On 23 July 2015, HM Treasury published a consultation paper on certain proposed amendments to the Limited Partnerships Act 1907, the principal legislation governing English and Scottish limited partnerships (the “1907 Act”). The proposed amendments are intended to “ensure that the UK limited partnership remains the market standard structure for European private equity and venture capital funds as well as many other types of private fund.”1
The consultation comes after extensive discussions between the British Private Equity & Venture Capital Association (the “BVCA”) and HM Treasury regarding the state of current UK limited partnership law. Debevoise & Plimpton and a number of other market participants assisted the BVCA with this process. The consultation period came to an end on 5 October 2015.
Brief History of Past Failures
The 1907 Act has remained in force with only minor amendments since its enactment. However, this is not the first attempt to reform UK limited partnership law in recent years.
In 2003, the Law Commission and the Scottish Law Commission2 (together, the “Law Commissions”) undertook a detailed review of UK partnership law (covering general partnership law and limited partnership law) and made a number of recommendations to the UK government. In 2008, the predecessor to the Department of Business, Innovation and Skills (“BIS”) consulted on wide-ranging reforms, based largely on the Law Commissions’ recommendations in 2003. That consultation resulted in only limited amendments to the 1907 Act.
The amendments proposed in HM Treasury’s current consultation are technical in nature. They do not, and are not intended to, go so far as those proposed in 2003 or 2008. If enacted, however, the proposed amendments would bring UK limited partnership law into line in certain key respects with limited partnership law in other jurisdictions in which private funds are typically established (such as the Cayman Islands, the Channel Islands, Delaware and Luxembourg).
Application of the New Regime
Private Fund Conditions
If enacted, the proposed amendments will apply only to UK limited partnerships that are “private fund limited partnerships” (a new statutory concept). A UK limited partnership will be capable of qualifying as a private fund limited partnership if the following conditions (the “private fund conditions”) are satisfied:
- the limited partnership is constituted by a written agreement, and
- the limited partnership is a “collective investment scheme” (or would be but for the group exemption).3
These are not difficult conditions for a private fund to satisfy. The purpose of the private fund conditions is not to create a particularly narrow new regime; rather, it is to ensure that the new regime is one that applies to private investment funds and not to any other type of vehicle that may take the form of a UK limited partnership. This is because, in general, UK limited partnership reform falls within the remit of BIS. However, after it received mixed feedback to its 2008 consultation, BIS declared that it would not pursue any further reforms to UK limited partnership law (other than the limited reforms that were enacted in 2009). HM Treasury is able to reform UK limited partnership law insofar as that reform would benefit the UK asset management industry. Accordingly, the proposed new regime is intended to impact a subset of UK limited partnerships only, i.e., those that are used for private funds.
One-off Elective Regime
It is not mandatory for a UK limited partnership that satisfies the private fund conditions to be designated as a private fund limited partnership and so fall within the new regime. If a UK limited partnership satisfies the private fund conditions, the general partner of that limited partnership may elect for that limited partnership to be designated as a private fund limited partnership either (i) in the case of a UK limited partnership registered after the proposed amendments are enacted, at the time of registration or (ii) in the case of an existing UK limited partnership, within one year after the proposed amendments are enacted.4 If such election is not made, the UK limited partnership (even where it satisfies the private fund conditions) will not fall within the new regime.
It is not possible for a private fund limited partnership to be re-designated as a (non-private fund) limited partnership. Once designated as a private fund limited partnership, the private fund conditions are not tested on an ongoing basis.
Proposed Scope of the New Regime
The most note-worthy of the amendments proposed in the consultation are summarised below.
Adoption of a ‘White List’
Currently, if a limited partner of a UK limited partnership takes part in the management of the partnership business, it will have unlimited liability for the debts of that limited partnership incurred while it takes part in the management. However, there is no authoritative guidance on what taking part in the management of the partnership business means. As a result, there is a degree of uncertainty as to what a limited partner of a UK limited partnership may do without jeopardising its limited liability status.
The consultation proposes introducing a “white list” of activities that a limited partner of a private fund limited partnership may perform without jeopardising its limited liability status.
5 The list itself is drafted broadly and covers activities such as approving or vetoing investments, as well as more mundane limited partner governance matters (e.g., approving financial accounts, appointing a person to represent the limited partner on the private fund’s advisory committee and taking part in a decision in respect of a potential or actual conflict of interest).
The white list does not seek to prescribe what rights the limited partners in a private fund will have. Instead, the white list will enable the general partner and limited partners of a private fund limited partnership to give effect to their commercial agreement on what governance, review and oversight rights the limited partners should have, with the added certainty that the limited partners may undertake activities that fall within the categories of activities set out in the white list without jeopardising their limited liability status.
