Introduction
The UK limited partnership (LP) has a long history.Footnote 1 It is not a corporate vehicle, but instead a partnership vehicle.Footnote 2 It has recently been subject to multiple legislative reforms. The most recent outlines in explanatory notes that many changes ‘establish provisions which broadly mirror provisions that apply to companies’,Footnote 3 including powers to ‘make regulations which apply company law to limited partnerships with suitable modifications’.Footnote 4 It generally ‘provides a mechanism’ to ensure that LP law ‘can keep up with developments in company law reforms’.Footnote 5
This mechanism is the additionFootnote 6 of section 7A of the Limited Partnership Act 1907, which allows the Secretary of State to amend that Act, to ‘make provision in relation to limited partnerships that corresponds or is similar to any provision relating to companies or other corporations’.Footnote 7 This power can also change the Partnership Act 1890 or the Companies Act 2006.Footnote 8 This section was entirely unamended during its parliamentary passage.Footnote 9 In the Bill’s first draft, this clause was justified with ‘[i]ntroducing this will mean that it is easier to keep the law for companies and limited partnerships aligned, which it is currently not’.Footnote 10 This point was reiterated by Kevin Hollinrake MP, the minister overseeing the Bill, who stated that the clause ‘will ensure that when company law is amended over time, the corresponding limited partnership law can be amended alongside it, making it easier to keep company law and limited partnership law aligned’.Footnote 11 The UK has, of course, had a change of government since then. Yet the new government has not changed approach. It is not likely to – Hollinrake’s counterpart in parliamentary debates was Seema Malhotra MP, representing the Labour Party (now in government). She stated that the clause ‘sets out provision for regulations to be made by the Secretary of State to facilitate the continuing alignment of partnership law with general company law. We support this.’Footnote 12 Both sides of the UK’s major political divide agreed to the new section 7A as a mechanism to align LP law to company law. The message is clear – the legislative trajectory of LP law is increasing alignment to company law, and this new section is a facilitative mechanism to achieve this.
The purpose of this paper is to challenge the wisdom of unreflexively aligning LP law to company law, and in particular to argue that the new power in section 7A should be used sparingly. The decision to align LP law to company law needs to be made on an item-by-item basis, to evaluate the appropriateness of the rule in the LP context. For both political parties, the alignment of LP law to company law per se is seen as beneficial. This paper presents a case to use this new power sparingly as the two are fundamentally different types of entities. The argument is not that company law rules can never be relevant for LPs. Both are business vehicles, and so will share some similarities for legal reform. To conclude that they should be relevant, though, involves considerable analytical work on a case-by-case basis. I set out reasons in this paper to assume that alignment will not be desirable, and therefore that the default presumption in the new section is misguided.
These arguments arise because companies and LPs are different types of legal vehicle. Most jurisdictions tend to respond to new policy challenges with new forms of legal vehicle.Footnote 13 For example, jurisdictions tend to allow for the creation of limited liability partnerships (an entirely different type of vehicle with a confusingly similar name to the LP) due to pressures from particular industries.Footnote 14 Thus non-corporate vehicles tend to arise due to a particular policy issue that the corporate form does not adequately cater for. Aligning reforms of non-company vehicles to company law means ignoring the weaknesses of the corporate vehicle that required a different vehicle in the first place. It can also mean that commentators can miss the specialities of a non-corporate vehicles. UK LPs have their own issues that need to be resolved, which are often very different from company law concerns.Footnote 15 It has been argued that there are doctrinal and conceptual differences between LPs and companies – for example, the Scottish LP’s separate legal personality comes from a different conceptual basis than the company’s.Footnote 16 Starting from the company risks the exacerbation of any underlying issues in a non-corporate legal form by deliberately ignoring any conceptual difference in basis between that form and the company. This paper outlines identifies differences between LPs and companies in conceptual origin, management of the vehicle, limited liability, permanence, and capital maintenance.
Such risk arises because corporate law regulation has historically focused on larger companies.Footnote 17 It has been argued that for small business forms, we frequently need to draw from a wider toolkit of bespoke legal considerations rather than from a narrow list of pre-existing corporate tools.Footnote 18 This paper adds historical and empirical insights into this argument, to conclude that rather than trying to align the regulation of LPs to companies, we should instead try to ensure that regulation is focused on the specific issues arising within LPs. LPs have two categories of constituent: limited partners, who receive limited liability on their investment but cannot be involved in the management of the partnership; and general partners, whose liability for the failure of the partnership is unlimited but who manage the partnership.Footnote 19 This is a common approach in common law jurisdictions.Footnote 20 Yet the LP considerably pre-dates its common law adoption and was a transplant from other legal traditions. This is discussed further in Section 1 below.
This paper makes three arguments as to why automatically aligning LP law to company law is misguided. First, the nature of the two vehicles is different. As shown below, the UK LP is a transplant from Mediterranean trade forms, and unconnected to the corporate form. This argument is not purely conceptual and historic in nature; it draws on empirical insights into the overall nature of all UK LPs that have ever existed. Exercising the new section 7A of the LPA 1907 will therefore push LP law to align to the laws of a legal form which is conceptually different, which can cause overcomplications which fail to meet policy needs for LPs. This can be seen in respect of current attempts to make LPs more transparent – by using the same tools as company law in an LP context, we make the way by which we seek transparency more complicated than it needs to be.
