Economic Crime and Corporate Transparency Bill: Changes coming for Limited Partnerships

This note covers the key changes to limited partnership law under the forthcoming Economic Crime and Corporate Transparency Bill (the “Bill”). The changes are relevant to fund managers which use English limited partnerships (“ELPs”) or Scottish limited partnerships (“SLPs”) in their fund structures.

Exactly when these changes will come into force is not yet clear, but the Bill has passed through its second reading in the House of Commons and has been sent to a Public Bill Committee which is scheduled to report on the Bill by 29 November 2022. As such, we anticipate the changes coming into force early next year.

Why are the changes being made?

LPs(1) have been the source of some criticism in more recent times - not for their role in the investment management industry - but that they can provide a means through which money can be laundered and assets concealed. Currently, LPs only need to file very limited information with Companies House when they first register. Filing changes to that information or disclosing operational developments on an ongoing basis is similarly limited. In an effort to increase transparency (and reduce corporate crime in the process), the new laws would:

• broaden the information to be filed with Companies House;
• require that information to be kept up to date;
• grant powers to HMRC to demand accounting information relating to an LP; and
• strengthen the nexus that ELPs and SLPs have with their jurisdiction of registration (and Companies House).

Additionally, the new laws would address how LPs can be dissolved and wound up. Laws on that topic have so far been conspicuous by their absence (for example there is currently no way to strike off an LP from the register). Having a regime to follow should be helpful to managers looking to dissolve and wind-up LP structures and 'tidy up' the Companies House register of vehicles they no longer use. These changes are not ground-breaking, but they are likely to increase the compliance burden on managers and GPs using LPs in their fund structures, mainly as a result of the additional filing obligations. New rules around winding up LPs are, however, largely welcome.

What are the changes?

The Bill would make various changes to the Limited Partnerships Act 1907, the core statute governing these vehicles. The new requirements are intended to apply to all LPs and, where relevant, a six-month transition period will apply from implementation. In some cases, non-compliance could constitute an offence(2) and / or result in de-registration of the LP. The new rules are set out below

.1. GP Registered Officers A GP which is a legal entity (as is ordinarily the case in fund structures) must have at least one individual appointed as a 'registered officer' i.e. a named individual with whom Companies House can make contact. Where the GP is an LLP (as is common practice) and the members of that LLP are corporate entities, the GP will also need to provide details of a 'registered officer', which may involve appointing an individual as a member of the GP LLP. Finally, where an additional GP is admitted to the LP subsequent to registration of the LP, a registered officer will need to be appointed for that GP too. As expected, a person who has been disqualified as a director of a UK company cannot be a GP or a registered officer. The Bill would also require GPs to remove any GP or registered officer of a GP who was subsequently disqualified.

2. GP Registered Offices An LP will need to have a registered office in the jurisdiction of its registration. The registered office will need to be at an “appropriate” address (i.e. a location where it's reasonable to expect that documents delivered there will come to the attention of the LP and delivery be acknowledged). The registered office can be at any of the following in the UK:

1. the principal place of business of the LP;
2. if the LP has a GP which is a legal entity, the registered office of that GP entity;
3. if the LP has a GP which is an individual, that individual's residential address (unlikely to apply in the funds space); or
4. an address provided by an authorised corporate service provider (ACSP).

Managers of an ELP or SLP which have relocated the principal place of business business of that LP to another jurisdiction (for example, for tax reasons or to avoid the need to appoint a full scope depositary for the purposes of the AIFMD) will need to add a UK registered office of the LP. Current FCA guidance indicates that a UK LP with, for example, a Cayman GP will have a Cayman principal place of business, and so would be classified as a 'non-UK AIF'. This is because such a UK LP has no registered office in the UK and therefore the registered office / principal place of business of the GP determines where the LP's principal place of business is (in this case, Cayman). If, as proposed by the Bill, a UK LP with a non-UK GP were to be required to maintain a UK registered office, this could result in the AIF being re-classified as a 'UK AIF', the consequences of which could be significant for managers and the LP's investors. The proposals also allow for Companies House to change an LP's registered office address if it is not considered “appropriate”. GPs will also have to maintain a registered email address for the LP (so that it is contactable).

3. More information to be filed about an LP's partners For any partner that is an individual, that person's name, date of birth, nationality, any former names, usual residential address and the part of the UK that such person is resident (or country or state if outside the UK) will need to be filed. For a GP that is an individual, a service address (which can be the LP's registered office) will also need to be filed(3).For a partner that is a legal entity, the name, registered or principal office address, service address and legal form of the entity will need to be filed. In addition, for a GP that is a separate legal person, details of any register on which it is entered will need to be filed. This is a material additional disclosure obligation for managers of funds structured as ELPs or SLPs that have any investors who are natural persons.  For managers whose investors are institutions (as is common), this may not be such an issue. However, more information may need to be filed about the participants in carry vehicles (structured as SLPs, for example), which is unlikely to be popular with fund managers.

