Two new types of limited partnership have been introduced in Jersey - the separate limited partnership and the incorporated limited partnership.
The new forms differ from a conventional limited partnership in that each has a separate legal personality. The incorporated partnership is further distinguished by being constituted as an independent body corporate and by having perpetual succession.
A separate partnership or incorporated partnership may be formed for any lawful purpose and is not subject to any formal requirement to carry on business with a view to profit. Fund sponsors will now benefit from the additional flexibility of having a wider range of partnership vehicles available in a single jurisdiction.
The Separate Limited Partnerships (Jersey) Law 2011 came into force on April 20 2011.
The key features of a separate partnership are:
- a separate legal identity distinct from that of its partners;
- an unincorporated status; and
- an unlimited legal capacity to enter into contracts.
The characteristics of a separate partnership are similar to those of a Scottish limited partnership.
Title to the property of a separate partnership may be vested in the name of its general partner or in the name of the separate partnership itself. In the case of a separate partnership set up to operate as an investment fund vehicle, many sponsors will find it attractive to have investment assets registered directly in the name of the fund partnership. A separate partnership's property will be held for the benefit of its partners in equal undivided shares or otherwise in accordance with the terms of the limited partnership agreement.
The general partner of a separate partnership has unlimited liability for the debts and obligations of the partnership. A limited partner has no liability for the debts and obligations of a separate partnership, unless:
- it has participated in the management of the separate partnership;
- a creditor counterparty of the separate partnership had actual knowledge of management participation on the part of the limited partner and had reasonable grounds to believe that the limited partner was acting as a general partner; and
- the separate partnership becomes insolvent.
The separate partnerships law specifically identifies a number of safe harbours that would enable a limited partner to exercise a degree of influence over a partnership's business strategy without constituting participation in management. These include acting as a director of a corporate general partner and providing advisory services to the separate partnership.
A limited partner's contribution to a separate partnership may be in the form of money, property or services, and its liability will be limited to the extent that its actual contribution is less than its partnership commitment. A limited partner is not required to repay any amount of capital contribution that is subsequently returned to it by the partnership, unless at the time of payment the separate partnership was cash-flow insolvent (or became insolvent as a result of making such payment). Where a separate partnership is insolvent at the time of the payment (or becomes so immediately after payment is made), the claw-back period for return of capital is limited to six months (except in the case of fraud).
The profits of a separate partnership vest immediately in the limited partners without any requirement for a formal distribution or declaration. Distributions of profit are not exposed to the risk of claw-back if the separate partnership was cash-flow solvent at the time of payment (and remained solvent immediately after payment is made). The claw-back period is limited to six months from the date of payment.
A further feature of the separate partnership is that a loan advanced to the partnership by a limited partner will, on dissolution of the separate partnership, rank equally with external leverage provided by a third-party unsecured creditor. The limited partner is not subject to any statutory subordination to external creditors, as would apply under limited partnership law in the United Kingdom and elsewhere.
A separate partnership must keep accounting records that are sufficient to show its transactions and disclose its financial position with reasonable accuracy. There is, however, no Jersey law requirement for a separate partnership or its general partner to comply with International Financial Reporting Standards or the UK Partnership (Accounts) Regulations 2008. Additionally, there is no requirement to have partnership accounts audited, filed with any regulatory authority or made available for public inspection.
In most other material respects the separate partnership is closely modelled on the conventional Jersey limited partnership.(1)
The Incorporated Limited Partnership (Jersey) Law 2011 came into force on May 26 2011.
The key features of an incorporated partnership are:
- a separate legal personality distinct from that of its partners;
- an incorporated status with perpetual succession; and
- an unlimited legal capacity to enter into contracts.
Other than as described below, many of the structural elements and principal characteristics of a separate partnership that are referred to above will apply in relation to an incorporated partnership.
Agency of general partner
An incorporated partnership is required on formation to have at least one limited partner and at least one other person to act as a general partner (who may also be a limited partner). Unlike a conventional limited partnership (or a separate partnership), an incorporated partnership will be unaffected by any change in status or identity of its partners. Having perpetual succession means that an incorporated partnership will continue to exist indefinitely as a legal person until dissolved by operation of law. The withdrawal or legal incapacity of a sole general partner of an incorporated partnership will not cause its dissolution.
Consistent with the status of an incorporated partnership as an independent body corporate, its general partner is designated as being an agent of the partnership (and not of the partners collectively). The general partner of an incorporated partnership has a fiduciary duty to act honestly and in good faith with a view to the best interests of the partnership and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The duties of a general partner of an incorporated partnership are broadly equivalent to those imposed on a director of a limited liability company.
Title to the property of an incorporated partnership may be vested in the name of the incorporated partnership itself or in the name of its general partner.
A payment obligation incurred by a general partner in relation to an incorporated partnership is a primary and direct liability of the partnership. If the incorporated partnership fails to discharge any payment obligation as it falls due, the general partner will, by way of secondary obligation, be liable personally to make good any shortfall. Although only limited partners are eligible under the legislation to benefit from a legal limitation in liability, in practice the owners of a general partner can effectively limit their exposure to liability by using a limited liability company or a further limited partnership to act in the general partner's role.
From a structuring perspective, one of the principal attractions of the limited partnership form is that it is generally treated as being transparent for tax purposes. The partnership itself will therefore not be assessed to tax and any profits and gains will be attributed directly to the partners themselves, who will be subject to tax on their proportionate share of such profits and gains in their place of tax residence.
Although specific advice would need to be taken in relation to any individual cases, leading counsel's opinion has been obtained in relation to the likely UK characterisation of both separate partnerships and incorporated partnerships. UK counsel envisage that separate and independent partnerships would be treated as tax transparent for UK income and corporation tax.
UK counsel are also of the view that because the property of a separate partnership is beneficially owned by the partners, the separate partnership is likely to be treated as transparent for UK capital gains tax. In the case of an incorporated partnership, partnership property will either be vested in the name of the partnership as principal or held by the general partner as agent of the incorporated partnership and, accordingly, treated as non-transparent for capital gains tax.
It is expected that the separate limited partnership will have a range of applications in relation to investment funds and private equity structures, particularly for carried interest and management group incentive arrangements. It is also anticipated that fund sponsors and their professional advisers will wish to take advantage of the cost efficiencies of having the fund partnership vehicle, the carried interest partnership and their respective general partners established in a single jurisdiction.
The two new forms of limited partnership are also expected to be used for a variety of corporate finance and private wealth purposes.
A limited partner of either a separate partnership or an incorporated partnership does not participate in management by doing any one or more of the following:
- being a contractor for or an agent or employee of the partnership or of a general partner, or acting as a director, officer or shareholder of a corporate general partner;
- consulting with and advising a general partner with respect to the activities of the partnership;
- investigating, reviewing, approving or being advised on the accounts or affairs of the partnership or exercising any right conferred by law;
- acting as surety or guarantor for the partnership either generally or in respect of specific obligations; and
- voting or otherwise signifying approval or disapproval of:
- the acquisition or disposal of any asset of the partnership or creating security over any of its assets;
- change in the activities of the partnership;
- change of general partner or limited partner; or
- dissolution of the partnership.
The possession or exercise of any other power by a limited partner will not necessarily constitute participation by such limited partner in management.
For further information on this topic please contact Michael Lombardi, Tim Morgan or Daniel Richards at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected], [email protected] or [email protected]).
(1) See briefing on "Limited Partnerships in Jersey" available at www.ogier.com/publications.