Scottish Law Commission (Reports)

PART XVI

ESTABLISHING AND OPERATING
A LIMITED PARTNERSHIP
(2): THE GENERAL PARTNER AND OTHER MATTERS

Introduction

16.1     In this Part we consider the central role played by the general partner in a limited partnership. Under the existing law, the general partner is the person with whom third parties deal and in most circumstances he alone has unlimited liability for the debts and obligations of the partnership. He alone is allowed to manage the business of the partnership and bind the firm.^[1]
16.2     We also consider whether there is a case for widening the definition of "business" in the 1890 Act in its application to limited partnerships and address miscellaneous issues relating to the limited partnership.

The general partner

16.3     In the Joint Consultation Paper (LP) we raised a number of issues about the identity and role of the general partner. Before considering these issues we have to define what a general partner is. The 1907 Act defines a general partner as "any partner who is not a limited partner as defined by this Act".^[2] We think a similar definition is appropriate.
16.4     We therefore recommend that a general partner should be defined as a person who is a partner in a limited partnership but is not a limited partner. (Draft Bill, cl 54(4))

Who may be a general partner?

16.5     Section 4(4) of the 1907 Act provides that a body corporate may be a limited partner. The Act is silent as to whether a body corporate may be a general partner but Companies House routinely registers limited partnerships which have companies as general partners. A large majority of consultees supported our proposition expressly to provide that a body corporate may be a limited or general partner.^[3] Those who opposed the proposition thought that it was not necessary. Almost all consultees considered that there was no need to restrict the right of limited companies to be general partners in a limited partnership.
16.6     We propose to remove any residual uncertainty by not re-enacting section 4(4) of the 1907 Act. In the draft Bill we define a partnership as "an association formed when two or more persons start to carry on business together under a partnership agreement".^[4] A limited company is a legal person and can therefore be a partner both in a general partnership and in a limited partnership.^[5]

Dual functioning of a general partner as a limited partner

16.7     We noted in the Joint Consultation Paper (LP) that statutes in Jersey and Guernsey allow a person to function both as a general partner and as a limited partner.^[6] We observed that it was hard to see how a person can be both a general partner and a limited partner unless in different capacities and that we were not aware of any pressure for change in this respect. Most consultees strongly opposed the idea of changing the definition of "general partner" to allow the same person to be both a general partner and a limited partner. It was widely felt that this would create confusion and unwanted complications. We agree. We do not take the matter any further.

Responsibility for registration formalities

16.8     Section 5 of the 1907 Act treats any limited partnership which is not registered in accordance with the Act as a general partnership, thus excluding the limited liability of the limited partners. The same result appears to follow if the registered particulars are inaccurate^[7] or if the limited partnership does not notify the registrar of the changes listed in section 9.^[8] We suggested that it was unduly harsh to deprive limited partners of the limitation of their liability for what may be no more than an administrative mistake or a comparatively trivial change. This was so, particularly as the general partner has control over registration procedures.
16.9     We therefore proposed that general partners should be fully responsible for the registration formalities and should have exclusive authority to sign the original registered particulars and any amendments.^[9] We also proposed that default in registration formalities should not remove the limited liability of limited partners but that the general partner or general partners should be liable for daily fines similar to those which apply to companies.^[10]
16.10     Consultees unanimously supported the proposal that general partners should be fully responsible for the registration formalities and that they alone had authority to sign the original registered particulars and any amendments. There was also unanimous support for the proposition that default in registration formalities should not remove the limited liability of limited partners. Almost all consultees supported our proposal of daily default fines on the general partners at the levels which apply to companies. One consultee suggested that a distinction should be drawn between deliberate defaults and accidental errors and that the default fine should be exacted only in respect of the period in which the general partner was aware of, and failed to correct, the default.
16.11     The unanimous support of consultees confirms our view that it is not appropriate to preserve the harsh consequences of minor defaults in registration formalities for limited partners.^[11] It would be possible to empower would-be limited partners to register themselves as limited partners and to require that limited partners should give notice of ceasing to be limited partners. Nevertheless, we think that it is simpler to impose registration obligations exclusively on the general partner or general partners in most circumstances. Only where there is no general partner will a limited partner be empowered to register a notice that he is ceasing to be a limited partner.^[12]
16.12     At the same time, not all limited partnerships are in fact managed by the general partner. Many limited partnerships are collective investment schemes under the Financial Services and Markets Act 2000 (FSMA) and therefore must be operated by an "authorised person".^[13] The general partner is rarely an authorised person under FSMA. The general partner therefore usually appoints a manager, who is an authorised person, to operate the limited partnership. We consider that where the general partner has appointed a manager who is an authorised person to operate the business of the limited partnership, the obligation to sign documents and comply with registration requirements should fall on the authorised person. This is because establishing, operating or winding up a collective investment scheme is a regulated activity and a general partner would be criminally liable if he undertook such activity without authorisation. The authorised person and not the general partner must sign the documents and be responsible for registration formalities.^[14] The only document which the authorised person may not sign is the original application for registration which must be signed by the proposed general partner or general partners.^[15]
16.13     We think that the existing level of default fines is unduly low^[16] and that assimilation with the levels applied to companies is appropriate. We do not think that it would be practicable to distinguish between deliberate defaults and accidental errors and therefore support the imposition of set daily fines.
16.14     We therefore recommend that:

