[For consideration by the Indemnity Insurance
Committee on 6 December 2004]
LIMITED LIABILITY PARTNERSHIPS
1.
Introduction
Following the IIC’s consideration of indemnity issues arising from Limited Liability
Partnerships (LLPs) in June 2004, the Indemnity Liaison Committee has asked for two
particular concerns to be readdressed:


the successor practice definition as it applies to LLPs; and
the position of qualifying insurers in respect of unpaid premium, particularly for
run off cover where an LLP ceases with no successor practice.
Qualifying insurers are concerned that an insolvent LLP, or one in financial difficulties,
is able to cease one day, resurrect the next and walk away from its liabilities. If there is
no successor practice run off cover would be triggered. The definition makes it easy
for an LLP to avoid being a successor practice, and insurers could then be obliged to
provide run off cover without premium as they have no recourse against the individuals
in the LLP.
2.
Limited Liability Partnerships
To recap briefly, despite the name, an LLP is not a partnership; it has members, not
partners; and partnership law does not apply. An LLP has a legal personality of its own
and one of the attractions of practice through an LLP is the protection it may give
individuals against the risk of a large claim falling wholly or partly outside the firm’s
professional indemnity insurance cover. Members of the LLP will not be liable for the
debts and obligations of the LLP (subject to certain statutory qualifications, particularly
sections 214 and 214A of the Insolvency Act 1986), and are protected from liability
attaching to them on a joint and several basis.
3.
Successor practice definition
3.1. If, when an LLP ceases, there is a successor practice within the definition, run-off cover
is not triggered. First, there must be a transition which results in the LLP no longer
being carried on as a discrete legal practice. If there is a transition, then it is necessary
to determine whether another practice is the successor practice. The definition in
clause 8.18 of the Minimum Terms and Conditions is as follows:
8.18 ‘Successor Practice’
Successor Practice means a practice identified in this definition as ‘B’, where (a)
‘A’ is the practice to which B succeeds; and
(b)
‘A’s owner’ is the owner of A immediately prior to transition; and
(c)
‘B’s owner’ is the owner of B immediately following transition; and
(d)
‘transition’ means merger, acquisition, absorption or other transition which results
in A no longer being carried on as a discrete legal practice.
B is a Successor Practice to A where -
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(i)
B is or was held out, expressly or by implication, by B’s owner as being the
successor of A or as incorporating A, whether such holding out is contained in
notepaper, business cards, form of electronic communications, publications,
promotional material or otherwise, or is contained in any statement or declaration
by B’s owner to any regulatory or taxation authority; and/or
(ii)
(where A’s owner was a sole practitioner and the transition occurred on or before
31 August 2000) - the sole practitioner is a Principal of B’s owner; and/or
(iii)
(where A’s owner was a sole practitioner and the transition occurred on or after
1 September 2000) - the sole practitioner is a Principal or Employee of B’s owner;
and/or
(iv)
(where A’s owner was a Recognised Body) - that body is a Principal of B’s owner;
and/or
(v)
(where A’s owner was a Partnership) - the majority of the Principals of A’s owner
have become Principals of B’s owner; and/or
(vi)
(where A’s owner was a Partnership and the majority of Principals of A’s owner did
not become Principals of the owner of another legal practice as a result of the
transition) - one or more of the Principals of A’s owner have become Principals of
B’s owner and (A)
B is carried on under the same name as A or a name which substantially
incorporates the name of A (or a substantial part of the name of A); and/or
(B)
B is carried on from the same premises as A; and/or
(C)
the owner of B acquired the goodwill and/or assets of A; and/or
(D)
the owner of B assumed the liabilities of A; and/or
(E)
the majority of staff employed by A’s owner became employees of B’s
owner.
Notwithstanding the foregoing, B is not a Successor Practice to A under paragraph (ii),
(iii), (iv) (v) or (vi) if another practice is or was held out by the owner of that other practice
as the successor of A or as incorporating A, provided that there is insurance complying
with these minimum terms and conditions in relation to that other practice.
3.2. There are therefore only two bases on which there can be a successor practice to an
LLP. Under sub-paragraph (iv) the acquiring practice will only become a successor
practice if the recognised body that is the LLP becomes a principal of the acquiring
practice. In reality, this seems unlikely and the more likely scenario probably is that the
LLP members would become principals of the new firm, rather than the LLP itself. The
only other way in which there can be a successor practice is under sub-paragraph (i) of
the definition by virtue of holding out, expressly or by implication, as being the
successor of the LLP or as incorporating the LLP.
