New UK legislation is intended to come into effect on 6 April 2017 aimed at addressing some of the issues of the Limited Partnerships Act 1907.
The UK limited partnership is one of the legal vehicles of choice used by the private funds industry. However, the relevant UK legislation (the Limited Partnerships Act 1907) imposes various restrictions on limited partners and gives rise to some uncertainty as to their rights and obligations. New UK legislation is intended to come into effect on 6 April 2017 aimed at addressing some of these issues.
What were the key issues?
Limited partners in a limited partnership are in many respects "sleeping" partners, contributing funding to the venture but not taking part in the day-to-day management and operation of the partnership. To do so risks losing the protection of limited liability. However, historically there has been some uncertainty as to those activities that will, and those that won't, risk a limited partner losing limited liability status.
What is changing and when?
The UK finance industry lobbied Government to bring clarity to the legislation. The result is the draft Legislative Reform (Private Fund Limited Partnerships) Order 2017.
The new legislation is expected to take effect on 6th of April 2017. It establishes a new type of partnership to be called the Private Fund Limited Partnership (PFLP). The current form of UK limited partnership will continue to be available. The benefits of the PFLP are predominantly:
- clarification of the permitted activities of limited partners which will not (of themselves) compromise their limited liability status;
- no need for limited partners to make a capital contribution to the partnership and capital contributions can be withdrawn; and
- a reduction in the reporting requirements in respect of transactions involving limited partners.
The following table summarises the key differences between a traditional UK limited partnership and a PFLP.
What is on the white list?
The "white list" of acceptable activities of limited partners that will not (of themselves) prejudice limited liability status is lengthy. These give the limited partners greater ability to monitor and control the assets and business of the partnership. Some notable examples are:
- taking part in a decision whether the general nature of the partnership business should change;
- taking part in a decision whether a person should become or cease to be a partner;
- taking part in a decision about whether the partnership should end or the term of the partnership should be extended;
- appointing a person to wind up the partnership;
- acting as guarantor for the partnership;
- approving the accounts of the partnership;
- reviewing or approving a valuation of the partnership’s assets;
- discussing the prospects of the partnership business;
- taking part in a decision regarding changes in the persons responsible for the day-to-day management of the partnership;
- acting as a director, member, shareholder or partner in a general partner of the partnership; and
- taking part in a decision approving or authorising an action proposed to be taken by a general partner (for example the disposal of all or part of the partnership business).
How do we take advantage of the changes?
There are two ways for a partnership to become a PFLP:
- on incorporation by application to the Registrar of Companies; and
- an existing limited partnership can apply to the Registrar of Companies to become a PFLP. However, once it has converted, a PFLP cannot revert to being a traditional limited partnership.
What conditions apply?
The PFLP designation will only be available for limited partnerships that meet the private fund conditions, which are:
- the partnership relationship must be governed by a written agreement; and
- the partnership must qualify as a collective investment scheme (CIS), ignoring any exemptions which are available (for example, if your partnership would have qualified as a CIS but for the permitted participant exemption, it can still qualify as a PFLP).
What are the benefits of the PFLP?
In summary, the principal benefits of the PFLP legal structure are:
- a statutory "white list" of appropriate actions that will not (of themselves) prejudice the limited liability protection of limited partners;
- no requirement for limited partners to make a capital contribution, and capital contributions can be withdrawn; and
- reduced public reporting of transactions involving limited partners.
Where can I find out more?
If you would like further information on the PFLP structure, or would like to discuss if and how it may benefit your business, please contact your usual DWF contact, or contact Gary MacDonald or Richard Tall