Following the Government’s July 2015 consultation, the legislative reform order (LRO) to introduce private fund limited partnerships (PFLPs) was laid before Parliament on 16 January and is expected to come into force on 6 April 2017.
The LRO amends the Limited Partnerships Act 1907 and introduces a new regime which applies to UK limited partnerships which satisfy certain conditions and elect to be treated as a PFLP. The purpose of the new regime is to ease the level of administrative burden which currently applies to investment funds structured as UK limited partnerships and to ensure that the UK remains an attractive domicile for such funds.
Becoming a PFLP
An application for PFLP status may be made by the general partner of a limited partnership at the time of initial registration of the partnership or at any time after registration. An application for PFLP status may be made in respect of a limited partnerships which is already in existence on 6 April 2017 but the ability to withdraw capital contributions without being liable for the debts and obligations of the partnership up to the amount withdrawn will only apply to capital contributions made on or after 6 April 2017.
In order to apply for PFLP status, a limited partnership must satisfy the following PFLP conditions:
- It must be constituted by an agreement in writing; and
- It must be a collective investment scheme (as defined in section 235 of the Financial Services and Markets Act 2000 but ignoring, for this purpose, any exemption).
Although satisfaction of the PFLP conditions will need to be assessed on a case-by-case basis, in practice any private investment fund which is structured as a limited partnership should satisfy these requirements and have the ability to be designated as a PFLP.
The Government’s 2015 consultation had proposed that satisfaction of the PFLP conditions should be certified by a solicitor. It is welcome that satisfaction of these conditions is now a matter for the general partner to confirm because this will reduce the cost of electing for PFLP status and satisfaction of the conditions will depend on the facts of the partnership’s situation, which will be known to the general partner.
Advantages of becoming a PFLP
A number of important benefits will apply to PFLPs which do not apply to other limited partnerships, including:
- a white list of activities which provide clarity on the activities which limited partners can carry out without being considered to be taking part in the management of the partnership and placing their limited liability status at risk;
- the removal of the requirement for limited partners in new PFLPs to contribute capital and (in relation to capital contributions made on or after 6 April 2017) the removal of the restriction on withdrawing capital contributions without being potentially liable for the debts and obligations of the partnership up to the amount withdrawn;
- greater freedom in relation to who may wind up a limited partnership which is a PFLP;
- exemption from certain statutory duties; and
- easing of certain administrative requirements.
We examine each of these in greater detail below.
White list of permitted activities
Limited partners who take part in the management of the partnership’s business are liable for all the debts and obligations of the partnership which are incurred whilst taking part in the management of the partnership’s business. This potential loss of limited liability can be a matter of serious concern to investors in investment funds which are structured as limited partnerships.
The LRO introduces a non-exhaustive list of actions that will not be considered to be taking part in the management of a PFLP. This approach, which is already in place in a number of non-UK jurisdictions is intended to ensure that the UK remains an attractive fund domicile.
It should be noted that the white list is not a list of actions which limited partners will be able to undertake by right, so the ability of limited partners to carry out such actions will still be a matter for agreement between general partners and limited partners. However, it clarifies the position on what is currently a grey area.
Importantly, the white list does not create any adverse presumption for limited partnerships which are not PFLPs, so the current position on what amounts to taking part in the management of a partnership’s business will continue to apply to non-PFLP limited partnerships.
The white list is extensive and key permitted actions include taking part in decisions about:
- varying or waiving a term of the partnership agreement;
- whether the general nature of the partnership’s business should change;
- whether any person should become or cease to be a partner; or
- whether the partnership should terminate or whether the term of the partnership should be extended;
- taking part in a decision about who is responsible for the day-to-day management of the partnership;
- consulting or advising a general partner, or anyone appointed to manage or advise the partnership, about the affairs of the partnership;
The white list also takes part in a decision approving or authorising the general partner, or anyone appointed to manage the partnership, to take any action, including any proposal to appoint or nominate persons to represent a limited partner on a committee (or revoking any such appointment or nomination) including:
- to dispose of all or part of the partnership business or to acquire another business;
- to acquire or dispose of a type of investment or particular investment;
- for the partnership to incur, extend, vary or discharge a debt; or
- for the creation, extension, variation or discharge of any other obligation of the partnership.
Removal of requirement to contribute capital and restriction on withdrawal of capital
The existing requirement for limited partners to contribute capital on becoming a limited partner will be abolished for partnerships which are PFLPs at the time of initial registration of the partnership. The requirement to contribute capital will remain for non-PFLP limited partnerships, even if they are subsequently designated as a PFLP.
Limited partners in PFLPs will be able to withdraw capital contributions made on or after 6 April 2017 without being liable for the debts and obligations of the partnership up to the amount so withdrawn. However, the existing position will continue to apply in relation to capital contributions made before 6 April 2017, even if the partnership is subsequently designated as a PFLP.
Currently, a limited partnership must be wound up by its general partner unless a court order is obtained. This can be time-consuming and expensive.
Under the changes introduced by the LRO, a PFLP can be wound up without a court order. If the PFLP still has one or more general partners, the basic position is that the general partner(s) must wind up the affairs of the partnership unless the partners have decided otherwise. Where a PFLP no longer has a general partner, the limited partners may appoint a person who is not a limited partner to wind up the partnership’s affairs.
Exemption from statutory duties
The changes introduced by the LRO disapply the duties set out in two sections of the Partnership Act 1890 which are seen as inconsistent with the role of an investor in an investment fund:
- The duty in section 28 for a partner to provide true accounts and full information of all things affecting the partnership to any other partner; and
- The duty in section 30 for a partner which carries on any business of the same nature which competes with that of the partnership without the consent of the other partners to account for and pay over to the partnership all profits made by him in the competing business.
In practice, these sections are typically disapplied in the partnership agreement for a limited partnership which is an investment fund but it is helpful that the LRO recognises that these are unlikely to be appropriate for a PFLP and to make this the default position.
Easing of administrative requirements
The changes which are introduced by the LRO remove the requirement to make certain filings with the registrar for limited partnerships in respect of a PFLP:
- Notification of changes which relate to the nature of the partnership’s business
- Notification of changes to the term or character of the partnership.
- Notification of the sum contributed by any partner.
The removal of these requirements is likely to be welcomed by investment funds which are structured as limited partnerships because they may help to keep investment decisions private.
The administrative burden on PFLPs is also lightened because there will be no requirement to publish transfers of limited partnership interests in a PFLP in the Gazette and because the LRO disapplies the provisions of section 36(1) of the Partnership Act 1890 (which provides that, until a person has notice of a change in a partnership’s constitution, he is entitled to treat all apparent members of the old partnership as still being members of the partnership).
Although PFLPs will still be required to publish a Gazette notice when a general partner ceases to be a general partner, the date of publication will not determine the effective date of the change. However, any person dealing with a person who has ceased to be a general partner of a PFLP will be entitled to treat the retired general partner as a general partner until he has notice of the retirement.