LIABILITY OF PARTNERS IN A LIMITED LIABILITY PARTNERSHIP REGIME

Transcription

1 392 LIABILITY OF PARTNERS IN A LIMITED LIABILITY PARTNERSHIP REGIME I Introduction 1 In the wake of the 1997 Asian financial crisis, the Singapore Government announced in 1999 the formation of the Economic Review Committee 1 with responsibilities for conducting a fundamental review of the national development strategy and formulating a blueprint to re-structure the country s economy. 2 The Committee on Company Legislation and Regulatory Framework (CLRFC) was thereafter convened 3 under the aegis of the Economic Review Committee to undertake a comprehensive and coherent review of company law and regulatory framework and recommend a modern company law and regulatory framework for Singapore which accords with global standards and which will promote a competitive economy. 4 2 The CLRFC has recommended, inter alia, that legislation be enacted to introduce two new business structures limited partnership (LP) and limited liability partnership (LLP). 5 The addition of these two proposed entities to Singapore s corporate legal landscape will give market players more options in deciding how they want to structure their businesses 6 so as to be more competitive in the international arena. To work out the details of the legal framework governing the LP and LLP, Source: (Ministry of Trade & Development s website). Singapore saw the need to develop new strategies to upgrade, re-make and re-energise its economy to fulfil its ambition of becoming a hub for the region and the broader Asian economy (ibid, note 1). The CLRFC was appointed by Ministry of Finance, Attorney-General s Chambers and Monetary Authority of Singapore. CLRFC Consultation Paper published on 22 October 2001, at p 1. ( As part of its economic make-over, Singapore has to compete with other financial centres; see also Financial centres today and tomorrow: a Singapore perspective, address by Mr Lee Hsien Loong (Deputy Prime Minister and Chairman of Monetary Authority of Singapore) at International Monetary Conference, Singapore, 4 June 2001, at p 1. See Recommendation 1.1 of CLRFC Report ( See Ministry of Finance s press statement (on 22 October 2002) Singapore Reforms Company Law (

2 15 SAcLJ Liability of Partners in a Limited Liability Partnership Regime 393 the Ministry of Finance set up in 2002 the Study Team on LPs and LLPs which posed a number of specific issues for public consultation. 7 3 Of interest in the present discussion is the particular issue of limited liability protection which, it is submitted, is the LLP s core feature a centrality also suggested by its very appellation. Various suggestions will be offered for the purpose of striking a fair balance between encouraging enterprise (by offering limited liability) and safeguarding the interests of third-party victims with respect to the specific issues raised in the following question 8 posed by the Study Team: (10) Liability of Partner Do you agree that while a partner in a limited liability partnership will not be personally liable for the malpractice of other partners in the firm, the partner who is negligent and fraudulent should be subject to unlimited personal liability according to general principles of law? II Extent of liability protection 4 It is suggested that the legal framework to be enacted for these new business vehicles should spell out as clearly as possible the extent of protection to be accorded a partner for any liability incurred by the LLP. The distinctions between different enterprise obligations should be highlighted at the outset: primary commercial liabilities in terms of ordinary contract debts incurred by the LLP. malpractice liabilities as well as general tort liabilities committed during the course of employment by a member of the LLP. A Commercial liabilities 5 Legislature has to determine whether a partner should be shielded from personal liability for the firm s ordinary business obligations (in much the same manner as the shareholders of a 7 8 See Ministry of Finance s press statement (on 18 June 2003) Public Consultation on Limited Partnerships and Limited Liability Partnerships ( The team has invited businessmen, professionals, academics and all interested persons to comment on its preliminary views. Ibid.

3 394 corporation). The original Texas legislation 9 which enacted the first LLP in the United States (US) provided only partial protection, 10 accordingly, members of Texan LLPs remained liable for the ordinary commercial debts 11 of their firms. Subsequently, a number of US states (including Texas as well) adopted a more expansive approach shielding the partners from the ordinary contract debts of their LLPs (much like ordinary business corporations). It seems that Singapore s policy preference is perhaps for the expansive protection - if so, this ought to be clearly indicated. B Malpractice liabilities 6 Malpractice obligations will undoubtedly constitute the central concern of many LLPs. After all, the galvanizing impetus propelling businessmen and professionals to opt for the LLP structure is the protection of the innocent partner from personal liabilities caused by any errant member s negligence, omissions or wrongful acts. 7 Of particular concern to the professional (when providing professional advice) is the controversy that arises when the partner himself has been professionally negligent in offering inaccurate advice. To what extent should he be liable for his negligent misstatement? This issue is mired in difficult controversies turning on whether the courts will regard the personal liability in tort of the LLP member as being in any way different from that of the company director The nature of the LLP will obviously have an impact on the extent of protection available. The two competing models of relevance to the present discussion are the US Delaware model 13 which regards the For a brief historical position of the US LLP, see Alberta Law Reform Institute, Limited Liability Partnerships Final Report No 77 (April 1999) pp Protects the other innocent partners of the LLP from malpractice liabilities (but not that of the firm s ordinary commercial debts). Tex Rev Civ Stat Ann, art 6132b-15 (West Supp 1998). See Alberta Law Reform Institute, Limited Liability Partnerships Final Report No 77 (April 1999) p 42. Since 1 January 1998, Texas has adopted the full shield approach; see art 6132b-3.08(b). As noted by G Morse in Partnerships for the 21 st Century? Limited Liability Partnerships and Partnership Law Reform in the UK [2002] SJLS 455. Under the Delaware Code (Title 6, Chapter 15, Delaware Revised Uniform Partnership Act), only a partnership may become an LLP; s (8) Delaware Code. The basis of the LLP is therefore the partnership; see R Wood, Limited Liability Partnerships (John Wiley & Sons New York, 1997) at 48. See also Alberta Law Reform Institute, Limited Liability Partnerships Final Report No 77 (April 1999) p 42 which suggests that the US LLP is best described as an ordinary partnership whose members are equipped with a liability shield.

