UK limited partnerships are one of the most common and popular vehicles for investments in various sectors in Europe including private equity, real estate and infrastructure, offering a flexible, tax-transparent vehicle, which provides the protection of limited liability to fund investors provided that they do not take part in the management of the partnership business – if they do, they become liable for the debts and obligations of the limited partnership incurred whilst they so take part. Whilst fund investors are generally passive, many seek to include consultation and approval rights in partnership documentation to protect their interests. The existing UK legislation provides little guidance or clarity on when these consultation and approval rights might cross the line, and constitute management. A conservative approach is typically taken.
The new private fund limited partnership (or ‘PFLP’) would retain the flexibility of a limited partnership and limited liability for investors, whilst setting out a clearer regime in relation to the rights that investors could exercise without compromising their limited liability status. No change is proposed to the tax treatment of any form of limited partnership.
HM Treasury consulted on the proposed regime for PFLPs in July 2015, and has now published its proposed changes to the regime in response to comments received. The main changes are as follows:
Designation of a PFLP
To be registered as a PFLP, a new limited partnership would need to apply for this designation on registration.
The designation would only be available for limited partnerships that (a) are constituted by a written agreement and (b) qualify as collective investment schemes – the application will no longer require a compliance certificate signed by a solicitor, a general partner’s confirmation will now be required.
Existing limited partnerships meeting the relevant conditions will be able to apply for re-designation as PFLPs at any time (the proposed one year transition period has been dropped). However, when a partnership becomes a PFLP, it will not be able to return to limited partnership status.
Typically, limited partners’ contributions to a limited partnership are structured by way of a 0.001% contribution to capital, with the balance being provided by way of debt. This split arises because there are stringent restrictions which apply on withdrawing capital from the limited partnership during its continuation – where capital is withdrawn, the limited partner becomes liable for the debts and obligations of the limited partnership up to the amount withdrawn.
The proposal is that limited partners in PFLPs would no longer be required to make any capital contribution. The option to make capital contributions will continue and capital will be withdrawable for limited partnerships established after the legislative changes. There will be no requirement to publicise capital contributions.
\For limited partnerships established before the legislative changes come into effect, capital contributions will continue to be treated as under the current regime - capital will be not withdrawable, and if it is withdrawn, the relevant limited partner will continue to be liable to contribute to the debts of the partnership up to the amount withdrawn. The publicity regime will continue.
Permitted activities for limited partners
The proposed “while list” of activities which a limited partner in a PFLP could undertake without being considered to be taking part in management of the partnership will be enacted, with limited changes to: (i) clarify that a limited partner is able to exercise its rights in relation to an underlying fund within a feeder fund structure; (ii) confirm that the list is not exhaustive; (iii) clarify that the activities on the list are not permissible for limited partners by right (so funds will have flexibility to select (or, perhaps more critically, limited partners may need to negotiate to avail themselves of the right to perform) activities from the list); and (iv) clarify that the list does not create any adverse presumptions for limited partners in other limited partnership.
Exemption from statutory duties
The consultation proposed exempting limited partners in a PFLP from some specific duties that currently apply to all partners in the limited partnership, on the basis that these are inconsistent with the position of a largely passive investor who may be invested in a number of funds with similar objectives/investment policies.
The duty under section 29 of the Partnership Act 1890 to account to the partnership for any benefits from transactions concerning the partnership without the consent of the other partners will however continue to apply (subject to disapplication by agreement).
Striking-off and winding up of limited partnership
The proposal on striking off has been dropped at this stage – this would have resulted in a partnership ceasing to be a PFLP on removal from the limited partnership register, but remaining in existence as a general partnership until it was dissolved by the partners (with the consequent loss of limited liability status for the limited partners during such period). Government may consider wider options for a striking off regime for partnerships more generally in due course.
Limited partners will be permitted to appoint a third party to wind up a PFLP (without the need for a court order) where the general partner has been removed, and the relevant activity will be included in the “white list” of permitted activities.
One introduced, these proposals will constitute a welcome modernisation of some aspects of the law applying to limited partnerships, and provide a much greater degree of certainty for limited partners without prejudicing their limited liability status. Investment fund managers, and investors, should consider how these proposals might be reflected in their fund structures once implemented.