Sometimes, I cannot help associating the Law Society’s experience in pushing for much needed changes to the law with Waiting for Godot.

Take the Land Titles Ordinance (Cap 585), for example, on which the Law Society’s Working Party has been diligently and patiently working with the government and other stakeholders on the issue for over 20 years. Yet nothing has materialised.

In 2004, the Law Society initiated a change of the law to allow the implementation of limited liability partnerships ( LLPs ) which have already been adopted widely around the world.

LLPs were first introduced in the State of Texas, USA in 1991. Since then, LLPs have spread rapidly throughout the United States and many other jurisdictions. New South Wales, Australia, enacted the Professional Standards Act in 1994 and introduced a scheme to cap the liability of members of the professional groups. Western Australia passed a similar Act in 1997. In Ontario, Canada, LLPs were introduced in 1998, and in Alberta in 1999. The Limited Liability Partnerships Act 2000 in the UK became effective in
2001. Singapore introduced LLPs in 2005. Mainland China amended its Lawyers Act in June 2008 to allow a special mode of partnership for law firms that is akin to the concept of LLPs. India introduced LLPs in 2008.

The Law Society sees an urgency to introduce LLPs in Hong Kong. To enhance the status of Hong Kong as an international financial centre as well as a legal centre, the demand for sophisticated legal services in cross-jurisdictional matters is high. The failure to modernise the law and legal infrastructure in Hong Kong hinders the expansion and mergers of legal practices that are conducive to the creation of synergies for more sophisticated legal services in Hong Kong.

LLPs take different forms in different jurisdictions. The Law Society’s Working Party on LLPs has recommended a model that protects a partner from all personal liabilities for any partnership obligations other than those caused by his or her negligence.

The Law Society put forward the LLP proposal to the Administration in 2004. Since then, it has held numerous meetings with and made submissions to different interested parties. After half a decade, in November 2009, the Law Society finally received the first draft of the Legal Practitioners (Amendment) Bill 2010 introducing LLPs. Discussions were held with the Administration in the months that followed and revisions have been made.

Let me start with the more straightforward administrative provisions.

Formation

An LLP is formed whereby a Hong Kong law firm or a foreign law firm is designated as an LLP for the purposes of the Legal Practitioners Ordinance (Cap 159) by written agreement between thepartners.

Disclosure of LLP status

Where a Hong Kong firm or a foreign firm commences practice as an LLP or converts from an existing general partnership to an LLP, it has to ensure that its firm name includes the words ‘Limited Liability Partnership’; ‘LLP’ or ‘L.L.P.’ and its name is exhibited clearly and legibly in its office premises and in all of the firm’s literature.

Notification to Law Society and clients

Where a Hong Kong firm or a foreign firm converts from an existing general partnership to an LLP and where a Hong Kong firm commences practice as an LLP, it must notify the Law Society in writing, at least seven days before commencement of practice, as to the particulars of the practice including the date of commencement as an LLP, the name of the firm, the name of each partner and the address(es) of the firm.

This requirement does not apply to the case of a foreign firm commencing practice in Hong Kong as an LLP because, in the process of its registration as a foreign firm, the particulars of the practice will have already been provided to the Law Society.

Where a Hong Kong firm or a foreign firm converts to an LLP from a general partnership, it must also notify all its existing clients that it has become an LLP and of the effect of liabilities of partners in an LLP. For a foreign firm that is already operating as an LLP in
overseas jurisdictions, the notification to existing clients is limited to existing clients in Hong Kong (that is, only those clients with a registered office or last correspondence address in Hong Kong).

Cessation

Where an LLP, be it a Hong Kong firm or a foreign firm, ceases to be an LLP, it must notify the Law Society in writing seven days before the date of cessation. Ceasing to be an LLP does not cause the partnership to dissolve. The seven-day notice is to be distinguished from the Law Society’s existing requirement of an eight-week notice of cessation of practice. If an LLP is to cease practice altogether (rather than converting to a general partnership) it must still give the Law Society an eight-week notice of cessation.

I do not anticipate any strong views on the above administrative provisions. What members should note is the extent of protection offered by the currently proposed model.

Protection covers liabilities arising from other partners’ negligence to third parties

The Working Party’s initial recommendation was an LLP model offering full shield protection, namely, a partner would not be liable for any obligations of the partnership except those arising from his or her negligence. This is aimed at protecting a partner from personal liabilities arising not only from negligence of others but also any other debts or obligations that were incurred by the partnership including, for instance, the operational cost of the business.

However, LLP status under the currently proposed model protects an innocent partner from those debts, obligations and liabilities of the firm that arise from the negligence of other partners committed in the course of business of the LLP. As far as other debts, obligations and liabilities of the partnership are concerned, the partners are still jointly
and severally liable.

To a certain extent, the Working Party notes that the partial shield model is mitigated by the permission, subject to conditions, to form service companies to carry out necessary administrative functions concerned with the running of the practice (for example, the provision of staff, hiring premises, furniture and equipment and general maintenance) under principle 2.07 of the Hong Kong Solicitors Guide to Professional Conduct Vol 1.

LLP protection does not extend to negligence of firm’s employees, agents or representatives

The currently proposed model only covers negligence by partners but not negligence by employees, agents or representatives of the firm. There was a proposal that the Law Society gives a written confirmation that in the absence of proper allocation of supervisory responsibility, the partners of an LLP firm will remain collectively liable if the protection is to be expressly extended to negligence of employees, agents or representatives of the firm. However, the Working Party considers it inappropriate to give such a confirmation as it is a matter of law for the court to decide, on the basis of the particular facts of each case, how responsibility should be allocated.

LLP protection not applicable where a partner has constructive knowledge of default

The LLP status will not operate to protect a partner from liability if the partner knew or reasonably ought to have known of the default at the time of occurrence and failed to exercise reasonable due diligence to prevent its occurrence.

The existing negligence law allows the court to determine whether a partner is negligent, taking into account all the circumstances of the case of which knowledge is only one of the many factors for consideration. The Working Party considers it inappropriate to expressly legislate an exclusion provision based on knowledge.

Regulation on the distribution of partnership property

The current proposal includes a provision regulating the distribution of partnership property for LLPs. In essence, the provision creates a liability on the part of the partner receiving a distribution of partnership property at any time to return it to the partnership if, as a result of the distribution, the firm will become unable to pay its obligations when they are due or the value of the partnership property will be less than the partnership
obligations. The amount to be returned will be the value distributed to the partner or the amount needed to discharge the firm’s obligations at the time of distribution, whichever is less.

The Working Party finds that this provision may be too onerous and is still working on its refinement.

All the work in relation to the introduction of LLPs has been done for the benefit of the legal profession and Hong Kong as a whole. We will continue our discussions with the Administration to finalise a workable model that balances the interests of the profession and the community. In the meantime, I urge members to carefully consider the LLP model described above and let the Working Party know if they have any comments. Members’ comments (which can be emailed to me at president@hklawsoc.org.hk) are most valuable in helping us decide the way forward. If everything goes as planned, and subject to our resolving the outstanding issues described above, we expect that a bill should be able to be introduced in the coming months.

Huen Wong