LIMITED PARTNERSHIPS ACT 1907 : A Joint Consultation Paper

The Law Commission
Consultation Paper No 161
The Scottish Law Commission
Discussion Paper No 118
LIMITED PARTNERSHIPS ACT 1907
A Joint Consultation Paper
London: The Stationery Office

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The Law Commission and the Scottish Law Commission were set up by the Law
Commissions Act 1965 for the purpose of promoting the reform of the law.
The Law Commissioners are:
The Honourable Mr Justice Carnwath CVO, Chairman
Professor Hugh Beale
Mr Stuart Bridge
Professor Martin Partington
Judge Alan Wilkie, QC
The Secretary of the Law Commission is Mr Michael Sayers and its offices are at
Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.
The Scottish Law Commissioners are:
The Honourable Lord Gill, Chairman
Mr Patrick S Hodge, QC
Professor Gerard Maher
Professor Kenneth G C Reid
Professor Joseph M Thomson
The Secretary of the Scottish Law Commission is Miss Jane McLeod and its offices are
at 140 Causewayside, Edinburgh EH9 1PR.
This joint consultation paper, completed on 28 September 2001, is circulated for
comment and criticism only. It does not represent the final views of the two Law
Commissions.
The Law Commissions would be grateful for comments on this consultation paper
before 11 January 2002. Comments may be sent either –
(a) by post to:
The Law Commission
The Scottish Law Commission
Wayne Mitchell
Mrs Gillian B Swanson
Law Commission
Scottish Law Commission
Conquest House
140 Causewayside
37-38 John Street
Edinburgh
Theobalds Road
EH9 1PR
London WC1N 2BQ
Tel:
020-7453-1228
Tel:
0131-668-2131
Fax:
020-7453-1297
Fax:
0131-662-4900
or (b) by e-mail to:
wayne.mitchell@lawcommission.gsi.gov.uk
info@scotlawcom.gov.uk
It would be helpful if, where possible, comments sent by post could also be sent on disk, or by e-
mail to the above address, in any commonly used format.
It may be helpful for the Law Commissions, either in discussion with others concerned or in any
subsequent recommendations, to be able to refer to and attribute comments submitted in response to
this consultation paper. The Scottish Law Commission may also make copies of comments received,
or summaries of them, available on their website and to any interested party on request. Any request
to treat all, or part, of a response in confidence will, of course, be respected, but if no such request is
made the Law Commissions will assume that the response is not intended to be confidential.
The text of this consultation paper is available on the Internet at:
http://www.lawcom.gov.uk
http://www.scotlawcom.gov.uk

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226-269-01
THE LAW COMMISSION
THE SCOTTISH LAW COMMISSION
LIMITED PARTNERSHIPS ACT 1907
CONTENTS
Paragraph
Page
PART I: INTRODUCTION
The terms of reference
1.1
1
The role of limited partnerships
1.2
1
The need for reform
1.8
4
Continued use of the description “limited partnerships”
1.13
6
Comparative law
1.15
7
The structure of the consultation paper
1.17
7
Acknowledgements
1.23
8
PART II: A BRIEF OVERVIEW OF LIMITED PARTNERSHIPS
Nature and formation
2.1
9
Registration
2.6
10
Rights and obligations of the partners between themselves
2.8
10
Dissolution and winding up
2.11
11
Dealing with third parties
2.12
11
Authority
2.12
11
Liability for debts and obligations
2.14
12
Related issues
2.22
13
Insolvency
2.23
13
Taxation
2.26
14
Collective Investment Scheme
2.28
15
Comments
2.30
15
PART III: REQUIREMENTS FOR ESTABLISHING AND
OPERATING A LIMITED PARTNERSHIP
Composition
3.1
16
Bodies corporate
3.1
16
Dual functioning of a general partner as a limited partner
3.4
17
Carrying on business
3.8
18
Registration
3.11
18
Information to appear on the register
3.12
19
Principal place of business
3.18
20
The establishment of a limited partnership
3.23
21
Notice of change of status
3.27
23
Companies House
3.31
24
De-registration
3.31
24
Name of limited partnership
3.32
25
Disclosure of limited liability status
3.33
25
Holding out
3.35
26
iii

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Paragraph
Page
Filing of accounts
3.40
27
Consequences of default
3.43
27
PART IV: LIABILITY OF A LIMITED PARTNER
Introduction
4.1
30
Scope of protection
4.2
30
Management
4.8
32
Definition of management
4.8
32
Knowledge of third party
4.17
34
What activities should be defined as “safe”?