Secondly, it argues that focusing on alignment with company law misses limitations in current rules that allow the ostensible policy balances within LPs to be circumvented. Debates in respect of limited liability are complex and unending, and there are clearly benefits and downsides of limited liability. Whatever the objectively correct normative approach may be in respect of limited liability, LPs ostensibly operate an age-old international model: limited liability for passive investors, and unlimited liability for active managers. Yet the ability to have a newly established thinly-capitalised special purpose vehicle as the only general partner, with a management agreement appointing a different entity without any liability to manage the LP, demonstrates how easily this model is avoided. This argument is verified by use of a simple case study of the legal structure of the recently closed Eighth Cinven Fund. This issue is that an apparent policy balance is easily avoided in practice. The mix of limited and unlimited liability is LP-specific, and therefore company law cannot provide guidance in this respect.
Thirdly, it empirically demonstrates the disproportionately high percentage of Scottish LPs, which means that aligning their regulation to those of companies – which are predominantly English – would be a mistake. Indeed, as outlined in Section 3 below, I have previously argued that recent company law legislation ignores Scots law specific issues and needs, and thus fails to achieve policy aims. Aligning LP law to company law risks compounding this: not only will such legislation miss nuances of the LP form, it will miss nuances of the Scottishness of the LP. Missing such nuances may undermine the policy aims advanced, whilst harming the LP.
Each argument, then, comprises conceptual and empirical components. I use the empirical components in this paper to provide verification/support of the conceptual arguments raised, and also to inform them: the notions that LPs are different to companies, and that limited liability can be easily sidestepped by legal structuring of general partner vehicles, are intuitions widely suspected by commentators in the field. That these are empirically verifiable is important evidence in translating these intuitions into policy.Footnote 21 The notion that the LP is disproportionately Scottish, though, arises purely from data and provides important additional policy considerations. Empirical evidence thus plays two important roles in this paper. First, it lets us ‘test our basic assumptions about the world’,Footnote 22 and verify ‘hunches’ about the operation of LP law.Footnote 23 The result of combining the two ‘provides another approach to understanding the role of law… one that is more grounded in real-life economic activity than purely analytical qualitative analysis’.Footnote 24 This lets us utilise intuitions more deeply in legal design. This is the traditional use of empirical evidence in UK corporate legal analysis.Footnote 25 Secondly, though, it provides insights for us to analyse which might otherwise have been missed.
This paper draws on two different forms of empirical evidence in respect of its claims. First, it includes a quantitative analysis based on an overview of all LPs on the UK register. LPs register at Companies House to exist.Footnote 26 Companies House records, therefore, contain details of all LPs in existence. Indeed, until secondary legislation enacts certain parts of the Economic Crime and Corporate Transparency Act 2023,Footnote 27 it is impossible for an LP to leave the corporate register. The most that they can do is file a form LP6 with Companies House notifying a change in the LP, noting the dissolution.Footnote 28 Such LPs remain, though, on the corporate register with the details that they held prior to their dissolution, and so remain counted in the quantitative analysis outlined in this paper.
Companies House releases a snapshot of all entries on the corporate registers once a month.Footnote 29 This data has been subject to empirical legal study in respect of companies.Footnote 30 Yet it also contains details of all LPs, which have not yet been empirically studied. As noted above, this should include all LPs that have ever been registered. If they have a prefix ‘LP’ then they are English, if ‘SL’ they are Scottish and if ‘NL’ then they are Northern Irish. This product downloaded as at 1 April 2024 unveiled a total of 58,503 LPs in total on the UK public register – including currently live and defunct LPs. This paper draws on this for insights into the typical UK LP. It also utilises an individual case study to illustrate points. This approach is usual in business history.Footnote 31 Such an approach is less extrapolatable than quantitative insights, but demonstrates that the analytical risks raised are not purely theoretical.
The rest of this paper proceeds as follows. Section 1 explores the LP’s roots, and identifies that the conceptual origins of the UK LP are different to the company form. Empirical data verifies this hunch for the modern day – most LPs have one limited partner and one general partner. Section 2 explores limited liability in the LP, and argues that the current rules allow for the bypassing of liability regimes, which will only be exacerbated by automatically aligning LP law to company law. It uses an empirical case study to illustrate its points. Section 3 explores the Scottishness of the LP, and the reasons why such Scottishness provides further reasons to resist aligning LP law to company law. A conclusion ends the paper.
1. The very limited partnership
(a) Non-corporate origins and basis
First, then, we should not automatically aim to align LP regulation with company regulation because they are fundamentally different vehicles. This means that the ends of company law regulation may not be appropriate, or need different means to be achieved, for LPs. The corporate form was originally chartered by the state, until incorporation by registration was passed in the UK in 1844,Footnote 32 with limited liability becoming available in 1855,Footnote 33 and aligned fully to a single company law regime in 1856.Footnote 34 This regime had a clear separation from partnerships – entities with over 20 ‘partners’ were forced to use the company form (precluding larger partnerships), and seven persons were needed to form a company (precluding the smallest of companies).Footnote 35 Law therefore treated the company form and the partnership form as alternatives with limited potential for overlap.
