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27 July 2009
Jersey’s introduction of a variety of new limited partnerships bestows upon the investor an unrivalled flexibility. By Ben Robins
Since the enactment of the Limited Partnerships (Jersey) Law in 1994, the Jersey limited partnership (JLP) has become
a vehicle of choice for the establishment of private equity funds.
Separate and incorporated limited partnerships
In recent years the use of JLPs has extended beyond private equity and their inherent flexibility is employed in the formation of funds investing in diverse asset classes, including mezzanine debt and real estate and in raising Tier 1 capital for financial institutions.
Generally managed by a Jersey corporate general partner that has unlimited liability for the debts of the partnership, a JLP offers its limited partners the benefits of limited liability (provided they do not participate in the management of the JLP - and the 1994 law sets out a number of activities, such as the exercise of key voting rights, that do not constitute management for this purpose) and tax transparency.
The 1994 law is inherently flexible in enabling the partners to specify in partnership agreements the terms on which they are to contribute to, and participate in, the profits of the JLP, with fewer restrictions on distributions than are found in company law. This affords the partners freedom to negotiate their commercial arrangements with minimal statutory interference.
JLPs also offer the formality of a vehicle registered with the registrar of limited partnerships in Jersey.
Since a JLP has no legal personality it must contract through its general partner(s) and a general partner holds (or is deemed to hold) the property of the partnership in its own name, as an asset of the partnership.
To further enhance the appeal of Jersey limited partnerships, in 2009 Jersey intends to add two new types of limited partnership: separate limited partnerships (SLPs) and incorporated limited partnerships (ILPs), each offering a degree of legal personality separate from its partners. Each new regime is closely modelled on, and offers much of the flexibility of, the 1994 law, but will be contained in completely independent statutes.
Separate limited partnerships
The anticipated features of the SLP regime that differ from the JLP regime are:
- it has a separate legal personality;
- its name must include the words ‘separate limited partnership’ or the abbreviations ‘S.L.P.’ or SLP;
- while a general partner of an SLP will be deemed to hold any property of the partnership in its own name (as an asset of the partnership), an SLP may either own assets in its own name or in the name of the general partner(s);
- despite having a separate legal personality, an SLP itself will not be capable of committing a criminal offence; and
- an SLP or its general partner will be able to instigate legal proceedings, and legal proceedings by or against an SLP may be instigated by or against the SLP or its general partner.
Incorporated limited partnerships
The anticipated features of the ILP regime that differ from the JLP or SLP regimes are:
- it has a separate legal personality but will also be incorporated (ie a body corporate);
- its name must include the words ’incorporated limited partnership’ or the abbreviations ‘Inc. L.P.’ or ‘Inc LP’;
- it will have perpetual succession until dissolved;
- due to its incorporated status, the dissolution of an ILP will involve a more formal process than the dissolution of a
- JLP or SLP - statutory winding-up and dissolution provisions, similar to those applying to companies, will apply;
- despite having a general partner, an ILP will own its property in its own name and will contract in its own name;
- a general partner of an ILP will act as an ‘agent’ of the ILP;
- the ILP law will impose statutory obligations on ILP general partner(s), including the duty to act honestly and in good faith with a view to the best interests of the ILP - a breach of this duty may be ratified by all partners of the ILP, subject to a solvency test;
- as a body corporate, an ILP will be capable of committing a criminal offence; and
- an ILP will be able to sue and be sued in its own name.
It is anticipated that the Jersey tax treatment for each new regime will be the same as for a JLP: a JLP itself is not assessed for Jersey income tax in its own name and is tax-transparent. UK counsel’s opinion on drafts of the SLP and ILP laws indicates that SLPs and ILPs will both be transparent for UK income tax/corporation tax on income purposes, but that, while an SLP will be transparent for UK capital gains tax/corporation tax on chargeable gains, an ILP will not.
Reasons to be cheerful
The range of possibilities afforded by JLPs, ILPs and SLPs, with their distinct variations of legal personality, asset ownership and tax transparency, all underpinned by limited liability and commercial flexibility, will enhance further Jersey’s appeal as a domicile for fund and finance vehicles.
Ben Robins is head of funds at Mourant du Feu & Jeune