A UK home for private funds? HM Treasury consults on potential amendments to United Kingdom limited partnership legislation
HM Treasury has published a consultation paper setting out proposed reforms to UK limited partnerships law with a focus on private fund structures (the “Consultation Paper”). The consultation includes a draft legislative reform order entitled ‘Legislative Reform (Limited Partnerships) Order 2015’ (the “Draft Order”). These reforms are part of the UK Government’s drive to remove “unnecessary legal complexity and administrative burdens to partnerships legislation” and were signalled in the 2013 Budget as part of the UK Government’s Investment Management Strategy.
If enacted, the proposals will bring domestic UK legislation better into line with that of other popular fund domiciles.
English and Scottish limited partnerships are commonly used for private fund structures because of their ability to offer a high degree of contractual flexibility, transparency for UK tax purposes and the limited liability protection they afford to their limited partners. However, the main legislation governing these structures is the Partnership Act 1890 (the “1890 Act”) and Limited Partnerships Act 1907 (the “1907 Act”), and UK partnerships law has consequently fallen behind other common private fund partnership jurisdictions such as Jersey and Guernsey, Delaware and the Cayman Islands (and, lately, Luxembourg with the reform of its partnership legislation), whose regimes offer features that fit better with the terms that private equity and other closed ended private funds typically include. Prior attempts at reforming UK limited partnerships law, most recently in 2003 and 2008, had foundered but practitioners had continued to argue for legislative reform.
The proposed amendments apply to limited partnerships which are considered ‘collective investment schemes’ under section 235 of the Financial Services and Markets Act 2000 but which are not authorised by the UK Financial Conduct Authority.
Designation as a private fund limited partnership
The proposals introduce the concept of a “private fund” limited partnership and, importantly, would only be applicable to a limited partnership that is designated as a private fund vehicle. The Draft Order introduces a process for designation as a private fund vehicle at the point of registration. An existing limited partnership may also elect to become a private fund vehicle under the Draft Order, provided that the election is made within the first year of the changes coming into effect.
A limited partnership electing to be a private fund vehicle would need to disclose the fact on the register of limited partnerships.
Introduction of ‘white list’ permitted activities
In order to preserve its limited liability status, a limited partner needs to restrict its activities so that it is not taking part in the management of the partnership’s business. The proposed reforms would supplement the terms of the 1907 Act (which does not contain a statutory statement of what “taking part in the management” might constitute) to include a list of activities which a limited partner is permitted to undertake without losing its status as a limited partner.
The Draft Order provides a non-exhaustive list of 19 permitted activities, including: (i) taking part in a decision about the variation of the partnership agreement; (ii) taking part in a decision about whether to allow a type of investment or a particular investment by the partnership; (iii) taking part in a decision about whether the partnership should be dissolved; (iv) acting as a director in a general partner or another person appointed to manage or advise the partnership in relation to the affairs of the partnership; and (v) appointing or nominating a person to represent the limited partner on a committee or revoking such an appointment or nomination. This will provide a welcome level of clarity, including as to the position of limited partner advisory committees, and will bring the domestic UK position better in step with many other fund jurisdictions which have long since clarified such issues through their own legislative “safe harbours”.
Removal of requirement to make a capital contribution
Under the 1907 Act, a limited partner is still liable for debts and obligations up to the amount of its capital contribution even if it has withdrawn from the partnership. As a result, limited partners typically make only a nominal capital contribution with the balance of funding provided by an interest free loan or advance to the limited partnership. This limits the limited partner’s statutory liability to a small proportion of their overall investment (although limited partners may of course be required to repay a greater amount as a contractual matter). This split structure is more complicated than non-UK partnership structures which do not require such a distinction to be made, instead allowing a limited partner to invest purely through a capital contribution.
The proposals are intended to reduce the administrative burden of establishing and operating a private fund limited partnership. Examples of the proposed simplification include:
- More limited public disclosure: Less information about the limited partnership would need to be filed with the Registrar than at present. The public register would no longer need to contain sensitive information such as a limited partner’s capital contribution to the partnership.
- Winding up: In certain instances, a court order is required to wind up a limited partnership. The proposals would allow partners in a private fund limited partnership to agree who should wind up a limited partnership without having to obtain a court order, reducing the administrative burden and the time taken to finalise dissolution.
- Removal of Gazette notice requirements: The 1907 Act currently requires a notice to be placed in the London Gazette where either a general partner becomes a limited partner in a limited partnership or a limited partner assigns its interest in a limited partnership to another party. The proposals would remove this requirement for private funds.
Reduced Limited Partner duties
Current legislation, particularly the 1890 Act, places certain statutory duties on limited partners, including a duty to render accounts and information to other partners and a duty to account for profits made in competing businesses. These duties sit awkwardly with limited partners who have a made a purely financial (and not also a time) commitment, and may be invested in multiple private equity funds conceivably pursuing similar investments. They can be burdensome and the information required to be disclosed may be sensitive. Limited partners in private funds would be exempted from these duties if these proposals were to be adopted.
Amendments to the register of limited partnerships
The new proposals would provide the Registrar of Companies with the ability to remove a limited partnership from the register, either by application by the partnership or by the Registrar where the partnership is no longer operating. There is currently no procedure for removing a limited partnership from the register (which is therefore becoming increasingly out of date because it includes partnerships that have been wound down).
Thoughts on the proposals
The Draft Order does not permit limited partnerships outside Scotland to elect to have separate legal personality (meaning that the partnership would be able, amongst other things, to enter into contracts, commence litigation in its own name and hold assets on its own behalf). The Consultation Paper notes that the UK Government is considering the possibility of introducing this concept in the future but more complex legislative proposals will be required.
The proposed introduction of a private fund designation and the associated changes could go a long way to modernising and simplifying the rules governing limited partnerships and make the structure more attractive for private fund managers. While the proposals show an understanding of the shortcomings of existing UK limited partnerships law, we have been here before. It is to be hoped that this time the proposals are in fact turned into enacted legislation.
HM Treasury are seeking comments on the Consultation Paper and the Draft Order, which are requested by 5 October 2015.