Limited liability partnerships: the LSRA and the Boston-Bolton conundrum

Eoin Molloy (Content Editor) Ireland

February 8, 2019

Introduction

Reform of the legal profession has always been slow moving. Law, perhaps more than any other discipline, places value on tradition and inherited wisdom - a fact that is best evidenced by the existence of stare decisis. This resistance to change is not because of obstinance but rather, is reflective of the need for certainty in the law.

Nowhere can this slow pace of change be observed more clearly than in the development of limited liability partnerships in Ireland. Provision for these much-needed business structures was made in the Legal Services Regulation Act 2015. However, many of the most important sections still await commencement.

 

Historical Context

Under the Limited Partnerships Act 1907, provision was made for a form of limited partnership whereby the partners are divided into 'general partners' and 'limited partners', the former being more involved in the day-to-day management of the company and therefore subject to unlimited liability. Under the 1907 Act, limited partners had strictly defined limits to the level of exposure they would have for the partnership's debts but they were excluded from management. 

Then came the Solicitors (Amendment) Act 1994, s 70 of which would have empowered solicitors to trade as limited companies, although this particular provision was never commenced. This would have put us on a similar footing to the regime which exists in the United Kingdom, where it has to be acknowledged that limited liability partnerships in the traditional sense do not exist. The distinction between the Irish and English approaches to LLPs will be discussed shortly, but first it is necessary to examine the provisions of the LSRA 2015.

 

Legal Services Regulation Act 2015

Even though it was enacted in December 2015, much of this transformative Act has not as of yet been commenced. The Act contains many innovative provisions which offer drastic reforms in areas which have always frustrated the legal services industry, namely: the advertising of legal services, the issue of solicitors seeking to become barristers and vice versa, and of course, the creation of various new forms of partnership. The new types of partnerships provided for in the Act are as follows: 

  • Legal partnership: allows for fused solicitor-barrister partnerships or barrister only partnerships, as per s 100
  • Multi-disciplinary practice (MDP): only one partner must be a legal professional, as per s 102
  • Limited liability partnership (LLP): partnerships of solicitors or legal partnerships which have been granted authorisation to operate on a limited liability basis, as per s 122

A key aspect of the 2015 Act is the establishment of the Legal Services Regulatory Authority under s 8. This body shall consist of 11 members, each of whom holding office for four years from the date of his or her appointment. The functions of the LSRA are laid out under s 13 - chief amongst these being their duty to 'regulate the provision of legal services by legal practitioners' and to 'ensure the maintenance and improvement of standards in the provision of such services'. These duties are subject to the over-riding caveat that the LSRA must be 'independent in the performance of its functions'. 

The draft regulations which would commence the provisions of the 2015 Act relating to LLPs have been drawn up by the LSRA who have sought submissions in respect of same. On 14 Decmber 2018, the Law Society issued their submissions which can be accessed here. To think positively, it appears possible that the roll-out of LLPs in this jurisdiction will commence sometime in 2019.

 

The Extent of Liability

Section 125 of the 2015 Act provides that only a 'relevant business' may apply to the LSRA for authorisation to function on a limited liability basis. Interestingly, MDPs are excluded from this as the definition of 'relevant business' provided in s 99 extends to partnerships of solicitors and legal partnerships only. 

Section 123 of the Act then provides in no uncertain terms that: 'a partner in a limited liability partnership shall not, by reason of his or her being a partner or being held out as being a partner in that partnership, be personally liable directly or indirectly, by way of contribution or otherwise, for any debts, obligations or liabilities arising in contract, tort or otherwise'.

The Act goes on to list a number of exceptions, whereby the limited liability carve-out will not apply. The most notable of these exceptions are: (a) where the act or omission giving rise to liability occurred prior to the grant of authorisation under s 125; (b) where the debt or liability arises owing to fraud or dishonesty on the part of the partner; (c) where the liability is tax; and (d) where the debt was incurred for a purpose unrelated to the business of the partnership. 

 

Miscellaneous Provisions

The Authority will have the power to issue written directions to partnerships if they have reason to suspect a lack of compliance with the obligations listed under the Act, with the High Court holding appellate jurisdiction over this process. Moreover, there is an obligation placed on partnerships under s 125(7) to notify their clients, creditors and other interested parties of their new limited liability status as soon as is practicable post-authorisation. The company name must also be updated to include the phrase 'limited liability partnership', which may be abbreviated to 'LLP' if desired. This requirement is provided for in s 125(8).

 

Boston or Bolton?

Therefore, it is fair to say that the Irish conception of limited liability partnerships is far removed from its UK counterpart, where s 1 of the Limited Liability Partnerships Act 2000 provides that LLPs operating in the United Kingdom shall have a 'separate legal personality' that is at law different from that of its subscribers and controllers. This means that UK LLPs are not really partnerships at all, but corporate entities. This leaves them open to a host of onerous statutory and common law duties, most notably the filing of accounts. 

In an article entitled, 'LLP service', published in the November 2017 edition of the Law Society Gazette, solicitor Paul Keane contends that the vision of LLPs put forward in the 2015 Act is far more similar to the US formulation. He summarises this conundrum by stating that, insofar as early cases involving limited liability partnerships, it would be more instructive for the courts to look to Boston as opposed to Bolton. This means that the body of UK case law which has developed since the inception of LLPs in that jurisdiction in the year 2000 has little authority here.

Keane goes on to offer a succinct analysis of the 2015 Act, and s 122 in particular, by stating: 'the general principle of the legislation is that claims against an LLP will be met by the assets of the LLP and its professional indemnity insurance but will not extend to the personal assets of the partners' - even though cases of partners becoming bankrupt owing to debts accrued by the partnership are 'mercifully rare'. In any event, it is hoped that the roll-out of LLPs will lead to increased growth in the legal services sector, as partners may now operate without trepidation, freed from the fear of losing their personal assets over a mis-judged case.

 

Conclusions

One must commend the legislators behind the 2015 Act. It lays down a clear and concise framework for the operation of LLPs, legal partnerships and MDPs, irons out various kinks which have inhibited growth of the legal services industry - all the while ensuring that the sector is still subject to a comprehensive, but not overly invasive, regulatory regime under the new Legal Services Regulatory Authority.

In a 2007 article, Delaware Chief Justice Myron Steele lamented the absence of guidance as to how various fiduciary principles and common law principles should apply to limited liability partnerships in a jurisdiction famed for its laissez faire approach to legislative intervention. He concludes that a contractual analysis of each individual partnership would be preferable, as 'instruments creating limited partnerships can easily be structured to carve out safe harbours for self-dealing by managers'. 

This would suggest that in the absence of comprehensive statutory intervention, which we currently have in uncommenced form in the LSRA 2015, laying the framework for LLPs would be anything but smooth sailing. One can only hope that the Authority will release their regulations with due haste and after that, it will only be a matter of time before the signature LLP sign-off comes to a correspondence near, or indeed addressed to, you. 

 

 


The second edition of Twomey on Partnership is available now. Featuring updated sections on LLPs and the provisions of the 2015 Act, as well as case law and commentary spanning the past 17 years, Twomey on Partnership is the complete, practitioner-focused guide to partnership law in Ireland. Order your copy here.