LIABILITY OF PARTNERS IN A LIMITED LIABILITY PARTNERSHIP REGIME

Published date01 December 2003
Date01 December 2003
I Introduction

1 In the wake of the 1997 Asian financial crisis, the Singapore Government announced in 1999 the formation of the Economic Review Committee1 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 convened3 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,

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 question8 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

corporation). The original Texas legislation9 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 debts11 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.12

8 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 model13 which regards the

LLP as essentially a partnership14 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 member16 whilst the adoption of the UK model ought to entail the...

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