4 15 SAcLJ Liability of Partners in a Limited Liability Partnership Regime 395 LLP as essentially a partnership 14 and the counterpart model in the United Kingdom (UK) which basically treats the LLP as a company. 15 Legislature ought to be clear about the choice of model to be adopted as the basis. Since a company is conceptually different from a partnership, the natural corollary may be that the adoption of the Delaware model should impel the application of partnership assumptions to an errant LLP member 16 whilst the adoption of the UK model ought to entail the application of company law presumptions. 17 The choice is likely to have significant impact on the liability of an errant professional partner s negligence in provision of service as will be subsequently discussed. 9 It is understandable for the public to expect that a partner engaged in the provision of professional services should not be protected from the consequences of his own negligence or misdeeds. This, in fact, is the prevailing position in most US states where LLP members are In general, the terms and conditions under which a partnership becomes a limited liability partnership must be approved by the votes necessary to amend the partnership agreement; s (b) Delaware Code. The partnership becomes an LLP upon filing a statement of qualification; s (8) read with s (d) Delaware Code. See Chapter 3 (entitled Forming the Limited liability Partnership ) of R Wood, Limited Liability Partnerships, (John Wiley & Sons New York, 1997). The UK LLP is a body corporate with legal personality separate from that of its members; s 1(2), Limited Liability Partnerships Act 2000, UK. The UK LLP comes into existence upon incorporation; s 2, Limited Liability Partnerships Act 2000, UK. Finch and Freedman have observed that in the debates on the 2000 Act, the Government saw the LLP as a new corporate form and as an exercise in company law rather than as a new variety of partnership to be read in the light of traditional partnership principles ; see V Finch and J Freedman, The Limited Liability Partnership: Pick and Mix or Mix-Up [2002] JBL 475 at 483. See also Alberta Law Reform Institute, Limited Liability Partnerships Final Report No 77 (April 1999) p 53. The LLP s separate legal entity means that it has its own rights and liabilities separate from those of its members. It is accorded entity treatment whilst a partnership that is governed by the provisions of the UK Partnership Act is generally treated as an aggregate of individuals. Note, however, the impending law reforms in general partnership law; in September 2000, the Law Commission and the Scottish Law Commission jointly published (see Law Comm Consultation Paper No 159 and Scottish Law Comm Discussion Paper No 111 respectively) a consultation paper on the reform of partnership law with reference to Partnership Act 1890 and the final report is expected shortly. A negligent partner would always be liable for his personal errant act under the general law of partnership. In addition, liability can also be imputed to the partnership if the act is authorised by the co-partners or committed in the ordinary course of business; see ss 10 and 12, Partnership Act (Cap 391). In company law, it would be difficult to impose personal liability on a negligent director unless some special relationship and assumption of responsibility can be proved. See Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; Williams v Natural Life Health Foods [1998] 1 WLR 830 (HL); and Noel v Poland [2001] 2 BCLC 645.