The presence of the company form, with limited liability for passive investors, drew attention to the fact that partnership vehicles did not enjoy similar rights.Footnote 36 Sir Frederick Pollock drafted the UK’s Partnership Act 1890,Footnote 37 and attempted to allow for LPs.Footnote 38 He argued in 1882 that:
The institution of partnership en commandite, or limited partnership, as we may call it in English, is unknown in the United Kingdom, and in these kingdoms alone, or almost alone, among all the civilized countries of the world.…. The essence of commandite partnership is the conjunction of at least one managing partner who is liable without limitation for the partnership debts… with one or more contributing partners who do not take an active part in the business, and are liable only to the extent of what they contribute… to its capital. This form of partnership has been known on the Continent for many centuries. The Mediterranean trade of the middle ages was carried on principally by its means.Footnote 39
Such a vehicle was provided in the UK in 1907. Three important insights arise here, though, in respect of the intellectual drive for the introduction of the UK LP. First, the intention was to provide a feature available in a different legal form to a partnership form, rather than holistic alignment. Thus the drive for the creation of LPs was not to generally align partnership law to company law, but instead to be able to cherry pick the most advantageous features available to a particular set of facts arising in a partnership. This drive was not even to apply to all partners, merely some of them. This is discussed further below. Secondly, the policy considerations were focused on the facilitation of trade. The UK’s early general incorporation regime was introduced due to a concern about difficulties in suing large partnerships, and so ensuring third party protection.Footnote 40 Pollock’s drive for LPs was based, instead, on the notion that trade was commonly carried out through such a vehicle. The reason for introducing LPs into the UK was not only not-corporate, but based on different policy considerations to the introduction of the corporate regime.
Thirdly, the desire to introduce the LP was comparative. Pollock’s argument is that other jurisdictions had forms of it, known as the partnership en commandite, or the commenda contract.Footnote 41 Such financial arrangements led to economic success where they were embraced,Footnote 42 and were a common way to trade overseas, including between Europe and Crusader States in the 1200s.Footnote 43 Indeed, their legal form is indistinguishable from the Islamic forms of trade known as the qirad. Footnote 44 At the very least these legal features migrated along trade routes,Footnote 45 although it is usually argued that the European commenda was based on the Islamic qirad. Footnote 46 These types of business arrangement all focused on allocating risk and reward between managers and passive investors.Footnote 47
Islamic legal traditions did not develop the equivalent of a ‘company’ from such a legal form.Footnote 48 The modern company originated in Western Europe with the English East India Company,Footnote 49 and the Dutch Vereenigde Oostindische Compagnie, known as ‘VOC’.Footnote 50 It arose because of the need for permanent capital within an organisation for trade at scale.Footnote 51 The popularity of the company form arose because of the need for more complicated business structures, including intergenerational transfers across family firms,Footnote 52 and due to state commitment to segregating the company’s assets.Footnote 53 The qirad, commenda, and UK LP do not have permanent capital. In addition to such capital, one of the advantages of the corporate form is stated to be the ability to lock such capital into the business venture.Footnote 54 These rules are mandatory and cannot be circumvented.Footnote 55 Such restrictions on what can be distributed and to what extent are lacking from LPs. Partners can withdraw capital from LPs unless they bind themselves not to,Footnote 56 but any limited partner who does so is liable for the debts of the LP up to the amount so withdrawn.Footnote 57 There is thus a fundamental difference in basis for any restriction on capital withdrawal under the two different business forms: one is an absolute prohibition, the other is a permission with a consequence.
Differences between the UK LP and its company form run considerably deeper. Unlike companies, English LPs have no separate legal personality.Footnote 58 This has long caused conceptual differences between the corporate and partnership form: whilst the former can hold its own property, the latter cannot.Footnote 59 In general partnerships, this means that the partnership’s assets are legally held by the partners individually for use in the partnership.Footnote 60 In LPs, partnership property will be held by the general partner.Footnote 61 So not only is there no permanent capital in an English LP, partnership property will be held in the name of the general partner, rather than in the name of the entity itself. In an LP one category of constituent (the general partner(s)) holds property that they manage for the benefit of another category of constituent (the limited partner(s)). Scottish LPs do enjoy separate legal personality,Footnote 62 but a very weak form of it.Footnote 63 Whilst the Scottish LP can hold assets in its own name, such personality is not perpetual as in companies, and therefore traditionally treated as less-than-corporate.Footnote 64 In particular, the concept of the Scottish partnership (general or limited) owning property is conceptually challenging.Footnote 65 Companies have perpetual existence from their incorporation until dissolved, regardless of the change of the individuals involved in the company.Footnote 66 LPs, on the other hand, technically end whenever a general partner changes, and are re-constituted by a new LP.Footnote 67 This makes them particularly attractive for business forms that are not intended to be permanent.Footnote 68
Overall, then, the LP and the company conceptually originated in different ways, driven by different needs into different directions and have different legal features. This weakens the argument to align LP law to company law. Given such conceptual differences between the two vehicles, the notion of automatically aligning LP law to company law therefore is inappropriate.
(b) The very limited partnership today
Yet historical antecedence only goes so far. To review features of modern LPs we can look at the snapshot of all LPs registered on the UK corporate database as at April 2024. Figure 1 shows the number registered by year, demonstrating a severe spike between 2009 and 2018, with a peak of 6,226 LPs registered in 2015. Thus most LPs are newer – increasing the possibility that the modern use of the LP has deviated from its historical origins.
Figure 1. Registered LPs by year.
However, drilling into the detail of the modern LP unveils that the characteristics of the modern LP have stayed close to their original conceptual roots. Table 1 sets out the number of limited general partners in each LP on the UK’s corporate register.
Table 1. Number of LPs per number of general partners and limited partners
Table 1 demonstrates that of the 58,503 LPs on the UK’s corporate register, 41,355, or 70.69%, have one limited partner and one general partner. The majority of LPs, therefore, fall squarely into the historical commenda dynamic by which one partner without limited liability manages the money, with a sleeping partner with limited liability; 74.2% of LPs only have one limited partner; 89.52% of LPs only have one general partner. Given that 3.10% of LPs are listed with no general partners,Footnote 69 only 4,321 LPs, or 7.39% of total LPs, have more than one general partner. As noted above, this general partner is the only partner able to undertake management activity for the LP, and has unlimited liability for its debts. As set out further below, this demonstrates that aligning LP law to company law will overcomplicate matters and risk missing policy aims.
