Part 1 History and legislation relating to LLPs
February 2013
53A.2 Introduction – what is a partnership
A partnership is defined as the “relation which subsists between persons carrying on business in common with a view to a profit” [Note 1]. This method of conducting business has been in use from the 16th century or earlier. A partnership has no separate legal identity and usually each partner has unlimited liability (see paragraph 53.18 and Part 2 of Chapter 53 for an exception).
53.A.3 Traditional partnerships
A traditional partnership is seen as a small number of individuals, known to each other and working together to make a profit, examples include the Leeds market stall run by Michael Marks and Thomas Spencer which became Marks and Spencer and “The Beatles”. The personal connection allows individual members to exercise some control and observance over the other members to limit the likelihood of losses for which they would have unlimited personal liability.
53A.4 Professional partnerships
Many partnerships, particularly in the professional sector, (accountants, solicitors, etc) have grown considerably with some firms boasting a thousand partners all over the world. These businesses prefer to operate as partnerships because of the flexibility, favourable tax treatment and less onerous regulation. However partnership legislation up to 2000 meant that generally each partner was personally liable for the firm’s liabilities. This meant that a partner could become liable for the negligent acts of another partner, possibly someone they had not even met.
53A.5 The United States creates the first LLP
During the financial crisis of the late 1980s and early 1990s hundreds of US Savings and Loans firms (equivalent to UK Building Societies) were declared insolvent. As a result of the collapse many accountancy and legal firms faced legal claims instigated by the US government. Successful claims could have resulted in all partners, including those who were not responsible for the failure of the savings and loan firms, being liable to repay millions of dollars in compensation. In 1991 Texas introduced the concept of a limited liability partnership (LLP). The concept was popular and the majority of US states eventually passed LLP legislation .
In September 1996 Jersey passed legislation allowing partnerships, particularly large accountancy firms, to register as LLPs. The UKs “Big Six” accountancy firms started campaigning for similar legislation to be introduced in the UK. After a lengthy consultation a bill was introduced into the House of Lords in November 1999 which received Royal Assent on 20 July 2000.
53A.7 Legislation relating to LLPs
The Limited Liability Partnerships Act 2000 came into force on 6 April 2001. The Act contains 20 sections. The detail of the legislation relating to LLPs is contained in the Regulations created under the Act. The most important of these are the Limited Liability Partnership Regulations 2001 and the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. These regulations consist, for the most part, of schedules which apply, disapply, amend, supplement or replace provisions of the Companies Act 2006, most of the remaining provisions of the Companies Act 1985 and the Insolvency Act 1986.
53A.8 Reading the legislation relating to LLPs
The regulations created by the Limited Liability Partnerships Act 2000 operate by reference to the primary legislation (particularly The Companies Act 2006 and the Insolvency Act 1986) by applying or modifying most of the relevant parts of the Acts to LLPs. The Regulations need to be read together with the relevant Act as effectively together they create a parallel Act tailored specifically to LLPs.
53A.9 Traditional partnerships
Traditional partnerships formed under the provisions of the Partnerships Act 1890 are dealt with in Chapter 53.
The Limited Partnerships Act 1907 allowed partnerships to have some members with limited liability, referred to as limited partners. A limited partner is prohibited from taking part in the management of the partnership. If a limited member takes part in the management of the partnership he/she loses his/her right to limited liability [Note 2]. Their role is, in effect, restricted to the provision of capital. The official receiver is unlikely to encounter a limited partnership as they are rarely used.
53A.11 Winding-up a limited partnership
Where a winding-up order is made against a limited partnership the official receiver should establish the amount and terms of the investment by the limited partner(s) and record this on the list of creditors. The official receiver should establish whether the limited partner(s) had any involvement in the management of the business as this could result in him/her becoming jointly and severally liable for the partnership’s debts (see paragraph 53A.10). The winding-up can be dealt with in accordance with the instructions in Chapter 53.
53A.12 Bankruptcy order against a limited partner
Where a bankruptcy order is made against a limited partner the official receiver should establish whether the bankrupt took any part in the management of the partnership. Where the bankrupt did take part in the management he/she becomes joint and severally liable for the partnership debts and the partnership creditors should be offered the opportunity to prove in the proceedings. Unlike a traditional partnership the bankruptcy of a limited partner does not result in the dissolution of the partnership [Note 3].
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