The Limited Partnerships (Jersey) Law, 1994 ("the Law") has provided financial planners with a valuable vehicle for use both by investment institutions and for sophisticated tax planning arrangements. This note describes how limited partnerships ("LPs") might be used for certain types of transactions and how they can be established and administered.

WHAT IS A LIMITED PARTNERSHIP?

A limited partnership is a partnership between one or more "general" partners (who manage the partnership and have unlimited liability) and one or more "limited" partners (passive investors who have no involvement in the day to day running of the partnership). A limited partnership has the following essential characteristics:

1. it does not have its own legal personality separate from its partners;
2. a limited partner in a limited partnership has, notwithstanding the nature of his contribution, only the right to demand and receive money in return for it, unless there is a statement to the contrary in the partnership agreement, or all the partners in the limited partnership consent to some other manner of returning the contribution;
3. a limited partner in the limited partnership has no authority or power to bind the partnership. Responsibility for managing the limited partnership rests exclusively with the general partner(s) and limited partnership property must be held by a general partner. General partners have unlimited liability for the limited partnership's debts but may themselves be a company in which the shareholders have limited liability;
4. the liability of a limited partner for the debts of the limited partnership is limited to the difference (if any) between the value of the money or other property contributed by him to the limited partnership and the value of the money or other property that he has agreed to contribute to the limited partnership. A limited partner may, however, incur unlimited liability for the debts and obligations of the partnership incurred during any period in which that limited partner participates in the general management of the partnership, or in certain circumstances where the limited partner allows his or her name to be incorporated into the name of the limited partnership; and
5. a Jersey limited partnership must have at least one limited partner and one general partner. A limited partnership will be automatically dissolved in the absence of a general partner.

FORMATION PROCEDURES

A limited partnership must consist of one or more persons who are general partners (who are liable for all debts and obligations of the partnership) and one or more persons who are limited partners (who have no liability for the debts or obligations of the partnership beyond the amount which they have agreed to contribute to the partnership). Both general partners and limited partners may be limited liability companies. A person may be both a general and a limited partner in a LP.

The terms of the partnership will be set out in a partnership agreement; however, a LP is not formed until a declaration has been filed with the Registrar of Limited Partnerships and the Registrar has issued a certificate that he has received the declaration. The declaration must give the name of the LP (which must end with the words "Limited Partnership" or its abbreviation "L.P." and which must be approved in advance by the Registrar), its registered office address, the name and address of each general partner (in the case of a general partner which is a company, its place of incorporation and registered or principal office) and the duration for which the LP is established; it will not be necessary to file with the registrar either a copy of the partnership agreement or the names of the limited partners. The partnership agreement is not available for inspection by anyone other than the partners. A registration fee of £500 is payable to the Registrar; there is no annual registration fee payable.

The Law includes an amendment to the Borrowing Control (Jersey) Law 1947, the effect of which will be that Control of Borrowing consent will be required for each LP to raise capital from its partners. In addition, if a LP intends to offer limited partnership interests to the public as a collective investment scheme, the LP and its manager and general partners will need to obtain the appropriate permits under the Collective Investment Funds (Jersey) Law, 1988.

ADMINISTRATION

General partners generally have all the rights and powers - and are subject to the restrictions and liabilities - of a partner in an ordinary partnership: this will usually give them the responsibility for the management and administration of a limited partnership. A limited partner may also participate in the management but in doing so may incur liability for the obligations of the LP; however, a limited partner may act as a director of a corporate general partner or as an agent or employee of the LP, without incurring liability for the obligations of the LP.

Each LP must keep at its registered office in Jersey records and information as specified under the Law, including (1) a register of limited partners, (2) a copy of the declaration of limited partnership, (3) a copy of the partnership agreement, and (4) statements showing financial contributions received from and returned to the limited partners.

The Law requires LPs to keep accounting records which are sufficient to show and explain its transactions and to disclose with reasonable accuracy the LP's financial position at any time. There is no requirement, however, for the accounts to be audited. The LP's accounts may be maintained in any currency (including Euro).

PARTNERSHIP RIGHTS

Limited partners have the same rights as a general partner to inspect the books and records of a LP and to be given information of all matters affecting the LP. Unless the partnership agreement provides differently, limited partners rank equally, in relation to one another, in respect of the return of their contributed capital and proportionally to their contributed capital in respect of profits and gains. A limited partner may assign his interest in a LP, but only if the partnership agreement permits him to do so or all the partners - limited and general - permit such assignment.

TAXATION

A Jersey LP will be "fiscally transparent": each of the partners will be separately assessed to tax and the LP will not be dealt with as a separate legal entity. Partners who are not resident in Jersey will only be liable to Jersey income tax on the partnership profits and gains if either (1) they arise from investment income (other than bank deposit interest) sourced in Jersey; or (2) they arise from a trade undertaken in Jersey.

LEGAL PROCEEDINGS, CLAIMS AND ENFORCEMENT OF JUDGEMENTS

Creditors of a general partner or a limited partner in a capacity other than as a partner of the limited partnership are not entitled to pursue their claim against the property of the limited partnership.

Legal proceedings by or against a limited partnership must be instituted by or against the general partner(s). No limited partner may be a party to or otherwise named in legal proceedings by or against the limited partnership. A general partner or, with the leave of the court, any other person may join or otherwise institute proceedings against one or more limited partners in situations where (i) a limited partner has become liable as a general partner under the Law, or (ii) a limited partner has not paid his agreed capital contributions to the limited partnership in full or is liable to account for a return of contribution or share of profits paid to that limited partner.

