Letters of the law

Partnership was once seen as the prize for years of meeting impossible deadlines, securing big deals and toeing the company line. The growth of the 1980s yuppie was proof that a legal, banking or accountancy career was preferable to one in industry. Yet, while a professional career may not have had the huge rewards that fresh-faced graduates expected, even as late as the early 1990s it offered something a manufacturing career did not – security.

Court cases reducing firms to bankruptcy and spiralling Professional Indemnity premiums have put paid to notions of security. Size, experience and quality are no guarantee of safety. City practices are not immune to potentially ruinous litigation. Many claims fail, but the risks remain. Reducing these risks and their related costs – including PI premiums – is seen by many as being as important as building one’s client base and turnover. The question is – how?

Is the government’s draft bill on Limited Liability Partnerships the answer to dangers presented by the fashion of suing professional advisors when a transaction goes sour?

The draft bill has three basic principles:

Limited liability – creditors will only have access to the assets of the LLP itself, not its members (the partners). In return, the LLP will be subject to company regulations to safeguard clients and public;

Corporate personality – LLPs will, like companies, be separate legal entities. Members will have no personal liability for its acts or omissions;

Internal flexibility – LLPs may regulate their internal affairs as they wish, subject to the two principles above.

The draft bill is, however, significant in what it does not do. It retains principles of the 1890 Partnership Act so that, with limited exceptions, each and every partner is an agent for the partnership, whose acts bind the partnership.

The draft bill does not alter the legal duties to a client, nor the principles that determine whether a partner has broken those duties, and the consequences of that breach. It simply ensures that the LLP bears the burden of a partner/member’s transgressions rather than that person’s colleagues.

This change is of limited practical benefit. True, your home may now be safe from repossession by a successful plaintiff. Unfortunately, he will still be entitled to claim against the assets of the LLP down to the last pen. You may still lose your firm and the means of earning a living and paying your mortgage for your home. The crux of the matter is that draft legislation does not remove the risk of litigation.

Nor will LLPs reduce the need or cost of PI insurance. Cover is underwritten on the risks businesses face. Insurers examine the work firms carry out, the experience of their staff, their claims history and decide upon the type and amount of cover they are prepared to offer.

Accountancy LLPs, just as with traditional partnerships, can still be sued for bad tax advice and will need cover for it. One small change is that former partners may no longer need run-off cover, because LLPs will be defendants. As claims may, however, be brought for members’ activities where the LLP denies liability, it might be wise to purchase it.

In fact, the draft bill adds to the liabilities against which cover is required. LLPs will need to file audited accounts. Its members will be subject to penalties for wrongful and fraudulent trading. LLPs and members can be investigated by the DTI in the same way as companies and directors.

An LLP’s liquidator will have the power to apply to the court to recover any withdrawals of property made by members within the two years prior to winding up the LLP, provided it can be shown that they knew the firm was insolvent or that the withdrawal would lead to its insolvency.

These new liabilities will be akin to those of companies. While the draft bill has been criticised for introducing company law concepts into partnership law, the legislation that reaches the statute books is certain to retain many of these provisions.

PI policies will not cover such company-law-style ‘wrongful acts’ as opposed to the negligent provision of professional services. Professionals in LLPs will need to buy directors and officers-type policies to protect themselves from plaintiffs aggrieved at the transgression of these ‘company’ regulations. Fines and official penalties will not, however, be insurable.

LLPs will help professional partnerships protect themselves from ‘doomsday’ litigation but they are not a panacea. The only salvation is to limit or expunge risk itself. The DTI has ruled out any change to the rule on joint and several liability.

Contractually ‘capping’ one’s liability to clients is frowned upon by the courts and does not provide any protection against non-clients anyway. The campaigns for such reforms may not succeed for many years given our current consumer protection culture.

Therefore, professionals will still need insurance cover, good recruitment, training and working practices. In the end, excellent work and good housekeeping are the only ways of keeping risk at bay.

Gary Meggitt is a solicitor based at the London office of law firm Wansbroughs Willey Hargrave

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