5 396 personally liable for their own wrongful acts in the provision of professional services. 18 Furthermore, many US states also impose personal liability on the LLP member for the wrongful acts of another partner or employee under his direct supervision and control. These issues ought to be specifically addressed by the Singapore legislature, - in particular, the various US approaches should be taken into consideration if Parliament chooses to follow the Delaware model to its logical conclusion. 10 On the other hand, the UK corporate model may lead to a more uncertain and open-ended conclusion. The problem there stems from the general law position arising from the case of Williams v Natural Life Health. 19 The tort of negligent misstatement pivots on the existence of a special relationship between the parties based on an assumption of responsibility by the tortfeasor towards the client. 20 The law now stipulates 21 that acting merely as a director of a company is not sufficient to give rise to such an assumption of responsibility. There must be something more. The question is whether the tortfeasor has assumed responsibility for the advice he provided. This also entails establishing whether the claimant had relied on the assumption and whether the reliance was, in fact, reasonable. 22 Will the Singapore courts regard the personal liability in tort of the LLP member as being in any way different from that for the company director? 23 The issue may hinge on whether the mere fact of having become a member of the LLP reflects that the partner wishes to hide behind the LLP as a separate corporate entity entailing an automatic non-assumption of personal liability Alberta Law Reform Institute, Limited Liability Partnerships Final Report No 77 (April 1999) p 45. See also para 4C, consultation paper Limited Liability Partnerships by Law Reform & Revision Division of Attorney-General s Chambers, LLRD No 3/2002. [1998] 1 WLR 830 (HL). See also subsequent cases like Merrett v Babb [2001] 3 WLR 1. This requirement was created in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. See Williams v Natural Life Health Foods [1998] 1 WLR 830 (HL); Noel v Poland [2001] 2 BCLC 645; and G Morse, Partnerships for the 21 st Century? Limited Liability Partnerships and Partnership Law Reform in the UK [2002] SJLS 455. Williams v Natural Life Health Foods [1998] 1 WLR 830 (HL); see also R Grantham and C Rickett, Directors Tortious Liability: Contract, Tort or Company Law? (1999) 62 MLR 133. For subsequent cases, see Noel v Poland, supra note 17 and Merret v Babb, supra note 19. As observed by G Morse in Partnerships for the 21 st century? Limited Liability Partnerships and Partnership Law Reform in the UK [2002] SJLS 455.

6 15 SAcLJ Liability of Partners in a Limited Liability Partnership Regime Instead of leaving the matter to general principles of law 24 (and hence creating uncertainty), legislature should indicate more clearly what impact the existence of the LLP is intended to have on the assumption of responsibility by any member acting or omitting to act. Returning to the Williams case (which involved a one-man commercial non-professional enterprise incorporated to take advantage of the corporate shield in a normal business setting), it is suggested that the professional LLP merits different treatment from the non-professional setting of Williams. The UK approach, if adopted, will be at odds with the US model. If CLRFC has recommended that the Singaporean LLP be modelled on the US Delaware Code, 25 the ensuing corollary would be that LLPs in Singapore bear more resemblance to partnerships (rather than companies), - accordingly, partnership rules ought to govern and negligent partners will then be personally liable under the general law of partnership due to the principle of joint and several liability. The Williams ruling (which is based upon a fundamental company law doctrine 26 ) should not be relevant to the LLP equation. Another reason for not preferring the UK approach is the likelihood of the negligent tortfeasor enjoying greater protection than originally intended by the LLP legislation or expected by the profession itself, 27 - indeed, any extensive protection accorded to an errant professional may also run contrary to public perception and expectation. 12 It is thus submitted that the US approach be followed in order to minimise doubt. There should be clarification (in no uncertain terms by statutory wording) that the liability of the professional LLP partner is not affected by the fact that he is carrying on that practice as a member or employee of the LLP 28 or that the personal liability for a partner s own negligence is unaffected by the existence of the LLP. As for the provision of professional services, there should also be clarification whether a member of the LLP is liable for the wrongful acts of another The Stationery Office s guidance note accompanying the UK Limited Liability Partnerships Act 2000 specifically stipulated that the case of Williams v Natural Life Health ought to be considered when determining the extent of personal liability for the economic loss ensuing from negligent misstatement; see S Cross, Limited Liability Partnerships Act 2000 [2003] JBL 268 at 276. Para 2.7 of CLRFC Report (supra note 5) indicates that the preferred model seems to be the US Delaware Code. See R Grantham and C Rickett, Directors Tortious Liability: Contract, Tort or Company Law? (1999) 62 MLR 133. V Finch and J Freedman, The Limited Liability Partnership: Pick and Mix or Mix- Up [2002] JBL 475 at 484. See Alberta Law Reform Institute, Limited Liability Partnerships Final Report No 77 (April 1999) p 46.

7 398 member or employee of the firm under the former s direct supervision and control. 13 Another suggestion for possible consideration is that professional firms with limited liabilities should be subject to higher mandatory insurance requirements than those imposed for the unlimitedliability firms. This may be viewed as quid proco: in exchange for the grant of limited liability status, some form of greater protection should be afforded to third parties dealing with LLPs. The question of insurance limit may be taken care of by the relevant professional bodies. III Conclusion 14 Increasing the number of options available for business vehicles so as to enhance the competitiveness of Singapore as a financial centre, is certainly a welcome proposition. It is hoped that granting limited liability status will not (unintentionally) cause the interests of third parties dealing with LLPs to be overlooked. Safeguards should be unambiguously put in place and not left vague or open-ended. YEO HWEE YING Associate Professor, Faculty of Law, National University of Singapore.