Limited partnerships are a key tool in the structuring of the majority of private equity funds set up in the UK. Acknowledging this, the Government has proposed to establish a new regime for private funds structured as limited partnerships.
Reform of the Limited Partnerships Act 1907 (the "Act") has been on the Government's agenda since the 2013 Budget and in July 2015 the Government issued a consultation paper and draft Legislative Reform Order setting out proposed amendments to the Act. Following the consultation, the Government has now issued its response, which will see the Act undergo several changes.
Designation of private fund limited partnerships
The key change is the introduction of a new designation or species of limited partnership - the private fund limited partnership ("PFLP").
In order to qualify as a PFLP, a limited partnership will have to satisfy the definition of a "collective investment scheme" as defined in section 235 of the Financial Services and Markets Act 2000 ("FSMA"). The exceptions which apply to this definition when it is used in other contexts will not apply to PFLPs.
A PFLP will be designated as such at the point at which it registers as a limited partnership. Registration as a PFLP will require a certificate to be made by the general partner of the PFLP, confirming that the limited partnership will meet the criteria of a PFLP.
Limited partnerships registered prior to the new legislation coming into force will be able to convert to PFLP status but, once converted, cannot re-convert back to general limited partnership status.
The Act currently requires a limited partner to make a contribution of capital at the time of entry into the partnership. The limited partner's liability is limited to the amount of their contribution and if they withdraw the capital then the limited partner is liable for the LP's debts and obligations up to the amount they receive back. Any increase in capital contribution must be declared.
Under the new rules, limited partners will not be required to make a capital contribution to the PFLP, although they will have the option to do so.
For partnerships established before the introduction of the new rules but which subsequently convert the PFLP regime, the pre-PFLP capital contributions do not transfer and so cannot be withdrawn. If such contributions are withdrawn then the limited partner will remain liable. Such capital contributions will still need to be declared by the limited partnership. However, contributions made after the conversion to the PFLP regime will be capable of being withdrawn without liability and without declaration.
Once a partnership established after the introduction of the new rules converts to the PFLP regime, any capital contributions made before the PFLP regime will transfer so that all capital contributions of the PFLP can be withdrawn and do not require to be declared.
White list activities
Currently, a limited partner may not take part in management of the limited partnership's business without becoming liable for the LP's debts incurred for the period during which they were involved in the management.
Under the Act, there is no guidance of what constitutes "taking part in the management of the partnership business" and it is therefore unclear what limited partners may do without losing their limited liability.
A new, non-exhaustive, "white list" of activities that a limited partner in a PFLP may undertake without being considered to be taking part in the management of the business will be introduced as part of the new rules. It is hoped this will help partners to understand which activities they can undertake without risking their limited liability.
The white list includes taking part in a decision about:
The white list includes taking the following actions:
- There will be no facility to allow PFLPs to be removed from the limited partnership register. This means that, as with limited partnerships, anyone searching the register will be unable to tell if a PFLP is still active.
- Where a general partner has been removed, the limited partner can appoint a third party to wind up the partnership on its behalf. As a result of the white list, taking part in the decision to wind up will not result in the limited partner losing their limited liability
- PFLPs will not be required to declare the nature or the term of the partnership at the point of registration.
- Where a limited partner assigns an interest in a PFLP to another person, the partnership will not be required to advertise that fact in the Gazette. The requirement to advertise the fact that a general partner has become a limited partner will remain but the current provision, which delays the effect of the change until advertisement, will be removed.
The Government will put forward draft legislative amendments in due course with the intention that the changes will be in place within a year. While these changes only affect those limited partnerships which convert to PFLP status, it seems likely that future consultations on wider changes to all limited partnerships will take place in the near future.
Morton Fraser has a wide experience of advising clients on the establishment of private equity funds and other private fund structures using limited partnerships. If you have any questions about the PFLP regime or any matter relating to private funds or limited partnerships, please get in touch.