LIMITED LIABILITY PARTNERSHIPS BILL

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LIMITED LIABILITY PARTNERSHIPS BILL: Order for Second Reading read.

The Acting Second Minister for Finance (Mr Raymond Lim Siang Keat): Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill before the House seeks to introduce a new business structure called Limited Liability Partnerships, or LLP in short.

Currently, the company is the only business structure in Singapore which offers limited liability for its owners, ie, the shareholders.

In October 2002, the private sector-led Company Legislative and Regulatory Framework Committee, or the CLRFC, recommended the introduction of the limited liability partnership business

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structure as an additional business form for Singapore. LLPs are already a well-known concept in other leading jurisdictions such as the United States and the United Kingdom.

After extensive public consultation, the Government decided to accept the Committee's recommendation to introduce LLPs in Singapore. The introduction of LLPs demonstrates the Government's resolve to ensure that Singapore always remains responsive to changing business needs.

The LLP, as its name implies, is essentially a partnership with limited liability. The LLP structure gives businesses the option of becoming a limited liability entity with the internal flexibility of a partnership. An LLP is a separate legal entity from its partners, meaning that it will be able to enter into contracts, hold property and exist independently of changes in its partners.

The LLP gives its partners the flexibility of limited liability compared to none for usual partnerships but yet with less onerous reporting requirements than companies. However, this comes with safeguards in the LLP Bill to minimise abuse and protect the LLP's other stakeholders.

While an LLP gives the benefit of limited liability to its partners, the LLP itself will be fully liable to its clients for the actions of its partners. Claims can therefore be made against an LLP to the full extent of its assets. Also, if a partner is negligent, claims for losses resulting from his own negligence can be made against him and his personal assets. The LLP only protects "innocent" partners from personal liability for the negligence of other partners. The "innocent" partners' liability is limited only to the amount that they have contributed to the LLP. The Bill requires the name of an LLP to contain the words "limited liability

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partnership", or the acronym "LLP", so that the status is clear to those who transact with it.

An LLP is not required to file its accounts or have them audited, nor does it need to disclose its capital. The Bill, however, has several safeguards to protect creditors' interest. An LLP is required to declare its solvency status annually, and to keep proper accounting records so as to enable true and fair views of financial statements to be prepared. The Registrar of LLPs is empowered to require the LLP to produce the accounting records for inspection where appropriate. In addition, all LLPs must have at least one locally resident manager whose responsibilities include ensuring that such requirements are satisfied.

The LLP has features to ensure equity in the treatment of creditors in the event it is wound up. The Bill provides a structured winding up process, modelled after the Companies Act, where an independent party, namely the liquidator, will objectively collect all assets and distribute them fairly amongst the creditors. To prevent partners from siphoning off funds, the Bill provides that, if a partner receives a distribution from the LLP when the LLP is insolvent or which results in the LLP becoming insolvent, the LLP is allowed to "claw back" the amount distributed if the distribution occurred within a period of three years preceding the commencement of the winding up of the LLP. This safeguard is unique to LLPs. Other safeguards include the provision that partners can be held personally liable for the debts of the LLP if they carried on the business of the LLP with intent to defraud creditors.

The LLP partners can be disqualified from being managers of an LLP and from being a company director. Also, a person who receives a disqualification order from the High Court under section 149 of the

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Companies Act will automatically be disqualified from managing another LLP or company during the period of the disqualification order.

Sir, I shall now briefly touch on some of the other provisions in the Bill. The Bill provides that the Accounting and Corporate Regulatory Authority, or ACRA, shall be responsible for the administration of the Bill. It also provides for the appointment and duties of the Registrar of Limited Liability Partnerships.

The Bill requires that every LLP shall have at least two partners at the point of registration. The LLP and its partners must be registered at ACRA.

To facilitate partnerships and private limited companies who may wish to convert to LLPs, the Bill sets out a conversion process which may be used by such partnerships or companies if they wish, whereby the properties, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the partnership or company may be transferred to the LLP under the conditions set out in the Second and Third Schedules.

Sir, the creation of the LLP business vehicle will increase the options available to businessmen and investors. It is consistent with our overall policy in Singapore to make it a progressive and preferred place for business.

Sir, I beg to move.

Question proposed.

