Response to HM Treasury’s Consultation on using Legislative Reform Order to change partnership legislation for private equity investments (July 2015)
This document is a co-ordinated response to the consultation and draft Legislative Reform Order prepared by and submitted on behalf of the following law firms:
Addleshaw Goddard LLP Hogan Lovells
Allen & Overy LLP King & Wood Mallesons LLP
Ashurst LLP Kirkland & Ellis International LLP
Berwin Leighton Paisner LLP Linklaters LLP
Burness Paull LLP Nabarro LLP
Charles Russell Speechlys LLP Olswang LLP
Cleary Gottlieb Steen & Hamilton LLP Pinsent Masons LLP
Clifford Chance LLP Ropes & Gray LLP
CMS Cameron McKenna LLP Simmons & Simmons LLP
Dentons Simpson Thacher & Bartlett LLP
Farrer & Co LLP Skadden, Arps, Slate, Meagher & Flom
Freshfields Bruckhaus Deringer LLP Travers Smith
These firms have many years’ experience of advising on the use of English and Scottish limited partnerships, as well as limited partnerships established under the laws of Jersey, Guernsey, the Cayman Islands, Delaware, Luxembourg and elsewhere, for use as private fund vehicles and other investment and business purposes.
The English and Scots law practitioners who have contributed to this response are therefore well- placed to comment upon the existing difficulties with UK limited partnership law, the practical impact of the reforms proposed by HM Treasury and the competitive position of the UK limited partnership structure compared to structures that exist in other jurisdictions.
Contact details
This response has been co-ordinated by Linklaters LLP, and queries or requests for further information should be directed to Jonathan de Lance Holmes, Partner ([email protected]) and Emily Harmsworth, Managing PSL ([email protected]).
Terms used in this document
“1907 Act” means the Limited Partnerships Act 1907, as amended;
“CIS” means a collective investment scheme within the meaning of s235 Financial Services and Markets Act 2000;
“CIS Exemption Order” means the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001;
A30407557/1.0/05 Oct 2015 1
“Consultation” means the consultation paper issued by HM Treasury in July 2015 titled ‘Proposal on using Legislative Reform Order to change partnership legislation for private equity investments’;
“LRO” means the Legislative Reform (Limited Partnerships) Order 2015 draft statutory instrument; and
“PFLP” means a private fund limited partnership.
Overview
We welcome the proposals to reform limited partnership law, and our responses to specific questions raised in the Consultation are below. Given the number of firms participating in the response, there is naturally some divergence in views. While this response seeks to provide a single agreed upon position, we have noted the differing views/suggestions where relevant.
We want to emphasise that the new PFLP regime should be viewed as an entirely separate subset of limited partnership, such that any provisions in the LRO should be neutral as to its impact on the law governing limited partnerships which do not constitute PFLP. For example, the list of permitted activities set out in draft section 6A should not give rise to an inference that these activities constitute taking part in management in relation to a limited partnership which is not a PFLP. That issue should continue to be interpreted by the courts without reference to the LRO.
While we note that the possibility of allowing funds in the UK outside Scotland to elect to have separate legal personality is not within the scope of this Consultation, we are pleased to see the Government’s intention to explore the feasibility of implementing this additional change in the future reaffirmed in the Consultation. Whilst recognising that English limited partnerships do not have separate legal personality, we would nevertheless in the interim welcome the inclusion of a provision expressly allowing the registration of an English limited partnership (“A”) as a limited partner in another UK (English or Scottish) limited partnership (“B”) without the result being that each of the partners in partnership A has to be registered as a partner in partnership B. This would provide a welcome degree of flexibility in terms of the overall objectives of the UK as a competitive fund domicile, and help to minimise costs to investors.
Finally we note there are various other issues in relation to limited partnership law which need further thought and probably reform. These include, for example, registration of charges in respect of corporate limited partners, and the application of insolvency law generally to limited partnerships.
