Partnerships: a firm line

The Partnerships (Prosecution) (Scotland) Act 2013 completed its passage through the UK Parliament on 22 April 2013 and received Royal Assent on 25 April. Unusually, it came into force the day following Royal Assent. This demonstrates the urgency with which the UK Government has sought to introduce and deliver legislation to ensure that a loophole in the law is addressed.

The Act is of significance to partners, and to professionals who advise partners, partnerships or those considering joining a partnership. As the Minister responsible for taking this legislation through the House of Commons, and as a proud (if non-practising) member of the Law Society of Scotland, I am pleased to have the opportunity to brief members of the Society about the Act.

Anyone considering joining a partnership should be aware that it will be competent to prosecute the partnership for offences committed before they joined

In taking this legislation through the UK Parliament, we have implemented recommendations made by the Scottish Law Commission (“SLC”) in its 2011 Report on Criminal Liability of Partnerships, thereby addressing the loophole identified by the High Court in Balmer v HM Advocate [2008] HCJAC 44. That case concerned the attempted prosecution of health and safety offences relating to the fatal fire at the Rosepark nursing home in Uddingston in 2004, which was, at the time of the fire, operated by a partnership. It was the partnership, as employer, which was alleged to have committed the offences; but the partnership had been dissolved prior to the prosecution. The High Court held that the legal personality of the partnership came to an end immediately upon dissolution, and that since the accused was no longer in existence, the charges against the dissolved partnership were not competent.

The result was that no criminal charges could competently be brought in respect of the Rosepark fire. Regardless of whether such charges would have succeeded on their merits, it was clearly unsatisfactory that there was a technical bar to their ever being considered by a court. It was this evident defect in the present law which prompted the SLC to undertake its project on criminal liability of partnerships.

Recommendations

The SLC recommended that, pending a more thorough reform of the law of partnerships, legislation should be introduced to reverse the outcome of the Balmer case. It suggested that it should be possible to prosecute a dissolved partnership, notwithstanding its dissolution, provided that proceedings were brought within five years of the date of dissolution. It also recommended that statute should put beyond doubt that a partnership could be prosecuted for an offence committed prior to a change in membership.

Regardless of whether such charges would have succeeded on their merits, it was clearly unsatisfactory that there was a technical bar to their ever being considered by a court

As the Law Commission and the SLC noted in their 2003 Joint Report on Partnership Law, it is not certain whether the legal personality of a Scottish partnership survives a change of membership. On one interpretation of the present law, any change of membership would amount to a dissolution which might prevent the partnership from being prosecuted for offences which it had already committed. It was recommended that this doubt be settled for the purposes of criminal liability in favour of continuing legal personality.

Since these recommendations concerned the legal effect of the dissolution of a partnership, they fall within the reservation – in terms of the Scotland Act 1998 – of business associations, and could only be implemented by legislation in the UK Parliament. With this in mind, the SLC’s report was addressed to the Secretary of State for Scotland. We in the Scotland Office took the matter up, ran a further consultation, and, with continuing support from the SLC, introduced a bill into the House of Lords in November 2012. The Advocate General for Scotland, Lord Wallace of Tankerness QC, took the bill through the House of Lords. This was the first Scottish bill to make use of the UK Parliament’s special procedure for Law Commission bills, under which much of the consideration of non-controversial law reform bills is taken in committee rather than on the floor of the House.

Continuing liability

The principal effects of the Act may be summarised as follows:

Dissolution of a partnership no longer bars its prosecution (s 1). Provided that proceedings are brought within five years of the date of dissolution, “the partnership may be prosecuted, or continue to be prosecuted, for the offence as if it had not been dissolved”. (Where there is already a shorter time limit, as for summary-only offences, this shorter limit will continue to apply.) Where the partnership is convicted, “any enactment or rule of law relating to the liability of partners on the conviction of a partnership applies as if the partnership had not been dissolved”. Section 1 thus applies the existing law relating to partnership liabilities: a fine is treated as a debt of the partnership (Criminal Procedure (Scotland) Act 1995, ss 70(6) (solemn) and 143(2) (summary)), a debt for which each of the partners at the time of dissolution is jointly and severally liable (Partnership Act 1890, ss 4(2) and 9).

