Legislate in haste, repent at leisure: Drafting errors identified in the PSC Rules for Scottish Limited Partnerships

The speed at which the The Scottish Partnerships (Register of People with Significant Control) Regulations 2017 have been brought into force has come in for significant criticism from The House of Lords’ Secondary Legislation Scrutiny Committee.

21 July 2017

The speed at which the The Scottish Partnerships (Register of People with Significant Control) Regulations 2017 (the Scottish Regulations) have been brought into force has come in for significant criticism from The House of Lords’ Secondary Legislation Scrutiny Committee.

The Scottish Regulations bring Scottish limited partnerships (SLPs) and Scottish qualifying partnerships (SQPs) within the ambit of the UK Persons with Significant Control (PSC) regime that previously only applied to UK companies and limited liability partnerships.

The changes are part of the UK’s implementation of article 30 of the Fourth Money Laundering Directive, which requires beneficial ownership information for incorporated legal entities to be made available.  It is hoped that the extension of the PSC regime to SLPs and SQPs should (in theory) assist lenders and other third parties dealing with SLPs, offering greater transparency on ownership structures and help combat fraud and money laundering activities. However, some of the technical reasons for doing so are questionable. Whilst partnerships in Scotland enjoy separate legal personality, they are not 'incorporated' legal entities in terms of article 30 – a point which was misstated in the discussion paper published by the Department for Business, Energy and Industrial Strategy as part of the consultation process leading up to the Scottish Regulations and other related secondary legislation.

In their report, the Committee raise material concerns about the lack of a formal document setting-out responses to the discussion paper.  The Committee also question the effectiveness of impact assessments carried-out on the net cost to UK businesses complying with the new legislation.   

In particular, the Committee highlighted the shortcomings of the PSC rules relating to partnerships.

“The provisions relating to people with significant control of a partnership do not, as drafted, provide sufficient clarity to those affected.  The 'person with significant control' test is set as someone with the right to receive 25% of the assets on winding up.  In many partnership agreements it is not clear in advance what percentage of assets will be received by an individual partner. Many partnerships provide for the priority repayment of subscribed capital, often to the original partners, with the remaining surplus distributed in different proportions, sometimes prioritising newer younger partners. The percentage of the total assets received by each partner will therefore depend not only on the individual percentages but also on the relative balance between subscribed and retained capital.”

In our view, the Scottish Regulations also contain a number of drafting flaws or errors that need to be clarified or amended:

1. Security exemption: rights in SLPs that are held in security in connection with lending in the ordinary course of business do not appear to be exempt from the effects of the PSC regime.  Paragraph 18 of Schedule 1 to the Scottish Regulations contains a provision that is expressed to exclude only “rights attached to shares held by way of security.” 

Depending on your point of view, this appears to be either (a) a drafting error, if the intention is to exclude anyone holding in security rights in an SLP given that shares in partnerships do not technically exist in Scotland or (b) an oversight, if the reference to shares is intended only to exclude anyone holding in security rights attached to shares in a company that constitutes a PSC in relation to the relevant eligible Scottish partnership.

2. Enforcement procedure: paragraph 16(1)(a) of Schedule 2 to the Scottish Regulations states that it is an offence for any PSC to fail to comply with their duty to update PSC information supplied about them.  However, one of the “duties” referred to in the provision cross-refers to a regulation containing no relevant duties, rather than to Regulation 13 which contains corresponding duties obliging a PSC to provide relevant information to the SLP where it has not been requested by the SLP.  PSCs are still required to comply with Regulation 13 and provide the relevant PSC information, however, failure to comply with this duty does not appear to attract sanction.

3. Surplus Assets: a person is considered a PSC for an SLP if they directly or indirectly hold rights over more than 25% of the surplus assets of the SLP on a winding up.  Therefore what qualifies as “surplus assets” for an SLP and who holds the right to those assets are clearly important (as noted above by the Committee in their report). 

Paragraph 12 of Schedule 1 to the Regulations clarifies who holds the right to surplus assets  (where there is no express provision in a partnership agreement) stating that “each partner in the eligible Scottish partnership shall be treated as holding the right to an equal share in any surplus assets on a winding up.”However, the definition of “partner” in Regulation 2 of the Regulations (in relation to a limited partnership) “has the same meaning as general partner in s.4(2) of the Limited Partnerships Act 1907.”  

On the face of it, this would appear to produce an odd result under paragraph 12 of Schedule 1 (if applicable only to the general partner in an SLP) as limited partnerships require both general and limited partners in terms of the 1907 Act.  Therefore, unless this is a drafting error and the wrong defined term has been used, it is unclear why the drafters of the legislation should have thought that the default position in the absence of express provisions should be that limited partners have no entitlement to surplus assets on a winding-up.


These are just a few of the shortcomings that we have identified ourselves since the Scottish Regulations were published on 23 June 2016.  If you have spotted any discrepancies or drafting errors yourself, we’d love to hear your thoughts on this.

This update is for general information only and should not be relied upon as advice on your specific circumstances.

If you wish to discuss any issues highlighted in this update, please contact Peter Alderdice and Rod MacLeod.