Responses to questions asked in the Consultation
1 What are your views on the proposed process for designating private fund limited partnerships?
We welcome the designation and registration process for a PFLP, but have some comments as to how these can be improved. In summary: (1) the designation should be the result of filing a notice in the prescribed form with the registrar; (2) once designated, the designation shown on the register should constitute conclusive evidence that the limited partnership is a PFLP; (3) there should be no restriction on when an existing or yet- to-be-formed limited partnership elects to be designated as a PFLP; (4) the requirement for a solicitor’s certificate is inappropriate; it should be sufficient for the general partner (or operator, if one is required) to attest to the status or intended status of the limited partnership and its business purpose; and (5) any limited partnership that is, or is expected to be, a CIS, disregarding the CIS Exemption Order, should be eligible to be designated.
A30407557/1.0/05 Oct 2015 2
1.1 Designation Process – Conclusive Evidence
Section 8C(4) of the 1907 Act provides that the certificate of registration is conclusive evidence of the existence of the partnership. We as law firms welcomed this conclusive evidence provision when it was introduced in 2009. The LRO would amend section 8C to reflect the designation as a PFLP on the certificate; but that does not entail that such designation is conclusive evidence that the limited partnership is, at law, a PFLP. This is hopefully a minor drafting change, but it would be very helpful to extend the proposed amendment to section 8C to make this explicit as it would provide necessary legal certainty in this area.
1.2 Designation Process – Timing
The ability to elect to be designated as a PFLP should be available at any time during the life of the limited partnership. An existing limited partnership should be able to register as a PFLP at any time after the LRO comes into force rather than just during the proposed one year grandfathering period. The ability to re-register as a PFLP should equally apply to a limited partnership registered after the LRO comes into force.
1.3 Designation Process – Solicitor’s Certificate
In our view, the requirement for a certificate signed by a solicitor is inappropriate for the following reasons:
1.3.1 The purpose for the reforms is to remove inconvenience and uncertainty. It is not in the interests of the commercial parties to engage a solicitor to certify that a limited partnership is, or will be, a CIS (either in terms of their time or cost).
1.3.2 Whether or not a limited partnership is or will be a CIS is also not strictly the type of matter that a solicitor can ‘certify’ without exercising judgement and making assumptions about its operation. The question of what is or is not a CIS is, or can be, technical and difficult and fact specific. Solicitors are often asked whether an arrangement is a CIS or not, and while a solicitor can form a view on whether a limited partnership is a CIS it is an expression of an opinion based on an assumption of certain facts.
Anyone dealing with the limited partnership will be on notice of its status as a PFLP and the consequences of it being so designated in any case. It is therefore appropriate in our view that it should be the general partner, or the operator of the scheme if one is required, which attests to the business intention as part of the formal submission to the registrar, rather than a solicitor’s certificate being required - this is in keeping with the purpose of the reforms and provides a proportionate means of restricting the class of limited partnerships to those intended to benefit from these changes. In practical terms, we suggest this be a tick box confirmation by the GP in the Form LP5 or Form LP6.
We note that the timing of the certification process may also cause an administrative issue for parties. Parties typically prefer to establish a limited partnership prior to bringing investors into the limited partnership and we suspect would prefer to register as a PFLP prior to bringing investors into the limited partnership. However, some limited partnerships may not actually be a CIS until the investors are brought into the limited partnership and it may therefore not be possible to provide the certification, and register as a PFLP, until after investors are brought in. To remove this inconvenience, we would suggest that the certification instead include a declaration that the limited partnership is, or is expected to be, a CIS.
A30407557/1.0/05 Oct 2015 3
1.4 Fund Condition – Agreement in Writing
The requirement that the partnership is constituted by an agreement in writing is unobjectionable in our view.
1.5 CIS Exemptions
We understand the intention of the LRO is to catch limited partnerships that are fund vehicles. In our view, the essential characteristics of a ‘fund’ are contained in the core language of s235 Financial Services and Markets Act 2000. The exemptions in the CIS Exemption Order are highly technical, have been drafted and evolved over the years (and presumably may be added to or amended in future) to deal with unintended consequences for all sorts of specific circumstances and in the light of policy considerations as to whether it is appropriate to apply a particular marketing regime and requirements for an authorised operator. We consider it would be simpler and clearer (and would avoid further unintended consequences in future) for the criteria to be whether the limited partnership is, or is expected to be, a CIS within the meaning of s235(1) to (4), disregarding for this purpose s235(5) and the CIS Exemption Order completely.