4.20
35
Ordinary and extra-ordinary matters
4.22
35
Decision-making
4.24
36
Advice
4.30
37
Other matters
4.32
38
Capital withdrawal and liability of limited partner after leaving the firm 4.34
39
Lost capital
4.38
40
When may capital be withdrawn?
4.41
41
Liability following assignment/assignation
4.43
42
Duration of liability
4.44
42
PART V: RIGHTS AND OBLIGATIONS OF PARTNERS
Introduction
5.1
45
What matters need the consent of limited partners?
5.3
45
Admission and dismissal of general partners
5.7
46
Fiduciary duties
5.12
47
General partners
5.12
47
Limited partners
5.13
48
Profits and losses
5.16
48
Retirement
5.20
49
General partners
5.20
49
Assignment / assignation by, and retirement of, limited partners
5.22
50
Dissolution and winding up
5.29
52
Duration
5.29
52
Death or bankruptcy of a partner
5.31
53
General partner
5.31
53
Limited partner
5.32
53
Charging order on a partner’s share
5.34
54
General partner
5.34
54
Limited partner
5.36
54
Dissolution by the court
5.37
54
Winding up
5.40
56
PART VI: SUMMARY OF ISSUES FOR CONSULTATION
57
APPENDIX A: LIMITED PARTNERSHIPS ACT 1907
66
APPENDIX B: EXAMPLES OF LAW FROM OTHER JURISDICTIONS
72
APPENDIX C: INDIVIDUALS AND ORGANISATIONS WHO
HAVE ASSISTED WITH THE PROJECT
81
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ABBREVIATIONS
In this consultation paper the following abbreviations are used:
1890 Act
Partnership Act 1890
1907 Act
Limited Partnerships Act 1907
Delaware Act
Delaware Revised Uniform Limited
Partnership Act
DTI
Department of Trade and Industry
Guernsey Law
The Limited Partnerships (Guernsey) Law
1995 to 1997
Jersey Law
Limited Partnerships (Jersey) Law 1994
Joint Consultation Paper
Partnership Law: A Joint Consultation Paper
(2000) Law Com No 159; Scot Law Com No 111
Lindley and Banks
R C I’Anson Banks (editor), Lindley and Banks
on Partnership (17th ed 1995)
LLP
Limited Liability Partnership
NSW Act
Partnership Act 1892 (New South Wales) as
amended by Partnership (Limited Partnership)
Amendment Act 1991
Ontario Act
Ontario Limited Partnerships Act 1990
Prime and Scanlan
T Prime and G Scanlan, The Law of Partnership
(1st ed 1995)
The Myners Review
Paul Myners, Institutional Investment in
the UK: A Review (6 March 2001) (available from
HM Treasury: http://www.hm-treasury.gov.uk)
Twomey
M Twomey, Partnership Law (1st ed 2000)
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PART I
INTRODUCTION
THE TERMS OF REFERENCE
1.1 This consultation paper forms part of the joint review of partnership law which
the Law Commission and the Scottish Law Commission have undertaken at the
request of the Minister of State at the Department of Trade and Industry
(“DTI”). We have already published a detailed consultation paper on the general
law of partnership.1 Our terms of reference were:
To carry out a review of partnership law, with particular reference to:
independent legal personality; continuity of business irrespective of
changes of ownership; simplification of solvent dissolution; a model
partnership agreement; and to make recommendations. The review is
to be conducted under the present law of partnership, namely the
Partnership Act 18902 and the Limited Partnerships Act 1907.3
THE ROLE OF LIMITED PARTNERSHIPS
1.2 The United Kingdom was much slower than many other countries to introduce
a business institution in the form of a partnership in which some of the partners
could have limited liability.4 Continental jurisdictions had long since had the
société en commandite and similar institutions.5 The enactment of the Limited
Partnerships Act 1907 coincided with the introduction of the private company.
