On 16 January 2017, HM Treasury published a draft Legislative Reform Order ("LRO") to amend the Limited Partnerships Act 1907 ("LPA 1907") and introduce a Private Fund Limited Partnership ("PFLP") structure. The structure will be available to private investment funds (predominantly being those funds not authorised to be promoted to retail consumers) which are structured as limited partnerships.
An English limited partnership is commonly used as an investment vehicle for a variety of funds including private equity, real estate and infrastructure funds. The principal legislation governing such partnerships is the Partnerships Act 1890 ("PA 1890") and the Limited Partnerships Act 1907 ("LPA 1907") (collectively the "Acts").
Both Acts have remained largely unchanged for much of the 20th century and as a result do not accommodate modern requirements. In a market where other jurisdictions, such as Luxembourg and Jersey, have already reacted to investors' requirements to reduce administrative cost and burden, the LRO looks to ensure that UK limited partnerships ("UKLPs") continue to be a preferred option for investors and fund managers alike.
What are the PFLP conditions?
A limited partnership may only be a PFLP if it is:
- constituted by an agreement in writing (this is satisfied by a usual form of limited partnership agreement ("LPA")); and
- a collective investment scheme ("CIS") (as defined by S235 FSMA 2000). This condition will be met and the partnership can be a PFLP even if it takes advantage of one of the exemptions available to a CIS as S235 (5) FSMA is dis-applied.
The general partner will need to confirm that these conditions are satisfied but, practically speaking, a private investment fund structured as a limited partnership should easily satisfy the requirements and have the option to be designated as a PFLP.
How can a limited partnership register as a PFLP?
To register a new PFLP, a Companies House Form LP7 should be completed and filed with the registrar. This form differs from the current form used to establish a limited partnership in that there is no requirement to provide information relating to:
- the nature of the partnership's business;
- the term of the partnership; or
- the sum of capital contributed by any limited partner.
And, as mentioned above, the general partner will be required to confirm that the limited partnership meets the conditions of a PFLP (as set out above).
Existing limited partnerships can apply to become a PFLP using new Companies House Form LP8.
What are the key advantages of the PFLP?
A number of important benefits apply to PFLPs. Of particular note are:
(i) Clarity on what actions limited partners can take
Limited partners are currently entitled to the benefit of limited liability but this is dependent upon them not taking part in the management of the partnership. In most cases, this is not an issue for private funds as the limited partners are passive investors. However, investors are increasingly looking at ways to monitor and protect their investment and yet securing such protection may inadvertently jeopardise their limited liability status.
A "white list" of activities is included within the LRO. This is a list of activities which limited partners may become involved in without automatically being considered as taking part in the "management" of the partnership's business and therefore placing at risk their limited liability status. A number of jurisdictions have adopted this sensible approach already, most notably the State of Delaware, Cayman Islands, Guernsey, Jersey and Luxembourg.
The white list is not aimed at enabling limited partners to carry on management activities, but rather it gives certainty to limited partners that they are able to carry on activities which enable them to monitor and better protect their investment. It provides much needed certainty in this grey area and is a welcome clarification.
Key decisions included in the white list are:
- taking part in a decision about:
- the variation of the partnership agreement;
- whether the general nature of the partnership business should change; and
- partners joining and leaving the partnership.
- approving the accounts of the partnership or a valuation of partnership's assets;
- taking part in a decision about how the partnership should exercise any right as an investor in another collective investment scheme (i.e. a master fund), providing the partnership's exercise of this right would not cause the partnership to be liable for the debts or obligations of the master fund beyond the amount contributed, or agreed to be contributed, by the partnership to the master fund;
- appointing persons to represent the limited partner on a committee (or revoking any such appointment or nomination);
- taking part in a decision authorising the general partner to acquire/dispose of any business; investment or investment rights; and incurring/varying partnership debt; and
- appointing a third party to wind up the partnership.
The list confirms what actions can be taken without prejudicing limited liability, however, for limited partners to acquire such rights they will need to be agreed and contained in the limited partnership agreement. The LRO makes it clear that such activities are permitted only to the extent that they do not amount to taking part in the management of the business. A good example of this distinction is that a limited partner can advise and consent to specific investments but it should not get involved in the selection process or execution of the investment.
(ii) Capital contribution rules updated
The requirement for limited partners to advance a capital contribution to the partnership (and for the details to be registered and hence publicly available) will be abolished for PFLPs. Capital contributions will remain a requirement for ordinary limited partnerships and, if such a partnership converts to a PFLP, then its existing capital contributions will remain available to creditors.
PFLP limited partners that withdraw capital contributed on or after 6 April 2017 will not be liable for the debts or obligations of the partnership beyond the amount of partnership property available to the general partners. This will not apply to contributions made before April 2017.
This will enable private fund finances to be structured more flexibly and aligned with investment objectives. However, in practice, we would anticipate that many PFLPs will still require capital advances but the ability to keep this detail confidential will appeal to both fund managers and investors.
(iii) Winding up a limited partnership
Under the existing system, if a general partner is not available to wind up a limited partnership, the remaining limited partners must apply for the limited partnership to be wound up under the supervision of the court. This can be a time-consuming and costly process.
A PFLP may be wound up without an order of the Court, on the application of the general partner, subject to any express or implied agreement between the partners as to the winding up of the partnership. If there is no general partner, the PFLP may be wound up by a third party appointed by the limited partners (subject to any express or implied agreement between the limited partners as to the winding up of the partnership). This will reduce both the time and cost of a winding up.
(iv) Removal of unnecessary statutory duties
The Government has acknowledged that a number of duties placed upon limited partners under the PA 1890 were not consistent with the role of a passive investor in a private fund. As such, the following sections are dis-applied in respect of PFLPs:
- S28 being the duty of the partners to prepare full accounts and provide these accounts to the other partners within the partnership; and
- S30 being the restriction on partners from carrying on any business of the same nature or competing with the partnership and the duty to account to the partnership for any profits made in connection with such similar/competing business).
These provisions are typically amended in an LPA. In addition, S36 (1) PA 1890 is dis-applied. This provision required notice to be published in the Gazette where a limited partner ceases to be a partner. No notice is required in respect of a change in the limited partners in a PFLP.
(v) Easing administrative requirements
A PFLP will not be required to file at Companies House:
- changes which relate to the nature of the partnership's business;
- changes to the term of the partnership; or
- details of capital contributed by any limited partner to the partnership.
This development is welcome as it will help to keep investment decisions private and confidential.
The requirement to advertise certain matters in the Gazette and for such changes to only take effect when the advertisement has been published in the Gazette has been abolished for PFLPs. The requirement was designed to protect creditors, but in practice the Gazette is not widely monitored for this purpose. This change should reduce unnecessary costs and risks.
On the date of issue of the LRO, the Department for Business, Energy & Industrial Strategy also published a call for evidence to consider whether the current UKLP framework needs to be reviewed.
The call for evidence principally stems from reports that Scottish limited partnerships are potentially being used as vehicles for criminal activity, but the review will also look more broadly at whether limited partnerships need to be reformed (covering transparency requirements, arrangements for ending a partnership, the role of formation agents and a limited partnership's principal place of business for the purposes of registration and service of legal documents).
The call for evidence closes on 17 March 2017.
We anticipate that the PFLP will be very popular with both fund managers and investors. The proposals effectively mean that the partnership will retain the advantages of flexibility, tax transparency and limited liability, while also providing extra safeguards and protections to investors (as noted above).
We welcome the moves being taken by the Government to ensure that the English limited partnership remains a safe, efficient, user friendly model in the global market.