Most company law reforms recently have focused on transparency. This originally targeted finding the underlying beneficial owners behind assets,Footnote 70 and restrictions on overseas control of strategically important businesses.Footnote 71 Yet the 2023 reforms – passed but not yet fully in force – focus on the management of the entity, such as preventing disqualified directors from becoming directors of subsequent companies,Footnote 72 ensuring that directors have their identity verified,Footnote 73 and ensuring that the company’s registered office is fit for purpose.Footnote 74 The last of these will be applied to LPs – requiring them to have a registered office that is appropriate and at which the LP can be reached.Footnote 75 For the 89.52% of LPs with only one general partner able to manage the business, this is misguided.
A requirement for a registered office has been longstanding in UK company law: it appeared in the first Act to allow for UK general incorporation.Footnote 76 Here, promoters of any company would need to register their own personal places of business, and the intended place of business of the company,Footnote 77 and then register a deed of settlement setting out the principal place of business of the company, and every branch office.Footnote 78 The report preceding general incorporation set out that there were some risks of businesses pretending to do business in places that they did not.Footnote 79 To remedy such concern it recommended publication of everywhere that the company undertakes business.Footnote 80 This is predicated upon it mattering who ran the business and where it was carried out, with the assumption that the two will be based in different places. This regime continues today – directors must publicly register service addresses,Footnote 81 and the company must have a registered office.Footnote 82 The preparatory work for the most recent full restatement of the Companies ActFootnote 83 is very cursory on the point, merely noting these requirements as part of the restatement.Footnote 84 Modern academic discussion of the registered office tends to focus on flexibility to move them across borders,Footnote 85 leaving the core need for a registered office for corporate forms as axiomatically assumed. It remains predicated upon the notion that the business activity of the company is carried out at a different place to the location of those tasked with carrying out that activity.
LPs have traditionally had ‘principal places of business’ rather than registered offices,Footnote 86 a factual confirmation updated at the register ex post rather than to be updated ex ante.Footnote 87 This, too, presupposes some autonomous business activity carried out at a place different to where they are based. We should immediately question this concept in respect of LPs – limited partners cannot carry out any activity on behalf of the LP, and so only general partners can. For English LPs, neither a registered office nor principal place of business is relevant when there is only one general partner, as LP activity must be carried out by the general partner, or contracted by that general partner to a third party. Registered offices exist for companies because the activity of the company is thought to be different from those who undertake the activity – historically, at least two directors were required for any individual company,Footnote 88 and so finding those who bind the company would not necessarily be sufficient to find the activity of the company.
Yet the empirical data show that this is not the case for the vast majority of LPs: 89.52% have only one general partner: find the general partner, you find the activity of the LP. For such LPs, the best way to achieve transparency is to go straight to the sole general partner, the only partner which can manage the vehicle, and with unlimited liability for its debts. We do not need the added complication of identifying a registered office. Starting from the presumption that LP law should align to company law results in unnecessary complication, and an additional compliance burden. The same is true of new requirements for email addresses being introduced for companies.Footnote 89 This is also being applied to LPs.Footnote 90 Here, the requirement is not that there is an email address at which the LP can be reached, but that those setting up the LP must ‘specify the intended registered email address of the limited partnership’, and that ‘the general partners in a limited partnership must ensure that its registered email address is at all times an appropriate email address’.Footnote 91 For 89.52% of LPs, this is unnecessary – we simply need to be able to contact the general partner. Such requirement is only necessary where there is more than one general partner. Such additional requirements are more than mere additional hassle – they are actively harmful. Legitimate LPs will incur an additional compliance burden in having to follow such rules for no public benefit. Illegitimate LPs can use this extra superfluous compliance layer to their advantage by hiding behind it. A general partner intent on wrongdoing could operate themselves from one address, yet claim that somehow the LP operates from another, adding complexities for tracing and law enforcement. Indeed, aligning LP law to company law here may actively obfuscate: we must work out the address at which the general partner carries out partnership business, rather than targeting transparency directly at the general partner.
Empirical data thus demonstrates that the LP today follows its historical antecedents as mostly having one passive investor and one active manager, and that attempting to align LP law to company law over-complicates the picture in the vast majority of cases. Only where there is more than one general partner will it ever be necessary to utilise more complicated methods to achieve transparency into the affairs of the LP. If transparency laws were targeted purely at finding out more about the general partner, then transparency could be achieved for 89.52% of LPs in a simpler and more direct way.
This seems to have been tacitly acknowledged. The 2023 reforms will, when fully enacted, change the law so that anyone who is a disqualified director cannot be a general partner,Footnote 92 and that any corporate general partner must identify a natural person whose identity has been verified and who is not disqualified.Footnote 93 This focus on ensuring the general partner is traceable is the best way to ensure transparency in LPs. It happens to align to the approach taken in respect of directors.Footnote 94 However, for transparency in LPs, attempting to focus on anything over and above the general partner is misguided – rather than reforming LPs using company law methods to improve their transparency, we should be focusing on finding out as much as we can about their general partners. Presuming that LP law should be aligned to company law will miss this. The new power to align LP law to company law needs to be carefully exercised, as company law may provide subpar means to achieve the same ends in LPs.