The latter, together with the general partnership, have become the standard
vehicles for small businesses.
1.3 In June 2001 there were 8,898 limited partnerships registered in England and
Wales6 of which Companies House estimates approximately 3,000 – 4,000 are still
functioning.7 Companies House for Scotland estimates that there are 3,555
1
Partnership Law: a Joint Consultation Paper (2000) Law Com No 159; Scot Law Com
No 111 (referred to in this paper as the “Joint Consultation Paper”).
2
Which we refer to in this paper as the “1890 Act”.
3
Which we refer to in this paper as the “1907 Act”.
4
Lindley and Banks, para 28–01; Prime and Scanlan pp 342 – 343.
5
The partnership en commandite or limited partnership is a partnership in which the
dormant partners, or commanditaires, finance the business and are liable only to the extent
of their investment in the partnership. The active members or commandités are jointly and
severally liable for all of the obligations of the partnership.
6
Companies House records. As there is no de–registration system for limited partnerships it
is impossible to determine accurately the number of dormant limited partnerships. We
make recommendations for reforming the register of limited partnerships below, see paras
3.11-3.31 below.
7
The number of limited partnerships is small when compared with the number of
partnerships (684,645) and trading companies both private and public (738,325). See
Small and Medium Enterprise (SME) Statistics for the UK 1998 (August 1999) DTI,
Table 23.
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limited partnerships in Scotland and that most of them are still functioning. The
large number of functioning partnerships in Scotland may be explained by the
use of limited partnerships in agricultural tenancies.8 The use of a partnership
which the landlord as limited partner can terminate, for example on the death of
the general partner, is a device by which parties can avoid the security of tenure
provisions of legislation relating to Scottish agricultural holdings. Although the
number of limited partnerships remains small in both jurisdictions, there has
been an increase in the use of limited partnerships in recent years as vehicles for
venture capital investment.
1.4 On 26 May 1987 the Inland Revenue and the DTI approved a statement on the
use of limited partnerships as a vehicle for venture capital investment funds.9
Since then, limited partnerships have become the standard structure used by
venture capitalists not only for United Kingdom funds but also for European
funds.10 Due to their separate personality,11 Scottish limited partnerships have
also been used as vehicles for investment in Lloyds since 1997.12 Guernsey has
recently amended its limited partnership law to give partners in a limited
partnership the right to elect that the partnership shall have legal personality.13 We
understand that a reason for giving the option was to allow such partnerships to
be used for carrying on business as underwriting members of Lloyds, while
preserving the option of a partnership without legal personality for certain other
investment vehicles.
1.5 The limited partnership is a useful vehicle for investors who do not wish to take
an active role in the management of their funds. They may use it to create an
investment fund under the control of a general partner who alone has unlimited
8
See C M Blight, “Land Tenure Forty Years On” (1989) 34 JLSS 463; A Stockdale and A J
Lang, “The Limited Partnership Tenancy in Scotland” (1996) Vol 9 No 7 Farm
Management 336.
9
The statement explains that a limited partnership established for the purpose of raising
funds for investment into companies will be regarded as carrying on a business and will
represent a partnership within the definition in s 1 of the Partnership Act 1890 for the
purposes of United Kingdom taxation (contrast the discussion in paras 3.8-3.10 below).
The income and capital gains arising within the partnership will be subject to tax upon
receipt by the partnership as the income and gains of the partners who are entitled to
them.
10
Our attention has also been drawn to the use of the limited partnership structure for a fund
set up to provide a bridge between university research funding and investment in product
development. The Sulis Seedcorn Fund was established in December 1999 with initial
contributions from the Universities of Bath and Bristol, The Wellcome Trust and HM
Treasury (see http://www.bath.ac.uk/Research/sulis–innovation/contacts.htm). The two
universities are limited partners, and the fund manager is general partner. (We are grateful
to Carol Dent, Chief Executive of the Fund for this information).
11
At present in the UK only Scottish partnerships have separate personality, but one of the
provisional proposals of the Joint Consultation Paper is the introduction of separate legal
personality in English law: see para 4.17.