2 What are your views on the measures to allow the registrar to remove from the register entries for inactive private fund limited partnerships?
The register of limited partnerships in its current form makes no obvious distinction as to whether a limited partnership has been dissolved or not. A recent case1 emphasises this point: Nugee J commented (at paragraph 108) “the register is not simply a register of existing partnerships. It is a register of partnerships that have come into existence”. In that case, Nugee J held that there is no authority to rectify the register, even though the limited partnerships in question had been registered via fraud, and noted:
“that although the 1907 Act requires partnerships to be registered, it does not contain any provision for de-registration. Indeed it is not obvious that there is any statutory requirement even to notify the Registrar that a limited partnership has been dissolved: s. 9(1) requires various changes to the partnership to be notified but it does not expressly include the dissolution or termination of the partnership, and although it could be said that a termination was within s. 9(1)(e) as being a change in the “term” or “character” of the partnership, there is the added difficulty that s. 9(1) applies to changes “during the continuance of a limited partnership” and it is not obvious that a termination of a partnership, by dissolution or otherwise, is a change that takes place during its continuance.” (paragraph 107)
Therefore introducing the ability to tidy-up the register will be a useful practical mechanism, and we welcome the proposals in principle, subject to the comments below.
2.1 Consequence of removal
We have serious concerns about the consequences of removal of a PFLP from the register as set out in the proposed section 14C, i.e., that if the firm has not been dissolved, the firm would continue to exist but would cease to be a limited partnership. This would cause limited partners to be partners in a general partnership, with unlimited liability for debts and obligations of the firm incurred from that date, through no action of their own, and with all partners able to bind the firm. As passive investors in vehicles which can incur substantial liabilities, limited liability is of fundamental importance to limited partners – the risk of
1 Bank of Beirut S.A.L. and another v HRH Prince Adel El-Hashemite and another [2015] EWHC 1451 (Ch)
A30407557/1.0/05 Oct 2015 4
inadvertently incurring unlimited liability would, in blunt terms, put paid to any prospect that the PFLP would be a viable vehicle for fund investment. The limited partners are particularly at risk where the registrar moves to strike the firm off under section 14(B) as notices will usually be sent to the general partner and it is likely that the limited partners will be unaware of such action by the registrar. We can think of no other vehicle that carries such a risk, and this would put the PFLP at a serious disadvantage to any other limited partnership structure that we are aware of. The risk falling on the limited partners is heightened by the ability in the proposed section 14A(3)(c) of any person with authority to make the strike off application on behalf of the firm without any requirement of the registrar to investigate such authority.
There are different possible solutions to this problem. Requiring all partners to take part in or consent to removal would be administratively difficult and would in practice substantially reduce the use of the procedure. It would seem more workable to provide either that it should be a condition to removal from the register that the partnership has been dissolved (with a power for any partner to challenge and reinstate the registration if the partnership has not actually been dissolved) or for the effect of removal without the consent of all partners to be that the PFLP is moved into the register of ‘ordinary’ limited partnerships (with limited partners deemed to have made a nominal capital contribution) or a separate register of ‘inactive’ PFLPs whose liability remains unchanged. Another solution would be to provide expressly that removal from the register has no impact on the liability of limited partners.
It would also be desirable for the LRO to specify that if a PFLP is determined by a court to have been wrongly struck off the register in accordance with section 14D, the effect of such a decision is that the PFLP is deemed to have continued to be on the register the entire time – i.e., a rectification-style process rather than reinstatement.
2.2 Test for removal by registrar
The proposed test looks at whether the registrar has reasonable cause to believe that a PFLP is not “carrying on business or in operation”. We note that this duplicates the process for the registrar to strike off companies, as set out in s1000, Part 31 Companies Act 2006.
There is a risk of uncertainty using this test for PFLPs, as fund partnerships are inherently investment vehicles which may continue to have obligations and liabilities that can subsist for a long time without that vehicle taking any active steps. Clarification regarding what “carrying on business or in operation” in the case of a PFLP would be helpful, for example, that a PFLP would still be “carrying on business or in operation” for so long as it has assets or liabilities in relation to its investment activities.
