HM Treasury is consulting on its proposal to change the partnership legislation for private equity investments. The consultation states that the purpose of the proposals is to remove inefficiencies in the current partnership rules and make the UK a more competitive place for private equity investors to use the limited partnership model.
Consultation title: “Proposal on using Legislative Reform Order to change partnership legislation for private equity investments”
Consultation dates: 23 July 2015 to 5 October 2015 (responses currently being analysed)
The more significant changes proposed include:
- Having a “white list” of activities for limited partners. Under the partnership legislation, a limited partner may not take part in the management of the partnership business, otherwise they will be treated as a general partner and therefore be liable for all the debts and obligations of the partnership. The white list will be a non-exhaustive list of activities that a limited partner can safely do without being treated as managing the partnership’s business.
- Removal of the requirement for a limited partner to contribute capital. The partnership legislation requires a limited partner to contribute capital. In reality, typical investors in private equity funds will contribute only nominal capital and fund the balance of their commitment using a loan. This is partly because of the current rules at paragraph 3 below.
- Removal of the current treatment for limited partners who withdraw capital. Under current rules, a limited partner who withdraws partnership capital during the life of the partnership will be liable for the debts and obligations of the partnership up to the capital withdrawn. To avoid this outcome, private equity investors make loans rather than capital contributions to the partnership. It is stated in the consultation that this causes unnecessary complications and confusion and so the proposal is to abolish these rules.
Other proposals included in the consultation are around changes to registration requirements for limited partnerships, winding up the partnership (removal of the requirement to obtain a court order) and removal of certain statutory duties for limited partners (e.g. to render accounts and other information).