Scottish Law Commission (Reports)

PART I

INTRODUCTION

Partnership law reform in its context

The role of partnerships in the business world

1.1     Partnerships play an important role in the United Kingdom economy. At the start of 2002 there were 567,955 partnerships in the United Kingdom with a combined turnover (excluding VAT) of £136,902 million.^[1] Partnerships provide substantial employment: 33,995 partnerships employ more than 10 persons and 200 partnerships have 200 or more employees.^[2]
1.2     Partnerships vary in size and formality. An informal association of two persons in a short-term profit-making venture may be a partnership. Many small family businesses are conducted in partnership. There are also professional or business partnerships with many members and elaborate management structures.
1.3     Partnerships carry on work in a wide range of business activity. Many professionals carry on business in partnership. Partnerships are also prominent in the retail trade and in the construction, manufacturing, agricultural and tourist industries.
1.4     The great differences in the size and nature of partnerships illustrate the flexibility of partnership as a business entity.^[3] As partners have unlimited liability for the debts which a partnership may incur, partnerships require much less regulation than limited liability vehicles such as the company or the limited liability partnership. Partnerships also have the advantage of a large degree of privacy in financial matters. The consultation exercise in this project has confirmed that people value this flexibility and informality. One of our aims in making recommendations for reform is to preserve these attributes.

The relationship of the general partnership to the limited partnership

1.5     While the partnership is used as a business vehicle in a very wide range of activities, the limited partnership is much more specialised in nature.^[4] The partnership is a means by which business people pool their resources and skills in the management of a business. Partners have unlimited liability for the partnership's obligations. By contrast the limited partnership is a useful vehicle for investors, who do not wish to take an active role in the management of their funds, to combine to create an investment fund under the control of a general partner who alone has unlimited liability for the partnership's obligations. The limited partner is liable only to the extent of his contributions. However, the limited partner loses limited liability if he takes part in the management of the partnership business.
1.6     Since 1987 when the Department of Trade and Industry (DTI) and the Inland Revenue agreed guidelines on the use of limited partnerships as venture capital funds, the UK limited partnership (and in particular the English limited partnership) has become one of the most important vehicles for venture capital investment across Europe. This has contributed to the UK's leadership in the private equity and venture capital sector of the European economy. Businesses backed by private equity now employ around 2,700,000 people in the UK.^[5] Due to their separate personality, Scottish limited partnerships have also been used as a vehicle for investment in underwriting at Lloyd's.^[6]
1.7     The reform of the limited partnership raises discrete issues which we address in Parts XV to XIX of this report.

The relationship of the general partnership to the limited liability partnership

1.8     The new limited liability partnership (LLP) was created in response to pressure from large professional partnerships, which were concerned about the unlimited liability of partners for very large legal claims, in particular for professional negligence.^[7] The LLP is designed for professional or trading partnerships. It enables partners who are actively involved in the business of their partnership to limit their liability for the partnership's debts and obligations. But a partner may not enjoy the benefit of limited liability in relation to any negligent act which he commits in the course of the LLP's business.^[8]
1.9     The limited liability of the LLP comes at the price of considerable regulation. This contrasts with the almost total absence of regulation of the general partnership.^[9] Provisions of the Companies Act 1985 relating to the preparation, audit and publication of accounts and the delivery of annual returns, and provisions of the Company Directors Disqualification Act 1986, among others, are applied to LLPs.^[10] Partnerships which choose to become LLPs therefore lose the privacy enjoyed by existing partnerships in relation to their financial affairs.
1.10     We understand from Companies House that, as at 1 September 2003, the number of incorporated LLPs was 5420 in England and Wales and approximately 250 – 260 in Scotland. It appears that the number of such incorporations has been greater this year than last. However, while limited partnerships and LLPs will provide useful business vehicles for particular businesses, it is likely that the vast majority of partnerships will remain general partnerships.

Terms of reference

1.11     The Department of Trade and Industry gave us the following terms of reference:

To carry out a review of partnership law, with particular reference to: independent legal personality; continuity of business irrespective of changes of ownership; simplification of solvent dissolution; a model partnership agreement; and to make recommendations. The review is to be conducted under the present law of partnership, namely the Partnership Act 1890 and the Limited Partnerships Act 1907.