4. Confirmation statements LPs will need to submit a statement confirming that the information held by Companies House is correct. This statement must be delivered within 14 days of each review period, which is generally every 12 months from the date the LP is registered or last submitted a statement. For existing LPs, the first review period will be between registration and the end of the transitional period. As long as managers keep on top of their Companies House filings (no mean feat), the annual confirmation should not be too much of a burden. Any changes to the information that needs to be filed under the new rules will need to be notified to Companies House, and the pre-existing requirements to file LP6s with certain changes relating to an LP will generally continue.

5. HMRC power to demand accounts of an LP The Bill will give HMRC the power to require GPs to prepare audited accounts for review by HMRC. Note there is no new requirement for LPs to file accounts at Companies House (i.e. for public view). Also, most managers arrange for accounts to be prepared for their funds anyway as their investors routinely require these (and full scope UK AIFMs are required to prepare them under the FCA Rules), so this new power may not prove to be burdensome. It is not clear whether HMRC requires any grounds to demand the accounts of an LP (such as reasonable suspicion of criminal activity), and it is hoped that HMRC would accept the accounts already prepared for investors rather than demanding information be presented in a different way, but confirmation of this would be welcome. It is worth noting that a demand by HMRC could also apply to LPs that are not funds per se, such as carry vehicles or aggregator LPs.

6. Filings only to be made by Authorised Corporate Service Providers (“ACSPs”) Only ACSPs will be able to apply to register LPs and make other filings relating to LPs. This might make little difference to how filings are made in practice to the extent FCA authorised managers make the filings themselves. Failing that, other corporate service providers (including appropriately authorised fund administrators) should be able to make the filings. We await confirmation as to whether law firms will be able to make these sorts of filings - if the approach taken to certain filings under the recently introduced Economic Crime (Transparency and Enforcement) Act 2022 is anything to go by, then a specific ACSP may have to be used.

7. Dissolution and winding up of LPs To date there has not been a comprehensive legal procedure to follow for winding up LPs. New laws governing how LPs can be dissolved should therefore provide a welcome code to follow. Essentially, under the new rules, if an LP is dissolved when there is at least one GP, the GP(s) will be able to wind it up, subject to agreement between the partners. This would ordinarily be the case in a fund structured as an LP. However, if an LP is dissolved when there is no GP (for example, where a GP has been removed in accordance with the provisions of a fund's limited partnership agreement), the limited partners can, subject to any other agreement between them, appoint a third party to wind up the LP. Importantly, limited partners can make this appointment without compromising their limited liability by participating in management of the LP's business. In either case the partners would need to notify Companies House of the dissolution. In cases whether there is no GP, the limited partners would need to make that appointment and notify Companies House of the dissolution (and may be guilty of an offence if they fail to do so).In addition, Companies House will have the power to deregister LPs that are dissolved or no longer carrying on business (where the LP has notified dissolution to Companies House). Where notice of the dissolution has not been given and Companies House has reasonable cause to believe that the LP has dissolved (for example if unable to contact the LP to confirm the contrary), the LP can be treated by Companies House as having been dissolved, subject to a restoration procedure that can be used where appropriate. This provides some clarity on the existing approach to winding up LPs. However, it will be important to take care when handling de-registrations, so that the limited liability conferred on limited partners by registration of the partnership at Companies House remains in place until it is no longer needed. Managers may also wish to revisit the dissolution provisions of the limited partnership agreements governing their funds to ensure they will be compliant with the new rules.

What do we think?

The changes are likely to be significant for fund managers using LPs, but are not major. We still expect ELPs and SLPs to continue to be key tools in the box when it comes to structuring private funds, carry vehicles, co-investment sleeves and funds of one in the UK. They also remain popular with institutional investors, who are well accustomed to how they operate and protect them as participants. However, fund managers should prepare for the changes soon so they can remain compliant from the point the new laws become effective. We will continue to monitor the Bill's progress through the legislative process and provide further updates as and when there are significant developments. Want to know more? Please contact George Metcalfe in our Private Funds department.

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(1) In this note 'LPs' refer to ELPs and SLPs, and 'GPs' refer to their general partners.(2) Depending on the breach, the GP could be guilty of an offence (the consequences for which are mainly fines but could be imprisonment).(3) Personal information such as dates of birth and residential addresses would not become publicly available.