The government has recently published a consultation on proposals for reform of the law concerning limited partnerships.
Background
As we mentioned in our article on the introduction of private fund limited partnerships last year, the Department for Business, Energy and Industrial Strategy issued a call for evidence on limited partnership law in January 2017. This followed reports of a marked increase in the number of limited partnerships registered in Scotland and suspicions that Scottish limited partnerships were being used for illegal purposes.
Unlike English limited partnerships, Scottish limited partnerships have legal personality, so that a Scottish limited partnership may enter into contracts, including opening bank accounts. Since limited partnerships are not subject to the same reporting and transparency obligations as limited companies, it was feared that Scottish limited partnerships were being increasingly used for money laundering, organised crime or tax evasion.
The consultation confirms that Scottish limited partnerships have been used to enable illicit activity. For example, an investigation by the Organised Crime and Corruption Reporting Project and Novaya Gazeta found that 113 Scottish limited partnerships were involved in the Russian Laundromat, a scheme used to move large amounts of money out of Russia between 2010 and 2014.
In order to improve transparency, the regime relating to people with significant control over a company was extended to Scottish limited partnerships with effect from 26 June 2017, so that Scottish limited partnerships are now required to file details of people with significant control over the partnership at Companies House. Perhaps as a result, there has been a notable decline in the number of new Scottish limited partnerships registered.
The call for evidence invited views on the following topics, each of which now forms the subject of a proposal in the consultation:
Registration requirements
Almost all applications for registrations of limited partnerships are presented by formation agents, and in recent years most registrations of Scottish limited partnerships have been made by a small number of such agents. There is a concern that some of these agents may not have been complying with their anti-money-laundering obligations.
It is therefore proposed that all those presenting applications to register a limited partnership should have to provide evidence that they are supervised by an appropriate body under money-laundering legislation. Examples of such bodies include the Financial Conduct Authority, the Institute of Chartered Accountants in England and Wales and the Law Society.
Principal place of business
Under the Limited Partnerships Act 1907, a new limited partnership must on application for registration provide the address of its principal place of business. This must be within the same jurisdiction as that in which it is to be registered: for example, to be registered as a Scottish limited partnership, the initial principal place of business must be situated within Scotland. A limited partnership must inform the Registrar of Companies if its principal place of business subsequently moves, but there is no requirement for the principal place of business to remain in the United Kingdom. This contrasts with the position for limited companies, which must maintain a registered office in the country of their incorporation.
Research at Companies House has shown that a large number of Scottish limited partnerships purport to have their principal place of business at a small number of locations. For example, in May 2017, over 17,000 Scottish limited partnerships (58% of those registered at the time) were registered at just ten addresses. It is considered unlikely that they are actually conducting their business from those locations, especially in the light of research from Transparency International which showed that 71% of Scottish limited partnerships registered in 2016 were controlled by companies based in overseas jurisdictions where information about their directors, shareholders and beneficial owners is not publicly available.
In order to ensure that limited partnerships retain a meaningful address at which UK authorities can contact them, two alternative options are proposed:
Reporting and transparency requirements
The filing obligations of limited partnerships are currently not extensive. A limited partnership is obliged to inform the Registrar of Companies of changes to its name, principal place of business, the partners or the name of any partner, and any change from a general partner to a limited partner or vice versa.
A limited partnership that is not a private fund limited partnership is also obliged to file any changes to the general nature of its business, the term or character of the partnership and the sum contributed by any limited partner.
A Scottish limited partnership is, in addition, required to inform the Registrar of any changes to its people with significant control and to file an annual confirmation statement confirming that the information held by the Registrar is correct.
A limited partnership is obliged to file annual accounts only if each of its general partners is a limited company, an unlimited company each of whose members is a limited company, a Scottish partnership each of whose members is a limited company, or a Scottish limited partnership each of whose general partners is a limited company.
This contrasts with the requirements relating to limited companies, all of which are required to file annual accounts and a confirmation statement confirming details of the company’s registered office, directors, secretary, statement of capital, shareholders, standard industrial classification, and people with significant control; larger companies are also required to file a directors’ report and a strategic report.
In order to improve transparency, it is proposed that all limited partnerships should be required to file an annual confirmation statement. This would confirm their principal place of business, service address (if option B above is adopted), general and limited partners, and the sum contributed by each limited partner.
The possibility of requiring all limited partnerships to file annual accounts and a directors’ or strategic report is also being considered. Among those who would be affected by this proposed change are venture capital firms structured with a limited liability partnership as their general partner, which are currently not obliged to file accounts.
Strike-off provisions – proposals
It is not possible for a limited partnership to be removed from the register at Companies House. A limited partnership may make a filing to indicate its voluntary dissolution, but its name will remain on the register.
A limited company, on the other hand, will have its name struck off the register if the Registrar of Companies is informed that it has been dissolved. Further, the Registrar may himself strike a company’s name off the register if (a) he has reasonable cause to believe that it is not carrying on business or in operation (for example, because the required filings have not been made, post sent to its registered office is undelivered, or the company has no directors); (b) he has written to the company to enquire whether it is still carrying on business or in operation; and (c) notices have been published in the Gazette.
In order to make it clear to the authorities and the general public whether a limited partnership is in operation or not, it is proposed that the Registrar of Companies should be able to strike off limited partnerships in the same circumstances as for limited companies, namely:
If this proposal is enacted, the historical record would remain on the register when a limited partnership is struck off, but the entry would be marked as ‘Dissolved’. As is the case with a limited company, this would indicate that the limited partnership does not operate and no longer exists.
Strike-off provisions – background and comment
Proposals to enable limited partnerships to be removed from the register have been made before. In 2008, the government consulted on a broad range of reforms to limited partnerships, including the possibility of strike-off. In the event, however, the reforms proposed were not pursued, and only limited changes, not including strike-off, were enacted.
Strike-off was also proposed in 2015, when HM Treasury consulted on the introduction of private fund limited partnerships (PFLPs). Again, it was not taken forward, partly because it was considered that any such change should apply not only to the new PFLPs but to all limited partnerships, but also because of concerns expressed by respondents to the consultation.
The main objection concerned the possibility that a limited partnership might be removed from the register without having first been wound up. If this happened, the firm would continue in existence as a general partnership (for which no registration is required), with the result that the limited partners would have unlimited liability for its debts. Since there was no requirement for a general partner to obtain all the limited partners’ consent before requesting removal of the limited partnership from the register, a limited partner could lose their limited liability status without even being aware that this had happened. As explained in a co-ordinated response from leading law firms, ‘the risk of inadvertently incurring unlimited liability would, in blunt terms, put paid to any prospect that the PFLP would be a viable vehicle for fund investment’.
Among the solutions suggested to address this point were to make removal from the register conditional on the firm’s having been wound up. If a limited partnership were removed from the register and it was subsequently found that it had not been wound up, it was proposed, the Registrar should have the power to reinstate it, with the limited partnership treated as never having been struck off.
Alternatively, as the British Venture Capital Association suggested, the legislation could ensure that limited partners would continue to benefit from limited liability even after striking off, for example by providing that striking off would have no effect on the rights and liabilities of any of the partners.
The latest consultation document suggests that, where necessary, ‘additional operational safeguards’ would be introduced relating to strike-off. No detailed proposals are set out, however, and so it remains to be seen how the concerns raised previously will be addressed.
Next steps
Responses to the consultation should be sent to the Department of Business, Energy and Industrial Strategy by 23 July 2018. It is intended to legislate for the proposed reforms when the parliamentary timetable allows. Transitional provisions will be included where necessary.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
