Why does the existing limited partnership structure require reform?

There have been increasing reports recently of the misuse of English limited partnership and Scottish limited partnership vehicles (together, LPs), and links to criminal activities such as money laundering and fraud. Of particular concern is the fact that, under the current legislation (the Limited Partnerships Act 1907), LPs must have a principal place of business in the UK on registration but are free to subsequently move abroad without needing to notify Companies House. Therefore, an LP may become disconnected from the UK by moving its principal place of business abroad and the relevant individuals may become difficult to track down, meaning it is possible to potentially exploit the opaque nature of the LP structure.

With LPs commonly utilised in investment fund and property holding structures, as well as in the venture capital industry, it is important, not least for the UK as a global financial and asset management centre and its role as a leader in corporate transparency, that the LP structure is robust. LPs can be part of complex structures and, with limited information required to be registered at Companies House, it can also be difficult to determine the persons controlling the LP under the current legislation. In particular, Scottish limited partnerships have been exploited because of their separate legal personality, albeit mitigated to a degree by the People with Significant Control (PSC) regime, which makes it even harder to trace back control.

The Economic Crime and Corporate Transparency Bill

In September 2022, the UK government announced the new Economic Crime and Corporate Transparency Bill (the ECCT Bill) which aims to reform the current LP regime and crack down on the misuse of these entities by increasing the scope and reliability of information that must be filed at Companies House and ensuring that a legitimate connection to the UK is maintained by the LP. Part 2 of the ECCT Bill proposes, inter alia, the following new measures:

• Information about general partners

If the general partner of an LP is a legal entity (as is common), then it must appoint a named "registered officer". The registered officer must be one of the managing officers of such entity and any additional general partners appointed must equally have such an individual appointed. This makes it easier to trace significant control or ownership back to a named individual. LPs must also provide a statement that none of the proposed general partners is disqualified when registering.

• Information about limited partners

Where a limited partner is an individual, personal information such as their name, date of birth, nationality and usual residential address must all be provided to Companies House. This information is also required in relation to any registered officers. If a limited partner is a legal entity, the name, registered office address, service address and the form of the legal entity must also be filed. This provides greater transparency as to who is involved in the LP.

• Registered office

The registered address of an LP must be "appropriate" by satisfying the following conditions: (a) if, in the ordinary course of events, a document delivered there would be expected to come to the attention of a person acting on behalf of the LP and the delivery of documents is capable of being recorded by the acquisition of an acknowledgement of delivery; (b) it is in the part of the UK where the LP is registered; and (c) it is at least one of either: (i) the address of the principal place of business of the LP; (ii) the usual residential address of a general partner who is an individual; (iii) the address of the registered or principal office of a general partner that is a legal entity; or (iv) an address of an authorised corporate service provider that is acting for the limited partnership. The key change above is that the registered address must be situated in the part of the UK where the LP is registered and, importantly, must always stay in the original jurisdiction of registration. This ensures that a concrete connection to the UK is maintained.

• Confirmation statements

General partners must file annual confirmation statements at Companies House to confirm that all the information filed in relation to the LP is correct.

• HMRC powers

HMRC will have additional powers to demand audited accounts of the LP, which it can review to ensure that the LP is not being used for money laundering or other criminal purposes.

• Dissolution/winding-up of LPs

Companies House can dissolve an LP if it has cause to believe that the LP is simply no longer active. This will ensure that LPs do not unnecessarily remain as active entities on the register.

Potential issues for the funds sector

The above enhanced filing and disclosure requirements will increase the administrative burden for fund managers. It is proposed that a six-month transition period will commence when the ECCT Bill is passed to enable general partners and fund managers to comply with these requirements. There are strict penalties for failure to comply, such as fines or prison sentences in some cases.

The proposals, as currently drafted, will require existing and new LPs to have a registered office in the UK. This could cause issues for existing LPs which have migrated to another jurisdiction and would need to make adjustments to meet the new requirements, potentially compromising their regulatory position in the "migrated" jurisdiction. Another potential problem is the proposed ability for an LP to be deregistered. Were that to happen, limited partners would lose the benefit of limited liability. Although the risk of this happening in the ordinary course of business is small, investors may find the possibility enough to think again about how appropriate the LP structure is for their needs.

Overall, there are potential unintended consequences of the proposed legislation because, in its intent to make things more transparent, it may adversely impact on some LPs. It will be interesting to see how the final legislation balances the need to shut down ways in which LPs are being misused with the impact such changes may have on legitimate LP structures.