In this article, Senior Associate Ryan White and Solicitor Alina McNess look at what the changes mean for partnerships in Western Australia.
Limited partnerships provide a unique business structure, allowing partnerships between ‘general partners’, who manage the business of the partnership, and at least one ‘limited partner’, whose liability is limited but who is a passive investor. Limited partnerships are regulated separately to ‘ordinary’ partnerships.
Because of their unique structure, limited partnerships provide an attractive investment vehicle. In particular, the structure has come to be favoured by the venture capital investment industry, in part because of the favourable taxation treatment of investments into limited partnerships. Recent changes to those tax benefits are set out in our previous alert.
In line with this, the purpose of the Act is twofold. Critically, the Act offers a much-needed overhaul of the existing legislation, providing a modern regulatory approach to limited partnerships. It also seeks to stimulate further development of innovative industries in Western Australia by encouraging and incentivising venture capital investment. Encouraging innovation is a key commitment of all levels of government in Australia and the Act seeks to achieve this, inter alia, by permitting incorporated limited partnerships.
Incorporated Limited Partnerships (ILPs)
ILPs are a modern limited partnership structure, restricted to use with the Venture Capital Act 2002 (Cth). Registration as an ILP gives the limited partnership a separate legal personality, with the general partner acting as agent of the ILP. This structure ensures that liability is attributed to the ILP and not the partners of the ILP. Limited partner investors in the ILP have no liability for the liabilities of the ILP or the general partner, beyond the capital they have contributed. ILPs also allow venture capital investors to take advantage of tax concessions as noted above. Providing for ILPs brings Western Australia into line with other jurisdictions and removes a barrier to venture capital investment in Western Australia.
In a limited partnership, the limited partner is restricted from undertaking ‘management’, at the risk of losing their limited liability status. The Act expands the activities which a limited partner may be involved in and still retain limited liability status. For limited partners of ILPs, these safe harbour provisions are expanded even further, recognising the active role that limited partners in ILPs may play in safeguarding their investment and in advising and assisting the partnership or the general partners in certain circumstances.
In order to protect third parties, the Act requires all limited partnerships (including ILPs) to identify themselves when conducting business activities.
In addition, the Act:
- requires partners in an ILP to have a written partnership agreement which sets out the partners’ interests, rights and duties (although we recommend that all partnerships should have a partnership agreement in place);
- introduces provisions disqualifying certain persons from managing limited partnerships and ILPs. In particular, the Act disqualifies the following persons (subject to a right to apply to the Commissioner for Consumer Protection for leave) from being a general partner of a limited partnership or an ILP, or managing a limited partnership or ILP:
- a person convicted of an offence involving fraud or dishonesty punishable on conviction by three months or more imprisonment;
- a person convicted of an offence and in prison serving a sentence of imprisonment;
- a person who has been convicted of an offence against the Act prescribed by the regulations; and
- a person who is disqualified from managing a corporation under the Corporations Act 2001 (Cth) or is disqualified by the regulations;
- includes powers for the Commissioner to investigate potential breaches of the legislation, incorporating the investigation and enforcement provisions of the Fair Trading Act 2010 (WA) to enable the Commissioner to investigate potential breaches of the Act; and finally
- clarifies the winding up and dissolution provisions for limited partnerships and ILPs.
The Act represents a positive step in modernising Western Australia’s regulatory framework around limited partnerships and should serve to encourage venture capital within WA.