2. Limited limited liability
(a) Limited liability
Focus on the general partner also demonstrates further differences between LPs and companies. I noted above that limited liability was the primary driver for the introduction of the LP. Yet limited liability in an LP is fundamentally different from that in the company. For a company, all shareholders enjoy limited liability,Footnote 95 and directors do other than in a small number of factually-specific circumstances.Footnote 96 Yet for an LP, silent partners enjoy limited liability as long as they stay out of management, and those partners who manage the firm have unlimited liability for the firm’s debts.Footnote 97
Limited liability has many benefits, especially in respect of passive investors. First, it fixes the amounts that a party will have to pay to the relevant fund. As such, it allows investors to diversify, knowing that they can interact with multiple funds without the financial difficulty of one acting as a cross-contagion to all their assets.Footnote 98 Secondly, it decreases monitoring costsFootnote 99 that limited partners suffer from those managing the vehicle.Footnote 100 If parties do not have limited liability, then they have to incur considerable costs watching those controlling the fund to ensure that they correctly quantify, and minimise, the risk of their assets being called on. Thirdly, a lack of limited liability for limited partners would mean they would need to monitor each other. This is because, without limited liability, the risk of having to pay into the fund is inherently linked to the wealth of each other limited partner. By way of simple illustration, imagine if two parties (A and B) have unlimited liability for a firm’s debts. A’s risk of having to pay into the fund on the fund’s insolvency depends on the comparative wealth of B. Imagine A has £100. If B is insolvent, A is likely to be called upon in the event of the fund’s insolvency. If B is a billionaire, A is very unlikely to be required to contribute in the event of B’s insolvency as creditors will save recovery costs by pursuing the easier target.Footnote 101 Limited liability thus avoids A and B needing to care about each other’s wealth.
But limited liability is also highly controversial. The ability to split assets into different silos, each with limited liability for the other’s debts, is said to encourage excessive risk.Footnote 102 In particular, it encourages overinvestment into high-risk industries, and using higher risk methods within those industries.Footnote 103 Goodhart and Lastra argued that it creates a ‘moral hazard’ – whatever the equilibrium of risk may be, limited liability pushes actual risk levels above it because shareholders are insulated from the downside of corporate failure whilst enjoying its upside.Footnote 104 The Times thundered in 1824 that
[n]othing can be so unjust as for a few persons abounding in wealth to offer a portion of their excess for the information of a company, to play with that excess – to lend the importance of their whole name and credit to the society, and then should the funds prove insufficient to answer all demands, to retire into the security of their unhazarded fortune, and leave the bait to be devoured by the poor deceived fish.Footnote 105
Limited liability, then, has many advantages but some large downsides. To resolve the downsides, Goodhart and Lastra propose that it should not apply to shares held by ‘insiders’, those who are able to direct the business’ activity.Footnote 106 This is effectively the LP model. Indeed, a number of the concerns in respect of limited liability generally were thought not to occur in the case of LPs: limited liability only applied to passive investors, and not those who managed the firm. This meant that those in control had no incentive to push for excessive risk, and those with such incentive had no control to do anything about it. Saville states that John Stuart Mill thought that limited liability for companies was a more difficult case to argue than it was for an LP form, and generally it was thought that limited liability for sleeping partners and unlimited liability for those who managed the vehicle solved the majority of issues with limited liability generally.Footnote 107 Overall, then, whatever the objective rights and wrongs of limited liability may be, the LP seems to reflect a nuanced policy balance between the two extremes, one that others would like to emulate, and one which has strong historical antecedence in ancient trade regimes. Yet this is not so in practice. This is because there are very few requirements in respect of general partners. Whilst companies must have at least one director who is a natural person,Footnote 108 general partners can be purely corporate. A general partner can be a private company, and private companies have no requirement to have any meaningful economic presence at all.Footnote 109 I noted above that 2023 reforms will require general partners to identify at least one individual who manages the general partner.Footnote 110 Yet increased access to named individuals above will not create any requirement that the general partner be a meaningful entity. It is perfectly legitimate under the current regime for a company with a large capital base which wishes to run an LP to set up a new, thinly capitalised special purpose vehicle (with limited liability) as a wholly owned subsidiary to be its general partner, which then signs a management agreement appointing the company with the large capital base as the manager of the LP’s assets. Here, the manager is insulated from the LP’s liabilities because it is managing the LP’s assets under an arms’ length, third-party management agreement, whilst the general partner (with unlimited liability) is a shell subsidiary of the managers. Doing so neatly sidesteps the nuanced position reached in respect of limited liability in LPs. This is a distinct issue for the policy balance struck within LP law – and demonstrates a conceptual issue that will be missed by merely aligning to company law, as each at times has different policy ends that need to be achieved.
(b) Liability bypassed
LPs are frequently utilised in venture capital and private equity funds,Footnote 111 and regulation of LPs has been driven heavily by this industry.Footnote 112 Most academic attention on private equity focuses on its process for acquiring portfolio companies,Footnote 113 its effect on them,Footnote 114 and a need to regulate the process of fundraising.Footnote 115 These funds have a finite life – normally approximately 10 years.Footnote 116 They are set up on the understanding that funds will be provided for finite periods, and then investments will be liquidated and value returned to limited partners.Footnote 117 Managers establish fund after fund, with the new one raised on the reputation of the previous fund’s successes. The complex structuring utilised in such funds provides a way to achieve de facto limited liability for managers of such funds.
