The changes will effectively create two “regimes” within the Act, with the new rules only applying to those limited partnerships designated as “private fund limited partnerships” (PFLPs) that elect to be subject to the new rules. In order to qualify as a PFLP, an LP must be constituted by an agreement in writing and be a collective investment scheme as defined in section 235 of FSMA. It falls to the general partner to confirm both criteria apply when registering the limited partnership as a PFLP. For the purposes of determining whether a partnership is a collective investment scheme under section 235 of FSMA, the changes to the Act helpfully ignore any exemption order made under that section. Therefore, partnerships initially set up with all partners being body corporates in the same group (and hence not a collective investment scheme if the “group exemption” is taken into account) can still qualify as PFLPs.
Existing limited partnerships can apply for PFLP status once the changes are enacted by filing a new form LP8 with Companies House, containing the name of the partnership, its registered number, the date of initial registration as a limited partnership and the address of the principal place of business. The name and signature of each general partner is also required. Partnerships formed once the new rules are in place can apply to be PFLPs upon registration by using the new form LP7, which will require less information than the form LP5. Forms LP6 will be used for updates to both “standard” limited partnerships and PFLPs, with forms LP5 only used to register partnerships under the old regime.
The important changes that the new regime will bring are:
A “white list” of actions that limited partners are permitted to take without jeopardising their limited liability.
There has always been uncertainty as to what exactly would constitute “management of the partnership” by a limited partner (and therefore result in the loss of limited liability), given the lack of any guidance in the statute. PFLPs will now benefit from a non-exhaustive list of actions that LPs can take without fear of unlimited liability. The government has made it clear that anything not included on the list will not necessarily be treated as management, and also that the list does not give limited partners the power to take such actions if they are not included in the governing documents of the limited partnership. While it is unusual for investors in blind pool funds to have a say in how the fund operates on a day-to-day basis, the white list will provide a great deal of comfort to investors who appoint a representative to a fund’s advisory board, and also those using limited partnerships for joint ventures, pledge funds, separate managed accounts or deal by deal financings, where greater investor powers are more common.
No requirement to commit capital and the removal of the prohibition on return of capital
Capital contributions will no longer need to be made by limited partners, unless they choose to do so. Any capital that is contributed will also be allowed to be distributed to such limited partner during the life of the fund. Previously the prohibition on return of capital prevented any distributions of capital until the end of the life of the fund (which is the main reason why investors’ commitments to UK limited partnerships is made predominantly by way of a loan). It is important to note that this prohibition still applies for non-PFLPs and also to capital contributed to a limited partnership prior to it becoming a PFLP. This will essentially remove the need for the “capital/loan split” that has been a feature for decades in UK limited partnerships, but not in any other jurisdiction.
No requirement for Gazette Notices on a transfer of a limited partner interest
There will no longer be a need to file a Gazette Notice on the transfer of a limited partner's interest. A notice was previously required to perfect a transfer. For PFLPs, a Gazette Notice will only be required if a general partner becomes a limited partner, in order to give notice of such change to third parties who may otherwise be dealing with the general partner.
Removal of the requirement for a court order to dissolve a partnership without a general partner
Previously, if the limited partners removed the general partner and wanted to wind up the partnership, it was necessary to get a court order to that effect, as the limited partners were unable to take on the winding up without jeopardising their limited liability status. The changes to the Act mean that the limited partners can jointly appoint a third party to wind up the partnership, removing any need for the courts to get involved.
Limited partners exempt from certain statutory duties
All partners in UK partnerships are subject to statutory duties as set out in the Partnerships Act 1890, and two of these duties in particular are incompatible with the use of limited partnerships as fund vehicles – the duty to render accounts and information to other partners on all things affecting the partnership, and the duty to not compete with the partnership and account for all profits made in competing businesses. They have been explicitly excluded from the constitutional documents of most funds as a matter of course, but the changes to the Act will mean these duties no longer apply to limited partners in a PFLP.
Overall these changes are of significant benefit to the UK funds industry, allowing limited partnerships to be used for a wider range of products, reducing administration for managers, and giving greater certainty and comfort to investors. If you would like to discuss how the changes may benefit your business then please contact Ed Hall, Greg Barclay or your usual Goodwin contact.