Guernsey limited partnerships

The Limited Partnerships (Guernsey) Law, 1995, as amended (the "Law") governs Guernsey limited partnerships.

A Guernsey limited partnership seeks to combine the flexibility and tax transparency offered by a partnership structure with the benefit, for limited partners, of limited liability status similar to that offered by a company for shareholders. The Guernsey regime is flexible: a Guernsey limited partnership may elect on registration to have legal personality, there is no statutory upper limit on the number of partners, limited information is publicly available, and there is no general statutory requirement for audited accounts unless required by the partnership agreement or applicable regulatory requirements.

Guernsey limited partnerships continue to be used extensively. Numerous collective investment schemes, funds, carry vehicles, joint ventures and private venture capital schemes have a limited partnership structure and limited partnerships also form the basis of many property holding and financing structures. The Law has been amended over time, to support the continued use of Guernsey limited partnerships as flexible commercial vehicles.

Structure

A Guernsey limited partnership must consist of one or more general partners and one or more limited partners. There is no limit under the Law on either the number of limited partners or the number of general partners.

A general partner can also be a limited partner and vice versa.

General partners

A general partner has that status if it is admitted to the limited partnership as general partner in accordance with the partnership agreement and is named as such in the declaration delivered to the Registrar of Companies in Guernsey (the "Registrar") as part of the registration of the limited partnership. If a change is made to the registered particulars, notice of the change must be filed in accordance with the Law.

A general partner undertakes the management of the limited partnership and has all the rights and powers and is subject to all the restrictions and liabilities of a partner of a "general partnership" except as provided for in the partnership agreement and under the Law.

The general partners of a Guernsey limited partnership are jointly and severally liable without limitation for all debts of the limited partnership in the event that the limited partnership’s assets are insufficient to discharge them. General partners are therefore typically limited liability companies.

The Law does not require a general partner to be resident or, if a company, incorporated in Guernsey, though depending on the activity, regulatory status, tax or operational requirements of the limited partnership, there may be a separate requirement, or other preference, for this.

Limited partners

A limited partner has that status if admitted as a limited partner in accordance with the Law and the partnership agreement. The limited partnership must keep records of the name and address of each limited partner and the amount and date of each limited partner’s contribution.

The Law defines a partnership interest as "a partner’s share of the profits and losses of a limited partnership and the right to receive distributions of partnership assets". Limited partnership interests can, in principle, be assigned.

Limited liability

Subject to the terms of the partnership agreement and the Law, the liability of a limited partner to the limited partnership and creditors of the limited partnership is limited to (i) the amount of money contributed to the limited partnership by such limited partner from time to time; and (ii) the amount of money agreed to be contributed to the limited Partnership by such limited partner and not yet contributed.

In accordance with the Law a limited partner may lose its limited liability status if the limited partner takes part in the conduct or management of the business of the limited partnership beyond the exercise of the rights and powers of a limited partner as set out in the Law. In addition, a limited partner who knowingly permits his name or a distinctive part of his name to be used in the name of the limited partnership will be liable as a general partner to any person who extends credit to the limited partnership without actual knowledge that such limited partner is not a general partner.

If a Guernsey limited partnership is insolvent at the time of or immediately following a distribution representing a return of a limited partner's contribution to the limited partnership, or in the event of the insolvency of the limited partnership within a period of six months immediately following the distribution (or such longer period specified by the partnership agreement), the distribution is, for a period of one year from the date of receipt by a limited partner, repayable to the extent necessary to discharge any debt of the limited partnership incurred at the time when the limited partner's commitment formed part of the assets of the limited partnership. Solvency is determined according to a "cash flow" test: "solvent" means that the general partner is able to discharge the debts and obligations of the limited partnership (not including liabilities to partners in respect of their partnership interests) as they fall due out of the assets of the limited partnership.

Non-participation in management

Limited partners are not intended to, and should not, participate in the management of the limited partnership. They are effectively passive investors and as limited partners have no implied authority to bind the limited partnership.

Under the Law, a limited partner must not participate in the conduct or management of the business of the limited partnership or transact the business of, sign or execute documents for or otherwise bind the limited partnership. A limited partner who contravenes these provisions will be liable as if he were a general partner in respect of all debts of the limited partnership incurred while he so acts or purports to act.