For example, in January 2024, famousFootnote 118 UK private equity firm Cinven finished its fundraising for the Eighth Cinven Fund, raising $14.5 billion.Footnote 119 The name indicates that there have previously been seven such funds raised, generating profit, then wound up. Managers now increasingly aim to sell assets from a previous fund which needs to be wound up to a newly launched fund, so-called ‘continuation funds’ – causing tensions between the old fund and the new fund (it is in the interest of the old fund to obtain the highest price possible and the interests of the new fund to obtain the lowest price possible).Footnote 120 There are five Cinven English LPs registered at Companies House, with names from ‘Eighth Cinven Fund (No. 1) Limited Partnership’ (registered number LP022357) to ‘(No. 5)’.Footnote 121 More LPs may be established offshore. It is usual to split a fund into a number of LPs, as it allows for specialisation across LPs within the fund with slightly different investment polices: LP number 1 may, for example, have an investment policy focusing on buying portfolio companies between $50 and $100 million; LP 2 may, for example, have a policy focusing on buying European companies.Footnote 122 That means that if a European target company which would cost $60 million is found, both LPs could contribute.
Cinven Limited’s accounts state that it had shareholder equity of over £86 million as at 31 December 2023,Footnote 123 following turnover in 2023 of over £275 million.Footnote 124 Cinven Limited is therefore, by most metrics, a very strong company with a meaningful economic presence. Filings in the US indicate that Cinven Limited is the manager of the Eighth Cinven Fund.Footnote 125 The overall picture, then, is that Cinven has raised a new fund, involving getting $14.5 billion from passive investors – limited partners – on the basis of Cinven’s experience managing private equity investments. It therefore seems as if funds have been raised from passive investors for management by an experienced manager with unlimited liability for the debts of the various partnerships – functionally the same as the commenda upon which the LP under UK law is based, and reflecting the policy balance reached on a contentious topic.
Yet Cinven Limited is not a general partner in these LPs. Since 27 May 2022, one general partner of Eighth Cinven Fund (No. 1) Limited Partnership has been Cinven UK F8 General Partner.Footnote 126 This entity is an unlimited company, whose unaudited accounts filed on 30 October 2024 demonstrate that it has no liabilities and its only asset is one share of £1.Footnote 127 Its shareholder is Cinven UK F8 GP Holdco,Footnote 128 another private unlimited company with the same financial position, which is wholly owned by Cinven Capital Management (VIII) General Partner Limited.Footnote 129 This appears to be a Guernsey limited company.Footnote 130 It is famously difficult to access corporate information in respect of Guernsey companies.Footnote 131 This means that should the LP have fewer assets than its liabilities, a disgruntled creditor would need to first proceed against the LP’s general partner. As this has negligible assets and unlimited liability, such creditor would need to proceed against its parent company, in the same position. The end of the chain is a Guernsey company. It is likely that it similarly has minimal assets, but the use of the word ‘limited’ in its name means that its shareholders have limited liability.Footnote 132 The fund will be managed by Cinven Limited pursuant to a management agreement, in exchange for a fee.Footnote 133 Cinven’s carry and co-invest vehiclesFootnote 134 will likely be undertaken through Scottish LPs.Footnote 135 The result is that Cinven can deploy its name in gathering investors, and profit from the success of the fund, but not be at risk meaningfully for the downside should the fund fail to be successful. Such strategic deployment of liability is commonly deployed by sophisticated corporate actors.Footnote 136
Not, of course, that the Eighth Cinven Fund will fail. The emphasis in such a fund is a return on its investment, so it will be an unmitigated failure if it fails to return $14.5 billion to its investors, and so the notion that it may leave external creditors unsatisfied is incredibly remote. However, private equity assets, being shares in private companies, are famously illiquid.Footnote 137 Upon financial difficulty, it may be difficult to sell assets at their worth (as buyers reduce their offers at the slightest signs of desperation). More importantly, it unveils an issue in the legal structuring of the LP. Its form is meant to provide some partners with limited liability in exchange for those who manage the LP being liable should partnership assets not suffice. The structure of the Eighth Cinven Fund demonstrates how easy it is to circumvent the latter part of this trade off, to utilise a minimally capitalised corporate group structure to effectively bypass this liability.Footnote 138
Thus a case study demonstrates the hunch identified above – that whilst the partial liability noted above is seen as an important part in the societal palatability of LPs, it is easily side-stepped in practice. The risk here is not the highly-regulated Cinven.Footnote 139 The risk is those LPs which have been argued to be of doubtful legality.Footnote 140 A proper liability regime for general partners, requiring a meaningful entity to be the general partner, would deter illegality in LPs by providing the ability to meaningfully hold them to account for wrongdoing. Indeed, this is a key area of LPs where law-on-the-books does not align to law-in-action.Footnote 141 Yet to fix it requires the LP insight noted above, that we should focus on general partners. Drawing from the company law toolkit,Footnote 142 which as noted above embraces limited liability wholesale for all parties other than in exceptional circumstances, will not do so. Company law, of course, has also had a changing approach to limited liability. The famous caseFootnote 143 of Salomon in 1897 upheld limited liability structures with one dominant shareholder,Footnote 144 upending the received wisdom as to how limited liability would be treated towards a more liberal interpretation.Footnote 145 It is therefore tempting to dismiss ease of isolated general partners as part of this wider trend. Yet not only is the starting point for limited liability different between LPs and companies, so is its trajectory of limited liability. Limited partners obtain limited liability so long as they are not involved in the management of the LP.Footnote 146 A 2013 case held that, should such happen, then the limited partners become liable for all of the LP’s debts, even those incurred before the commencement or after the cessation of such management involvement.Footnote 147 This seems harsh, and demonstrates a different trajectory to company law in treatments of limited liability for participants in the vehicle.
