ignoring the 2006 act is not a practical option. Companies House, for example, would have to maintain a 1985 act-style system for LLPs, while having to simultaneously maintain a 2006 act regime for companies.

An approach currently being discussed is a full-blown change that goes beyond applying provisions of the 2006 act, which are the direct equivalent of the 1985 act provisions that currently apply. The argument is simply that this keeps LLPs on a level playing field with limited liability companies – the other most popular commercial vehicle. Maintaining parity between LLPs and companies would also be a boon for legal advisers who deal with both types of entity.

Whichever route is taken, the Government’s aim is to implement the 2006 act for LLPs in October 2008, which ties in with the date on which many of its provisions will come into force for companies. Between now and then there will be further consultation and draft regulations published, so there should be no nasty surprises for members of LLPs and it will be clear which route has been chosen.

Consequences

What will the Companies Act 2006 mean for members of LLPs? The most visible changes will be administrative – merely concerning which forms need to be filed and when. A few will bring welcome changes for members: most would be happy if they no longer have to publish their home addresses on the Companies House website, alleviating a longstanding privacy concern. Updated accounting provisions, such as changes to the special accounting provisions for medium-sized LLPs, will be of no concern to some and a nuisance to others.

Perhaps the main concern for members of LLPs will be that applying the 2006 act does not equate to a wholesale importation of company law concepts. Most members of LLPs (particularly lawyers) entered into this form of business structure because it seemed that the trade-offs were worth it to achieve limited liability. If concepts such as directors’ duties are imposed on members, with a consequent increase in the need to document the decision-making process, it makes that trade-off less attractive and members of LLPs may feel they have been duped into moving away from a stable partnership model to an uncertain future.

There is good reason to fear that this is where the law will end up. BERR’s consultation document gave directors’ duties as an example of a concept that may be relevant to an LLP’s ‘designated members’. It seems rather unfair that the designated members of an LLP, whose functions are essentially administrative in nature, be lumbered with this burden when they may not necessarily be involved in the LLP’s management, participation in which is totally unrelated to a member’s status as a ‘designated member’.

Assuming BERR realises this inequity, there is then a risk that directors’ duties will be applied to the members as a whole, which is surely an even worse outcome. With luck, BERR will drop the whole idea of applying the new directors’ duties provisions to LLPs at all.

There may also be some unexpected, but avoidable, consequences of the 1985 act being replaced. For instance, those law firms with potentially litigious partners may find themselves on the receiving end of a Section 994 application from a disgruntled partner (Section 994 being the replacement for the existing unfair prejudice provisions under the 1985 act). Unfair prejudice claims are usually excluded by agreement between the partners, but the agreement often achieves this by reference to the section number alone. Accounting for these kind of changes is straightforward, but can be easy to miss and costly to deal with if spotted too late.

The only certainty for members of LLPs is that the 2006 act will bring with it some important changes. For lawyers, who over the same period are having to contend with regulatory shake-up that will see ownership rules being relaxed, the period of relative stability in the business structures of professional services firms will be coming to an all too abrupt end.

Tina Williams is senior partner and Daniel Sutherland is an associate at Fox Williams