Helpfully, the Law sets out a list of activities that a limited partner may do without being deemed to have participated in the conduct or management of the business of the limited partnership. These include, amongst other things:

• acting as a contractor, agent or employee of the limited partnership or of a general partner;
• acting as a director, officer or shareholder of a corporate general partner;
• acting as a partner in a partnership which itself is a general partner;
• consulting with and advising a general partner with respect to the activities of the limited partnership;
• investigating, reviewing, approving or is advised as to the accounts or affairs of the limited partnership;
• acting as surety or guarantor or providing any other form of security for the limited partnership, generally or in respect of specific debts;
• requiring the appointment or removal of an auditor in accordance with the Law;
• voting as a limited partner on certain matters of the limited partnership to include (but not limited to): the dissolution of the limited partnership; the acquisition, sale, transfer, exchange, lease or charging of any property or assets of the limited partnership; the incurrence of debt; any change to the nature of the business of the limited partnership and amendments to the partnership agreement; and
• exercising the rights of a limited partner conferred on limited partners by the Law.

Information rights

A limited partner’s information rights (including to inspect the limited partnership’s records and to take copies of them) are subject to the partnership agreement. This is particularly useful in the context of a carried interest vehicle where individuals’ carry entitlements are often commercially sensitive and confidential.

Contributions, loans and distributions

Contributions and loans

The Law allows flexibility as to the form of limited partners’ contributions. They can be made in money or property but not services or loans.

Limited partnerships have the capacity to operate on a variable capital basis allowing capital contributions to be increased or decreased during the life of the limited partnership or to be payable in instalments as required for investment.

A limited partner is permitted, amongst other things, to lend money to the limited partnership. A limited partner, who is not also a general partner, will rank in respect of such a loan – and other transactions – as a creditor of the limited partnership pari passu with external creditors. A limited partner’s claim for profits or a return of the limited partner’s capital contribution is of course subordinated (on which please see below, including under "Winding up and dissolution").

Distributions

Unless the partnership agreement provides otherwise, the limited partners are entitled to share in the profits of the limited partnership pro rata to their paid up contributions, and their claims in respect of the return of their contributions rank equally. Thus different classes of limited partnership interest can be created.

The partnership agreement may provide that a partner has no right to return of its contribution or to receive profits, or both. This dispenses with the need for every partner to be given a profit share, however small, even where the commercial intention is that one or more partners do not share in the limited partnership’s profits.

Profits including capital profits may be distributed, and capital returned, to the limited partners provided that at the time of and immediately following the relevant payment the limited partnership is solvent. Subject to this proviso a limited partner may demand the return of its contribution immediately before the completion of the winding up of the limited partnership or at a time specified in the partnership agreement.

Returns of capital in specie are permissible if the partnership agreement so provides or all the partners consent.

Establishment of a Guernsey limited partnership, regulatory requirements and partnership agreement

Name

The name of a Guernsey limited partnership must include the words "Limited Partnership" or the abbreviation "L.P." or "LP". A Guernsey limited partnership with separate legal personality must include the word "Incorporated" or "Inc" in its name.

Names can be reserved with the Guernsey Registry for a period of three months. The Registrar may refuse to register a name if the name to be registered already appears on the register of limited partnerships or companies in Guernsey or is, in the Registrar’s opinion, misleading or otherwise undesirable.

The name of a Guernsey limited partnership must not contain the name, or a distinctive part of the name, of a limited partner. A limited partner who knowingly permits its name to be used in the name of the limited partnership may incur liability as if it were a general partner to a person who extends credit to the limited partnership without actual knowledge that the limited partner is not a general partner.

Formation

A declaration is required to be delivered to the Registrar (and a certificate issued by the Registrar on registration of that declaration) for a partnership to be registered and this must be signed by one or more general partners and must state certain particulars in respect of the limited partnership required by the Law, including, the name and nature of the limited partnership, its registered office and principal place of business, information relating to the general partner(s) and the term for which the limited partnership is entered into. If the limited partnership is to have legal personality, that election must be made on registration.

A registration fee is payable on registration. Other fees are payable in relation to ongoing filings and annual validation requirements.

Regulatory requirements

Depending on its activities, a Guernsey limited partnership may be subject to regulatory requirements, including where it is used as an investment fund or conducts regulated activities. Relevant consents, registrations, notifications, exemptions or licences may be required from the Guernsey Financial Services Commission (the "GFSC") or other competent authority.

Limited partnerships are commonly used as private and public investment fund vehicles in Guernsey. Where a Guernsey limited partnership is used as a fund, the applicable Guernsey funds regime and any requirements of the GFSC should be considered. For more on this, including Guernsey regulation, please see our briefing note A guide to Guernsey investment funds | Carey Olsen.

