LLP's are easing into the 21st Century

May 13, 2008

This opinion piece was written for The Lawyer

The Government consulted in February on the application of the Companies Act 2006 to LLP's and has, a little past its own deadline, published its response. Since most forward-thinking law firms have converted to LLP status, the outcome of this consultation is likely to have far reaching effects in the legal world. Undoubtedly, several bullets have been dodged. The bullet that everyone worried was aimed for the heart was the application of the new regime for directors' duties to members of LLP's. This was an absurd prospect for many reasons, not least because, as junior partners at magic circle firms will attest, many members of LLP's have little if any involvement in the day to day management of a firm. A member of an LLP is clearly not a director. Thankfully sense was seen and the whisperings that partnership boards would have to start taking into account such matters as the impact of the LLP’s operations "on the community and the environment" came to nothing.

Some of the outcomes of the consultation perhaps reveal the inherent conservatism of the respondents a pool drawn mainly from the ranks of lawyers, accountants and professional associations. The prospect of making email the default mode of communication between LLP's and their members continues to be subject to agreement, as the respondents pushed for hard copy to remain the standard. Given that in practice email is likely to already be the dominant means of communication between members of an LLP, and that it should be hoped that this law will survive at least the next decade, LLP's (and anyone with an interest in the welfare of trees) may come to regret that a more progressive approach was not taken.

The most controversial outcome of the consultation is the 'no change' approach taken in respect of LLP's formed in overseas jurisdictions. These LLP's have the potential to become the 'non-doms' of the corporate world, as they take advantage of limited liability, but often lack transparency both in the UK and in their home jurisdiction. The government’s reasoning for not enforcing the usual quid pro quo for limited liability disclosure of key financial information on public register seems to be that dealing with overseas LLP's is too complicated. An opportunity has clearly been missed to put overseas LLP's on a level playing field with those incorporated in the UK.

Members of LLP's who are upset by their firm’s management are unlikely to take much comfort from the consultation. Members will continue to be routinely excluded from bringing claims against the LLP for perceived unfairness and the new derivative action claims, whereby in a company setting shareholders can bring claims against third parties in the name of the company, are not being translated to LLP's. It is notable however that both the consultation document and one of the respondents, the Association of Partnership Practitioners (of which the author is a member) took the view that members of LLP's already have some recourse to the courts. This is likely to be news to many and could make some disgruntled partners look again at their legal position.

Ultimately the consultation does not suggest that any changes will be introduced which will harm the two key benefits of LLP's: their tax transparency and flexible management structure. A review of the operation of LLP's by Her Majesty’s Revenue & Customs would perhaps be even more keenly considered than one which ultimately only tinkers with the fringes of LLP law. Given that the application of the Companies Act 2006 looks set to be fairly benign in nature, those firms who have been holding back from becoming LLP's should now consider taking the plunge and converting to LLP status, albeit perhaps to an LLP incorporated in Delaware rather than the UK.

Related pages:

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