1 Briefing Session on LLPs Briefing Session on LLPs 3 February 2016
Background • Law firms in Hong Kong currently operate, other than sole fi i l h h l proprietorships, as partnerships with joint and several liability as provided under the Partnership Ordinance • Limited liability partnership (“LLP”) is a special type of partnership for la partnership for law firms in Hong Kong firms in Hong Kong • The innocent partners of the LLP who are not in default are p generally speaking protected from partnership obligations that arise from the provision of professional services by the LLP as a result of a default of the other partners of the firm as a result of a default of the other partners of the firm. 2
Form • LLPs are in the form of partnerships. • Hence, the Partnership Ordinance, Cap 38 and every other law that applies in relation to a partnership, unless they are inconsistent with the Amendment Ordinance will apply to inconsistent with the Amendment Ordinance, will apply to LLPs. • L LPs are not limited partnerships formed under the Limited Partneship Ordinance, Cap 37. 3
Status and Commencement • An LLP, being a partnership, does not have a separate legal entity status. p g y • The Amendment Ordinance for setting up • The Amendment Ordinance for setting up LLPs will come into operation on 1 March 2016 2016 4
Protection • An innocent partner of an LLP is not jointly and severally i f i j i l d ll liable for the professional services defaults (i.e. professional negligence) of another partner of the LLP (S 7AC(1)). g g ) p ( ( )) • However, if the partner knew of the default at the time of its occurrence and failed to exercise reasonable care to prevent its occurrence or if the default is the default of the partner himself or an employee /agent/representative of the LLP p y g p under his direct supervision (in which case he will be vicariously liable), then he will not enjoy any LLP protection (S 7AF(1)(2)) protection.(S 7AF(1)(2)) 5
Protection (OSP Requirement) • Further, to prevent any attempt by partners of an LLP to avoid liability by partners of an LLP to avoid liability by not supervising the professional services services at at all all, the the Amendment Amendment Ordinance provides for at least one overall supervising partner (“OSP”) ll i i ( ) requirement. (S7AE(1)) 6
Protection (OSP Requirement) To enjoy LLP protection one of the conditions is to To enjoy LLP protection, one of the conditions is to comply with the OSP requirement, i.e. (a) an LLP must inform its client of the identity of at least one OSP for his matter not later than 21 days after the acceptance of instructions; (b) the LLP must keep the client informed of the identity of at least one OSP throughout (S7AE(2)) (S7AE(2)). 7
Protection (Partial Shield) • The Amendment Ordinance provides only a “partial shield” protection for the innocent p p partners of an LLP arising from professional services defaults, whilst all the partners , p remain jointly and severally liable for the LLP’s ordinary business obligations, such y g , as office rent and staff salaries. 8
Conditions for Protection The protection to an innocent partner against another partner s The protection to an innocent partner against another partner’s professional services defaults only applies if at the time of default: (a) the partnership was an LLP; (b) (b) th the client knew or ought reasonably to have known that li t k ht bl t h k th t the partnership was an LLP; ( ) (c) the partnership had complied with the top-up insurance p p p p p requirement; (d) the partnership had complied with the “overall supervising partner” (“OSP”) requirement (S7AC(3)). i i t ” (“OSP”) i t (S7AC(3)) 9
Protection (Partner’s Interest in Partnership Property) in Partnership Property) • However, no protection will apply to a partner in respect of his interest in the partner in respect of his interest in the partnership property (S7AF(3)). 10
Claw Back (Purpose) • A claw back provision is included in the A l b k i i i i l d d i th Amendment Ordinance to prevent partners of an LLP from dissipating partnership f LLP f di i ti t hi assets to the detriment of clients claiming against the LLP when there are reasonable i t th LLP h th bl grounds to believe that after the distribution, the th LLP will LLP ill not t b be able bl to t pay it its obligations or the value of its assets will be l less than its obligations (S7AN). th it bli ti (S7AN) 11
