Wiped out if the winner takes all
Roger Trapp looks at how a judgment against one firm could lead to its partners going bust
Wednesday 13 December 1995
No, the issue is - once again - law suits for negligence and the reaction to them. Last week's pounds 105m High Court judgment against Binder Hamlyn was shocking in part because only a few within the profession even knew the case was going on. But the real drama arose because - in what is believed to be the first instance - the firm admitted that it did not have enough insurance cover to meet the award. This meant there was a real prospect of the partners - even those who have been absorbed into the immensely successful Arthur Anderson - being forced into bankruptcy.
It put into focus the week's other groundbreaking event: the emergence of plans by Ernst & Young, headed by Nick Land, and Price Waterhouse, headed by Ian Brindle, for registering their businesses in Jersey in order to obtain limited liability partnership status, and so, they hope, avoid the risk of being obliterated by a claim. Since even the firms themselves can see that going offshore has negative connotations, this is clearly a desperate measure for desperate times.
Because KPMG has already opted to seek greater protection from the spiralling claims for redress for negligent work by turning its audit practice into a limited company, KPMG Audit, observers have a chance to weigh up the pros and cons of each approach to liability limitation. Which would you choose?
KPMG's move amounts to only partial incorporation. Since turning the whole firm into a company would have cost a lot more in terms of lost tax advantages, senior partners have chosen to ring-fence the most vulnerable bit: the part that audits public companies. Though changes to the tax system will cancel out some of these benefits, partners will continue to enjoy lower National Insurance costs as a result of being self-employed, rather than company directors on PAYE.
Becoming a company brings a requirement of greater financial disclosure. Because it is only incorporating part of its operation, KPMG is not obliged to publish accounts for the whole organisation. But it is doing so, as a marketing ploy.
It is sometimes said that adopting company status makes management more streamlined than is possible with several hundred partners. In fact, the days of all partners sitting around a table to decide on business decisions went when restrictions on the number of possible partners were lifted a couple of decades ago. Partnerships already ape the ways of companies, with all partners voting only on really big issues, and day-to-day running delegated to a team that does little client work.
So what difference does it make in the event of a legal claim? First, the organisation can be put out of business if it lacks sufficient assets to meet a claim. Second, the individual partner responsible can still be ruined. But partners unconnected with the case do not lose all their worldly goods because of the actions of someone who, in the modern firm, they have possibly never met.
Some rivals of KPMG have suggested that its partial incorporation might not provide this protection, since it could be possible for a determined litigant to involve the partnership in an action against the audit arm. If this proves to be so, it is likely that some leading legal advisers could find themselves in a situation with which accountants have become all too familiar.
Limited liability partnership
The concept has existed for some time in Britain, but has been of little help because of the requirement that those seeking to use it not take any part in the running of the business. What Jersey is planning is something like the system the US state of Delaware introduced last year. In return for a deposit of a few million pounds (to meet routine claims), a large professional firm will be able to obtain for all its partners the same sort of limited liability available to companies without giving up the ethos of being a partnership.
This is important because, although proponents of incorporation insist that the partnership culture is not lost with the mere change of name, others say they are deeply attached to such partnership fundamentals as co-operation and sharing - except when it comes to colleagues' law suits.
A limited liability partnership is an attempt to have the best of both worlds, since partners will continue to have the same sort of tax advantages as members of traditional partnerships while at least partially protecting themselves from the prospect of being ruined by a large claim. The firms looking at going offshore insist they are not being drawn by the tax breaks for which places such as Jersey are noted but will continue to pay taxes as if they were registered in Britain.
So what is the bottom line? Much the same as for incorporated bodies. The whole body can be knocked out by an aggrieved litigant, while the individual partner found to be at fault can also be ruined. But other partners' assets are protected.
There is a third option, strongly defended by Touche Ross: stay as you are. This firm is not the only one to see the partnership culture as special. Others point out that - even with the moves towards more modern management styles - partnerships encourage ideas of not wanting to let one another down. Furthermore, says one managing partner, they aid recruitment, since the urge to gain the recognition that being a partner brings is greater than the desire to be a manager.
But that leaves everyone exposed to legal action, regardless of their involvement - which is where we came in. Touche's stance, if it represents the firm's true attitudes (and not everyone is sure it does), could be a brave one. And not only because it will look isolated if, as seems likely, Anderson and Coopers & Lybrand announced plans to take one route or other. Rather, if it becomes the only surviving partnership, it will be that much more vulnerable to the wipe-out claim of which insiders fear the Binder case is just a harbinger.
- 1 Australia to impose 24-hour curfew on all cats to protect endangered species
- 2 Model's video shoot on the beach interrupted by sudden landing of a group of illegal migrants
- 3 The difference between a psychopath and a sociopath
- 4 MH370: Boeing 777 wing that could match missing plane found on the French island of Reunion
- 5 'Killer robots' with AI must be banned, urge Stephen Hawking, Noam Chomsky and thousands of others in open letter
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn – or a return to a Labour government
Labour leadership contender Jeremy Corbyn says 'we can learn a great deal from Karl Marx'
I am the Jeremy Corbyn supporter that many will tell you doesn't exist
Public anger after French sunbather beaten up by gang for wearing a bikini in Reims park
Labour leadership: New poll shows party is now even 'less electable' than under Ed Miliband
Labour leadership contest: I would never quit the party, says Liz Kendall
iJobs Money & Business
£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...
£45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...
£12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...
Day In a Page
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.