In the absence of legislation for limited liability partnerships (LLPs), Hong Kong law does not recognize a U.S. LLP law firm operating in Hong Kong as a true LLP. Farrar Buxbaum LLP v. Samuel-Rozembaum Diamond Ltd. (CACV 272/2004).
Until now, law firms in Hong Kong have only been allowed to practice in one of two forms: (1) a sole proprietorship or (2) a general partnership with joint and several liability for all partners concerned in the firm.
The concept of “joint and several liability” has long been criticized as giving rise to unfairness, because all the partners of the firm are jointly and severally exposed to liability, regardless of whether they are personally at fault.
For nearly a decade, the Law Society of Hong Kong has been pressing for legislative changes for the establishment of LLPs to allow law firms an additional choice in setting up their legal practice so that innocent partners can opt out of having to shoulder personal liability in situations where they are not personally at fault.
The Legal Practitioners (Amendment) Ordinance
On July 12, 2012, the Legal Practitioners (Amendment) Ordinance (the Amendment Ordinance) was finally passed by the Hong Kong legislature, permitting a law firm to practice in the form of an LLP.
However, the Amendment Ordinance is not yet in force, because necessary amendments to subsidiary legislation and procedural rules are still pending.
Nature of an LLP
An LLP operates in much the same way as a general partnership. The major difference is that in an LLP, an innocent partner would not be automatically liable for any negligence arising from the provision of professional services by other partners, employees, agents, or representatives of the law firm.
Notwithstanding this general principle, it should be noted that a partner would continue to be personally liable (1) for his or her own negligence; (2) for the negligence of those employees, agents, or representatives under his or her direct supervision; and (3) where a partner knew of negligence at the time of its occurrence and failed to exercise reasonable care to prevent its occurrence.
Other Key Features of Hong Kong LLP Law
The other key features of Hong Kong LLP law can be outlined as follows:
Partial Shield v. Full Shield
Pursuant to Part IIAAA of the Amendment Ordinance, the Hong Kong model of LLP law only provides a “partial shield” against partnership obligations arising out of a “negligent or wrongful act or omission or any misconduct” of other partners of an LLP. This means that, unlike the LLP model in some overseas jurisdictions, the Hong Kong model does not provide a full shield against partnership obligations not arising from professional services defaults, such as payment of general trade debts, office rent, and overhead, for which all partners would continue to have joint and several liability.
Top-Up Insurance Coverage
All LLPs in Hong Kong would be required to maintain top-up insurance coverage of not less than HK$10 million for any one claim, with no limit in the aggregate in addition to the current mandatory Professional Indemnity Scheme coverage of HK$10 million per claim, thus making a minimum total coverage of HK$20 million per claim.
Two Years’ Clawback of Partnership Distributions
Clawback provisions are also applicable to LLPs in Hong Kong under Part IIAAA of the Amendment Ordinance. If an LLP makes a distribution to a partner or an assignee of a partner’s share in the LLP in contravention of the relevant solvency tests set out in the Amendment Ordinance, the partner or the assignee (except where the circumstances fall within the statutory defense available under the Amendment Ordinance) is liable to the partnership for the value of the distribution or the amount necessary to discharge the partnership obligations at the time of the distribution, whichever is the lesser. Proceedings to claw back may be commenced within two years after the date of distribution to which the liability relates.
Partnership Model v. Corporate Model
Unlike in London or Singapore, or those states in the United States where “corporate” LLPs are allowed, the Hong Kong LLPs would operate on a “partnership” model only, i.e., not as a separate legal entity.
Additional Requirements for Setting Up an LLP
Apart from the existing requirements for the establishment of a law firm in Hong Kong, a firm applying to be an LLP would also have to comply with the following additional requirements:
- The law firm must have a written agreement between its partners designating the partnership as an LLP.
- The law firm must also provide the Law Society of Hong Kong with evidence that it has complied with the top-up insurance requirement as mentioned above.
- The Law Society of Hong Kong must be notified of the particulars of the LLP at least seven days in advance of its commencement of business.
- The name of the partnership should either include “Limited Liability Partnership” or the abbreviation “LLP,” and such name should be clearly stated in all partnership literature and at the firm’s premises.
- Where a law firm has been carrying on practice as a general partnership in Hong Kong immediately prior to its becoming an LLP in Hong Kong, it must notify its existing clients of the change and the resulting effect on the partners’ liabilities.
- Further, after a law firm has accepted instruction to act for its client(s) on a retainer matter, the identity of at least one overall supervising partner for that matter must be disclosed to its client(s) within 21 days thereafter. Otherwise, a partner of an LLP would not enjoy limited liability protection for nondisclosure.
The Way Forward
The LLP legislation brings Hong Kong in line with many overseas jurisdictions and is consistent with the global trend. The legislation will enable law firms in Hong Kong to operate as LLPs and, as a result, expand their practice and scale of operations. It is hoped that the Amendment Ordinance will be brought into force before the end of 2013.