The only issue about which concerns were raised was the potential liability of an incoming partner where a fine was imposed upon a continuing partnership following a prosecution by virtue of clause 4

The Act puts it beyond doubt that a partnership may be prosecuted for an offence committed prior to a change in membership, where that change of membership takes place after the Act has come into force (s 4). For these purposes, the partnership is treated as the same legal entity before and after the change of membership. (The SLC considered that this may well be the current law, but that the question was uncertain.) So if a partnership composed of partners A, B and C commits an offence, partner C resigns, and the business of the partnership continues as before, the continuing partnership (now composed of A and B) may be prosecuted. The same would be true if, instead of C resigning, a new partner, D, had been assumed. As with s 1, the result of a conviction is that the existing law applies: the fine will be enforced against the partnership as if it were a decree for payment of a partnership debt. Normally, this will be paid from the partnership assets. Where this is not possible, the fine may be collected from the individual partners, on the basis of their joint and several liability for partnership debts.

The Act also provides, for the avoidance of doubt, that neither a dissolution nor a change of membership will prevent the prosecution of an individual partner where the present law provides for individual criminal liability (ss 3 and 5), for example on the basis of a partner’s consent and connivance in the partnership’s offending. In the SLC’s view, this amounts to a restatement of the current law.

Incoming partners

During its passage the bill received broad cross-party support, and the evidence heard by the Special Public Bill Committee in the House of Lords – from the Lord Advocate, the Scottish Law Commission, the Faculty of Advocates and the Law Society of Scotland – showed strong backing for its general principles. The only issue about which concerns were raised was the potential liability of an incoming partner where a fine was imposed upon a continuing partnership following a prosecution by virtue of clause 4.

This issue was fully explored both in evidence at the House of Lords committee stage and in the debates, on probing amendments promoted by the Society. The Advocate General and I were able to reassure Parliament that the only criminal liability in issue in proceedings by virtue of clause 4 was that of the partnership: the clause did not expose any individual partner to personal criminal liability. Evidence from the Faculty of Advocates confirmed our view that clause 4 as it stood represented the most practical approach to the prosecution of a partnership following a change of membership.

All in all, the process demonstrated that the special procedure for Law Commission bills works well, both in allowing parliamentary time for law reform measures that might otherwise go unimplemented and in allowing scope for full and proper scrutiny of such bills.

Practical effects

What are the practical implications for partnerships and those advising them?

First, and most obviously, partners should be aware that criminal proceedings may be brought against a dissolved partnership during the five years following its dissolution. If a fine is imposed, the former partners’ assets will be exposed. This may be relevant both to former partners and to those administering their estates.

Secondly, anyone considering joining a partnership should be aware that it will be competent to prosecute the partnership for offences committed before they joined. If a fine is imposed, and cannot be paid from the partnership assets, each of the partners – including any who joined after the offence – will be jointly and severally liable to pay, in the same way as for any other partnership debt incurred during their membership. Prospective partners should be advised to undertake appropriate due diligence and, if concerned about potential liabilities arising from criminal charges relating to existing acts or omissions of the partnership, to seek suitable indemnities from the existing partners before joining the firm.

The Act is the fruit of hard work and institutional cooperation between the Scotland Office, the SLC, the Office of the Advocate General and Crown Office. It is also the first Scottish measure to be put into law through the new Law Commission procedure at Westminster. I am delighted to have been a part of this process. It demonstrates both the commitment of the UK Government to the reform of Scots law and the ability of the UK Parliament to legislate appropriately for Scotland.

Further guidance

The Society held a seminar in conjunction with the Scotland Office and the Office of the Advocate General for Scotland, on 30 April 2013. Members of the legal profession and stakeholder organisations heard Scottish Law Commissioner Patrick Layden QC describe the changes brought about under the Partnerships (Prosecution) (Scotland) Act 2013. Non-statutory guidance on the Act is available at www.gov.uk/government/publications/partnerships-prosecution-scotland-act-2013