Dr Ahmad Mohd Magad (Pasir Ris-Punggol): Mr Deputy Speaker, Sir, thank you for allowing me to start the debate on the LLP Bill. I would like to first declare that I am a member of the Accounting and Corporate Regulatory Authority (ACRA) Board which, as the Acting Minister has just announced, will be

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tasked as the regulatory board to administer LLPs upon enactment of the LLP Bill into law.

I am heartened that the Company Legislative and Regulatory Framework Committee initiated the formation of a study team with a view of introducing LLPs as a new business structure to fill the gap between business firms such as sole proprietorship and partnerships, and private limited companies which are governed by the Companies Act. In addition to an alternative business structure, LLPs accord businessmen and investors with limited liability, privacy as their accounts are not required to be publicly filed, and tax transparency as the partnership would be a separate legal entity from its partners. The absence of filing requirements and mandated company secretariat, as in the case of private limited companies, also means lower compliance costs. What is also interesting is the provision for a seamless conversion from general partnerships or companies to LLPs or vice versa.

Sir, broadening the business structure options to the business community would certainly encourage existing businesses to stay rooted while attracting new businesses, both local and foreign, to be created here. Feedback I received from various sources has been favourable, with many keenly awaiting for the passage of this Bill. While I applaud the Ministry of Finance's timely move in introducing this Bill, which will enable us to keep pace with countries such as the United States, the United Kingdom and Australia, I would like to raise several concerns and issues for the collective benefit of the business community.

First, Sir, is the provision of a grace period of up to two years for a sole remaining partner to find another partner,

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failing which winding up proceedings will commence. I feel this duration is excessive and may be subject to potential abuse. One partner may deliberately leave after a short time of incorporation to make way for the surviving partner to run the business behind the veil of limited liability for a much longer period than necessary. While it could be argued that the Companies Act now allows the registration of private companies with one director and one shareholder who need not be a different person, it has to be borne in mind that a one-partner LLP is a legal misnomer which is not in line with international practices. As such, I would like to suggest the following approach for the Minister to consider: Should the vacancy in a two-partner LLP arise from the resignation of one partner, the surviving partner should be required to resolve the partner vacancy within one year. However, should the vacancy

result from death of one of the partners, then the grace period of up to two years, as provided for in the Bill, applies. This would help in preserving the credibility of LLPs and prevent those desirous of establishing LLPs from taking advantage of such loopholes. The aim is also to induce a sense of urgency in resolving the remaining partner's vacancy.

Let me move to my second point. Since LLPs are not required to prepare, file or have its financial statements audited, other than just declaration of solvency or insolvency to the Registrar of LLPs annually, I am concerned that this may place unwary creditors in a position of high risk. While it is understood that some of the key objectives of creating the LLP structure is to confer limited liability on owners of firms and also to lower compliance and maintenance costs for businesses, a fair balance needs to be struck between meeting these objectives and protecting creditors and customers of LLPs. I would like to suggest that a form of monitoring and surveillance system be developed by ACRA, the regulatory body

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in this case, to ensure that LLPs maintain an annual set of financial statements and records that properly reflect a true and fair state of affairs of the business and that these are readily accessible in the event of a dispute arising between the LLP and its creditors. A monitoring and surveillance system would help in ensuring that LLPs become more compliant in properly declaring their state of solvency or insolvency.

To facilitate a conversion to an LLP, this Bill provides that whenever a partnership converts to an LLP, all the properties and assets that are vested in the partnership would be deemed to vest in the LLP. In addition, all the liabilities and obligations of the partnership would be transferred to the LLP. I believe this is fair. However, the Bill is silent about allowing changes, such as adding new partners or relieving existing partners, and restructuring the assets during the conversion stage. If there is no provision for such changes at the conversion stage, I would like to propose that such flexibility be permitted to allow the entities to make the necessary adjustments at the stage of conversion to an LLP.

Further, on the point of the conversion process, the Bill is also silent on payment of stamp duty. I am of the view that a change of an existing partnership to a limited liability partnership should not attract stamp duty as it is merely a change in the legal status of the business structure. It would also be contradictory to the seamless conversion process envisaged in the Bill. However, if stamp duty is considered necessary, I feel that existing partnerships should be given a sufficient window period, say, 1-2 years for the settlement of stamp duty, considering that larger partnerships would likely take a longer period of time than smaller ones.

