Partnership lawyers are weighing up the pros and cons of using limited liability structures, reports Grania Langdon-Down


Converting to limited liability partnerships (LLPs) as a way of managing the risk of an Armageddon-type claim is dominating the agenda for many partnership lawyers.


But, as a practice area, there is more to partnership law than just LLPs, according to Ronnie Fox, partnership specialist at City firm Fox Williams and president of the Association of Partnership Practitioners (APP). ‘There is going to be a new Partnership Act to replace the Act of 1890. It will have a long gestation period, but it will involve quite large differences – partnerships will have separate legal personalities, and the default model will change,’ he explains.


‘There is also the current feverish movement of partners. US firms in London are recruiting very rapidly, and they want advice on how to deal with restrictive covenants and garden-leave clauses because they want to get people on board quickly.’


Richard Linsell, head of the professional practices group at US/UK firm Mayer Brown Rowe & Maw and an executive committee member of the APP, points to mergers and demergers – ‘last year, I did more demergers than mergers, though I don’t think it will be the same this year’ – as another busy area. It includes US firms merging with UK practices ‘because they don’t feel that lateral hires will get them to the platform they want quickly enough.


‘There are also tensions in the area of remuneration, and questions over whether lockstep is the way forward or whether some more merit-based system is more appropriate. That leads to partner performance, planning and reviews. There are also issues over governance and whether firms have got succession in place and whether they are attractive to younger partners who will come in and take the business forward which, in turn, leads to merger and demerger.’


However, some of the trickiest issues surround the growing trend towards LLPs. So far, more than 220 UK law firms have become LLPs since the Limited Liability Partnership Act 2000 opened the way. That is still only a tiny proportion of the 10,000 partnerships and sole practitioners in England and Wales, but the numbers taking the plunge each year are increasing significantly – from 30 in the first year to about 100 last year.


For Richard Turnor, also an executive committee member of the APP as well as being head of the professional practices group at City law firm Allen & Overy and a self-confessed ‘LLP freak’, guiding the practice to being the first magic circle firm to convert to LLP status was worth the ‘cost and hassle. It took 16,000 chargeable hours worldwide, which gives an idea of the effort involved. But it won’t be nearly so bad for others because they can learn from our experience and avoid going down blind alleys.’


Mr Turnor says the only reason to become an LLP is risk. ‘We are often advising on huge deals with other advisers, such as accountants who have capped their liability in a way we have been less successful in achieving, so you can effectively become the deep pocket. It is only a matter of time before a law firm gets a huge claim of the kind with which accountants are all too familiar. If you are an LLP, you are in a much stronger negotiating position.’


And he maintains: ‘If you are not an LLP in five years’ time, your younger or potential partners will be asking why.’


Dick Tyler, managing partner of City practice CMS Cameron McKenna, which has just converted to LLP status, says: ‘It is a time-consuming exercise and there are different views as to whether it is worth the effort.’ However, it is a ‘bit of insurance’ against the doomsday scenario – ‘though the protection it offers won’t be much consolation if you get to that point’. But it encourages good housekeeping and ‘life carries on as before’, he says.


The issue of transparency in filing LLP accounts has proved less of a concern than anticipated. Some firms have sought advice on whether they have to register members’ home addresses. A spokesman for Companies House says some law firms have successfully applied for confidentiality orders after the police confirmed there was a genuine risk to members in publishing them.


Another ‘fashionable’ topic for firms considering converting to LLP status is whether a practice that needs to borrow money can give the bank a charge over the business. Mr Linsell says: ‘I act for a bank that told several small and middle-sized law firms outside London that it would only lend with personal guarantees from the partners or with security over the LLP. The Law Society has very strict rules on who can have access to client files and who can sue on their debt, so the firms held up converting. However, in February that changed when the Society issued practice directions allowing LLPs to give a debenture over the business.’


For firms with international offices, there are tax complexities. Mr Turnor says the French currently treat LLPs as a corporate entity, which results in a ‘horrific’ tax charge for French partners, so some firms are waiting to convert because the French are expected to relax that view quite shortly.


For smaller firms, the Law Society proposal to change the insurance regime in October so that LLPs would have to have a minimum of £3 million qualifying insurance – compared to £2 million for regular partnerships – could prove a disincentive to convert.


While the main motive for becoming an LLP is to protect partners’ personal assets, the question of whether the personal assets of an individual employee or member responsible for the doomsday claim can be protected is still untested by the courts.


This is the key concern raised by firms contacting Chancery Lane, according to Chris Bramall, a policy consultant in the Law Society’s professional ethics department, who says: ‘The Law Society has done a lot of work on the legal and professional conduct aspect of limiting personal liability and the conclusion we have reached is “yes”, subject to a proper health warning that this doesn’t remove a client’s statutory rights.’


Mr Linsell has completed 50 LLP conversions, including the first law firm to convert – Kemp Little – and that of his own firm. He says that under the US LLP model adopted by Clifford Chance, it is written into the statutes that individual members are personally liable.


However, he says: ‘Here, the question was deliberately left open by the government for the courts to determine. I subscribe to the view that the law ought to be the same as that applying to piercing the corporate veil of a company and going after the individual director. However, each case will depend on its facts and I would say the smaller the firm and the smaller the client, the greater the risk because the personal reliance will be that much greater. If a little old lady in Rochdale, who has been with the same law firm for 30 years, relies on her personal lawyer and doesn’t understand what an LLP is, I think the courts will be more likely to break the veil than if it is a big corporate company signing us up as advisers.


‘However, we have included in our contract conditions express terms from the client saying they won’t sue the individual employee or member.’


The issue becomes increasingly complex for international firms because some offices, for instance in Hong Kong or Italy, have to remain partnerships because LLPs are illegal. Mr Turnor says: ‘Where you have a multi-jurisdictional transaction, you have to make clear in your engagement letters which entity is responsible for which bit of advice and consider how you can protect those still in the partnership element. We have developed a structure to try to preserve the “one firm” ethos, without creating a deep pocket, so they don’t feel hung out to dry.’


Peter Ashford, a partner with the professional practices group at Cripps Harries Hall in Tunbridge Wells, says: ‘Whatever you say or do, the law will always look at the question of personal liability in the round. We all put clauses in our contracts to protect individuals, but I don’t think they will be the absolute panacea.’


And when a claimant has an individual in their sights, one of the main problems would be how the other members stand behind that individual, he says. ‘The worst thing in the world would be to have individual contractual indemnity because that could suck everyone’s personal assets into the pot. What you need to do is either establish a discretionary trust, which could be used to support a member’s family, or to take out insurance.’


He adds that LLP members are not just at risk from claims by clients but also from non-clients, as former accountancy practice Binder Hamlyn found to its cost. One of its accountants was asked by the prospective purchaser of his client company if he stood by the accounts. When it turned out there were problems, his one-word answer across the table of ‘yes’ left Binder’s partners personally facing liability for any claim in excess of the firm’s insurance policy.


One way to get round that, says Mr Ashford, is to publish health warnings on advice that it should only be relied on by the client. ‘This sort of disclaimer is unfortunately becoming more and more prevalent. It is a sad reflection on society that we have to do this. It is like defensive medicine – one of the first things we are having to teach young lawyers now is how not to be sued rather than how to do a good job.’


Grania Langdon-Down is a freelance journalist