LLPs - Regulatory Default Provisions
ACCA's response to the Department of Trade and Industry's consultation paper is set out below.
i) Express Default Provisions
We agree that it would be helpful to incorporate into the LLP legislation provision for default constitutional provisions that would apply in the absence of any agreement between the members. We would suggest, however, that the regulations make clear that each individual default clause would apply to an LLP in the absence of an express agreement to vary or disapply it.
Our comments on individual draft clauses are as follows:
6(1) If every member is entitled to share equally in the profits of the LLP, the default provision might also refer to members sharing equally in the losses of the LLP.
6(3) As with clause 6(9) referred to below, there is a presumption here that every member has the right to take part in the management of the LLP. This presumption does not exist in the draft Bill, where there are two classes of member - the [ordinary] member and the 'designated' member - and where it is inferred, in certain clauses at least, that the designated members alone will be involved in the management of the firm. The Department is aware of concerns that have been expressed about the Bill's lack of clarity as regards the intended roles of the two categories of 'member'. If it is the Department's clear intention that 'designated members' alone are to be treated as being involved in the firm's management, then this term can be used in clause 6(3). If, on the other hand, no such clarification is to be made, then many LLPs will wish to vary the clause as drafted.
6(6) The clause refers to the need for unanimous consent from members for any change in the 'nature of the business' of the LLP. We suggest that the wording of that phrase needs to be clarified so as to make clear that the passage is not intended to refer to a change in the constitutional character of the LLP.
6(7) We do not see the need for a default provision of this kind. It is difficult to envisage a situation where a member agrees to a clause which states that he may be expelled from the LLP against his wishes.
6(9) As we said with relation to clause 6(3) above, the latter segment of this clause appears to imply that all members are involved in the management of the LLP. It would be much more satisfactory if the respective management responsibilities and rights of the 'member' and the 'designated member' were set out explicitly.
In principle, however, we agree fully that, if a member is involved in the firm's management, then he should have a right of access to its books and records, although we suggest that the clause be amended slightly so as to provide that the firm's books may be inspected by a member within office hours. The proposed framework of creditor protection in the Bill provides for civil liability to attach to a 'member' where that person has actual or implied knowledge of the LLP's present or future insolvent state. It would be difficult for a liquidator, when assessing whether or not any member had knowledge of the firm's financial state at a particular point in time, to imply to him knowledge of the situation if all the information to which he had access comprised of (retrospective) annual accounts that had been distributed some months after the year end. The right of access, either given to all members or just those participating in the firm's management, appears to us to be essential to the effective working of the creditor protection framework.
ii) A duty of good faith
We believe that, since the LLP will be a legal entity in its own right, members should owe their duties to the firm rather than to each other. We would have no objection to the incorporation of draft clauses (11) and (12), seeing as they reaffirm the duties of individual members to account for their activities to their firm.
iii) Minority Protection
We accept that members of an LLP may well be more likely than members and directors of companies to agree in advance on how the LLP is to be run, and on their own role in that process. The chances of this happening may be increased further by the adoption of default provisions. It would, however, be sensible to provide for a fall-back buy-out provision in respect of individual members who have been excluded from the LLP's management. We suspect that s459 of the Companies Act as it stands may need to be amended for application to LLPs. We have referred above to the uncertainty that surrounds the respective management roles of the 'member' and the 'designated member'. Since s459 works to protect the interests of a company member (and not a company director) where some additional agreement has been entered into to give the member management rights, some amendment would appear to be necessary in the case of the LLP.