My next point pertains to clause 9 of the Bill. According to this clause, an LLP

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is not bound by anything done by a partner in the circumstances provided for by the Bill. In this case, I believe an aggrieved party could not initiate legal proceedings against the LLP. Considering that the aggrieved party's course of action is only against the partner he had dealt with, what happens if the partner is a bankrupt? This is by virtue of clause 12 which provides that a bankrupt could still be a partner of an LLP, unlike a bankrupt who could not be a director of a private limited company. It is legally impossible and practically pointless to sue a bankrupt. Where is the protection for the aggrieved party in such situations?

In regard to the liability of an LLP partner, while a partner would not be personally liable for the malpractices of other partners in the LLP, the Bill is unclear whether a partner who is negligent and fraudulent is subject to unlimited personal liability according to the general principles of law, or whether his liability is limited to his capital contribution. I would appreciate it if the Minister could clarify this.

In conclusion, Sir, LLPs are likely to be embraced by many partnerships for the benefits they confer, especially that the move involves little cost. Many businessmen and entrepreneurs have also mentioned that the new business structure is more attractive for those who wish to limit their personal liability.

Similarly, foreign companies would welcome a wider variety of business structures and legal vehicles to choose from when they consider investing in our country. Providing this additional LLP option is another important step in our endeavour to make Singapore the best place for business.

Considering the fact that we are progressively moving up the technological and innovation ladder, and also the intense dynamics of the global business

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environment that we operate in, where rules and laws are frequently reviewed and revised to suit changing business needs, it is imperative that we, too, must be prepared to do likewise in periodically reviewing our policies and regulations to keep ourselves relevant.

On that note, Sir, I support the Bill.

Dr Wang Kai Yuen (Bukit Timah): Mr Deputy Speaker, Sir, to-date, the Singapore legal system recognises just two categories of business entities, namely, companies and partnerships. Partnership, the last innovation in business legislation under the common law, was introduced in 1907 when the Limited Partnerships Act was enacted in Britain. Thus, for close to a century, a firm could choose between being a company or a partnership. A company is the preferred choice if one wants a good split between ownership and management. On the other hand, a partnership is the route if one wants greater flexibility in arranging the internal affairs of the business and does not mind unlimited liability. As the Minister has said, so far, only a company, either a private limited company or a public company, offers the directors or shareholders limited liability. Sir, for the past century, this has been the legal framework of businesses. So, as a result, the whole culture of how business is transacted has evolved around this legal framework. The public understands the pros and cons when they enter into a relationship with a business entity, be it a company or a partnership. Thus, when we create a new entity, the Limited Liability Partnership, we need to bear this in mind. We are not just introducing a new entity, we are actually introducing a whole new culture, and by this legislation, people would have to take on a new culture in doing business. Sir, when

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changing culture, this House should take great care because the instincts of people could not be changed overnight, while the law could be implemented overnight.

Sir, let us look at the concept of LLP and how it came about. The concept of LLP was invented in Texas in 1991, not too long ago, just 13 years ago, as an alternative to an ordinary partnership, in which innocent partners were shielded from the vicarious personal liability for malpractice liabilities of the firm. Thus, an individual partner of the LLP would not be liable for claims against the firm arising from negligence or other forms of malpractice, unless the partner was personally involved in the negligence or malpractice. Sir, we must bear in mind that this concept was introduced at a time, and in a country, where litigation, as well as damages awarded by the courts, was increasing at an alarming rate. This concept in the US proved to be very popular and most states in the US have such legislation by the end of the decade, whereas UK only implemented its LLP Act in 2000. When the UK Labour Government introduced the Bill, being a pro-business Bill, some of the Labour MPs asserted that it was the outcome of the lobbying effort of the big accounting companies.

Sir, in Singapore, litigations involving malpractices of partnerships are rare, in fact, very uncommon. Thus, this could not be the reason for introducing this Bill in this House. It is true that when this legislation is implemented, it would help small partnerships to resolve the age-old problem of one or more partners retiring. It is also true that this legislation would provide a new platform to launch many more new businesses. But I believe the major beneficiary of the LLP Act would be the big accounting companies or other existing professional services partnerships. Therefore, in examining this Bill, I am particularly interested in the safe

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guards for the clients and suppliers of the existing partnerships which would take the opportunity to convert to LLPs.