This is another illustration of the need for reticence in exercising the new power of the Secretary of State to align LP law to company law. Section 1 above demonstrated that we may need to deploy different means to achieve the same ends between company law and partnership law. This section has demonstrated that there can be different ends that need to be focused on between company law and LP law. Too readily aligning the two will miss such nuance. Aligning LP law to company law so far results in: (a) overcomplications to obtain transparency into LPs; and (b) missing issues in the policy balance of limited liability. More such issues will arise if section 7A is widely deployed.
The issue illustrated in this section transcends limited liability – whilst having a shell general partner is common, general partner structuring within an LP can also be utilised to avoid other requirements. For example, LPs with only limited companies as general partners have to file accounts for the LP along with the general partner accounts.Footnote 148 This requirement was introduced to follow an EU Directive, and ensure ‘that limited partnerships which have as general partners only limited liability entities… must prepare and publish accounts’.Footnote 149 Yet the precise wording means that such requirements do not apply where general partners are limited liability partnerships, which also provide limited liability.Footnote 150 Having a limited liability partnership as general partner, then, achieves the same benefits as a corporate general partner (as set out above) without the corresponding downsides of increased publication.Footnote 151 As companies have their own, complicated, accounting requirements,Footnote 152 these issues are purely LP specific, and such issues and others like them will be missed by utilising the new power to align LP law to company law without further analysis.
3. The tartan LP
The third empirical insight into LPs is their geographical split. This section demonstrates that the LP is mostly a Scottish vehicle, and that recent company law reforms have missed Scottish nuances. Utilising section 7A to align LP law to company law is likely to miss these nuances, to the detriment of the intended reform. LPs were historically unpopular in England,Footnote 153 verified by LP’s modernity, noted above. They were more popular in Scotland because their separate legal personality provided the ability to structure more complicated funds – a Scottish LP can be a limited partner of another LP, allowing for multiple tiers of ownership.Footnote 154 When partnerships were capped at 20 members,Footnote 155 this was particularly helpful in not ‘using up’ this number – a Scottish LP with seven limited partners could, due to its separate legal personality, be a limited partner in another LP and utilise one ‘slot’, whilst an identical English LP would utilise seven.
This cap has been removed. But the utility of separate legal personality remains. It is often minimised as a mere convenience, and so rather trivial on its own, its only role to minimise transaction costs,Footnote 156 which has implications for the regulation of companies generally.Footnote 157 Yet this tacitly concedes some utility for separate legal personality, even if merely to reduce costs. Indeed, the Law Commission found considerable practical benefit in the provision of separate legal personality.Footnote 158 Given that the Scottish and English LP are almost identical, with the former enjoying separate legal personality and the latter not, the comparative popularity between the two lets us see how much separate legal personality is valued in practice. The overall geographical distribution of all LPs on the register are set out in Table 2.
Table 2. Jurisdictional split of UK LPs
Nearly two-thirds of all LP that have been created are Scottish. This is a very different picture to companies, with concerns in Scotland in respect of this shrinking over time.Footnote 159 In contrast, the LP is a Scottish vehicle. Once more, this demonstrates core differences between the company and LP as legal vehicles, meaning that each requires careful legal analysis, rather than automatically aligning the latter to the former.
The limitation on the maximum number of partners was removed in 2002,Footnote 160 and so for the last 20 years the only advantage of utilising a Scottish LP over an English LP has been the practicality of separate legal personality. This data seems to demonstrate that separate legal personality is valued in practice for its utility. Figure 2 sets out the percentage of LPs registered in each year which are Scottish.
Figure 2. Percentage of total LPs registered in any year which are Scottish.
We see here that the LP was almost exclusively Scottish for its first 80 years. From 1976 we see a gradual decrease in the proportion of newly registered LPs which were Scottish, until to a low point of 19% in 2005. Yet this is still dramatically higher than its corporate equivalent – as at 31 March 2024, Companies House statistics show Scottish companies represent 4.89% of UK companies.Footnote 161 To talk of a low point in respect of Scottish LPs at 19% is therefore rather material, and demonstrates that even at the nadir of its comparative popularity, Scotland was still considerably more dominant in the LP than it was in its corporate form. Since 2005, the proportion of LPs registered that were Scottish gradually rose to a peak of 88.9% in 2016, the year of the most registrations. It has now reduced to the approximate halfway mark (2020 saw a dip to 41.44%, and 2023 a rise to 52.39%).
There are many aspects that could explain the volatility in the percentage of Scottish LPs created in any year. The dominance of the Scottish form could well be a matter of path dependencyFootnote 162 from the legal and financial professions that choose LP jurisdiction.Footnote 163 Alternatively, it could be driven by international criminal organisations touting the Scottish LP as an easy way of doing business.Footnote 164 If the advantages of the Scottish LP are mostly acknowledged in complex financial structuring (such as private equity funds), then this decline could represent the ebbing and flowing of the comparative importance of the Scottish financial industry.Footnote 165 The ‘why’ is less important than the ‘is’ – a jurisdiction with approximately 8% of the UK’s populationFootnote 166 contains most of its LPs, which is a materially different position than applies to companies.
There is little evidence of such LPs leaving the relevant jurisdiction once registered. Companies House data also include the principal place of business of the LP.Footnote 167 Table 3 sets out the percentage of LPs whose principal place of business has moved into another UK jurisdiction, outside the UK, and are incomplete.
Table 3: Principal places of business outside the jurisdiction
This does not show a mass exodus of Scottish LPs – 0.17% transferred their principal place of business to another UK jurisdiction, 0.95% outside the UK, and data was incomplete for 1.29%. This reflects 2018 UK government statistics.Footnote 168 The obligation to update your principal place of business is an ex post reflection of factual circumstances.Footnote 169 A number of principal places of business could have factually changed without the register being informed. Nevertheless, the data does not demonstrate a large number of Scottish LPs moving out of Scotland. This reinforces the thesis of this paper – LPs are distinct from companies, and so require their own policy analysis and tailored legislation. In this case, it demonstrates that the LP is primarily a Scottish vehicle.