A limited partner may bring an action on behalf of the limited partnership where a general partner has refused without good reason to institute proceedings.

A judgment can only be enforced against the assets of a limited partnership if it has been obtained against a general partner in his capacity as such unless a lack of a general partner has made it impossible to obtain such a judgment.

DISSOLUTION

The dissolution of a limited partnership may occur in the following ways:

A limited partnership can be dissolved by an act of the partners (including the pursuant to the terms of the partnership agreement), subject to the filing of a statement of dissolution (as set out below). For example, the agreement may provide for the dissolution of the partnership on the bankruptcy or withdrawal of a limited partner, the death, legal incapacity or retirement from the limited partnership of a limited partner who is an individual, or the dissolution of a corporate limited partner. However, the partnership dissolution cannot take effect (other than where the reason for the dissolution is the lack of a general partner) until a statement of dissolution, signed by a general partner, is filed with the Registrar. The general partner(s) will commit a criminal offence if a statement is not filed for these purposes. A limited partner cannot dissolve the limited partnership by notice. In the case of a dissolution following the act of the partners, the winding-up is to be effected by the general partner(s).

Notwithstanding any provision in the partnership agreement to the contrary, dissolution will occur immediately where the sole or last remaining general partner becomes bankrupt or withdraws from the limited partnership. Dissolution will similarly occur where the last remaining general partner is an individual and dies, becomes legally incapable to transact or retires from the partnership or is a body corporate and itself is dissolved. There are provisions in the 1994 Law for the continuance of the partnership despite its apparent dissolution in these circumstances if, within ninety days thereof, the limited partners elect one or more general partners either unanimously or in accordance with the terms of the partnership agreement. If the activities of the partnership are not to be continued by making use of the provisions referred to above, a statement of dissolution of the limited partnership in these circumstances must be signed and delivered by a limited partner to the Registrar so that the Registrar may cancel the registration of the declaration and the limited partnership must be wound up forthwith in accordance with the partnership agreement or in accordance with directions of the Royal Court on the application of a limited partner or a creditor of the limited partnership.

The Royal Court of Jersey may, on the application of a partner, order the dissolution of the limited partnership if it is satisfied that:

1. the limited partnership is being conducted in a manner calculated or likely to affect prejudicially the carrying out of the limited partnership's activities;
2. the limited partnership is being conducted in a manner oppressive to one or more of the limited partners; or
3. circumstances have arisen that render it just and equitable that the limited partnership be dissolved.

The Royal Court may give directions as to the winding-up of the limited partnership in these circumstances. The partner making the application must cause the order of the Royal Court to be delivered to the Registrar within 21 days so that the Registrar may cancel the registration of the declaration of limited partnership. A fee of £50.00 is payable to the Registrar in respect of the registration of the notice or order of dissolution.

After dissolution of a limited partnership, the liabilities of the partnership to its limited partners, on account of their contributions or profits, and to its general partner(s) can only be paid after all other liabilities of the partnership to its creditors have been satisfied.

Unless the partnership agreement or any subsequent agreement between the partners provides otherwise, such liabilities to the partners are to be paid in the following order:

1. to general partners other than for capital and profits;
2. to limited partners in respect of the capital of their contributions;
3. to limited partners in respect of their share of the profits on their contributions;
4. to general partners in respect of capital; and
5. to general partners in respect of profits.

USES OF LPs

Examples of three possible uses are described below:

1. Venture capital funds: LPs are generally the favoured structure for use in a venture capital fund, as (unlike a limited liability company) capital raised from investors may readily be returned to them as investments are realised. The structure provides limited liability participation and yet is a look-through vehicle for investors each partner being taxed directly on his share of receipts from underlying investments. The general partner of a LP established for such a purpose will generally be the investment manager (or a special purpose subsidiary of the investment manager) and if this is a public fund with 50 or more investors, the general partner will require a permit under the Collective Investment Funds (Jersey) Law, 1988, as will any Jersey functionary such as the manager or custodian. Venture Capital funds with less than 50 investors can be set up as private funds under the Control of Borrowing (Jersey) Order 1958 and the structure of such Company or fund can be negotiated with the Jersey Financial Services Commission.
2. Asset protection arrangements: an individual wishing to protect a portion of his wealth from creditors, whilst still retaining control over and use of those assets, could establish a LP whose general partner - with a minimal interest in the partnership assets - is a company owned and controlled by him. He would transfer certain assets into the partnership in consideration for the limited partnership interests - which are entitled to most of the partnership assets - and then settle those limited partnership interests on Jersey trustees. He would retain control over the general partner - and so over the LP's assets - whilst the Jersey trustees control the limited partnership rights.
3. Private business ventures: persons wishing to invest capital in a new business venture which is likely to generate a sufficient cash flow to allow the capital - or part of it - to be returned to the investors within the foreseeable future, may prefer to invest in a LP which (unlike a limited liability company) would allow the return of the capital without the need for court approval or similar complications. The liability of persons who invested in the new business as limited partners would be limited in accordance with the terms of the Law.

CONCLUSION

The Law provides a helpful new form of investment vehicle which is useful in a wide variety of financial planning arrangements or asset holding structures.

Voisin and Volaw are well placed to advise upon and assist in establishing Jersey LPs and in managing them from Jersey.

This note is intended to provide a brief rather than a comprehensive guide to the subject under consideration. It does not purport to give legal or financial advice that may be acted or relied upon. Specific professional advice should always be taken in respect of any individual matter.