On 26 July 2015, a consultation paper was published on proposed changes to the UK's Limited Partnerships Act 1907 (the "Act"). With very few changes to the Act since 1907, the UK Government is aiming to bring it into line with limited partnership law in other jurisdictions such as Delaware, Cayman, Jersey, Guernsey and Luxembourg
and maintain "the UK's competitiveness as a centre for fund domicile".
The changes will be made by way of a legislative reform order (LRO), a draft of which accompanies the consultation paper, and covers a number of different areas. Importantly though, they will not apply to all limited partnerships, but only those that satisfy certain criteria. The result being a "private funds regime" for some limited partnerships and another regime for all others. The criteria are that the limited partnership is governed by an agreement in writing and that it is a collective investment scheme
as defined in section 235 of the Financial Services and Markets Act 2000. Existing limited partnerships established prior to these changes can opt in within 12 months of the LRO coming into force. As currently drafted, a legal adviser will need to certify that the limited partnership (whether it is new or existing) meets the criteria for a private fund for it to take advantage of the new regime.
For those partnerships that qualify as "private funds" the main changes proposed are:
- including a "white list" of activities that a limited partner can undertake without losing its limited liability;
- removing the prohibition on returning capital to a limited partner during the life of the partnership;
- removing the requirement for a limited partner to contribute capital to the limited partnership, although limited partners can still make a contribution if they so decide;
- abolishing the need to publish a Gazette notice on the transfer of a limited partners interest, or when a general partner become a limited partner;
- excluding the statutory duties which arise under sections 28 and 30 of the Partnerships Act 1890, which means limited partners will not be under a duty to render accounts and information to other partners, nor will they be required to account for profits in competing businesses;
- removing the requirement for limited partners to obtain a court order to wind up the limited partnership in circumstances where the general partner has been removed;
- the introduction of a procedure to remove limited partnerships from the register at Companies House; and
- the removal of the requirements to update Companies House when changes occur to the nature of the business or the term of the limited partnership, or a change in the amount of capital contributed by limited partners.
The changes are intended to remove either uncertainty or adminstrative burden, but perhaps most helpful are the white list of permitted activities and the removal of the prohibition on return of capital. There has long been uncertainty over what a limited partner can do without straying over the line into management, and in a commercial context this is not ideal for fund managers or their investors. The white list will at least provide some certainty to this very grey area. The prohibition on the return of
capital is one of the main reasons for UK limited partnerships having a "capital/loan split" in the investors' commitments. Most other funds structured as limited partnerships outside of the UK will draw from and repay capital to their investors throughout the life of the fund, but managers of UK limited partnerships have traditionally drawn very small amounts of capital from investors upon their admission, with the bulk of the commitment advanced by way of loan. This has enabled distributions to be made to investors
during the life of the partnership without breaching the Act, rather than having to wait until the fund is wound up - which would clearly be unpalatable to both investors and the fund manager.
Limited partnerships with a capital/loan split has not led to many issues for fund managers, apart from having to explain the rationale to unfamiliar investors, but one problem it does cause is that because the commitment is made by way of a loan, it is not possible to register a UK limited partnership with the Korean regulator, which is necessary to admit large Korean investors. As investors in this region become more and more important, it has meant that fund managers have had to set up feeder vehicles in
jurisdictions outside the UK that allow "all capital" commitments, which is both time consuming and costly.
The fact that investors will no longer have to commit an amount of capital on admission to the partnership will mean dispensing with the current practice of either drawing a small amount of capital from investors (or lending it to them) on their admission to ensure that they have limited liability. The removal of the requirement for Gazette notices will lower administration but will also remove the uncertainty around when a transfer is effective. Secondary market buyers and sellers often agree to effective
dates many months prior to the date the transfer documents are signed, but under the Act, transfers are currently not effective until the date the Gazette notice is published.
For funds at the end of their life, the amendments will allow limited partners to agree between themselves who will wind up the partnership in the absence of a general partner, without having to go to court as they do currently. And being able to remove limited partnerships from the Companies House register will mean the register is accurate and also introduces a procedure for correcting the register in the case of fraud.
One potential change that is not dealt with as part of this consultation is the issue of separate legal personality (currently Scottish limited partnerships have this while English limited partnerships do not). The government intends to give English limited partnerships the option to elect to have separate legal personality but this will require primary legislation and has not been included in this round of reforms.
The consultation will run until 5 October 2015. If you would like more information on the proposed changes please click here.