12
The Lloyds’ membership bye-laws only permit separate legal persons to be Lloyds names,
thereby excluding English limited partnerships and general partnerships.
13
The Limited Partnership (Guernsey) (Amendment) Law 2001.
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liability for the partnership’s obligations. The limited partner is only liable to the
extent of his contributions, provided he does not take part in the management of
the partnership business.14 The limited partnership offers the investor privacy, as
the accounts of the partnership are not generally disclosed.15 Like other
partnerships, it also provides the benefit of fiscal transparency – the partnership is
not treated as an entity distinct from its members for the purpose of income tax
or capital gains tax.16
1.6 Over the last 10 years, limited partnerships have been used increasingly for
property investment.17 The tax-transparent structure of the limited partnership
makes it an attractive vehicle for institutional investors, such as pension funds or
insurance companies, which are partially or wholly tax-exempt. It enables them to
invest jointly with tax-paying entities, such as property companies, without losing
their tax advantages. The same features have made them suitable for use in urban
regeneration projects, bringing together public authorities (such as English
Partnerships), institutional investors and property developers.18 Notwithstanding
the increased use of limited partnerships in the property field, there appears to be
continuing pressure for the creation of a new business vehicle for this purpose,
comparable to the Real Estate Investment Trust in the United States.19 Although
the consideration of an alternative to limited partnerships is not within our terms
of reference, we would welcome comments on whether changes to the law of
limited partnerships might help to fill this perceived gap.
14
1907 Act, s 6(1).
15
Although the Partnerships and Unlimited Companies (Accounts) Regulations 1993 (SI
1993 No 1820) require the accounts of a limited partnership to be audited and disclosed
where each of its members is (a) a limited company, or (b) an unlimited company, or a
Scottish firm, each of whose members is a limited company (section 3(1)). The
regulations apply to comparable foreign entities (section 3(4)).
16
See paras 2.26-2.27 below.
17
The Estates Gazette 9th June 2001 (p 58 ff) included a series of articles on limited
partnerships in property development. It was estimated that limited partnerships accounted
for some £10bn of property investments, with shopping centres and retail warehousing
forming the largest category: “… investors are using limited partnerships to get exposure
to assets that are otherwise too large, too risky or too scarce for them to take on solo”
(ibid, p 69). One of the perceived disadvantages of investment through limited partnerships
is lack of liquidity: there is no established market for trading in shares in them.
18
For example, the English Cities Fund, established as a limited partnership by Amec plc,
English Partnerships and Legal and General Assurance. The need for such initiatives was
underlined by the White Paper “Our towns and cities – delivering an urban renaissance”
(Nov 2000) DETR Cm 4911.
19
For a recent study of the Real Estate Investment Trust and other comparable models, see
Arthur Andersen, Donald Robertson and Andrew Scott, “Property Securitisation in the
UK” (2000) (commissioned by the Investment Property Forum). They comment that “a
key problem for both commercial and residential investment has been illiquidity in the
markets leading to under-investment and price volatility”; and conclude that “the
economic benefits of introducing tax-transparent vehicles for securitised property
investment would be very significant.”
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1.7 The limited partnership performs a different role from that of the limited liability
partnership (“LLP”), which has recently been introduced into the United
Kingdom.20 The LLP is designed as a business vehicle for professional or trading
partnerships. It enables partners, who are actively involved in the business of
their partnership, to limit their liability for the partnership’s debts and
obligations.21 Although it is treated as a partnership, it is subject to accounting
and other rules closer to those of a company. The LLP was introduced in
response to concerns by professional practitioners about their possible exposure
to massive claims for damages arising from the alleged negligence of one or more
of their partners.22 Following an initiative by two large accountancy firms to
introduce a limited liability partnership based in Jersey, the DTI published a
consultation paper on the LLP in 1997.23 The Limited Liability Partnerships Act
2000 was enacted in July 2000.24
THE NEED FOR REFORM
1.8 Unlike the 1890 Act,25 the 1907 Act has not been regarded as a model of
draftsmanship. In the view of Michael Twomey, it “raises more questions than it
answers regarding the legal treatment of limited partnerships and their
members.” 26 Twomey goes on to say that:
The source of much of the confusion is the fact that the 1907 Act
creates a new type of partner, the limited partner, but applies many of
the provisions of the 1890 Act to that partner… this was done,
without due effort being made to weave those differing provisions
together to produce a coherent body of law suitable for a limited
partnership.27
1.9 These theoretical weaknesses do not seem to have caused great difficulty in
practice. This is probably because (unlike general partnerships) limited
partnerships have been largely used for the specialised purposes noted above. The
partners have therefore been able to devise suitable agreements to mitigate the
20
See Limited Liability Partnerships Act 2000.
