What is a Scottish LP?
In common with LPs registered in the rest of the UK, a Scottish LP is a partnership formed in accordance with the Limited Partnerships Act 1907. A Scottish LP:
- Must have at least one general partner, responsible for the management of the Scottish LP and liable for the debts and other obligations of the Scottish LP;
- Will have one or more limited partners, who take no role in the management or decision making of the Scottish LP and whose liability is limited to the value of their capital contribution;
- Will be registered at Companies House and the partnership agreement governing the relationship between the partnership and its partners will be governed by Scots law;
- Will have its principal place of business and its domicile in Scotland although it may carry on activities in other jurisdictions and
- Will be subject to the jurisdiction of the Scottish courts which can determine disputes in relation to the activities and/or assets of the Scottish LP in addition to any other court having jurisdiction by virtue of, for example, contractual provisions.
What are the advantages of a Scottish LP?
Unlike limited partnerships registered in the rest of the UK, the Scottish LP is a separate legal entity with a legal personality of its own, distinct from that of its partners. A Scottish LP can therefore sue and be sued as a separate legal entity.
Despite its separate legal personality, a Scottish LP is transparent for tax purposes, which means that the tax authorities look through the Scottish LP and only tax the profits arising from the Scottish LP’s activities in the hands of its partners. The vehicle itself, unlike a company, is not subject to its own taxation regime.
The separate legal personality enables a Scottish LP to own assets in its own name; borrow money and grant security over those assets. A Scottish LP cannot grant a floating charge and fixed security is therefore often taken over any heritable property owned by the Scottish LP.
The Scottish LP and insolvency
Unlike a limited partnership registered in the rest of the UK, the Scottish LP is not subject to the corporate insolvency regimes of the Insolvency Act 1986 but to the Scottish bankruptcy procedure (also known as sequestration) set out in the Bankruptcy (Scotland) Act 2016.
Where a limited partnership seeks to apply for its own sequestration this must be made by way of a debtor application to the Accountant in Bankruptcy.
A limited partnership can also be sequestrated by the Court on the petition of a qualified creditor. To that extent the process for formal insolvency is akin to a court liquidation in England and Wales but the following differences require to be borne in mind:
- It is possible to petition for the sequestration of the limited partnership without also petitioning for the sequestration of the members of the limited partnership.
- A qualified creditor is a creditor with outstanding debts due of at least £5,000 (but excluding contingent or future debts). A group of creditors who together are due at least £5,000 could join together to present the sequestration petition.
- The test of insolvency which must be satisfied in order to enable a creditor to present a petition for the sequestration of a limited partnership is one of “apparent insolvency” which is established in accordance with the provision of the 2016 Act.
- Unlike a limited company “apparent insolvency” cannot be established using the cash flow or balance sheet tests laid down in the Insolvency Act 1986.
- “Apparent insolvency” is established either by making a statutory demand (in the prescribed form which expires without payment) or by serving a Charge for Payment, and 14 days must elapse without payment being made. To be able to serve a Charge for Payment the creditor must hold a judgement/decree or an equivalent document for an enforceable debt.
Often in restructuring assignments where a formal insolvency process is used by one or more of the entities involved, it is important to have certainty as to the timing of placing the entity into a formal process. That can be problematic when dealing with a Scottish LP. Careful planning is required in order to ensure that the formalities of the 2016 Act are complied with and, where timing is of the essence, to ensure the step plan is completed without slippage.
Should you require support or advice in relation to the issues set out in this article please get in touch with our Restructuring and Business Advisory team or your usual Shepherd and Wedderburn contact.