The relationship of partnership law reform to the Company Law Review

1.12     The DTI launched a wide-ranging review of company law in March 1998. This was completed in July 2001 when the Company Law Review Steering Group published their final report.^[11] In that report the Steering Group adopted three core policy principles as the basis of their recommendations. They described these principles as:

The "think small first" approach to private company regulation and legislative structure;

An inclusive, open and flexible regime for company governance; and

A flexible and responsive institutional structure for rule-making and enforcement, with an emphasis on transparency and market enforcement.

"Think small first"

1.13     The first policy principle is the most relevant of the three core principles to partnership law reform. The emphasis on a simplified and accessible regime for small companies seeks to make the law correspond to the reasonable expectations of honest business people. We think that the much less detailed rules of partnership law should also correspond to such expectations. Partnership law should not contradict the perceptions of such business people and thus contain traps for the unwary. The rules of partnership law should be readily understood. The reform of the Partnership Act 1890 should provide an accessible default code, setting out the basic rules which will govern a partnership if the partners do not agree different terms. We discuss the aims of partnership law reform more fully in Part III below.

The structure of the report

1.14     The report is divided into five Sections (including six Appendices). Section A comprises this introduction (Part I), a summary of existing partnership law (Part II) and an overview of the reform proposals in Part III. In Section B (Parts IV to XIV) we consider and make recommendations for the reform of the general law of partnership. Section C (Parts XV to XIX) contains our review of the law relating to limited partnerships and our recommendations for its reform, including our recommendation of the special limited partnership. Section D (Part XX) contains a summary of our recommendations. Section E contains the Appendices.
1.15     A draft Bill to implement our recommendations is contained in Appendix A. The Bill deals with both general partnerships and limited partnerships and is designed to replace both the Partnership Act 1890 and the Limited Partnerships Act 1907. The subject matter of the draft Bill is not within the legislative competence of the Scottish Parliament, as it relates to the reserved matter of business associations.^[12] We believe that enactment of our recommendations would not breach Convention rights.

The consultation exercise

1.16     In September 2000 the Law Commission and the Scottish Law Commission issued a Joint Consultation Paper on partnership law.^[13] The Paper set out proposals and questions for the reform of the general law of partnership. In October 2001 the Commissions issued a shorter Joint Consultation Paper dealing with the reform of limited partnerships.^[14]
1.17     We received 84 responses to the Joint Consultation Paper on partnership law. The responses came from a wide range of respondents including judges, barristers, advocates, solicitors, academics, accountants, organisations representing business, Government departments, public bodies and individuals. There have been several journal articles discussing the reform proposals.^[15] The Institute of Advanced Legal Studies organised a conference in London in June 2001 on the Law Commissions' proposals to reform partnership law. The Manchester Law Society and Manchester Chamber of Commerce organised a joint conference on partnership law in December 2001. We are most grateful to those who organised the conferences and to all those who responded to the Joint Consultation Paper or otherwise contributed their views.
1.18     We received 42 responses to the Joint Consultation Paper on limited partnerships. The limited partnership is a more specialised subject as it is a vehicle for particular investment activities. We received responses from barristers, advocates, solicitors, academics, accountants, financial and venture capital organisations and companies, government departments and individuals. The Institute of Advanced Legal Studies organised a conference in London in April 2002 on the proposals for the reform of limited partnerships. Again we are very grateful to the Institute for organising the conference and to those who responded to the Joint Consultation Paper and assisted us.
1.19     We list the persons and organisations who commented on the two Joint Consultation Papers in Appendices E and F.