Claw Back (Liability) If an LLP makes a distribution to a partner or his assignee and p g immediately after making the distribution, the LLP is unable to pay its obligations as they become due (“cash flow test”) or the value of the remaining partnership property is less than the value of the remaining partnership property is less than the partnership obligations (“net asset test”), then the partner or assignee who has received the distribution will be liable to the LLP for: LLP for: (a) ( ) the value of the distribution; or ; (b) the amount necessary to discharge the partnership obligation at the time of the distribution, whichever is less (S7AN(4)). 12
Claw Back (Defence) • The partner or assignee can rely on the statutory defence that the LLP has made statutory defence that the LLP has made a reasonable assessment before the distribution on the basis of the financial distribution on the basis of the financial information available at the time that the LLP LLP would would be be able able to to satisfy satisfy the the solvency tests after the distribution (S7AN(2) and (3)) (S7AN(2) and (3)). 13
Cl Claw Back B k (Reasonable Compensation) ( p ) • Payment of reasonable compensation for current services provided by a partner will t i id d b t ill not be subject to claw back . The payment will be taken as reasonable to the extent if ill b t k bl t th t t if paid to a person who is an employee of, but not t a partner t i in, th the partnership t hi as compensation for similar services (S7AN(7)) 14
Claw Back (Limitation) • The limitation period to bring proceedings to enforce the claw di f h l back is 2 years after the date of the y distribution (S7AN(8)). 15
Top-up Insurance • An LLP must maintain top-up professional indemnity cover for that part of the loss that y p exceeds the statutory limit of $10 million per claim under the current Professional Indemnity Scheme (PIS)) up to an amount not less than $10 million in respect of any p y one claim with no limit as to the aggregate amount or to the number of claims (S7AD(3) ( ( ) and (6)). 16
Disclosure and Notification (S7AI to S7AL) (S7AI to S7AL) An LLP is required to comply with the following disclosure and notification requirements: notification requirements: (a) ( ) Give 7 days’ prior notice of commencement or cessation as y p an LLP; (b) Include “LLP” in its firm name; ( ) (c) Di Display its name clearly in its correspondence, notices, l i l l i i d i publications, invoices and bills of costs and websites; (d) ( ) Inform its existing clients that it has become an LLP within g 30 days of its commencement. 17
Disclosure and Notification (Non-Compliance) (Non-Compliance) • An LLP is liable to a fixed penalty of An LLP is liable to a fixed penalty of HK$10,000 and a fixed investigation cost of HK$15,000 on summary disposal for failure HK$15,000 on summary disposal for failure to comply with each of these requirements, coupled with the possible loss of LLP coupled with the possible loss of LLP protection 18
Proceedings • Proceedings di can b be brought b h against i the h partnership hi collectively in the name of the LLP to enable the plaintiff to bring proceedings or take enforcement actions against the g p g g partnership assets (S7AH(b) and Order 81). • However, an innocent partner protected by LLPs will not be a proper party to the proceedings separately in his individual name (S7AH(a)). ( ( )) 19
Proceedings (enforcement) E Execution to enforce a judgment against an LLP ti t f j d t i t LLP may not issue against a member of the LLP unless (a) the member admitted in the proceedings that h i he is not protected by LLP; or t t t d b LLP (b) he is adjudged to be not protected by LLP in the proceedings or on an application for leave to enforce the j dgment (Order 81) to enforce the judgment (Order 81). 20
Procedure To become an LLP: T b LLP ( ) (a) D Designate the partnership as an LLP by partners’ i h hi LLP b ’ agreement; (b) Maintain top-up insurance cover of at least $10 (b) M i t i t i f t l t $10 million per claim above the statutory PIS level with no aggregate limit; with no aggregate limit; (c) Notify the Law Society 7 days prior to commencement as an LLP in a prescribed form; commencement as an LLP in a prescribed form; 21
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