So, therefore, this leads me to a key question. The question is: is LLP closer to a partnership or a company? The Minister has mentioned that it is more like a partnership, except it has limited liability. But if you look at it more carefully, while partners of LLP would be free to make arrangements amongst themselves much like a partnership, the LLP itself would be a separate legal entity owned by the partners. Thus, it would be able to enter into contracts, hold properties and continue to exist independently of changes in the membership. Thus, in many respects, LLP is more akin to companies than to partnerships. In fact, in some jurisdictions, the participating legal persons involved are referred to as "members" and not as "partners", to distinguish the differences unambiguously. Therefore, personally, in fact, I would prefer the drafter of the Bill to use the word "members" instead of "partners" in this Bill.

Sir, I would also like to deal with the fundamental roles and responsibilities between two parties in a business transaction. Under the common law system, limited liability granted is a privilege. It tilts the balance between two parties towards the one with limited liability. Also, with privilege come responsibilities and one of these responsibilities under the common law is the requirement to disclose the soundness of the finances so that the other party could make a sound judgment and decision. Thus, companies with limited liability are required to disclose their financial status. On the other hand, partnerships with unlimited liability have been free to keep the internal financial status to within the partners. Thus, in creating the new entity, it is important that the law be drafted so that, as the Minister has also mentioned, this privilege is not abused.

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We need to strike a proper balance between privilege and disclosure. In this Bill, clause 24 imposes a requirement for the LLP to lodge an annual declaration of solvency. So the question we should ask is whether this requirement is striking a proper balance. However, there is no definition in the Bill about what is considered solvency. Someone reading the Bill might say that being "solvent" is "the ability to pay bills", or for the annual declaration of solvency, maybe at the end of the year, one might have a positive balance in the assets. And a positive balance could be as little as $10 or $100. So I feel that solvency is not the same as the declaration of assets and also the liabilities of the LLPs. Since an LLP is more akin to a company, I personally would like to see the same disclosure requirement that was required of a company as provided for under the Companies Act. When UK implemented its LLP Act, this was what was required. In other words, disclosure of the LLP is more in line with that required of a company.

Sir, another major consideration is the quality of service provided by the LLP. With unlimited liability, the perceived assurance was that the partners in a partnership would work out a very rigorous system of check and counter-checks to ensure quality of service provided. Indeed, it was a great privilege to the professional to be invited by the partnership to be a partner. Hence, the existing partners would screen the aspiring newcomers vigorously. For the prestigious partnerships, the tutelage could be long and the screening process exhaustive. Thus, the public, in dealing with a partnership, has this assurance of the quality of work performed by a partner, in fact, any partner within a partnership. In creating an LLP, this House should be assured that the quality of work would not be compromised, in particular, when existing partnerships are converted to LLP as provided in this Bill.

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A consequential question would be the question of damages. In a partnership, the aggrieved party could take any of the partners to court to seek damages suffered as a result of poor advice or malpractice. When an existing partnership is converted to an LLP, this sense of protection will go away. Would the Minister consider, for instance, making sure that the converted LLP charge less for the same service it provided before the conversion? Because the nature of the transaction has changed. Alternatively, would the Minister consider requiring the converted LLP to carry the relevant insurance so that third party's interest of the transaction could be protected? Because, once the conversion is over, the unlimited liability would also go away. In fact, in some jurisdictions, requiring the converted LLP to carry insurance is part of the total package.

Sir, as the Minister has pointed out, the LLP concept has been well tested in the US and the UK. The drafter of this Bill has done a very thorough job scanning the legislation of those countries that have enacted similar legislation. Hopefully, this Bill has taken into consideration the lessons learned elsewhere. Therefore, a question I would like to ask is whether this Bill is self-contained in its entirety and could function well as a single source of legislation for the LLP. Or do we need to amend other legislation, such as the Companies Act, and other related laws to make the LLP concept function appropriately? The Sixth Schedule of the Bill lists the consequential amendments to other laws in Singapore. But reading through it, I gained the impression that they are mostly amendments of a typographical nature to include the LLP concept. It seems to me that when the UK enacted the LLP Act, various regulations were introduced, including a requirement for financial disclosure equivalent to that required of

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companies, which I have mentioned earlier, the provision that partners of an LLP can be sued for wrongful or fraudulent trading, and the provision that partners can be disqualified from being partners of an LLP and company directors. The UK also amended the Insolvency Act of 1986 to include a measure that would deter partners of an LLP from siphoning off funds to the detriment of creditors.

