Farewell to the Limited Partnership Act 1907
Farewell to the Limited Partnerships Act 1907
The clumsily named Department for Business Enterprise & Regulatory Reform has recently issued a consultation document on the reform of the law relating to limited partnerships.
The use of limited partnerships has been widespread in the private equity and venture capital industry since the late 1980s because of their favourable tax regime (being ‘tax transparent') and the limited liability status for investors in them.
The reform, which is proposed to come into force on 1 October 2009, is designed to clarify the law in this area. In the words of the British Venture Capital Association, it should "ensure that [limited partnerships] remain attractive to fund managers and investors worldwide". It is clear, however, that the changes do not amount to a ‘root and branch' reform.
Repeal of the Limited Partnerships Act 1907
The proposal is to repeal the Limited Partnerships Act 1907 (the "1907 Act") in its entirety and to replace it with new provisions to be set out in the Partnership Act 1890 (the "1890 Act"). Repealing the 1907 Act is being sold as a modernising step so it is ironic that the 1890 Act is being used as the vehicle through which the reform is being made. In addition, the Law Commission has advocated major changes to the 1890 Act but it is far from clear when, or even whether, these will be acted upon. In the meantime, the law relating to limited partnerships is likely to be contained in an Act dating from an earlier era still: Victorian as opposed to Edwardian. Oh well, at least change is afoot!
Liability of the Limited Partner
- One of the criticisms of the 1907 Act is that it is not clear when limited partners venture into the territory of management (which means that such limited partners risk losing their limited liability status). It is therefore proposed that the activities which limited partners are allowed to undertake will be listed in detail for the first time so that their limited liability is not inadvertently jeopardized. The Secretary of State will have the power to amend this list.
- Limited partners will no longer be required to make any capital contribution to the limited partnership although they will be able to make such a contribution if they wish.
Registration and de-registration
There will be a number of changes to clarify the timing of the ‘birth' of the limited partnership and the point at which limited liability is gained.
- The limited partnership's name must end in ‘LP' or ‘Limited Partnership' (or their Welsh equivalents).
- The key address for the limited partnership will no longer be its ‘principal place of business' rather it will have a ‘registered office' like companies and LLPs.
- Certain information such as the term for which the limited partnership is entered into and the general nature of the limited partnership will no longer be required to be registered although there are a small number of matters which Companies House will now need to be informed about regarding changes in the limited partnership.
- There will be a new procedure for de-registering a limited partnership either on the initiative of the limited partnership itself or by the registrar.
Establishing and operating a Limited Partnership
Most of the law on establishing a limited partnership remains the same. New changes include:
- The general partner(s) will be responsible for completing registration formalities.
- A mistake in registering the limited partnership will not in itself mean that limited liability status is lost.
What it doesn't change
The Law Commission suggested in the past that limited partnerships should have separate legal personality (as in Scotland), particularly given that they habitually operate as if they were legal entities and, indeed, this is how they are received by the public. However, there were concerns that making limited partnerships separate legal entities could have restricted their ability to trade in some European countries. It might also have exposed them to different tax regimes than expected. This proposal has therefore not been taken forward.
It has also been suggested that, as limited partners have limited liability, there is no strong argument why they should be required to register their names at Companies House particularly where they make no capital contribution. There has been no change on this point either.
The consultation document is located at http://www.berr.gov.uk/files/file47577.pdf. The deadline for replying to the consultation document was 21 November 2008. The Government normally aims to provide a summary of public responses to consultation within 3 months of the closing date so we would expect to see further progress in this matter by March 2009 or shortly thereafter.
For existing limited partnerships, when the new law comes into force there will probably only be a one-off requirement to respond to a letter from Companies House in order to register under the new law. There should certainly be no need to instruct any external advisors.
We would be happy to discuss these proposals with you or to discuss how relevant laws relating to the venture capital and private equity industry will impact upon your business generally.
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