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HM Treasury drives private fund limited partnership reform


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Summary: Further to its July 2015 proposals to amend UK limited partnership law, HM Treasury has published a response document. Here, we explain some of the central themes and changes to the original proposal.

HM Treasury has published a response to its 23 July 2015 proposals to amend UK limited partnership law. Legislative amendments will follow, with the intention that the changes will be fully operational within a year. HM Treasury’s response sets out some changes to the detail of its original proposals (see our earlier article posted on 22 September 2015). It has taken on board many of comments received in the consultation process and reminds us of the overall aims: to promote the UK limited partnership as a market standard structure for European private funds and, alongside other measures, to maintain and enhance the UK as a competitive fund domicile.

The new regime will apply only to UK limited partnerships that meet the ‘private fund limited partnership’ ('PFLP') conditions; other limited partnerships will continue to be subject to the existing rules. This is what was originally envisaged in HM Treasury’s proposals: any wider-ranging proposals would require further consideration and therefore delay implementation.

We have set out below some of the key themes and main changes from the original proposals covered in the response document. The full picture will emerge in due course when the legislation is published.

PFLP with fund characteristics

Only UK limited partnerships that meet the PFLP conditions and are so registered can take advantage of the more generous and flexible limited partnership regime. For the purposes of the PFLP conditions, the consultation proposed using the ‘collective investment scheme’ definition in the Financial Services and Markets Act 2000 but carving out the ‘group exception’. However, the approach is now to disregard the exceptions to the definition of a collective investment scheme. In other words, limited partnerships that are essentially fund vehicles will qualify as PFLPs, whether or not they are caught by one of the exceptions.

This is a welcome change (which we raised in our joint response to the consultation), making the criteria for being a PFLP simpler and clearer.

Registration process more streamlined

When applying for registration as a PFLP, it will be the general partner who confirms that the limited partnership meets the PFLP conditions, and not (as was originally proposed) by way of a solicitor’s certificate.

HM Treasury has also dropped the one-year window to elect to be designated as a PFLP: instead, the regime will be available at any time during the life of the limited partnership (including for existing limited partnerships). Another change is that designation as a PFLP will be irrevocable.

These changes are also welcome, removing inconvenience and uncertainty in the registration process and creating flexibility for firms that are not structured as PFLPs at the outset, and wish to opt in a later date.

A white list of activities that a limited partner in a PFLP may undertake

A limited partner in a PFLP may undertake any activities on the so-called 'white list' without being considered to be taking part in the management of the business and therefore without losing its limited liability status. The final legislation will contain some requested confirmations that came up in the consultative process: that this list is not exhaustive; that it is not prescriptive (it will be a matter of commercial agreement between the partners as to whether limited partners may carry on any white list activity), and that it does not create any adverse presumptions for limited partners in other limited partnerships (in other words, does not give rise to any inference that carrying on these activities in relation to a limited partnership that is not a PFLP would constitute taking part in management).

The government confirms in its response that it will make one addition to this list to allow limited partners in feeder structures to exercise 'look-through' voting in respect of an underlying fund.

Capital contributions will no longer be required for limited partners in new PFLPs only

The proposals around capital contributions for new PFLPs remain: removing the requirements for limited partners in PFLPs to make registrable capital contributions and providing that limited partners are not liable for any capital contributions that have been withdrawn.

However, the existing regime, in respect of capital contributions, will continue to apply for limited partnerships registered prior to the implementation of the new PFLP regime. In these cases, limited partners cannot withdraw their capital contributions (made before the partnership became designated as a PFLP) during the term of the partnership; and their contingent liability will remain, as will the filing requirements for limited partners’ capital.

This is to avoid prejudicing any existing creditors who have taken comfort from the existing legal position (i.e. where substantial capital contributions have been made prior to a partnership’s designation as a PFLP).

Simplification of filing requirements

As well as simplifying the registration process, HM Treasury has confirmed that it will remove the requirement for a Gazette Notice to be published when a limited partner assigns its interest in a PFLP to another person. It also clarifies that there is no requirement for a Gazette Notice on the retirement of a partner in a PFLP or on a change in a PFLP’s constitution.

However, the requirement to advertise in the Gazette will remain when a general partner becomes a limited partner, and the government will clarify when the effective date of change is (and which will not be on publication of the Gazette notice).

Removal of some statutory duties

As set out in the original proposals, some of the statutory burdens will be removed from limited partners in PFLPs (whilst allowing partners to agree otherwise): limited partners will not be subject to the duties to render accounts and other information to other partners and to account for profits made in competing businesses. The statutory duty of accountability of partners for profits derived from transactions concerning the partnership or the property of the partnership (i.e. private profits) remains.

Being struck off the Companies House PFLP register – further consideration needed

Currently, there is no procedure to remove a limited partnership from the register maintained by the Registrar of Companies and the original proposals introduced a procedure to enable a PFLP to be struck off the Companies House PFLP register (either voluntarily on application, or by the registrar).

However, the government response contains a change of tack: it has chosen to explore and consult at a later date on further options on striking off. It will consider applying the striking off provisions to all limited partnerships and not just PFLPs, and addressing concerns around maintaining limited liability of the limited partners during the period between striking off and dissolution (the original proposals would have rendered the limited partners in a PFLP liable for all the debts of the partnership during this period).

Again, this is welcome. Although the ability to tidy up the register at Companies House would be useful, the risk of limited partners inadvertently incurring unlimited liability on removal of a PFLP from the register would have put the PFLP at a disadvantage to other structures.

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