Sir, the other aspect is that up to now, our discussion and deliberation leading to this Bill have been mostly focused on professional partnerships. However, in the United States where LLPs have existed for some time, the LLP structure is increasingly used for joint ventures, such as those between manufacturing companies. In the US, there are many advantages, especially when non-US international companies come together to establish a new joint venture in the locale. The structure offers relatively favourable tax advantages, as compared to the traditional companies. Thus, the US experience shows that LLPs could be a new vehicle for entirely new enterprises, which the LLP drafters might not have anticipated.

Singapore is a regional hub. Would the new LLP legislation create new niches for foreign professionals or even foreign LLPs in the legal and accounting professions to enter into the Singapore market? As a partner in an LLP could be an individual or body incorporate - foreign ones included as provided for under clause 7 of this Bill - this could throw the whole field of local professional services open to foreign competition. So, in proposing this Bill, I hope the Minister has taken into consideration the American experience. There should not be unexpected consequences flowing from the Bill if the LLP structure is applied beyond the professional partnerships.

Sir, after the Act is enacted, customers and suppliers of the LLP must be made aware of the nature of the new

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entity they are dealing with. I urge the Ministry to conduct an exercise to educate the public regarding LLP. We should ensure that LLP should not be confused with any other abbreviation, such as the LLB, which is Bachelor of Laws, or the Taiwanese version of abbreviations. I would suggest that the Ministry make certain regulations to ensure that LLP be displayed prominently in all business letters, just like the requirement to display company registration number. Furthermore, until the public is conversant with the LLP abbreviation, maybe the full text of LLP, ie, Limited Liability Partnership, should be used in business letterheads.

Sir, the creation of limited liability partnerships does add to the variety of business entities available to those wishing to set up business in Singapore. Firms will now have the option of becoming a limited liability entity with the internal flexibility of a partnership. Taking everything into consideration, such a new business environment would only be a positive step for Singapore.

Sir, I support the Bill.

Prof. Ivan Png Paak Liang (Nominated Member): Sir, I rise in support of the Bill. However, I would like to share a concern with the Minister and hope that it can be addressed.

I understand that in the United States and in the UK, a key attraction of a limited liability partnership is its flexibility as a way of minimising taxes. This has already been mentioned by Dr Wang Kai Yuen. I would like to emphasise this point. In particular, partners may write off partnership losses against their personal income. Roughly speaking, this would also be true of our proposed LLP.

Now, the Bill provides for transition from partnerships to LLPs and from companies to LLPs. If investors choose LLPs over partnerships, there will be no

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tax revenue loss because any opportunity they had as a partnership would be available with LLPs. However, if investors choose LLPs over the limited company form, our tax revenue will be diminished. Shareholders of companies may not write off the company's losses against their personal income. But, as I have just said, LLP partners or members may write off partnership losses against their personal income. So, our Inland Revenue Authority is going to lose revenue.

As Dr Wang Kai Yuen has mentioned, the LLP form will probably not only attract professionals such as accountants and lawyers, but it is going to attract regular business like manufacturing, services, not just professional services. So the scope of this tax law is much wider than we might have thought initially.

Sir, one of our competitive edges as an economic hub is the simplicity of our tax system. We offer a simple system with very low rates; made even simpler when recently we rescinded taxation of shareholder dividends. I do hope that we do not graduate to a "first-world" system of high tax rates with complicated deductions and reliefs that would benefit only a selected group of taxpayers. I would like to ask the Minister what measures have been taken or are contemplated to void the LLP becoming a tax shelter.

Mr Raymond Lim Siang Keat: Mr Deputy Speaker, Sir, I thank the Members for their support and the comments that they have made. I would like to thank Dr Wang Kai Yuen for an erudite exposition of the history of LLP and the various issues involved. And Dr Ahmad Magad who anticipated my speech on the Stamp Duties Act, because he has raised an issue which actually relates to the Stamp Duties Act, and I commend him for that. I will also address that here. And, of course, Prof. Ivan Png who actually brought up an issue which we discussed

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last November. So we have a spectrum of issues here.

