Limited Liability Partnerships: All Change with the Companies Act 2006?

June 3, 2008

This article was written for Butterworths Journal of International Business and Finance Law

Key Points

• The government has confirmed that the Companies Act 2006 will replace the Companies Act 1985 as the basis for the detailed provisions which govern Limited Liability Partnerships.
• The government’s response to the recent consultation on the application of the 2006 Act to LLP's has clarified that the 2006 Act will, for the most part, only be applied insofar as equivalent 1985 Act provisions applied. This avoids the potential difficulties in applying, for example, the new statutory directors' duties to members of LLP's.
• Most of the 2006 Act provisions which are to be applied to LLP's will come into force in October 2009.

Abstract
In November 2007 the Government published a consultation document, requesting comments on the application of the Companies Act 2006 to Limited Liability Partnerships (LLP's). The results of that consultation were published in May 2008 and give the clearest picture yet as to how the 2006 Act will shape the law of LLP's in coming years.

Background
Currently much of the law governing LLP's is derived from the Companies Act 1985. Although it has been clear for several years that nearly all of the 1985 Act would be repealed in respect of companies, it was less clear what effect this would have on 1985 Act provisions which had been applied to LLP's. It was by no means certain that LLP's would automatically be subject to equivalent provisions of the 2006 Act upon the repeal of the 1985 Act (and indeed most advisors have worked on the basis that the 2006 Act does not apply to LLP's). The government sought to clarify matters when it published a consultation paper in November 2007 which asked for comments both on the fundamental question, 'to what extent should the 2006 be applied to LLP's?' and on a number of more detailed questions as to how the 2006 Act could be practically applied to LLP's. The consultation concluded in February 2008 and the government’s response to the submissions was published in late May 2008.

Outcome of the Consultation
Perhaps unsurprisingly, there was strong support from respondents for the 2006 Act to be applied to LLP's, where corresponding provisions of the 1985 Act currently apply. The government agreed that this was a sensible course of action and so the 1985 Act will cease to be relevant to both LLP's and companies. Whilst LLP's are a unique form of corporate body, and the law applicable to them may well develop to further distinguish them from limited companies, there seemed little benefit in fixing the law governing them to an out of date Act. Having the same Act as a common basis for both limited companies and LLP's should also benefit advisors who work with both types of entity.

Just as certain parts of the 1985 Act were not applied to LLP's (such as provisions regarding shareholders), parts of the 2006 Act are clearly inappropriate for LLP's. However, the 2006 Act introduces a number of provisions which are, arguably, suitable for LLP's. One such area is the imposition of statutory duties on directors. Much has been written about how the codification of these duties will affect how boards take decisions and there had been a suggestion that the concept would be extended to apply to the members of LLP's. The responses to the consultation were unanimous in their rejection of this approach. There were several reasons why this was so strongly resisted and the government’s response highlights a number of these, noting, amongst other reasons, that members of an LLP are not equivalent to the directors of a company and that LLP's typically seek to regulate the duties of members by contract, as a matter of internal governance. Members of LLPs are likely to be relieved that the government has now confirmed that it will not apply directors’ duties to members of LLP's.

Much of the response to the consultation indicates that a conservative approach will be adopted when applying the 2006 Act. For example, the government has concluded that the statutory provisions for derivative actions will not apply and there will be no new provisions regarding narrative reporting or electronic communications. Although some may see this as a missed opportunity, it is in line with the general principle that members of LLP's are free to determine such matters between themselves.

Probably the most controversial outcome of the consultation is the 'no change' approach taken in respect of LLP's formed in overseas jurisdictions. The issue arises because overseas 'LLP's' have the potential to take advantage of limited liability, but without offering the same transparency as English LLP's. Part of the government’s reasoning for not requiring overseas LLP's to disclose key financial information on public registers appears to be that defining an overseas LLP is too complicated. This is a fair point, since the initials LLP can have substantially different implications depending on jurisdiction.  Nonetheless, just because the issue is complex does not mean it should be ignored.  An opportunity has perhaps been missed to put overseas LLP's on a level playing field with those incorporated in the UK. The government has indicated that this will be an area that will be kept under review.

Implementation
The timetable for implementation of the 2006 Act generally was recently put back and accordingly the application of these provisions to LLP's has also been delayed. The majority of provisions applying the 2006 Act to LLP's are now expected to come into force during October 2009. The relatively benign outcome of the consultation means that the key benefits of LLP's: tax transparency and a high degree of freedom as to internal governance, are not currently under threat and so a smooth transition to the 2006 Act seems likely.


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