Abolition of the Two Rules on Capital
Currently, a limited partner of a UK limited partnership must contribute capital on its admission as a limited partner in order to secure its limited liability status (i.e., capital must be drawn down from, or advanced on behalf of, an investor concurrently with its admission as a limited partner). Further, a limited partner of a UK limited partnership that withdraws capital contributed to that limited partnership during the life of that limited partnership will be liable for the debts of that limited partnership up to the amount of capital withdrawn.
As a consequence of these two rules on capital, a convoluted and overly prescriptive approach has developed in respect of the admission of a limited partner to a UK limited partnership and the distributions made to a limited partner during the life of that limited partnership.
Currently, it is typical for an investor in a private fund formed as a UK limited partnership to have its total funding commitment split between a nominal capital contribution and a contractual undertaking to fund the balance of its commitment by way of interest-free loans or advances. The primary reason for the capital/loan split is to enable an investor to receive distributions from a private fund formed as a UK limited partnership in respect of its commitment prior to the end of the life of that limited partnership without being subject to a statutory obligation to return such distributions. This split often results in complications, as well as confusion for those unfamiliar with UK limited partnership law.
The consultation proposes abolishing:
- the requirement for a limited partner of a private fund limited partnership to contribute capital to that limited partnership; and
- the restriction on a limited partner of a private fund limited partnership withdrawing capital contributed to that limited partnership during the life of that limited partnership.
The abolition of the two rules will allow a limited partner of a private fund limited partnership to fund the full amount of its commitment to that limited partnership by way of capital contributions only, while also allowing the flexibility for a private fund sponsor to continue to employ the traditional capital/loan split for a private fund limited partnership if it wishes.
Introduction of a More Streamlined Approach to Publicly Available Information
The existing registration process in respect of UK limited partnerships is complicated insofar as it requires certain information about a limited partnership’s status to be registered, namely: (i) the general nature of the limited partnership’s business and (ii) the term of the limited partnership. This information forms part of a publicly accessible register that is maintained by Companies House.
The consultation proposes a simplified registration process for private fund limited partnerships, with a reduction in the amount of information that has to be included in an application for registration when compared with what is currently required for a UK limited partnership. For example, the amount of a limited partner’s capital contribution would no longer have to be notified to Companies House. This proposal would also reduce the amount of information about a private fund limited partnership that is made available to the public.
In addition, the consultation proposes abolishing the requirement to advertise publicly certain changes to a private fund limited partnership. Currently, an advertisement must be placed in the London Gazette if, for example, a limited partner of an English limited partnership assigns any portion of its interest in that limited partnership to another person.
The consultation period ended on 5 October 2015.
If HM Treasury decides to take forward any reforms, the reforms will be enacted by way of a legislative reform order.
8 Based on correspondence with HM Treasury, it is expected that the final legislative reform order will be put before UK parliament early in 2016.
1 As an aside, technically there is no such vehicle as a “UK limited partnership.” There are two different forms of limited partnership governed by the 1907 Act that are commonly utilised in the private fund context – English limited partnerships and Scottish limited partnerships. The primary difference between an English limited partnership and a Scottish limited partnership is that the former does not have separate legal personality. In this article, any reference to a UK limited partnership is a reference to both an English and a Scottish limited partnership.
The Law Commission and the Scottish Law Commission are independent bodies established to keep English law and Scottish law, respectively, under review and to recommend reform where it is needed.
3 A common theme in a number of responses submitted in respect of the consultation was that the “collective investment scheme” condition should be further broadened.
A vehicle constitutes a “collective investment scheme" if it falls within the definition of such term as set out in section 235 of the Financial Services and Markets Act 2000. There are certain prescribed exemptions that apply to arrangements that would otherwise constitute collective investment schemes, which are set out in the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001. One such exemption is known as the “group exemption” (in general, an arrangement that would otherwise constitute a collective investment scheme will not constitute a collective investment scheme when all its participants are bodies corporate in the same group; broadly speaking, a “body corporate” is a legal vehicle that has separate legal personality).
4 In its response to the consultation, the BVCA recommended that a UK limited partnership should be able to be designated as a “private fund limited partnership” at any time, so long as the limited partnership satisfies the private fund conditions at the time of designation.
5 Adoption of the “white list” will bring the “private fund limited partnership” in line with limited partnerships established in Delaware, the Cayman Islands, the Channel Islands and Luxembourg.
6 Companies House incorporates and dissolves UK companies and limited liability partnerships and registers UK limited partnerships, registers the information they are legally required to supply and makes that information available to the public.
7 The name of each limited partner of a UK limited partnership is publicly accessible information. The consultation does not propose to alter this position. A number of respondents to the consultation recommended that this requirement be abolished.
8 A legislative reform order is a statutory instrument that can amend primary legislation (such as the 1907 Act) without the need to follow the full parliamentary process for primary legislation. A minister of the UK Government may make a legislative reform order for the purpose of removing or reducing any burden to which any person is subject as a result of any legislation.