A new form of limited partnership, the private fund limited partnership (PFLP), has been introduced in the UK from 6 April 2017. This follows industry lobbying to modernise UK limited partnership law and preserve the UK limited partnership as a structure of choice for private equity and venture capital funds.
Limited partnerships in the UK are regulated by the Limited Partnerships Act 1907 (the 1907 Act), legislation which, until now, had remained largely unchanged for over 100 years. The Legislative Reform (Private Fund Limited Partnerships) Order 2017 amends that legislation to provide for the PFLP.
Only those UK limited partnerships which qualify and elect to be PFLPs will be within the new regime. A limited partnership can become a PFLP if it is:
- subject to a written agreement; and
- a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000 (or would be but for the exemptions in section 235(5)).
Application to be a PFLP:
Provided a limited partnership satisfies these conditions, the general partner can apply to Companies House for PFLP designation either on first registration of the partnership or afterwards.
A certificate of designation as a PFLP issued by Companies House is conclusive evidence that the limited partnership is a PFLP.
A general partner of a limited partnership which existed on 6 April 2017 and meets the private fund conditions can, subject to any internal requirements, apply immediately for PFLP status for the partnership.
A limited partnership which is a PFLP will still have a name ending with "limited partnership" or "LP".
The 1907 Act provides that a limited partner may not take part in managing the partnership business. Any limited partner who does so can be liable for all debts and obligations of the limited partnership as if they were a general partner.
There has been much uncertainty about the boundaries of this restriction. A significant change, therefore, for PFLPs is a new, non-exhaustive, list (a so-called "white list") of actions which will not be considered management of the business. The actions on the white list are intended to provide limited partners of a PFLP with enough scope to monitor and assess investment performance and to approve actions of the general partner. The white list is not intended to prejudice the role of the general partner, and the actions on the list are not rights for limited partners. Whether a limited partner can carry out white list actions or not remains dependent on the terms agreed in the partnership agreement.
Examples of white list actions are:
- taking part in a decision about changing the partnership agreement or business;
- appointing a person to wind up the partnership;
- approving the accounts;
- discussing the prospects of the partnership business;
- taking part in a decision about changes in those responsible for the day-to-day management of the partnership;
- acting as a director, member, employee, officer or agent of, or a shareholder or partner in, a general partner (or another person appointed to manage or advise the partnership) provided this does not involve a limited partner taking part in managing the partnership business;
- taking part in a decision approving an action proposed by the general partner or another person appointed to manage the partnership.
The white list does not create any presumptions for limited partners in limited partnerships which are not PFLPs.
The 1907 Act requires a limited partner to make a capital contribution to the partnership and makes the limited partner liable for any capital contributions withdrawn during the life of the partnership. In contrast, for all new PFLPs there is no capital contribution requirement.
For limited partnerships which existed before 6 April 2017 and are transferring to PFLP status, capital contributions already made are treated as under the former regime. For limited partnerships registered on or after 6 April 2017 which later transfer to PFLP status, the treatment of capital contributions will also transfer. This means that all capital, whenever contributed, can be withdrawn.
Under the 1907 Act only the general partner can wind up a limited partnership unless a court orders otherwise. Where the general partner has been removed, this can be administratively burdensome. For a PFLP with no general partner, the limited partners can appoint a person who is not a limited partner to carry out the winding-up. Where a PFLP has a general partner, the partners generally may agree that a person other than the general partner should carry out the winding-up.
Under the 1907 Act if a general partner becomes a limited partner or a limited partner assigns its partnership interest, these are only effective once advertised in the Gazette. In contrast, for PFLPs there is no requirement to advertise the transfer of a limited partnership interest. A general partner of a PFLP must still advertise on becoming a limited partner. However, the date of the notice does not decide the effective date of the change.
Limited partners in a PFLP are exempt from the requirement for limited partners to comply with the statutory duties in sections 28 and 30 of the Partnership Act 1890. (These require partners to render accounts and information about matters affecting the partnership to other partners, and to pay to the firm profits made in competing businesses. These requirements were considered inappropriate for passive limited partner investors.)