Professionals are aware of the fact that Companies’ Ordinance, 1984 requires partnerships to be registered under section 14 where the number of partners exceeds 20 and the object of such partnership is acquisition of gain. However, since independence or even at the time of promulgation of Companies’ Ordinance, 1984, no body bothered to put cross references in Partnership Act, 1932.
The concept of LLP was introduced in the developed countries like US and UK by active lobbying by large audit firms on the grounds discussed below while on the other hand, Pakistani profession took an active U turn and an amendment in sub section (2) if section 14 by inserting clause (d) was introduced whereby accountants, lawyers and other professions bound by their regulation are not required to register the same. This article is an endeavor to understand ifs and buts relating such U turn by the professionals in Pakistan, conceptual background of Limited Liability partnership [LLP] and basic infrastructure of any proposed limited liability partnership [LLP] law.
HISTORICAL BACKGROUD OF LLP
The core reason of lobbying for the LLP in US is the increased litigation against the professionals owing to the literacy rate and increased awareness about the various professions. The origin of the concept of LLP lies in the 1990’s whereby increasing incidence and scale of actions against professional advisers for liability in respect of financial loss to stakeholders became a matter of acute concern and Audit firms, in particular, came to feel highly exposed.
In general, the reason of development of such feeling, particularly in audit firms, revolves around the fact that they deal with financial authenticity. In particular, for instance, since aggrieved creditors or investors of a failed company may seek redress against the company’s directors or its auditors. It was felt by many in audit profession that they, who are likely to carry substantial professional indemnity insurance, were being specifically targeted by litigant regardless of the level of their fault for the loss claimed. The cost to firms for defending actions rose sharply in the decade, as did the cost of insurance.
In furtherance, under the partnership laws around the globe, each partner is jointly and severally responsible for the liabilities of the firm. In the light of increasing level of risk, it became harder for many in the larger firms to reconcile their firms’ increasing size and specialization with the traditional partnership structure, in which all partners are agents of each other. Many felt that to require each partner in a large, highly specialized firm to accept unlimited financial responsibility for the actions of his or her partners had become an unrealistic proposition.
Owing to the above-mentioned reasons, the professionals were expecting that, given the huge sums which were increasingly involved in negligence claims, the continuing exposure of partners to joint and several liability could deter the most talented young accountants from entering the audit profession.
Although this is not the case in Pakistan owing to the facts contributed to the major factor of literacy and time involved in judicial process, which is also of special nature. In furtherance, there are no major cases pending in courts relating to the audit profession, however, such cases were solved by the involvement from relevant government sectors, like SBP and SECP with penulative actions. This further strengthen our point regarding specialized literacy level and time involved in judicial process that even after such penulative active, none of the shareholders of any company has sued the auditors in Pakistan on the ground that earlier financial statements may also be misleading etc, etc.
However, were the fears to be realized in Pakistan like in developed countries coupled with lacking of the concept of indemnity insurance in Pakistan, it could, in the long term, damage the quality of Pakistani Auditing and, in turn, the whole of the financial services sector and section 14 (d) of CO1984 would be solely responsible for such disaster. However, such an experience has already been experience by the developed nations like UK, and US that respectively promulgated such laws in 1996 and 2001.
NATURE OF LLP
The concept of LLP is already present in CO1984 and resembles the limited company. Firstly, it is corporate bodies with separate legal personality and secondly, the liability of its members is limited. As we know that, being a corporate body with separate legal personality, it can take and be the subject of legal action it its own name. It continues to exist irrespective of changes in its membership.