21
Unlike the limited partnership, which offers limited liability only to the partners who are
not actively involved in the business.
22
See, for example, ADT Limited v Binder Hamlyn [1996] BCC 808.
23
Limited Liability Partnership – A New Form of Business Association for Professionals
(Consultation Paper, URN 97/597, February 1997). The LLP has since been extended to
businesses other than professional businesses.
24
The Limited Liability Partnerships Act 2000 came into force on 6 April 2001 (SI 2000
No 3316).
25
“A model piece of legislation”: per Harman LJ, Keith Spicer Ltd v Mansell [1970] 1 All ER
462 at p 463. Our review of partnership law has however confirmed suspicions that the
1890 Act contains serious inconsistencies in its treatment of partnerships on a change of
membership.
26
Twomey, para 28.05.
27
Twomey, para 28.08.
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deficiencies of the statutory scheme.28 Indeed, commentators have strongly
emphasised the dangers of using the limited partnership structure without a
formal agreement.29 In considering possible reforms, it seems reasonable to
assume that this advice will be heeded. Thus we are not, as with general
partnerships, seeking to provide a default code for a large number of (mainly
small) businesses for whom the statutory rules are the sole basis on which their
affairs are regulated.30
1.10 As a result of our preliminary consultations with, amongst others, the venture
capital industry, a number of significant practical problems with the 1907 Act
have been identified. The review of partnership law provides an opportunity to
put forward remedies.31 This opportunity occurs against a background in which
various jurisdictions – including Bermuda, the Cayman Islands, Delaware,
Guernsey, Ireland, and Jersey – have introduced or modernised legislation on
limited partnerships. The venture capital industry in the United Kingdom is the
largest and most developed in Europe.32 But other European jurisdictions are
developing structures in a bid to increase their share of the European venture
capital industry.33 In Ireland, the Investment Limited Partnerships Act 1994 was
introduced to create a new form of collective investment scheme and provides a
convenient structure within which to invest and withdraw capital. The Act
enables funds to be pooled by investors with limited liability, and managed by a
third party. This facilitates, amongst other things, diversification of asset
investment. The Irish investment limited partnership is in many ways different to
the English partnership: it can be listed on the Irish stock market and because of
this, is subject to greater regulation.34
1.11 A strong case has been made for updating the 1907 Act to enable the UK to
continue to maintain its competitive position in the venture capital market. A
recent Treasury report, while confirming the importance of limited partnerships
28
For example, there are established styles for partnership agreements for limited
partnerships in Scottish agricultural tenancies. See Gill and Foz, Agricultural Holdings
Styles (1997) pp 3 – 15.
29
Lindley and Banks, para 28–08; Twomey, para 28.05.
30
Joint Consultation Paper, para 1.17. The main small business use of limited partnerships
appears to be for Scottish agricultural tenancies, for which solicitors have standard forms.
31
The issues dealt with in this consultation paper are relevant to all limited partnerships and
are not restricted to the venture capital industry. For an outline of the issues covered in
this paper see paras 1.17-1.22 below.
32
It accounted for 49% of total European venture capital investment in 1998. For further
information on this subject see: http://www.3igroup.com/essentialreading/themarket/
33
There is an interesting parallel in Australia, where competition from other states for
inward investment led New South Wales to enact the Partnership (Limited Partnership)
Amendment Act 1991: see Ian Ramsay, “The Expansion of Limited Liability: a Comment
on Limited Partnerships” (1993) 15 Sydney Law Review 537 at p 546. The subsequent use
of limited partnerships was inhibited by amendments to Commonwealth tax legislation in
1992, which required them to be taxed as companies.
34
See Twomey, paras 29.133–176.
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