Dr Ahmad Magad brought up the issue of whether two years is too long a grace period in the case where there is only one remaining LLP partner. Like what Dr Wang Kai Yuen has said, we had extensive public consultation on this. What is interesting is that the public feedback was: is it too short? Their consideration was that when we do international benchmarking, the US Delaware model is the most popular model, and there when they are down to one partner, they do not get deregistered. They remain an LLP. So it is a one-partner LLP; in other words, it is for an indefinite period. So we use that as one particular benchmark. The UK has it as six months. Some say that it is a bit too short.

So, based on consultation, we decided that, as the Member has pointed out, it is really a misnomer to have an LLP with only one partner. The common understanding of a partnership is a voluntary association of two persons coming together to set up a business for profit. That is why we have a two-partner LLP. Once we settle on that and we have a two-partner LLP, what do we do then when we are down to one partner? So we need to give a grace period. The key thing is to ensure that there is sufficient time for the remaining partner to find someone else. We were told that one consideration is that sometimes it takes more than six months, when it comes to a partner who is deceased, for the Letters of Administration or Probate to be done. So, on balance, we said, let us give them two years to find a partner or wind up the LLP.

Dr Ahmad Magad also brought up the point about the liability of partners and

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asked for clarification. On the liability of partners, when a partner is personally liable for a wrongful omission or act, he is not limited to the capital contribution. This means he is personally liable to the full extent of his net worth. So, if a partner is professionally negligent, he is personally liable. So it is not limited to his contribution.

The LLP itself will also be liable for the partner's act. It is only the innocent partner, like I mentioned in my speech, who will not be held liable. The fact that a person is a partner in an LLP does not make him personally liable for the actions of the other partner who has committed a wrongful omission or act.

The Member asked why is there clause 9. The reasoning behind clause 9 is that the LLP should not be bound if a partner has no authority to act in a particular matter. I think that is quite reasonable. We should not bind the LLP if a partner has no authority on that particular matter.

Dr Ahmad Magad also brought up the point about conversion, which I said he anticipated in my next speech on stamp duties, but I will take it here. He is quite right that when it comes to conversion, what we have done is that when a general partnership is converted into an LLP, with the same partners and the same business, we will provide a seamless conversion. So all the assets and liabilities will be vested in the LLP.

On the issue of stamp duties, we have made a concession. In such a conversion and the LLP has chargeable properties, the stamp duty would be waived.

Dr Ahmad Magad and Dr Wang brought up the issue of creditors' interest, that we should protect creditors, given the fact that we are now giving partnerships limited liability. This is a valid concern and we took that into

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account. Whenever we have a new business form, we have to strike a balance between the users of the business form - owners, investors - and those who are dealing with it - the creditors, suppliers, customers, clients. We have to balance it. And when we want to strike a balance, we reference it back to the objective of this new business form. As I have mentioned, the objective of this new business form is to have the flexibility of a partnership with the inter-position of limited liability. So we have to ensure this, when we are striking a balance. As Dr Wang has said, we did a thorough scan of all the different legislation on how best to balance this. We wanted to make sure that we do not increase the business compliance cost or introduce a lot of features of a company into this structure, which will then defeat the whole idea of having a partnership, and we had to balance it, as both Members correctly pointed out, so that there are sufficient safeguards to protect creditors. I have mentioned earlier some of the safeguards

that will be put into the Act.

Dr Wang asked whether there is a definition of declaration of solvency in the Bill. There is, if you look at clause 24 of the Bill which defines what it means by that - that you should be able to pay your debts over the normal course of your business. So it gives a sense of what it means. To give a sense of perspective on this too, is the declaration of solvency enough? He said we are transiting from general partnership and now we have limited liability partnership. If you look at what is happening in Singapore today, it is not really difficult to get limited liability. Most companies in Singapore are exempt private companies and they do not file their accounts if they can have a declaration of solvency. Partnerships today, like legal firms or accountancy firms, can form themselves into a limited law corporation or a public accountant

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corporation. And, again, the reporting requirements are not much different from what we have in the LLP.

