17 April 2019

Many will be aware of concerns in the press raising the profile of limited partnerships registered in Scotland being used for criminal activity. Such concerns are enhanced by a recent increase in the number of limited partnerships registered in Scotland when compared to those registered in England, Wales and Northern Ireland.

As a consequence of this, the Government issued a Consultation in 2018 with a view to ascertaining the possible reasons why registration of limited partnerships in Scotland has increased, the value which such limited partnerships bring to the UK economy as a whole, and how the wider limited partnership framework operates and whether any changes need to be made. 

Background

By way of background, limited partnerships are governed by the Limited Partnerships Act 1907 in particular.  As with normal partnerships, it must be formed between two or more persons and must carry on a business in common with a view to profit. 

Generally, a limited partnership is similar to a general partnership under the Partnership Act 1890, except that it will have two categories of partner:

• General Partners, being partners who have responsibility for managing the business of the limited partnership and have unlimited liability for the partnership’s debts and obligations;
• Limited Partners, being those who invest capital in the partnership, but do not take an active role in its operation and have limited liability up to the amount of capital which they contribute. If a Limited Partner, however, takes part in the management of the partnership business, it loses its limited liability.

When compared to companies incorporated under the Companies Act, the statutory and regulatory framework which applies to limited partnerships is light – for example, companies have obligations to provide annual Confirmation Statements as well as publish accounts. 

From the evidence obtained by the Department for Business, Energy and Industrial Strategy (BEIS), it was clear that limited partnerships continue to be important as a legal structure in key sectors of our economy.  However, it was also recognised that there are ways in which the legal framework governing limited partnerships could be strengthened and updated.  

How the Government plans to implement changes

The Government’s response to the Consultation sets out how the Government plans to implement changes to the legislation as a consequence, whilst recognising that the issues which had been identified around the misuse of limited partnerships had been mitigated by the introduction of the Persons of Significant Control Register in 2017.  Accordingly, the Government indicated its intention to take action to limit the potential for abuse of limited partnerships whilst ensuring that they remain attractive for legitimate business use, in particular as an investment vehicle, the most common use to which they are put. 

From the Government’s response, the Government intends to make it mandatory for presenters of new applications for registration of limited partnerships to demonstrate that they are registered with an anti-money laundering supervisory body and that evidence of this is provided on the application for registration of the limited partnership.

It is recognised that there may be an increase in administration and fees for registration as a result of this, but it is expected that such increases will be minimal and proportionate to increase transparency and the accountability of presenters who require to conduct money laundering checks on their customers with a view to preventing applications for registration which are established with the intention of conducting illicit activity. 

The second strand to the review related to the principal place of business of limited partnerships where the Government believes it is vital for limited partnerships registered in the UK under the UK’s legal framework to maintain a demonstrable link to the UK.  The Government intends that information regarding this is provided on registration and on an ongoing basis, with limited partners being required to either retain their principal place of business in the UK, or demonstrate some legitimate business activity at an address in the UK, or demonstrate that they continue to engage the services of an agent registered with a UK anti-money laundering supervisory body which has agreed to provide its address as a service address for the limited partnership.

Having commented above on the obligation on limited companies to provide annual Confirmation Statements in terms of the Companies Act, the Government does not consider that the case has been made for all limited partners to prepare accounts and reports in line with limited companies.  However, it is intended that all limited partnerships are required to file a Confirmation Statement at least every 12 months (which is already mandatory for Scottish Limited Partnerships).  In addition, the Government is looking at seeking other information in relation to limited and general partners, as well as using a standard industrial classification code identifying the nature of the limited partnership’s business (as currently applied to limited companies) in addition to considering whether to require a PSC (People with Significant Control) Register (as currently applied in Scotland). 

The Government also considered whether it would be appropriate for the Registrar to have the power to strike-off limited partnerships from the Register of Companies with the conclusion that, for the Register of Companies to remain transparent and reliable, it is necessary that it should contain information that is up to date and accurate.  Accordingly, the Government intends to grant the Registrar the power to strike-off limited partnerships that are dissolved, or which the Registrar concludes are not carrying on business or in operation.  As with limited companies and the process for intimating the Registrar’s intention to strike-off a company, a similar process will apply in relation to limited partnerships to ensure that there is no risk of a limited partnership being struck off in error, with the possible result that a limited partner’s liability is increased as a consequence of the limited partnership in effect becoming a general partnership.

It is clear then that change is in the wind in relation to limited partnerships, with more to follow. 

Contact: Jeremy Glen, Partner, jsg@bto.co.uk T: 0141 221 8012