3.3. At the moment there is a disparity between LLPs and partnerships. With a partnership
the definition allows for there to be a successor practice where there has been a
transition and, either the majority of the principals in the partnership join another
practice as principals, or where one or more of the principals join another practice as
principals and they meet one of the conditions set out in sub-paragraph (vi). The
qualifying insurers are concerned that there are no equivalent provisions in respect of
recognised bodies, so unless there is a holding out or the LLP itself becomes a
principal of the new firm, the members of the LLP can orchestrate the situation to leave
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most if not all of their liabilities behind them, including the liability to pay any
outstanding premium/run-off premium, They also believe that there is a greater risk
that run-off cover will be triggered upon the dissolution of an LLP as compared with a
similar dissolution of a partnership. The way in which the definition is currently worded
makes it very easy for an LLP to avoid being a successor practice, and the qualifying
insurers have asked if the definition can be amended to prevent this.
3.4. The reasoning behind the current definition reflects the fact that an LLP has its own
legal persona which had to be distinguished and recognised within the framework of
the definition. When the definition was looked at in 2000, there was no specific focus
on LLPs, but with the increase in their number, and the gap in the definition, it might be
necessary to reconsider whether the definition is acceptable. If the Committee is
minded to do this, legal advice could be sought from Norton Rose and eventually the
views of the Liaison Committee.
4.
Unpaid run-off premiums
4.1. Qualifying insurers have realised that if an LLP becomes insolvent, they cannot recover
premium from the individuals behind the LLP, as an individual member or shareowner
of the LLP has no personal liability for the LLP’s debts, unless bound by a personal
guarantee. Whilst rule 36 of the SIIR makes it a disciplinary offence for any firm or any
person who is at the relevant time a principal in a firm to be in policy default, and the
definition of firm includes a recognised body, it is not possible to discipline the
members of the recognised body for being in policy default, as they are not personally
liable for the debts of the LLP (which, from their perspective, is the point of the LLP).
When an LLP closes, if run-off premium remains unpaid, the debt would fall to be paid
as part of the LLP’s estate, and it would be the responsibility of the administrators to
discharge it (out of the estate of the LLP) rather than the members Arguably therefore
any disciplinary offence committed by a member by non-payment of any outstanding
premium after the date of insolvency may be technical in nature given that liability for
payment rests with the LLP and the administrators rather than with the individual
members, and as a member has no civil liability to pay, it is hard to see how to make it
a disciplinary offence. By contrast, in the case of an unincorporated partnership all
partners would be jointly and severally liable for sums due under the policy.
4.2. Some qualifying insurers are already considering declining to insure LLPs unless they
can secure a letter of credit or personal guarantee from all the members of the LLP.
Some of the larger LLPs have indicated that they would be extremely reluctant to give
such guarantees. Nor do they see why they should be required to do so when they are
not required to give similar security to their banks or landlords. LLPs may well find it
increasingly difficult to obtain qualifying insurance. The question is whether anything
needs to be done. Putting LLPs on a par with unincorporated partnerships when it
comes to succession may alleviate the problem. On the other hand, like any other
unsecured creditor in a commercial world, qualifying insurers can require the members
of LLPs to provide give personal guarantees in respect of run-off (or other) premiums.
Whilst that practice may be disliked and may perhaps lead to a restriction in the
market, it is a matter of choice for the members of the LLP whether or not to accept
such terms.
5.
Recommendation
Previously, the Committee expressed differing views- LLPs should not be treated
differently to partnerships, but, on the other hand it would not be right to put barriers to
LLPs in the form of issues such as this, as there was a business need for them; it
seemed wrong that a successor practice could have some liability for run off premium,
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yet the members of the LLP had none; changing the definition of successor practice
would have practical problems; whilst the definition had been retrospectively applied in
other cases, and a date specific limb could be added into the definition, overall, a
change would knock a hole in limited liability. It was agreed therefore to make no
change, although it was recognised that insurers might choose to not offer cover to
LLPs, or, if they did, the premium set might be at a level to reflect the insurers’ disquiet.
The possibility of increasing the indemnity limit to £2m is under consideration. If this is
increased and it is felt that there is merit to the insurers’ concerns, consideration could
be given to removing the differentiation for LLP then.
The Committee is invited:
(i)
to consider whether the definition of successor practice should be amended
so as to make sub paragraphs 8.18 (v) and (vi) of the MTC applicable to
recognised bodies; and
(ii)
to express its views on the non payment of premium issue highlighted by
the qualifying insurers.
Director of Regulation: Stuart Bushell
Committee Secretary: Andrew Darby
Author:
Sharon Nightingale
Date:
24 November 2004
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