Developments in Limited Partnership Law: Private Fund Limited Partnerships

We examine the modernisation of limited partnership law relating to investment funds, and the likely impact on the Scottish limited partnerships commonly used.

7 April 2017

New rules regarding limited partnerships (LPs) came into force across the UK yesterday (6 April 2017). Under the changes, the Limited Partnerships Act 1907 has been amended to introduce a new subset of LPs known as private fund limited partnerships (PFLPs). Several overseas jurisdictions already allow flexible vehicles similar to PFLPs and it is hoped that the introduction of PFLPs will further cement LPs as funds vehicles, and the UK as an attractive jurisdiction for investment funds to be based and to do business.

As of yesterday, new LPs can register as PFLPs while existing LPs can apply to re-categorise themselves as PFLPs in order to benefit from the more modern, commercial regime being established by the changes. The main criteria for LPs to meet are:

  • the LP must be constituted by an agreement in writing (i.e. a limited partnership agreement); and
  • the LP must be a collective investment scheme under section 235 of the Financial Services and Markets Act 2000.

The new rules broadly serve to relax the existing restrictions on LPs whereby limited partners are prevented from taking part in the management of the LP. Currently, if they do, they run the risk of losing their limited liability status. The changes allow limited partners in PFLPs to take part in a number of activities that could previously have affected their limited liability status, without risking their limited liability status. It is important to note that limitations in an LP’s current partnership agreement, prohibiting limited partners from participating in the LP’s management, will still require to be amended before a limited partner can take advantage of its new powers.

The other substantive change to the limited partnership regime is that new PFLPs will not automatically require capital contributions from their limited partners. Further, if a limited partner does provide a capital contribution for a new PFLP, it is permitted to withdraw that contribution without (as is currently the case) incurring liability for partnership debts up to the amount of the withdrawn contribution. Contributions made by limited partners prior to 6 April 2017 to LPs that subsequently become PFLPs are not however covered by the new rules and cannot be withdrawn without incurring the liability.

The new rules allow greater flexibility and a reduction in administrative burden for LPs. They apply equally in Scotland as well as the rest of the UK where Scottish partnerships and Scottish limited partnerships (SLPs) have separate legal personality. This allows SLPs to hold investments, and borrow and grant security, in their own name, a significant benefit which sets SLPs apart from LPs in the rest of the UK. The new rules also remove the requirement to advertise publicly transfers of limited partnership interests in the local Gazette which is a welcome amendment to the existing rules for investors and fund lenders alike.

It is anticipated that the introduction of the PFLP vehicle will further enhance the appeal of SLPs as investment vehicles, although the DBEIS is currently consulting on the use of SLPs following reports of fraudulent activity linked to SLP vehicles and it is not yet clear how reduced reporting requirements under the PFLP regime will interact with any change that may be proposed to SLPs to address their use for criminal purposes.

For further information on SLPs, please click here to read the Scotland chapter in Global Legal Insights’ Fund Finance 2017, co-authored by Shepherd and Wedderburn partners Hamish Patrick, Rod MacLeod and Andrew Kinnes.