The UK limited partnership ("LP") is the standard structure for European private equity and venture capital funds. The LP in the UK is regulated by the Partnership Act 1890 and the Limited Partnerships Act 1907. Given that these statutes have not changed a great deal in the 100 years since they were enacted, the law surrounding LPs needs to be brought into the 21st Century.
The UK Government is consulting on this in its consultation paper which was published on 23 July 2015. The Government recognises that there is a need to remove the complexity surrounding the current partnership legislation and reduce the administrative burden placed upon LPs. A number of other jurisdictions, such as Jersey and Guernsey, have already enacted legislation which makes their LPs more suitable vehicles for private equity funds.
What is a LP?
By way of background, LPs must have at least one general partner, who has unlimited liability for the debts of the partnership. The other partners are limited partners and their liability is limited to the extent of the capital which they have contributed. It is worth noting that a Scottish LP has separate legal personality, whereas LPs constituted under English law do not. The UK Government has confirmed that it will continue to explore the possibility of allowing English LPs to have separate legal personality, but has decided that it is not possible to do so through the Legislative Reform Order discussed below.
In a typical private equity structure, the general partner will often be a limited company and will be responsible for the management of the LP. The limited partners are independent investors who will contribute capital to the fund.
Proposed changes to the law
In The Legislative Reform (Limited Partnerships) Order 2015 (the "Order"), the UK Government has proposed a number of amendments which can be made to the Limited Partnership Act 1907. Here, we will look at the main changes.
1. Designation as a private fund limited partnership
The proposed changes are only to apply to private fund limited partnerships. Therefore, when a LP is registered, the register will state if it is a private fund limited partnership. This will make it easier to establish which LPs the new regime applies to.
If the LP was registered before these changes come into force, they can apply to be designated as a private fund limited partnership within 12 months of the Order coming into force.
2. List of activities for limited partners
As the law currently stands, limited partners cannot take part in the management of the partnership business. If they do so, they will become liable for the debts and obligations incurred whilst they were taking part in the management of the business. This can create an issue for some investors in private equity funds, as they may be reluctant to take part in monitoring the performance of the fund because they do not want to lose their limited liability.
In order to combat this issue, the draft Order proposes a non-exhaustive list of activities that limited partners in a private fund limited partnership can undertake without losing their limited liability. These activities include taking part in decisions about the types of investments the LP should make and about whether the nature of the partnership business should change.
This provides more certainty for investors and enables them to play a role in monitoring the fund without losing their limited liability.
3. Removal of limited partnerships from the register
Unlike with companies, there is no procedure for removing a LP from the register. Therefore, although private equity and venture capital funds are only intended to have a short life cycle, they remain on the register even after they have been wound down. This means that the register becomes out of date.
The draft Order grants the Registrar of Companies the power to remove LPs from the register if an application is made by the partnership to do so or if the Registrar has reasonable cause to believe that the partnership is inactive.
4. Removal of capital contributions for limited partners
Under the current law, limited partners are required to contribute capital to the LP at the point when they enter the partnership. They are not able to remove the capital from the LP during the life of the LP, otherwise they will be liable for the debts and obligations of the LP up to the amount drawn out. This means that most investors will make a nominal capital contribution to the LP and will make the majority of their commitment through loans.
In order to avoid unnecessary complications, the draft Order removes the requirement for limited partners to make a capital contribution in a private fund LP. This is a welcome change as it was difficult to understand why limited partners were required to make such nominal contributions of capital in the first place. The draft Order also removes the liability of limited partners in private fund LPs where they have withdrawn their capital contribution.
The long overdue changes set out in the draft Order ensure that the UK maintains its edge in an increasingly competitive global market and it will bring us into line with a number of other jurisdictions. The comments on the proposals and draft Order are requested by 5 October 2015.