Jersey: Jersey’s Legal Framework Is Modernised By New Limited Liability Partnerships Law

Last Updated: 26 February 2013
Article by Mark Rawlins

Jersey is well placed to keep hold of its competitive advantage in the fight to retain and attract international business. It has the great benefit of the active, articulate and well resourced involvement of Jersey Finance, which operates as a strong partnership between government and the Jersey financial services community, to promote our interests here and across the globe, and to provide technical expertise to assist government in developing new laws. In tandem, the Jersey Funds Association provides additional weight.

With the assistance of these organisations, and the cross industry vigour for growth, Jersey is able to compete at the highest level.

One metric of our success is found in the Global Financial Centres Index rankings. We have continued to climb up these rankings over the last few years, and entered the top 20 in 2012. We have now risen one place (overtaking Shanghai) in the just published January 2013 edition of the Index. Guernsey is pegged at 27th (also up one place) and the Cayman Islands and BVI are ranked 38th and 41st respectively. London, New York, Hong Kong and Singapore are, unsurprisingly, the leaders of the pack (in that order).

These rankings benchmark the competiveness of global financial centres by calculating ratings based on available data and survey responses.

Our success is built on strong foundations, a significant part of which comes from Jersey's legal framework, which provides for a dazzling array of alternative structures and products that may be established in the Island and legitimately used by industry, investors and entrepreneurs alike.

No more evident is this than in the area of partnership law, which has developed over the last 20 years almost as a mirror of the growth of the financial services industry, and continues to develop as a leading example of the greater integration between industry and the government. The most recent amendment to the Limited Liability Partnerships (Jersey) Law of 1997 was, as detailed by Jersey Finance in their annual review this year, proposed as a firm policy decision in November, presented as a draft amendment in December and passed into law in January. This fleet-footedness will allow Jersey to modernise its laws to gain first mover advantage, or at the very least, stay with the best international developments as they arise, rather than years down the track. Customary law has always provided a partnership structure, which is adequate for its purposes, but does not benefit from modern innovations including the grant of limited liability to partners in various circumstances.

Accordingly, and to keep up with international developments (for example, the Cayman Islands Exempted Limited Partnerships Law, first passed 1991), in 1994 Jersey established a limited partnership regime that provided for a partnership structure to give limited liability to 'limited partners' who did not take part in the management of the business. One impetus for this development came from the need of industry, particularly the private equity industry, to have a fund vehicle that could accommodate their requirements for complex investor structures.

Then in 1997, and in order to attract an influx of business to the Island from the various global professional services firms, Jersey prepared an innovative structure under the Limited Liability Partnerships (Jersey) Law. The limited liability partnership (LLP) was designed to allow (and require) the partners of such a partnership to contribute effort and skill to the partnership but with the benefit of limited liability for its debts: their liability would, in essence, be transferred to the partnership itself, and they would be protected against liability unless the loss was caused by them, with the partnership being registered as a legal person. The law also made provision for the claw-back of certain payments made by the partnership to partners, in circumstances where the partnership is or becomes insolvent. Jersey expected that a substantial deal flow would result.

One flaw in the structure quickly became apparent. In order to protect creditors of LLPs the law provided that an LLP must maintain with banks and/or insurance companies a ring fenced bond or insurance policy (or other financial provision) in the sum of £5 million available to the liquidator of the LLP without any deduction or charge placed upon it.

This one provision, required by no other jurisdiction, rendered the whole law obsolete, and the business went elsewhere, to places such as Scotland and England (which introduced its own LLP law in 2000 and where there are now around 40,000 LLPs). It is unlikely that Jersey will see the fruits of its labours from over 15 years ago, and - to date - absolutely no LLPs have been established in Jersey. However, the amendment noted above, the Limited Liability Partnerships (Amendment of Law)(Jersey) Regulations 2013, with the stroke of a pen, does away with the £5m financial provision and opens the door to the utilisation of these entities for their intended purpose and for other clever uses, such as within joint ventures and other trading arrangements.

The amendment places LLPs more in line with other legal entities provided for on our statue books, including the 'plain vanilla' limited liability company. Now, in order for a partner to receive a 'withdrawal of property' (a capital repayment or profits/ drawings), the LLP will have to have made a solvency statement in the required form within twelve months prior to the withdrawal. Failure to make such a statement or making a statement without reasonable grounds will give rise to a potential liability.

This amendment, at the very least, allows us to compete on a level playing field with Scotland and England, and other jurisdictions further afield, such as Singapore and Qatar, and also removes a potential obstacle to the use of Jersey for detailed trading structures which may wish to include legal entities established as an LLP. It also provides a useful alternative to the 1994 limited partnership structure (and its more recent variants, the separate and incorporated limited partnerships), which does not require there to be one partner with unlimited liability (the general partner).

This change is an example of Jersey continuously monitoring its laws, and updating as required. We can expect many more examples over the coming year with the announcement, at the Jersey Finance Annual Review, of the establishment of 'J-Lab', a dedicated research and development function within the Jersey Finance technical division. It is incumbent on Jersey Finance, and ourselves as participants within the industry, to provide J-Lab with the appropriate cocktail of chemicals in order to create the perfect environment, if not for alchemy, for innovation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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