Limited partnerships for private funds - response to consultation

On 24 March 2016, HM Treasury published its response to comments received on its July 2015 consultation, Proposal on using Legislative Reform Order to change partnership legislation for private equity investments.
See our previous article, summarising the proposed amendments to the Limited Partnerships Act 1907.

The main aim of the reform is to improve the UK’s competitiveness in the private fund industry and remove any unnecessary legal complexity and administrative burdens caused by the current legislation. With these aims in mind, and taking into account the responses to the consultation, the Government intends the draft legislative amendments to include the following proposals:

• Although it was accepted that some of the changes would benefit all limited partnerships, not only private funds, the legislation will currently only apply to those funds designated as a Private Fund Limited Partnership (PFLP).
• In order to be designated as a PFLP, the Government accepted that the requirement for a solicitor’s certificate is too burdensome and so will, instead, require confirmation from the general partner that the partnership fulfils the requirements to qualify as a PFLP.
• It is accepted that not all limited partnerships will be able to transfer to the new regime in the 12 month transitional period, so it will be possible to transfer at any time. Once a partnership becomes a PFLP however, it will not be able to return to a "plain" limited partnership status.
• The definition of collective investment scheme (CIS) for PFLP purposes is to be amended to exclude the exemptions in section 235(5) of FSMA 2000, therefore allowing funds which might otherwise fail to be categorised as CIS for FSMA purposes to benefit from the PFLP scheme.
• A strike off procedure will not be introduced at this stage but will be considered in the future.
• The white list of activities that a limited partner may undertake without being considered as “taking part in the management of the partnership business” will be amended. Specifically the amendments will clarify:
  • that a limited partner may exercise its rights in relation to an underlying within a feeder fund structure
  • that the list is not exhaustive
  • that no adverse presumptions for limited partners in other limited partnerships are created, and
  • that the creation of the white list does not mean that the activities on the list are permissible for limited partners by right.
• The requirement for limited partner capital contributions, which were on the whole perceived as an administrative burden serving no practical purpose, will be removed. However, arguments were made that limited partners should still have the option to make capital contributions, as the use of this structure may present tax or regulatory advantages in other jurisdictions. The option will therefore remain. Capital contributed to a PFLP will be withdrawable and will not need to be declared on the register.
• Regarding contributed capital, there will be a split regime depending on when the limited partnership is established.
  • For limited partnerships established prior to the implementation of the Legislative Reform Order (the LRO), capital contributions made prior to the conversion to a PFLP will be treated under the former regime (ie are not capable of withdrawal and must be declared). Those made after the conversion will be permitted to be withdrawn, and there will be no declaration requirement.
  • For limited partnerships established after the enactment of the LRO, if a partnership converts to a PFLP, the treatment of capital will also be governed by the new regime.
• Limited partners will be permitted to appoint a third party to wind up a PFLP on their behalf. An additional activity will be introduced into the white list to ensure this appointment will not lead to the loss of limited liability for the limited partners.
• The current requirement to register the general nature and term of the partnership will be removed for PFLPs.
• The requirement to place a notice in the Gazette in the case of a general partner becoming a limited partner shall remain, but the current rule that this change will only be effective from the date of the advertisement will no longer be relevant. The requirement to place a Gazette notice when a limited partner assigns its interest in a limited partnership to another person will be removed.
• Limited partners in a PFLP will be exempt from their duties under section 28 (duty to render accounts and information to other partners) and section 30 (duty to account for profits made in competing businesses) of the Partnership Act 1890. These duties are perceived as inconsistent with the position of a largely passive investor who may have investments in a number of potentially competing funds.

The revised proposals include some welcome and pragmatic changes, although the need for the distinction between PFLPs and other limited partnerships remains slightly puzzling. It is hoped that these reforms will ensure that the limited partnership structure is more "fit for purpose" as a modern, efficient investment vehicle, able to compete with similar offshore structures, such as the Channel Islands and Luxembourg.