Acknowledgements

1.20     In addition to thanking our respondents, we wish to thank Roderick I'Anson Banks, who acted as our consultant, Tony Sacker and the Association of Partnership Practitioners (APP), the Scottish Law Commission's Advisory Group (R Craig Connal QC, Professor George L Gretton, David Guild, Advocate, Sheriff William H Holligan, David B Sinton CA, Ian M Stubbs, David S Williamson QC, and the late Campbell White), Lord Phillips of Sudbury OBE, Professor Geoffrey K Morse, Professor John F Avery Jones CBE, Colin Ives CTA, ATT, Janet Stephenson FCA, Glen Davis, David Marks QC, the staff of HM Land Registry and the Registers of Scotland, the Insolvency Service, the Bankruptcy Registrars, the Inland Revenue (London and Edinburgh), Lee Robins of Companies House, Professor Johan J Henning and the Institute of Advanced Legal Studies at London University, the Manchester Law Society and Chamber of Commerce, Professor Joseph A McCahery of the Netherlands and, last but not least, our contacts in the United States of America, namely, Professor Deborah A DeMott, Professor Larry E Ribstein, Professor Allan W Vestal and Professor Donald J Weidner.
1.21     Although this report is presented by the current Commissioners, the great majority of the work was carried out under the leadership of former Commissioners, Lord Justice Carnwath, Judge Diana Faber (Law Commission for England and Wales) and Patrick Hodge QC (Scottish Law Commission). We are extremely grateful to them all. We particularly wish to record our indebtedness to Patrick Hodge QC for leading the project during the preparation of the report and for continuing to work long hours for many months after his term of office as a Scottish Law Commissioner had officially ended in order to see it through to completion.

Note 1    See Small and Medium-sized Enterprise (SME) Statistics for the UK 2002 (August 2003), Table 2. The turnover of partnerships is less than that of the approximately 2.3 million sole proprietorships (£149,641million). The number of partnerships and the turnover which they achieve have declined since 1998 when the comparative figures were 684,645 partnerships with a turnover of £151,213 million.     [Back]

Note 2    See Small and Medium-sized Enterprise (SME) Statistics for the UK 2002 (August 2003), Table 2.     [Back]

Note 3    Very large partnerships are a modern phenomenon. See para 3.14 below.    [Back]

Note 4    There are about 3000-4000 limited partnerships that are currently functioning in England and Wales and about 3000 in Scotland.     [Back]

Note 5    This information is derived from correspondence with the APP, Jonathan Blake of S J Berwin, and the British Venture Capital Association.    [Back]

Note 6    In Scotland limited partnerships have also been used in agricultural tenancies.    [Back]

Note 7    The Limited Liability Partnerships Act 2000 came into force on 6 April 2001 (SI 2000 No 3316).    [Back]

Note 8    See the Limited Liability Partnerships Act 2000, ss 1(4) and 6(4): a member of the LLP can be liable for his wrongful acts and omissions and the LLP is liable for such acts and omissions which occur in the course of the LLP’s business or with its authority. Other members of the LLP are not liable for the LLP’s debts, although they may have to contribute to the LLP’s assets in the event of its being wound up where they have made personal drawings when they had reasonable cause to believe that the LLP was or, as a result of the drawings, would be unable to pay its debts (see Insolvency Act 1986, s 214A).    [Back]

Note 9    Partnerships involved in professional practice and in providing financial services are regulated (for example, solicitors are regulated by the Law Society and investment managers by the Financial Services Agency), but not simply because they are partnerships.    [Back]

Note 10    See the Limited Liability Partnerships Regulations 2001 (SI 2001 No 1090).    [Back]

Note 11    Modern Company Law for a Competitive Economy, Final Report Volumes I and II, July 2001, DTI/Pub 5552/5k/7/01/NP. URN 01/943.    [Back]

Note 12    Scotland Act 1998, Sched 5. The draft Bill, however, contains amendments to the Prescription and Limitation (Scotland) Act 1973 and the Bankruptcy (Scotland) Act 1985. See Sched 2, paragraphs 4-10 and Sched 4, part 4.    [Back]

Note 13    (2000) Consultation Paper No 159; Discussion Paper No 111.    [Back]

Note 14    (2001) Consultation Paper No 161; Discussion Paper No 118.    [Back]

Note 15    For example, E. Deards “Partnership Law in the Twenty-first Century” [2001] JBL 357 and D. Guild “Partnership Law for the New Millennium” 2000 SLT (News) 315.    [Back]

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