(1) General partners should be fully responsible for the registration formalities and (subject to (4) below) should have authority to sign the original registered particulars and any amendments, and where applicable authorised managers should have the same responsibility and authority except for signing the original application for registration;

(2) Where there is default of registration formalities, the general partner or general partners, or where applicable the authorised manager, should be liable for daily fines similar to those which apply to companies;

(3) Default in registration formalities should not of itself remove the limited liability of the limited partners; and

(4) A limited partner should sign a notice of a person ceasing to be a limited partner only if (a) he is the person ceasing to be a limited partner and is to become a general partner and (b) the partnership does not have one or more general partners, and limited partners should sign an application to de-register a limited partnership only if there are no general partners. (Draft Bill, cls 66(2) and 68; Schedule 7, paras 1(3), 2(3), 3(4), 4(4), 4(5), 5(5), 5(7), 6(1); Schedule 8, paras 1(4) and (5))

Other responsibilities of the general partner

16.15     As general partners alone have the right to manage the business, it makes sense that they should have the sole decision-making power in relation to ordinary business matters and that responsibility for performing statutory requirements should fall on them.
16.16     Thus we think that there should be a default rule that differences as to ordinary matters relating to the partnership business may be decided by the general partner or a majority of general partners. Other matters require the unanimous decision of the general partners.^[17] There should also be a default rule that the consent of the general partner, or all of the general partners, is necessary before a person may become a partner.
16.17     The general partner or general partners should bear responsibility for ensuring that the partnership name is stated on partnership documents. Also it should be the general partner or general partners who should have power to wind up the firm.
16.18     Again, where the limited partnership is a collective investment scheme under FSMA the authorised manager will have responsibility for ensuring that the partnership name is stated on partnership documents and winding up the firm.
16.19     We therefore recommend that:

(1) There should be a default rule that any difference arising as to ordinary matters connected with the partnership business may be decided by the general partner, or if there is more than one general partner, by a majority of them. (Draft Bill, cl 59(4))

(2) There should be a default rule that differences about other matters relating to the partnership must be decided by the general partner, or if there is more than one general partner, all of them; (Draft Bill, cl 59(5))

(3) There should be a default rule that a decision whether a limited partner should be given authority to act on behalf of the partnership is not an ordinary matter; (Draft Bill, cl 59(6))

(4) There should be a default rule that a person may become a partner in a limited partnership only with the consent of the general partner, or if there is more than one general partner, all of them, or, if there are no general partners, all the limited partners; (Draft Bill, cl 60(1) and (3))

(5) A general partner who without reasonable excuse fails to ensure that the name of the limited partnership and the address of its registered office are stated on any partnership document should be guilty of an offence and liable to a fine; (Draft Bill, cl 65(3))

(6) There should be a default rule that, unless the court orders otherwise or there are no general partners, the general partner, or if there is more than one general partner, all of them are responsible for winding up the partnership. (Draft Bill, cl 61(2))

Limited partner excluded from management

16.20     Under the 1907 Act a limited partner may not take part in management.^[18] 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 liability for the partnership's obligations. The limited partner is only liable to the extent of his capital contributions (if any), provided he does not take part in the management of the partnership business. We discuss in the next Part whether we should give further guidance on what constitutes "management".^[19] The basic rule however appears sound.
16.21     We therefore recommend that a limited partner should not take part in the management of the partnership business. (Draft Bill, cl 55(1))

Limited partner not an agent

16.22     At present a limited partner has no implied power to bind the firm. We see no need to alter this rule. We propose that a limited partner when acting in his capacity as limited partner should have no implied (or usual) authority to bind the partnership. It is, of course, possible for the general partners to give a limited partner express authority to act on behalf of the partnership.^[20] But a limited partner would require to act with care as involvement in the management of the partnership would remove the limitation on his liability.^[21] In addition a limited partner may incur liability under the general law by holding himself out as a general partner if a third party relies on that representation to his detriment.
16.23     We therefore recommend that a limited partner should have no implied authority to bind the partnership. (Draft Bill, cl 59(2))

A special definition of carrying on "Business"?