The Scottishness of LPs provides further reasons to be reticent to align LP law to company law too freely. This is because modern company law developments have been damaging to the Scottish form by missing nuances of Scots law. Companies and LPs are not devolved subjects, so they are regulated at Westminster alone.Footnote 170 Yet these business forms are very difficult to disentangle from private law: after all ‘shares’ in companies, and partnership interests, each represent intangible property under English law and incorporeal property under Scots law.Footnote 171 As such, there are provisions of the Scotland Act 1998 that allow the Scottish Parliament to make incidental amendments whilst making general private law changes,Footnote 172 although the Scottish government seems reticent to utilise this provision.Footnote 173
Company law is generally the same in England and Scotland.Footnote 174 Yet the method of taking a fixed security over shares varies between the jurisdictions – unlike the ability to take an equitable fixed charge in England by delivery of the signed, undated stock transfer form and stock transfer form,Footnote 175 in Scotland shares need to be transferred to the creditor.Footnote 176 This requirement means that it has always been less advantageous to have a Scottish subsidiary in a corporate group with a widespread security package than an English subsidiary.Footnote 177 Recent reforms initiated by the Scottish Parliament may change this, but they have only just come into force.Footnote 178
Recent Westminster changes to UK company law have exacerbated this issue, and so harmed the Scottish form. The taking of a real right in security over shares has always been carved out of a ‘subsidiary’ test – one party is a subsidiary of the other if the latter holds certain rights in the former, and rights held in security are ignored for these purposes.Footnote 179 This changed in 2015 with legislation which provided legal obligations on ‘persons of significant control’ in a company.Footnote 180 The test for a person of significant control was taken from the subsidiary test, with an additional limb being added – that the sheer holding of shares was sufficient to trigger these requirements.Footnote 181 As a result, a secured creditor holding a Scottish share pledge became a person of significant control. This formulation was copied again in the National Security and Investment Act 2021,Footnote 182 which I have previously called a ‘legislative assault’ by Westminster on the Scottish company form.Footnote 183 At the same time, the Scottish corporate form has become comparatively less likely to list on the London Stock Exchange.Footnote 184
Recent company law changes, then, have been seen as being damaging to the Scottish company form by missing nuances of Scots law. At the very least, particular points of Scots law have been ignored in legislative considerations, causing harm to the Scottish company form. LPs are predominantly Scottish, with 62.87% of all LPs being Scottish. They also have larger differences in law between England and Scotland – with Scottish LPs having separate legal personality which English LPs do not enjoy. These provide further reasons to avoid automatically aligning LP law more closely to company law. Company law has been set in a way that, at best, has ignored Scots law considerations. Law in respect of a conceptually different vehicle, that is predominantly Scottish and has larger legal differences between England and Scotland, should be very reticent to align to company law without analysing strongly the reasons for doing so on a case-by-case basis. Our presumption should be against alignment, unless we can identify strong and clear reasons to align.
Conclusion
This paper has combined conceptual, historical and empirical methodology to argue that the new power to align LP law to company lawFootnote 185 should be used sparingly and probably not exist at all. First, the historical and conceptual basis for the LP is different from that of a company. It is historically more akin to one person funding another’s trade, with ancient allocations of risk arising under it. This is borne out empirically: 89.52% of LPs have only one general partner. Thus, rather than attempting to align LP law to company law, it appears more apposite to focus on the general partner for any future regulation. Only in the limited situations with more than one general partner does any additional complication need to arise.
Secondly, the historical basis for differential limited liability within an LP is easily undercut in practice. Whilst this hunch has been held for a long time, a case study of the Eighth Cinven Fund demonstrates how easy it is to set up a shell general partner with minimal assets that effectively provides limited liability to the manager on insolvency. Aligning LPs to companies will miss that any such issue could arise.
Thirdly, UK LPs are predominantly Scottish, and company law reforms have been seen to be harmful to Scottish companies. In a legal vehicle which is conceptually different, is primarily Scottish, and where there are bigger differences between English and Scottish law, aligning LP law more to company law creates bigger risks of unintentional damage to the LP vehicle, particularly the Scottish LP. This vehicle is legitimately deployed in a vast number of corporate and fund structures.Footnote 186
These insights have key policy implications. LP law reform would be best to focus on the general partner – as a focus of transparency, and possibly requiring a meaningful business presence in a general partner. It should be aware of differences between Scots and English private law, and take them seriously when reforming LP law. In other words, it should focus on the specific legal features of the LP rather than automatically recommending alignment to company law.
This is not to say that we should never align LP law to company law. It is, though, to argue that doing so unreflexively, without adequate analysis, risks danger. It risks focusing reforms in the wrong area, missing issues with the LP form, and accidentally damaging the most common deployment of the LP for limited benefit. Section 1 demonstrated that we may need to use different means to achieve the same ends; Section 2 demonstrated that we may need to identify different ends; and Section 3 demonstrated the need to keep in mind the ‘Scottishness’ of the LP, and cater for nuances of Scots law which company law has recently failed to do. Any alignment needs to be properly conceptualised and worked through, following adequate consultation. There have been criticisms of the excessive inclusion in primary legislation of the ability to simply decide what is best in secondary legislation.Footnote 187 Section 7A of the Limited Partnerships Act 1907 is subject to the same issues, and should be utilised sparingly.
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