Pioneers of partnership law

The Liability Partnerships (Jersey) Law has now been registered and is expected to come into force later this year. Despite earlier indications that the Conservative government would not support the early introduction of equivalent legislation in the UK, the registration of the law appears to have prompted the Department of Trade and Industry (DTI) to bring forward proposals for a UK limited liability partnership law.

Representatives of Jersey's Financial Services Department (FSD) have seen this as a vindication of the approach taken in drafting the law.

Registration under the law, which was drafted in conjunction with three of the UK's leading accountancy firms, is currently being considered by some of the major City law firms, the partners in which are dissatisfied with their potential vulnerability to increasingly large US-style claims.

Jersey's Liability Partnerships law will provide a new form of partnership structure enabling individual partners to limit their liability for the debts of a partnership while continuing to participate in its management. The law arose from the need for the partners of leading UK professional firms to be able to protect their personal assets from the increasing risks of litigation while enabling them to continue their business within a traditional partnership structure.

The concept of limited liability for companies was recognised a century ago and the Jersey legislation will extend this recognition to partnerships.

Under the law a limited liability partnership (LLP) will remain wholly liable for its debts and any losses caused by it. Its property (together with any property withdrawn from it within six months of a claim if it was insolvent or became insolvent as a result of such transfer) will be available for the benefit of creditors. Every partner will be an agent of the LLP and have the authority to bind the partnership to contractual and other legal obligations.

A distinguishing feature of the law is that a partner will not be liable for any of the LLP's debts or losses unless the debts were incurred, or the losses caused, by that partner.

A partner, without specific contractual authority, will not be an agent of the other partners and will not be liable for any loss caused by another partner. The LLP will have a legal personality distinct from that of the partners of whom it is composed and this separate identity will not be affected, for example, by the admission or retirement of a partner.

The LLP structure has been adapted from the Scottish general partnership, which is treated by the Inland Revenue as being fiscally transparent. Great care has been taken in developing the new law to ensure that the LLP will be regarded for tax purposes as having identical characteristics to that of a Scottish general partnership. Confirmation of the tax status of the LLP is expected to be obtained from the Revenue in the near future.

A partnership wishing to become an LLP will need to register a declaration with the Registrar of LLP in Jersey who will issue a certificate of registration. For registration to take place, the LLP's name must end with the words “limited liability partnership” or “LLP” and the limitation in liability must be disclosed in all the partnership's correspondence and invoices.

The partnership must have a registered office in Jersey where its books and records will be maintained (which must disclose the names and addresses of the partners) and where a copy of the partnership agreement will be kept.

One of the more controversial aspects of the law is the requirement for the partnership to procure the provision of £5m to be made available on the dissolution of the partnership for the benefit of creditors. It is envisaged that appropriate financial facilities will be made available by major banks and it is worth noting that the law does not restrict the taking of security against partnerships assets to secure repayment of the financial provision.

The consultative document issued by the DTI sets out UK proposals which follow the same basic principle as the Jersey law, by seeking to protect the personal assets of a partner from legal action arising from the negligence of another partner.

However, proposed safeguards in the event of a partnership entering insolvency differ slightly from those under Jersey legislation and may reduce the effective limitation of the liability under the proposed UK legislation. These include allowing liquidators to claw back excessive drawings by partners for the previous two years.

Jersey's law allows drawings to be clawed back which were made at a time when the partnership was unable to pay its debts (or, where the drawings are made other than in the ordinary course of the affairs of the partnership, in the six months before such time).

Those who have been partners in the five years prior to the insolvency of the partnership may be personally liable for a fixed sum. Former partners in a Jersey LLP may be personally liable to a creditor when the partnership is dissolved if they were partners at the time that the creditor's debt was incurred and there was a shortfall in the provision of £5m at that time.