Jersey stirs debate on professional liability

The second reading of the draft Jersey law on Limited Liability Partnerships (LLPs) will be taken up again this week.

In the interim, there has been an opportunity to reflect on whether the law will provide a workable solution to the problems of unlimited liability, or whether it is merely a distraction from the real debate about law reform in the UK.

One thing is certain: the draft law has stirred the debate in the rest of the UK about professional liability. It has led directly to the personal intervention of the Deputy Prime Minister, Michael Heseltine, who has urged the Big Six accountancy firms not to resort to the alternative being offered by Jersey.

Heseltine has also held out the prospect of law reform. The Department of Trade and Industry is considering various legal reforms, in the light of responses it received to a questionnaire it circulated with a recent Law Commission study on joint and several liability. The study, controversially, concluded that the existing law on joint and several liability is fair.

Possible reforms include the ability to opt for proportionate liability by contract; the introduction of limited liability partnerships under English law; the reform of section 310 of the Companies Act 1985 and the Unfair Contract Terms Act 1977 to make it easier for auditors and others to limit their liability by contract; and a system of statutory caps on professional liability. The DTI should publish its conclusions this autumn.

Partners in a Jersey LLP are likely to be in a better position to resist a major claim than partners in a traditional English partnership. The Eng- lish courts, at least, have accepted the effectiveness of a foreign law giving limited liability to members of a company or other separate legal entity established under that law. The draft Jersey law has been carefully drafted to take advantage of this.

No doubt plaintiffs will do everything in their power to try to pierce the veil of limited liability, but current English law appears likely to favour the defendant partners of the Jersey LLP. Although it would be open to the Inland Revenue to argue that an LLP should be taxed like a company, it will probably accept that Jersey LLPs share the advantages of tax transparency with traditional partnerships.

After all, the only fundamental difference between a Jersey LLP and a Scottish limited partnership is that the partners of the former will be able to take part in management. Nobody has suggested that a Scottish limited partnership should be taxed like a company and partnerships which register in Jersey will not expect to pay less tax but to continue paying tax as before.

The draft law must overcome several significant obstacles before it becomes a realistic alternative. It must be passed by the States of Jersey, despite the opposition of some of the island's senators. The DTI must clarify whether Jersey LLPs will have to file accounts as a foreign body corporate carrying on business in the UK. Professional bodies like the Institute of Chartered Accountants in England and Wales and the Law Society must confirm that LLPs will be regarded as partnerships for their purposes (both are likely to do so).

Even if the law leaps all these hurdles, some firms are likely to be concerned about the reaction of clients, banks and landlords if they adopt limited liability without the requirements of financial disclosure which have been associated with limited liability companies. Others may be put off by the cost of arranging the £5 million “financial provision” with a Jersey bank, as required by the draft law.

Firms with these concerns may put off the decision to adopt LLP status, hoping that English law reform will provide a solution in due course, or that they will be able to learn from the experience of LLP pioneers.

Other companies, especially those that are particularly exposed to the risk of major claims, may feel that these considerations are outweighed by the urgent need for protection and to proceed with the Jersey option.

Even if the present UK Government makes a commitment to law reform, the DTI thinks it is unlikely any such reforms could be implemented for two or three years. And while the Labour Party is said to be broadly sympathetic to the plight of the professions, readers of an article by Austin Mitchell which appeared in Accountancy Age (22 August 1996) may feel that a future Labour government would face problems if it wanted to introduce legislative relief.

The draft law under consideration is no red herring. At the very least it has forced legislators to confront much more urgently the problems associated with professional liability. And bearing in mind the uncertainty about law reform in the UK, the first Jersey LLP could start practising in the first few months of 1997.

The States of Jersey, and the accountancy firms involved in drafting the LLP law, have not only devised a new approach to solving the problems of professional liability, they have pushed the issue higher up the political agenda.