2.3 Authority to apply for removal
Subject to solving the issue discussed in 2.1 above, we suggest that an application should be able to be made at the direction of a general partner or, if more than one general partner, all general partners. We are concerned that the concept of “relevant persons” in the proposed s14A requires all partners of a PFLP who are partners at the time of the application, or if the partnership has been dissolved, any person who was a partner immediately before that dissolution, to have given their consent for the application to remove the PFLP from the register. In practical terms, this will be potentially burdensome to obtain if the limited partnership agreement does not contemplate an express consent.
A30407557/1.0/05 Oct 2015 5
However, if the issue in 2.1 above is not solved, we believe that giving limited partners protection against potential loss of limited liability is of such overriding importance that it must be retained.
3 Is there uncertainty around what actions constitute “taking part in the management of the partnership business”?
We believe that there is considerable uncertainty around this question. There is very little case law on this point, and given the consequences of taking part in management, namely that any limited partner doing so loses its limited liability whilst taking part in management, accordingly we consider that statutory clarification of what this means, in the form of a ”white list”, to be very welcome. This would bring the UK limited partnership in line with partnerships established in other jurisdictions, such as Jersey, Guernsey, the Cayman Islands, Delaware and Luxembourg, for which statutory white lists exist.
It should be made clear that there is no presumption arising from the current drafting of the LRO that any of the white listed activities carried out by limited partners of partnerships which do not constitute PFLPs would be deemed to constitute taking part in management of the partnership. We would also like to see confirmation that changes brought about by the LRO are without prejudice to activities that were not treated as taking part in management prior to the making of the LRO.
4 Does the proposed list in the draft order cover the type of activities a limited partner is likely to undertake in monitoring and assessing the performance of a private fund? Are there any activities that should not be on the list?
We welcome the proposal to include a white list of activities that limited partners in a PFLP can undertake without compromising their limited liability status. In addition to providing some much-needed clarity on what it means to be "taking part in the management of the partnership business", it also brings UK limited partnership law further in line with the limited partnership regimes of other jurisdictions that do provide a similar list of activities, including Guernsey, Jersey, Luxembourg, the Cayman Islands and Delaware. This will, in our view, enhance the competitiveness of the UK limited partnership regime as compared to those other jurisdictions.
4.1 Comments on the white list
In our view the proposed white list set out in section (5) of the LRO is extensive and broad and does cover the type of activities we would expect a limited partner to undertake when monitoring and assessing the performance of a private fund. We note that, of course, the oversight rights of limited partners of private funds are a matter for commercial negotiation between the partners. In this respect, the proposed white list is not and should not be seen as prescriptive, and such rights will continue to be a matter for commercial agreement albeit with the added comfort of the inclusion of such rights on the white list.
We have some suggested drafting changes, which are set out below at paragraph 4.2. In addition:
4.1.1 We consider it important that the proposed section 6A should make it clear the list is non-exhaustive, so there is no risk of an automatic presumption that simply because a limited partner (or its representative) carries out an activity in relation to a PFLP that is not covered in the white list they are deemed to be involved in the management of the partnership business.
A30407557/1.0/05 Oct 2015 6
4.1.2 Proposed section 6A(2)(p) should make it clear that any person so appointed will be able to do all the activities set out in the white list without causing its nominating limited partner to jeopardise its limited liability under the 1907 Act.
4.1.3 Adding “taking part in a decision to alter the powers granted to the limited partners”. Often the limited partnership agreement of a fund acquires a historic character, due to various extraneous or intrinsic factors and it becomes necessary in time to update it.
4.1.4 Adding “taking part in a decision to extend, suspend or terminate any period within which the partnership can enter into binding agreements to purchase investments, incur other obligations, or require limited partners to advance commitments”.
4.1.5 Adding “implementing the winding up of the partnership in the circumstances referred to in section 6(3B) or taking part in a decision to authorise a third party to do so pursuant to section 6(3A) or (3B)”.
