Limited liability no substitute for good management

But despite the protection offered by LLP arrangements, the best safeguards are risk management and quality control, says Robert Derry-Evans. Robert Derry-Evans is managing partner at Cameron McKenna. After the last election it was uncertain whether the new government would pick up the baton left by the previous administration and run with proposals to legislate for the creation of “Limited Liability Partnerships” (LLPs) in the UK.

LLPs – a hybrid form of partnership conferring a degree of limited liability protection upon individual partners in certain circumstances – has been the subject of much professional discussion. The publication last month of a further consultation document and draft bill on the topic suggests that UK LLP status may soon be an option for all professionals to consider.

The consultation document highlights the purpose of the proposed legislation to add to the choice of organisational set-ups legally available to businesses in the UK, and to provide a new option so that people can have the security of carrying on business in common with limited liability. This is, however, subject to safeguards for those with whom LLPs do business.

When the DTI first published a consultation paper on this topic in 1997, many professionals were concerned that the proposed safeguards specified – in particular the obligation to publish accounts and the so-called “claw back provisions” – were too disadvantageous. The latest proposals, however, make it clear that embracing LLP status will require firms to become subject to a regulatory regime – including a requirement to publicise financial information and to accept a corporate-style insolvency regime – as a price for the better liability protection associated with being an LLP.

It is very important, however, that professionals do not lose sight of the fact that LLP status will not by itself remove the spectre of unlimited liability and exposure to doomsday litigation. I endorse the comments made by my colleague, Stephen Netherway, when he stressed in this same newspaper in June that the most effective means of limiting individual firm liability was to prevent litigation arising in the first place and to implement risk management and quality control strategies. Whatever business medium is chosen, there can never be any substitute for taking such steps.

That said, the possibility of being able to practise within a quasi-incorporated medium, a novel concept under English law, is an interesting prospect. The progress of these proposals will be watched with interest.