The Government is consulting on proposals to modernise and clarify the law on limited partnerships. The intention is to enhance the UK's position as a jurisdiction of choice for fund managers, who typically set up their wholesale funds as UK limited partnerships, and to strengthen investors' confidence in these vehicles.

One key element is to address investors' concerns that they should be able to take a more active role in limited partnerships, and be in a better position to monitor the business, without exposing themselves to unlimited liability.

If the proposals are implemented, all existing limited partnerships would have to re-register under the new regime. Failure to do so would lead to de-registration.

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The Government is consulting on proposals to modernise and clarify the law on limited partnerships. The intention is to enhance the UK's position as a jurisdiction of choice for fund managers, who typically set up their wholesale funds as UK limited partnerships, and to strengthen investors' confidence in these vehicles.

Like ordinary partnerships, a limited partnership is a collection of partners and not a legal person in its own right, and it follows from this that the partnership is tax-transparent. The key difference between ordinary partnerships and limited partnerships is that, provided that there is at least one general partner with unlimited liability, the liability of the other partners in a limited partnership for the partnership's debts and obligations can be limited to the amount of their contributions to the partnership on becoming partners. The catch is that limited partners cannot take part in managing the partnership's business: if they do, they lose the protection of limited liability.

Permitted activities

The legal and business community has lobbied for investors in limited partnerships to be able to take a more active role, and be in a better position to monitor the business, without exposing themselves to unlimited liability. At present, there is uncertainty as to what a limited partner can safely do. The Government is keen to introduce greater clarity here, and is proposing a list of permitted activities of limited partners, which includes:

  • Taking part in a decision about the variation of the partnership agreement

  • Taking part in a decision about whether to approve or veto a type of investment by the partnership

  • Approving the accounts of the limited partnership

  • Being engaged under a contract by the limited partnership or by a general partner in the limited partnership (unless the contract is to carry out managerial functions)

  • Discussing the prospects of the partnership business

  • Consulting or advising a general partner, or the general partners, about the activities of the limited partnership or about its accounts (including doing so as a member of an advisory committee of the limited partnership).

The Government acknowledges that some interested parties wanted to go further - for example, to enable limited partners to participate in specific decisions on major borrowing transactions – but has decided that it would be difficult to include these things without abandoning the fundamental principle that limited partners cannot take a hand in managing the partnership. The list would, however, be reviewed after two years of operation to see if it was causing problems.

Rights and obligations

Some increased flexibility is proposed, including:

  • removing the requirement for limited partners to make any capital contribution on joining the partnership

  • enabling limited partners to withdraw capital (subject to any agreement to the contrary between the partners) if the withdrawal is registered at Companies House. The limited partner would remain liable for the debts and liabilities of the partnership up to the amount withdrawn until 12 months after the withdrawal was registered

  • making it clear that limited partners would not owe certain statutory duties imposed on ordinary partners: for example - in the absence of an agreement to the contrary - a limited partner would not be under a duty to keep the other partners fully informed of partnership matters or to account to the partnership for profits made by him in a competing business; nor would he have any responsibility for the maintenance of accounting records.

Streamlining registration

Other proposals include:

  • A limited partnership would exist from the date of its registration at Companies House. General partners would be responsible for completing the registration formalities, and any default in registration would not in itself remove the protection of limited liability from the limited partners

  • The name of a limited partnership would need to end with "limited partnership", "LP" or the Welsh equivalent

  • In addition to certain existing things required to be registered (the partnership's name, each general partner's name, each limited partner's name and the capital contributed), it would be necessary to file the address of the partnership's registered office (rather than its principal place of business) and the address of each general partner

  • There would be a new procedure for de-registering limited partnerships, either voluntarily by the partners or by Companies House (subject to inquiries being made) if the partnership had been dissolved or did not have at least one limited partner (although some time would given to enable replacement partners to be found) or had not begun to carry on business within two years of registering

  • Notice to the registrar of Companies House of certain changes to the limited partnership would be required within 14 days.

All existing limited partnerships would have to re-register under the new regime (and would receive a new certificate but retain their old identity and registration number). Failure to do so would lead to de-registration.

Comments invited

The aim is for the changes to take effect from 1 October 2009. The existing legislation - the Limited Partnerships Act 1907 – would be replaced by new provisions in the Partnership Act 1890. Comments are invited by 21 November 2008.

Although the consultation paper includes some key changes, some may argue that the proposal does not go far enough. The proposals stem from a Law Commission review, the main recommendation of which was that all partnerships in England and Wales should, as a general rule, be legal persons in their own right, as is the case in Scotland, without altering their tax treatment. It was felt that this would simplify partnerships' dealings, particularly in the areas of contract and property law. There was concern, however, that having legal personality might alter the tax treatment of a partner's income in overseas jurisdictions. The Government has shelved this issue for the time being.

The Government's consultation paper can be accessed here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/10/2008.