4.1.6 Due to the nature of Scottish limited partnerships and their attribute of separate legal personality, our clients frequently set up fund structures which contain Scottish limited partnerships used as feeder vehicles. In this context, we often encounter the situation where a limited partner of the feeder fund wishes to direct how the feeder partnership exercises its rights as a limited partner in the underlying fund. The question is then whether this “look-through” voting constitutes “taking part in the management of the partnership business”. Since the business of the feeder is to be a limited partner in the fund partnership, there is a risk that whilst limited partners are directing the feeder votes in relation to the fund partnership, they may be taking part in the management of the feeder fund thereby losing their right to claim limited liability. However, we have found that in practice investors generally wish to preserve their right to look-through voting and so it would be helpful if the LRO could accommodate this practice. The Consultation states at paragraph 2.17 that feeder funds are within the scope of the proposed amendments. If the feeder fund were designated a PFLP, look-through voting may constitute a permitted activity on a wide interpretation of section 6A(2)(s). However, we would welcome further clarification on this point.
4.2 Drafting comments
Section (5) of the LRO (proposed new section 6A of the 1907 Act):
6A(2) the words “The permitted activities are” be replaced by “The permitted activities include”
6A(2)(a): insert ", or waiver of a term of" after "variation of" and insert "or associated documents" after "agreement"
6A(2)(b): insert "or a subsidiary undertaking" at the end of each sub- paragraph (i), (ii), (iii) and (iv)
6A(2)(b)(iii) and (iv): insert “, variation” after “extension”
6A(2)(d): insert "all or part of" before "the partnership business" and insert thereafter “or any property of the partnership”
6A(2)(g): insert "or the extension of the term" after "winding up"
A30407557/1.0/05 Oct 2015 7
6A(2)(h) and (k): delete "unless those rights are to carry out management functions" and "unless the contract requires the limited partner to take part in management functions" because it is not clear what "management functions" means
6A(2)(i): insert "or a subsidiary undertaking" after "partnership"
6A(2)(j): insert "(including those of a subsidiary undertaking)" after "assets"
6A(2)(i) and (j): insert "or reviewing" after "approving"
6A(2)(l): insert "(or having a representative act as)" after "acting as"
6A(2)(m): insert "reviewing and/or approving" after "involves" in the first line
insert ", its subsidiary undertakings" after "or relates to the partnership"
6A(2)(q): insert "(or any subsidiary undertakings), including the directors or members or employees of persons appointed to manage or advise the partnership (or any subsidiary undertakings)" after "the partnership"
6A(2)(s): add "or any person appointed to manage the partnership" after "general partner" to reflect the fact that in most private fund structures, a separate manager is appointed.
5 Is any purpose served by the requirement that a limited partner make a capital contribution, no matter how nominal?
We do not think the requirement for a limited partner in a PFLP to make a capital contribution serves any useful purpose. Under the current regime, limited partners in limited partnerships used as investment vehicles typically contribute nominal amounts of capital, and only those amounts are visible to third parties on the public register. As a result there is very little real protection afforded to creditors by this requirement, and creditors are aware that this is the case. Creditors therefore seek protection where necessary through the assets of the limited partnership and any contractual obligations of limited partners to make advances to the limited partnership. Creditors are not interested in nominal capital contributions.
If the requirement to make a capital contribution in order to become a limited partner were to remain, an investor would (as is currently the case) have to make a capital contribution when it adhered to the limited partnership agreement, in order to become a limited partner. The process of making this nominal capital contribution at the moment of admission of an investor (or more commonly, multiple investors from around the world) as a limited partner is an unnecessary administrative burden, both from an accounting and legal perspective. The UK regime should allow investors to become limited partners without contributing capital at a closing, and allow them to agree to contribute capital as and when this is required by the limited partnership in order to finance costs as they arise, and investments as they are made. We believe that this would be achieved by the suggested removal of the requirement for limited partners to make capital contributions, combined with the proposal to allow capital contributions that are made to be withdrawn during the life of the partnership (see our response to question 6).
A30407557/1.0/05 Oct 2015 8
The result would be equivalent protection for third parties and a simplified limited partnership financing structure that is in line with other jurisdictions.
