- What are Limited Partnerships?
-
- Created under Limited Partnerships Act 1907
- Not a separate legal entity
- Tax transparent
- Limited partners have liability limited to the amount of their
capital contribution, but cannot be involved in the management of
the Limited Partnership ("LP"). An LP is managed by its
general partner which has unlimited liability
- The LP is required to be registered at the UK Companies
Registry, but unlike a limited company, only very limited
information has to be registered
- Distinguish from an LLP which does have a separate legal entity
and operates more like a limited company
- Created under Limited Partnerships Act 1907
- Due Diligence
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- A lender will wish to examine the limited partnership
agreement. Of particular concern will be:
-
- The amount of the LP's fixed capital
- The obligations of limited partners to make capital
contributions
- Who can make calls for capital contributions?
- Ability of LP to borrow money and create security
- Terms of LP and manner in which it can be dissolved
- Term of any delegation by GP of its powers to an FCA authorised
manager.
- The amount of the LP's fixed capital
- Search at UK Companies Registry to check
-
- Duly registered
- Particulars of the LP including details of GP, limited partners
and capital amounts contributed
- Duly registered
- A lender will wish to examine the limited partnership
agreement. Of particular concern will be:
- Loan Agreement
-
- Entered into by GP on behalf of LP, subject to any delegation
to FCA authorised manager
- Bespoke financial covenants in respect of LP and possibly
limited partners
- Events of default with possible cross-default in relation to
all/ certain limited partners
- Negative covenants covering variation to partnership agreement,
incurring other indebtedness and granting any other security
interests
- Entered into by GP on behalf of LP, subject to any delegation
to FCA authorised manager
- Security over uncalled contributions
-
- This constitutes security over an intangible or "chose in
action"
- A capital contribution in the case of a UK LP takes the form of
a subordinated loan by the limited partners to the LP
- Loans by limited partners to the LP are by case law
subordinated to other creditors of the LP
- Normally security over uncalled contributions is taken by way
of assignment, but security can also be taken by way of
charge
- If the security is by way of assignment, it will usually be
executed by the GP (on behalf of the LP), but may need to be
executed by an FCA authorised manager if the GP has delegated its
powers to such manager
- The security required is normally the right to require capital
contributions from limited partners, rights over the proceeds of
the capital calls and rights to exercise penalties if a limited
partner does not comply. It has become the practice of some lenders
not only to take an assignment from the LP, but also from the GP
itself of the right it has to make capital calls. It is debateable
whether a GP has anything it can personally assign, but a benefit
of this approach is that a GP (which is a UK corporate entity or UK
LLP) can have such assignment registered against it at the UK
Companies Registry
- In any event, a lender will require an irrevocable power of
attorney by way of security from the GP (and possible a manager) so
that it can step into the shoes of the LP to make capital calls if
the GP fails to do so
- In addition, a lender will often take security over a bank
account into which the proceeds of the capital contributions are to
be paid. Ideally this could be a fixed charge, but if so the
account would need to be treated as a blocked account and the
lender would need actively to assert control over such
account
- You cannot register a security interest against an LP at the UK
Companies Registry. Instead, a lender protects its security
interest by giving notice to the limited partners. The main benefit
of giving notice is that the priority of assignments will rank
accordingly to the date when the limited partner receives notice.
It also prevents limited partners from paying the contribution to
the GP instead of the lender and prevents any equities (e.g. rights
of set-off on similar rights) arising in priority to the lender.
Ideally the lender would obtain an acknowledgment to the notice,
but in practice a lender rarely gets this as GPs are very
protective of their limited partners and would strongly resist the
limited partners being asked to give an acknowledgement. Sometimes
a lender will agree to defer requiring notice to be given until,
say, the next quarterly accounts are sent by the GP to the limited
partners so as to reduce the amount of paperwork received by the
limited partners. A lender will agree to this if it has a good
relationship with the LP and for the sake of such relationship is
willing to defer perfecting its security
- This constitutes security over an intangible or "chose in
action"
- Enforcement
-
- Normally the Lender (or its receiver) would step into the shoes
of the GP and exercise the right of the LP to make capital calls.
Obviously a lender cannot be in a better position to make capital
calls than the GP under the partnership agreement so this will need
to be checked prior to enforcement
- If the lender has taken security over a bank account, it can also look to recover the proceeds of capital contributions from such account
- Normally the Lender (or its receiver) would step into the shoes
of the GP and exercise the right of the LP to make capital calls.
Obviously a lender cannot be in a better position to make capital
calls than the GP under the partnership agreement so this will need
to be checked prior to enforcement
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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.