16.24     In the Joint Consultation Paper (LP) we discussed the definition of "business" in section 45 of the 1890 Act.^[22] In our proposals for the reform of general partnerships we had suggested that there was no need to redefine the term "business", as the term is sufficiently wide to cover all commercial undertakings and seems apt to include investment as a commercial venture.^[23] Because some consultees suggested that there is doubt among those who use limited partnerships as investment vehicles as to whether carrying on investment activities falls within the ambit of carrying on business for the purposes of the 1907 Act, we raised the issue again in our consultation on limited partnerships. We asked consultees whether they agreed that the 1890 Act definition of "business"^[24] is adequate also for the purposes of the 1907 Act (without express reference to "investment").^[25]
16.25     Consultees were divided in their responses. Some thought that clarification might be helpful to remove any doubt. Others thought that the definition was wide enough to include all lawful commercial activity, including investment. The Inland Revenue commented:

We have always accepted that the definition of business in the Partnership Act 1890 includes investment carried on as a commercial venture. We therefore do not consider there is a need to amend this definition.

16.26     Limited partnerships which are used as investment vehicles are registered by Companies House. The Inland Revenue, as mentioned above, accepts as partnerships firms which carry on investment as a commercial venture. We note also that RUPA defines "business" in substantially the same way as the 1890 Act.^[26] We believe that there is no significant problem in practice within Britain: since the Inland Revenue and the DTI approved a statement on the use of limited partnerships as a vehicle for venture capital investment funds on 26 May 1987,^[27] it has been generally accepted that "business" in the 1890 Act covers investment carried on as a commercial venture. We therefore think that there is no need to alter the definition of "business".

Other alterations to the general law of partnership

16.27     There are several provisions which relate to the general law of partnership which require to be adapted in their application to limited partnerships.^[28]
16.28     A partnership is formed when persons start to carry on a business together with the object of making a profit.^[29] A partnership may have existed as a general partnership before it is converted by registration into a limited partnership or a partnership may first come into existence when registered as a limited partnership. Provision requires to be made for the latter event.
16.29     We therefore recommend that where a partnership has not been formed before registration, the partnership is formed when it is registered as a limited partnership. (Draft Bill, cl 67(3))
16.30     In Part XVIII below we also make recommendations on the adaptation of the default rules in relation to the fiduciary duties of partners.^[30]

Offences

16.31     As it is important that the information on the register is accurate and as we have recommended that default in registration formalities should not of itself remove the limitation on the liability of limited partners,^[31] it is important that a person who provides false information to the registrar should be guilty of an offence. We recommend penalties which are equivalent to the penalties imposed in similar circumstances on company officials and on members of a limited liability partnership.^[32] We consider that these penalties are appropriate to deter the dishonest or reckless provision of false information.
16.32     We therefore recommend that:

(1) A person should be guilty of an offence if, when he makes an application to register or de-register a limited partnership, he knows that information in it is false or is aware that the information may be false;

(2) A person who is guilty of an offence under (1) above should be liable on summary conviction to imprisonment for up to six months or a fine not exceeding the statutory maximum, or both, or on conviction on indictment, to imprisonment for up to two years or a fine, or both;

(3) A person should be guilty of an offence if, when he delivers a notice to the registrar of a change in the particulars of a limited partnership, he knows that information in it is false or is aware that the information may be false; and

(4) A person who is guilty of an offence under (3) above should be liable on summary conviction to imprisonment for a period not exceeding six months or a fine not exceeding level five on the standard scale, or both. (Draft Bill, cl 69)

Offences by bodies corporate

16.33     As it is common for a limited company to be the general partner in a limited partnership, and as we recommend that the general partner should bear responsibility for ensuring compliance with the statutory requirements imposed by the draft Bill, we think that it would be appropriate to provide for offences by bodies corporate.^[33] We think that the appropriate regime is that where an officer of a body corporate has consented to or connived at an offence or the offence results from his neglect, he as well as the body corporate should be guilty of an offence. Similar liability should be imposed on members of a body corporate who manage that body.
16.34     We therefore recommend that if a body corporate commits an offence under the draft Bill with the consent or connivance of an officer of the body corporate or the offence is attributable to neglect on the part of such an officer, the officer as well as the body corporate should be guilty of the offence. If the affairs of the body corporate are managed by its members, a member of the body may similarly be guilty of an offence. (Draft Bill, cl 70)