We think it would be helpful to use the LRO to clarify that there is no requirement that a GP make a capital contribution, either.
6 Should a limited partner be allowed to withdraw their capital during the life of the partnership? If so, should they remain liable for the amount withdrawn?
We agree with the proposal that a limited partner should be allowed to withdraw any capital contributed and not remain liable for such amounts withdrawn. As noted in the Consultation, the existing regime (whereby investors make the majority of their commitment through loans rather than capital investment) results in considerable complications and unnecessary confusion. No purpose would be served by having a limited partner remaining liable for any such amounts as a third-party creditor (if any) would be interested in the assets and liabilities of the fund, including the contractual commitments (and not just the registered capital) of the limited partners.
While we accept that creditors would not typically rely upon the current law as opposed to express contractual provisions for protection, it is possible that there may be situations where creditors have taken comfort from the current law position. To avoid prejudicing any existing creditors, we would suggest that the right to withdraw without liability only applies to capital paid in after the registration of the relevant limited partnership as a PFLP.
We do want to emphasise that in order to bring the UK limited partnership in line with ‘competitor’ jurisdictions, any contributions made by limited partners to the PFLP should be viewed as ‘capital’ in its broadest sense, and therefore it is essential that limited partners be permitted to withdraw such capital. It would be commercially undesirable for the resulting position to be that all commitments to PFLPs end up as ‘loans’ rather than ‘capital’. We do recognise however that some private fund sponsors may wish to continue with the traditional capital/loan split of contributions mechanism, and we consider that the LRO permits this as currently drafted.
7 If limited partners are allowed to withdraw their capital, should any other conditions be put in place?
We do not consider that any conditions should be put in place in the event that a limited partner withdraws capital.
8 Should the limited partners in a private fund be allowed to agree among themselves who should wind up the partnership without having to obtain a court order?
Yes.
A PFLP will almost certainly be constituted by contractual agreement and related documents which will set out in some detail how the partnership should be wound up. We are in full agreement with the proposal, as set out in section 2(4)(c) of the LRO, that the partners of a PFLP should be able to agree amongst themselves who should wind up the affairs of the partnership, subject to any court order to the contrary.
A30407557/1.0/05 Oct 2015 9
Private fund investors are for the most part sophisticated individuals and institutions who are willing to assume a high degree of responsibility for their investment decisions. This should include awareness of the terms of the private fund’s governing documents in relation to how the fund shall be wound up and by whom. If the terms of the fund, agreed to by all partners of the fund, provide for a certain person to wind up the affairs of the fund then a court order should not be required in order to give effect to this decision, only to set it aside. The requirement for a court order to be made would impose cost and delay where none is necessary.
Our response will primarily be relevant where a PFLP has no general partner (because the event triggering the dissolution of the partnership is the removal of its general partner by the limited partners) but holds equally true if the general partner remains in place but the partnership as a whole wishes to have some other person act as liquidator.
In relation to the proposed drafting of the new sub-sections (3A) and (3B) of the Act, we agree with the amendments suggested by the British Private Equity & Venture Capital Association.
Sections 6(3A) and (3B) of the LRO should expressly be subject to a court direction, i.e. adding “unless the court otherwise orders” at the beginning of each of these clauses. This allows for the court to make an order where there is no express or implied agreement and the partners cannot otherwise agree between them. This is also in section 6(3) of the 1907 Act.
9 Should the requirement to register the amount of capital be removed for private funds?
Given that the requirement to contribute capital will be optional (as discussed above in response to question 5), and there will be an ability for limited partners to withdraw capital (as discussed above in response to questions 6 and 7), we see no purpose or value in registering the amount of capital contributed. Updating the register for changes to the amount of capital contributed is unnecessarily burdensome for general partners. The only exception to this is for capital contributed prior to an existing limited partnership electing to be a PFLP under the transitional provisions. For the reasons discussed in the response to question 6 above (in the second paragraph), there may be a benefit in keeping track of withdrawals of such capital.