Dr Wang brought up the point - I think this is an important point - that notification is important. Now that there is going to be limited liability, we have to notify. And the Bill provides that, in your name or the partnership, you have to put down "limited liability partnership" or "LLP". In the case of a conversion, ie, when you are converting from a general partnership into an LLP, for a period of one year, in all your official correspondence you must state that you have now been converted into a limited liability partnership, so as to put those people who have been dealing with you on notice.

Dr Wang raised another point. He said that he was concerned whether with this limited liability partnership, the quality of the legal profession or accountancy profession will start to fall. I think that there are incentives to maintain high standards. One of them would be the fact that the limited liability partner would still be personally liable for his wrongful acts or omissions. So it is not as though that with limited liability partnership, when he is professionally negligent, that is actually capped. It is not capped. So, as I said earlier, he is liable to the full extent of his net worth. The other thing, of course, is that the LLP is simply a business form, a vehicle. The relevant professions will continue to regulate to ensure that standards are maintained. He mentioned the legal profession. That, again, the relevant authorities will regulate them.

What about having insurance? This is again a compliance cost issue, and we think that we have sufficient safeguards. No jurisdiction has imposed insurance on LLPs.

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Dr Wang asked why is it that in the UK LLP Act, they made references to the Companies Act, and not in our case. We have drafted it differently. We have drafted it as self-contained, as he said, all in, whereas in the UK, their starting point is that the LLP is a company, and therefore they made a lot of references to the Companies Act. In our case, as I said, we have treated the LLP as essentially a partnership; hence the difference. And why have we done this? It is because we scan the existing LLP structures to ensure, in terms of business efficacy, we do not make the same mistakes as others have made. The feedback has been that the UK LLP Act has been criticised because it is too close to being a company.

Prof. Png brought up basically the point about tax treatment. As I said, we actually addressed that in the House last November. But just to clarify that, if you look at it at one particular level, this is really a timing issue. Because right now what we have is part of our tax feature, that companies can carry forward their losses against future profits. So, in the case of the LLP, we allow the particular LLP partners to offset their losses against their non-LLP income. So there is a cap, but you bring it a bit forward. Future losses can be offset against future LLP income. So it is principally a timing issue.

I thank Members once again for their contributions and support of the Bill.

Dr Wang Kai Yuen: May I seek a clarification from the Minister? Regarding the personal liability of a partner who is personally liable for malpractice or fraudulent act, the Minister has mentioned that the partner is personally liable and there is no cap. However, to bring that partner to court, I understand that he or she would have to be prosecuted under a different set of law, and probably the law

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of tort, which requires a different onus of proof, and makes it much more difficult to pursue the wrongdoing, whereas under partnership, of course, those do not exist. In creating LLP, perhaps we could also look into this consideration.

Mr Raymond Lim Siang Keat: Yes, the LLP provision is simply, as I said, forming a business structure. So, in terms of legal liability, professional negligence, he is quite right, it is under the law of tort. I think, similarly, in a general partnership, and it is not an LLP, if a particular partner is professionally negligent, again it is under the law of tort. The only difference now is that in an LLP, the other partners are not personally liable for your actions.

Prof. Ivan Png Paak Liang: Just a clarification from the Minister. It is not just a matter of timing because, as the Minister pointed out, the losses of the LLP can be written off against personal income. So, if you take two vehicles, a company that is sustaining losses that is going to go under and an LLP which is sustaining losses, someone may buy the LLP just for the losses to write off against their income, then it is not just a matter of timing, there is actually a revenue loss.

Mr Raymond Lim Siang Keat: Yes, that is why we cap it at the capital contribution. He is quite right that this is a possible tax avoidance issue, and the way we have tried to address that is to put a capital contribution cap on that. But this is something that we will monitor, because this is a new Bill, and we will look at developments and, if we need to, we would tighten it. From the revenue perspective, I am reluctant to facilitate tax avoidance schemes. So if this is the case, we will tighten it up.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

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The House immediately resolved itself into a Committee on the Bill. - [Mr Raymond Lim Siang Keat].

Bill considered in Committee.

[Mr Deputy Speaker in the Chair]

The Chairman: The citation year "2004" will be changed to "2005" as indicated in the Order Paper Supplement.

Clauses 1 to 61 inclusive ordered to stand part of the Bill.

First to Sixth Schedules inclusive ordered to stand part of the Bill.

Bill reported without amendment, read a Third time and passed.