Note 1    1907 Act, s 6(1).    [Back]

Note 2    1907 Act, s 3.    [Back]

Note 3    Joint Consultation Paper (LP), para 3.3.    [Back]

Note 4    Draft Bill, cl 1(2).    [Back]

Note 5    See para 4.15 above.    [Back]

Note 6    Joint Consultation Paper (LP), paras 3.4 – 3.7.    [Back]

Note 7    See MacCarthaigh v Daly [1985] IR 73, where protection was temporarily lost, because the contributions, which were referred to in the registration particulars as having been made, were not paid until some months later.    [Back]

Note 8    SeeLindley & Banks, para 29-28.    [Back]

Note 9    This involves altering the rule in the 1907 Act, s 8, which requires all the partners to sign the initial registration statement.     [Back]

Note 10    Joint Consultation Paper (LP), para 3.48.    [Back]

Note 11    A radical default in registration, such as a failure to register the limited partnership or to register a person as a limited partner, could however deprive a person intending to be a limited partner of limited liability.    [Back]

Note 12    This is necessary to deal with the circumstance where a general partner has died (or, if a corporate body, has been dissolved) and a limited partner wants to become a general partner, for example to avoid the risk of de-registration. In this circumstance the limited partner wishing to become a general partner may sign his own notice (draft Bill, Sched 7, para 4(5)). Where there is no general partner and a limited partner wishes to leave the partnership, the limited partner will have to arrange the appointment of another general partner (draft Bill, cl 60(1)) or arrange the break up of the partnership either by a vote of the limited partners (draft Bill, cl 61(1)) or by applying to the court (draft Bill, cl 47(1)).    [Back]

Note 13    A person may carry on a regulated activity in the United Kingdom only if he is an authorised person or an exempt person (FSMA, s 19). A person obtains authorisation from the Financial Services Authority under Part IV of FSMA. Section 38 of the FSMA empowers the Treasury to make exemption orders.    [Back]

Note 14    See the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001 No 544) (as amended), Art 51.    [Back]

Note 15    Draft Bill, cl 66(2). Normally there will be no partnership in existence before the limited partnership is registered and thus no person to authorise the manager to act on the partnership’s behalf. To protect the general partner from liability under the FSMA for “establishing” a collective investment scheme by signing the application for registration, we will recommend an amendment to the FSMA as a consequential provision under cl 78 of the draft Bill.     [Back]

Note 16    The 1907 Act, s 9(2) sets the daily default fine in respect of failure to register changes at a maximum of £1 per day.    [Back]

Note 17    These are default rules; a partnership agreement could allow a limited partner to participate in decisions. But making decisions about ordinary matters would be likely to amount to involvement in management which would contravene cl 55 of the draft Bill and expose the limited partner to unlimited liability.    [Back]

Note 18    1907 Act, s 6(1).    [Back]

Note 19    See paras 17.3 – 17.17 below.    [Back]

Note 20    We have recommended in para 16.19 above that the decision to give a limited partner such authority should be an extraordinary matter requiring unanimity among the general partners.    [Back]

Note 21    See para 17.23 below.    [Back]

Note 22    Joint Consultation Paper (LP), paras 3.8 – 3.10.    [Back]

Note 23    Joint Consultation Paper, para 5.10.    [Back]

Note 24    1890 Act, s 45 provides that the expression “business” includes every trade, occupation, or profession.    [Back]

Note 25    Joint Consultation Paper (LP), para 3.10.    [Back]

Note 26    RUPA, s 101 provides that “business” includes every trade, occupation, and profession.    [Back]

Note 27    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 1890 Act for the purposes of United Kingdom taxation.     [Back]

Note 28    See the draft Bill, cl 58.    [Back]

Note 29    Draft Bill, cl 1(2).    [Back]

Note 30    See para 18.12 below.     [Back]

Note 31    See paras 16.11 and 16.14 above.    [Back]

Note 32    See the Companies Act 1985, s 451 and Sched 24 and the Limited Liability Partnerships Act 2000, s 2(4).    [Back]

Note 33    It is also possible for an authorised person under the FSMA to be a corporate body. See the FSMA, s 40.    [Back]