More generally, we agree with the aims stated in paragraph 3.23 of the Consultation to reduce the administrative burden in relation to registering a PFLP and to protect investors’ privacy. Investors not wanting their absolute or relative contributions to the fund to be visible can be a reason for choosing a non-UK limited partnership. Removing the requirement to register the amount of capital would therefore bring the UK limited partnership in line with such other limited partnerships.
Separately, we also question the necessity to register the names of limited partners. This can be a competitive disadvantage for UK limited partnerships as compared with other limited partnerships where identities of limited partners and their contributions are not a matter of public record.
A30407557/1.0/05 Oct 2015 10
10 Should the requirement to register the general nature of the limited partnership’s business and the term of the limited partnership be removed for private funds?
With regards to the general nature: This tends to be drafted fairly widely for private funds. Registration as a PFLP will in itself serve as notice to the public of the general nature of the PFLP’s business, and therefore we believe that this requirement should be removed.
With regards to the term: The LRO provides a mechanism for inactive PFLPs to be removed from the register (as discussed above in response to question 2). Interested parties will therefore be able to ascertain whether a PFLP still exists. Further, the term of a partnership can be changed during the life of the partnership and so we agree with the proposal to remove the requirement to register the term of a PFLP.
11 What are your views on the requirement to advertise a notice in the Gazette? Does it present any specific problems? Is it appropriate to remove the requirement for private funds?
We welcome the proposed removal of the requirement for a Gazette notice when a general partner becomes a limited partner and in the case of transfers of limited partnership interests in PFLPs. This requirement is an administrative burden for private funds which causes delays in relation to transfers and which no longer provides any real benefit for creditors. When compared to other jurisdictions, this is an anachronism, We believe the Companies House notification requirements, as amended2, will provide sufficient information for the public and creditors about these changes in the status of partners in a PFLP.
The original aim of the Gazette notice provisions in the 1907 Act section 10 was to protect creditors, who through the Gazette advertisement process would be able to monitor the status of partners. However, the Gazette is no longer a widely consulted publication in relation to limited partnerships. Also, with the proposed removal of capital contributions by limited partners, the Gazette requirement will cease to have any real benefit for creditors.
Moreover, the requirement for a Gazette notice in relation to transfers of limited partner interests causes delay. Currently, the legal transfer of a limited partnership interest is not complete until the notice is published, which can take two or three days. This is the case regardless of whether the filing is made through the Gazette website3 or by paper forms. By contrast, there is no equivalent requirement for a Gazette notice in relation to transfers of shares in limited companies.
We would like to also see confirmation that other types of changes in a PFLP’s constitution are not required to be notified in the Gazette – in particular those pursuant to section 36 of the Partnership Act 1890.
12 Should the duties to render accounts and information, and to account for profits made in competing businesses, be removed for limited partners in private funds?
Yes, both duties should be removed. Limited partners in private funds are commonly invested in large numbers of other public and private funds, and directly invested in
2 1907 Act section 9 as amended by the LRO; notification to Companies House of changes in partners (on Form LP6) 3 https://www.thegazette.co.uk/
A30407557/1.0/05 Oct 2015 11
businesses, which will compete with each other. This is understood and accepted by all partners at the time of formation of a private fund. Limited partners typically do not play any part in the management of these competing funds or businesses, they are passive financial investors. The requirement to render accounts and information for, or to account for profits derived from, such other investment activities is incompatible with the operation of a diverse and effective investment program. It should not apply to PFLPs.
Our only additional comment is that in addition to the proposed drafting currently set out in section 2(4)(d) of the LRO, removal of the above duties in full would also require the disapplication of section 29 of the Partnership Act 1890.
In relation to the proposed drafting set out in section 2(4)(d) of the LRO, our suggested drafting is therefore:
(f) a limited partner in a private fund limited partnership is not subject to the duties in-
(i) section 28 of the Partnership Act 1890 (duty of partners to render accounts etc), or
(ii) section 29 of that Act (accountability of partners for private profits), or
(iii) section 30 of that Act (duty of partner not to compete with firm).
13 Do you have any comment on the interaction of the legislation for authorised fund limited partnerships and the proposed legislation for private fund limited partnerships?
No.
A30407557/1.0/05 Oct 2015 12