Limited partnerships: a new breed
Corporate briefing: the newly enabled private fund limited partnership relaxes the rules for a limited partnership comprising a collective investment scheme
On 6 April 2017, new rules in relation to limited partnerships came into force across the UK. A new form of limited partnership has been created: the private fund limited partnership (PFLP). PFLPs are intended for the funds industry and help bring the UK into line with other jurisdictions such as the Cayman Islands, Jersey and Guernsey.
What are limited partnerships?
Scottish partnerships have separate legal personality but unlimited liability. On the other hand, limited partnerships (LPs) are frequently used as investment vehicles by the funds market for various types of funds, including private equity and infrastructure funds. LPs are valued given their separate legal personality, limited liability, tax transparency and flexibility. However, there are a number of administrative and time consuming aspects which put Scottish (and English) limited partnerships at a disadvantage compared to other jurisdictions.
Commonly in LPs, each limited partner contributes a minimal amount of capital to the partnership and the majority of their investment by way of loan. This is because s 4 of the Limited Partnership Act 1907 requires a contribution of capital or property at a stated amount, and prohibits the withdrawal of that amount (otherwise the limited partner is liable for the debts and obligations of the limited partnership up to the amount withdrawn).
The Legislative Reform (Private Fund Limited Partnerships) Order 2017 (SI 2017/514) adds to the 1907 Act so that for limited partners in a new PFLP, capital contributions are no longer required (unless otherwise agreed between the partners). Such a limited partner will not be liable for the debts and obligations of the PFLP beyond the amount of partnership property which is available to the general partners to meet those debts/obligations. Also, there is no need to provide details of any capital contributed (or by whom) to Companies House.
Where a limited partnership is subsequently designated as a PFLP, contributions made before the LP becomes designated are subject to the previous regime (i.e. cannot be returned to the fund; a withdrawal by the limited partner brings liability to the extent of that withdrawal). Contributions made after the LP is so designated may be withdrawn without liability (or the need to make a declaration of said contribution).
Activities and management
In standard LPs that are not PFLPs, limited partners are unable to take part in the management of the business without facing a liability for the debts and obligations of the firm. Exactly what constitutes management is unclear. The 2017 Order provides some clarity in this area for PFLPs by inserting a new s 6A in the 1907 Act setting out a non-exhaustive white-list of various activities that will not be regarded as management of the partnership business. However, the list is not intended to prejudice the role of general partners, and the activities do not arise as of right but will depend on the terms of the partnership agreement.
The list is not intended to enable activities which would otherwise amount to management of the business. Some examples from the list include approving the accounts of the partnership, reviewing or approving a valuation of the partnership’s assets or discussing the prospects of the partnership business. Further guidance on the examples of permitted activities can be found in the explanatory document to the order, found via www.legislation.gov.uk
When can an LP be a PFLP?
An LP can be a PLFP when:
- the partnership agreement is constituted by an agreement in writing; and
- the partnership is a collective investment scheme (as defined in s 235 of the Financial Services and Markets Act 2000).
Existing LPs which meet the conditions can apply to be designated as a PFLP by completing a Companies House form LP8. Any capital contributions which were made pre-designation are subject to the previous regime. LPs which do not designate as a PFLP will continue to be subject to the previous regime. A new PFLP can be registered by completing Companies House form LP7.
Ohter benefits for PFLPs
A number of other benefits are brought by the order to PFLPs. This includes reduced registration requirements (e.g. descriptions of the partnership business do not need to be made for PFLPs), reduced filing requirements at Companies House (e.g. no need to notify of changes in the term of the PFLP), relaxed statutory duties (e.g. limited partners are exempt from the need to render accounts/other information, unless otherwise agreed), and the abolition of the need to advertise transfers of limited partnership interests in the Gazette. With the various advantages available to PFLPs, it is hoped they will prove popular models for fund managers and investors alike.
Emma Arcari, associate, CCW Business Lawyers Ltd