Personality clash

A recent decision in an English court has thrown up uncertainty as to the status of Guernsey limited partnerships. Ian Kirk and Paul Wilkes ask: are they just letterbox entities?

On 1 April 2010 Mrs Justice Proudman of the High Court of Justice handed down her decision in Pillar Securitisation Sarl and Others v Spicer and Another. The case concerned an urgent application to challenge the appointment of administrators to a Guernsey-incorporated limited partnership (GsyLP), Kaupthing ­Capital Partners II Master LP Inc (Master) pursuant to the Insolvency Act 1986. The two main grounds of challenge were: that the limited partnership’s centre of main ­interests was Guernsey, so the English court did not have jurisdiction in relation to the insolvency; and appointment out of court was formally and substantively invalid.

This case reached some interesting ­conclusions, which may have ramifications for limited partnerships that elect separate legal personalities and more generally for the offshore funds industry.

English courts and offshore funds

Under the Council Regulation on Insolvency Proceedings (1346/2000/EC), an English court may assert jurisdiction in the insolvency of an entity outside England and Wales where the entity’s centre of main interests (Comi) is within England and Wales. To determine you must understand the ­structure of the GsyLP model.

Master was registered in Guernsey on the register of limited partnerships. Under the terms of the limited partnership agreement establishing a GsyLP, a Guernsey-registered limited company was appointed as its ­general partner and an English company was appointed as the ’operator’. The ­majority of the day-to-day activities of Master were undertaken by the operator in London on behalf of the limited partnership, save for certain acts, including those that were required statutorily to be undertaken by the general partner. This is a structure that is common to many offshore funds established as limited partnerships.

Proudman J held that the limited ­partnership had a Comi in London, opining that “it would have been apparent to ­persons dealing with [Master] as creditors that their debtor’s affairs were being conducted in ­London on [Master’s] behalf. The truth of the matter is that [Master] was indeed a ­letterbox entity – all of its functions were carried out on its behalf in England, and those were matters apparent to all persons dealing with [Master] through the operator.”

With respect, finding that a GsyLP is no more than a “letterbox entity” misconstrues the structure. Master was established as a Guernsey limited partnership with a ­separate legal personality, with a Guernsey general partner that retained overall control of its operations. The operator, based in London, acted as a delegate or agent for Master and the general partner. It was not Master that had its Comi in London, but the operator. To find otherwise would disregard entirely the offshore structure and, indeed, the legal personality of the entity involved. Heaven forbid that this generous approach to interpretation on Comi be adopted by HM Customs & Revenue when considering whether the ’control and management’ of offshore funds has been brought onshore.

The bigger picture

Such a finding could have implications far beyond this isolated case. Offshore funds (whether structured as limited partnerships, companies or unit trusts) often delegate, on a discretionary basis, investment ­management functions to onshore entities, often based in London. Such delegation ordinarily being subject to the overall supervision and control of the general partner, board or directors or trustee respectively.

Applying the reasoning of this case, there is the potential for the English court to attempt to assert jurisdiction over a raft of offshore funds structured in this manner. In many cases this may not prove to be an issue, but it is a factor that must be borne in mind by practitioners when developing structures with their clients.

Incorporated limited partnerships

The second challenge to the appointment of the administrators of Master focused on a narrow procedural point that required the English court to consider the nature of an incorporated limited partnership under Guernsey law.

This issue centred on whether the correct prescribed form was used when filing the notice of the appointment of the administrators with the English court. In short, a ­different form is required for companies than for partnerships, and the company form had been used. It was argued that an incorporated limited partnership, as a ’body corporate’ under Guernsey law, was ­characterised correctly as a company for the purposes for completing the prescribed form. Having considered the expert ­evidence of Collas Day advocate Ian Kirk, the English court held that, although ­Master was a body corporate, it was not akin to a company, but rather retained the hallmarks of a partnership. Consequently the wrong form was used and the appointment was invalidated.

While this is a technical decision on a ­procedural matter of English law, the court’s findings are a confirmation to Guernsey practitioners that, where a limited partnership elects to have separate legal personality, it retains the primary ­characteristics of a ­partnership rather than adopting those of a company. Accordingly the principles of ­general partnership law remain paramount.

Food for thought

The ramifications of this April fool’s decision are twofold. First, Proudman J’s findings in relation to the Comi must be borne in mind when structuring offshore funds. Second, comfort can be taken from the finding that the election of separate legal personality does not alter the fundamental characterisation of a limited partnership.

Ian Kirk is a partner and Paul Wilkes is a senior associate at Collas Day