Service providers in Guernsey, including law firms, corporate service providers and administrators require certain information from clients to satisfy applicable anti-money laundering, countering the financing of terrorism and customer due diligence rules and requirements.

Annual validation and related filings may be required under the Law and regulations made under it, and failure to comply can result in civil penalties and, in certain circumstances, striking off.

Partnership agreement

Every Guernsey limited partnership must have a written partnership agreement dealing with the affairs of the limited partnership and the conduct of its business. Amendments to the partnership agreement must also be in writing.

The partnership agreement is not filed as a public document with the Registrar.

The partnership agreement is binding on the partners, their assigns and subsequent partners in accordance with the Law. It should set out the partners’ rights and obligations, management arrangements, transfer provisions, information rights, distribution mechanics, default remedies, indemnities and winding-up provisions.

Default provisions and remedies should be drafted carefully to ensure they are effective under Guernsey law and consistent with the Law and general principles of contract and partnership law.

Public records

The Guernsey Registry maintains the register of limited partnerships, which is open to public inspection. The registered particulars include information contained in the declaration filed with the Registrar on registration and any filed changes to those particulars. The public records of limited partnerships are limited.

The partnership agreement, the identity of the limited partners and their capital contributions, are not matters of public record although beneficial ownership information and other information may need to be provided to the Registrar or relevant authorities where required by applicable law.

A limited partner’s information rights (including to inspect the limited partnership’s records and to take copies of them) are expressly subject to the partnership agreement. This is particularly useful in the context of a carried interest vehicle where individuals’ carry entitlements are often commercially sensitive and confidential.

Administration

Registered office

A Guernsey limited partnership must have a registered office in Guernsey.

The Law requires records to be kept, including the partnership agreement, a register of limited partners, records of partners, details of limited partners’ contributions and proper books of account. These records must be kept at the registered office of the limited partnership.

These records are not generally public documents, but they may be subject to inspection rights under the Law, the partnership agreement and applicable regulatory or statutory requirements.

Accounting

A Guernsey limited partnership must keep accounting records sufficient to show and explain its transactions and to disclose with reasonable accuracy its financial position. There is no general statutory requirement under the Law for the accounts of a Guernsey limited partnership to be audited, but an audit may be required by the partnership agreement or by applicable regulatory requirements.

Limited partnership accounts may be maintained in any currency.

Service providers

A Guernsey limited partnership without its own local operating presence will need certain on-going administration services provided by a local service provider, which commonly would be combined with such services provided to a Guernsey general partner. These may consist of a straightforward "company-secretarial" type service (including holding the statutory books and records) together with provision of a registered office or a fuller service, if required. There are various professional administration firms in Guernsey which can provide such services.

Winding up and dissolution

A Guernsey limited partnership may be dissolved in the circumstances set out in the Law and the partnership agreement, including on the happening of an event specified in the partnership agreement, expiry of its fixed term, written agreement of all partners, certain events affecting a general partner (such as death, legal incapacity, retirement resignation, removal or bankruptcy) unless the limited partnership is continued in accordance with the Law or, by order of the Royal Court. In summary, the usual process is as follows:

• Step 1 – the limited partnership is dissolved upon the occurrence of an event specified in the Law or the partnership agreement.
• Step 2 – notice of dissolution is filed with the Registrar and published in La Gazette Officielle, within the applicable statutory period (currently within seven days beginning on the date of dissolution). Notice must also be provided to the GFSC if the limited partnership is regulated in Guernsey. Normally, the Greffier will remove the limited partnership from the register of limited partnerships forthwith after the receipt of the dissolution notice. 
• Step 3 – upon dissolution of the limited partnership no further activities or operations may be conducted except for such action as is necessary for the winding up of the affairs of the limited partnership and the distribution of the limited partnership’s assets to the partners in accordance with the Law and the partnership agreement. The affairs of the limited partnership are wound up by the general partner(s) unless a liquidator is appointed by the Royal Court in accordance with the Law.
• Step 4 –the winding up and dissolution is complete once the above and steps required by the Law and partnership agreement are completed.

Separate striking-off provisions may apply where substance, annual validation or other statutory filing requirements are not met or, in the opinion of the Registrar, there have been consistent or gross contraventions of the Law.

Guernsey tax treatment of limited partnerships and limited partners

A Guernsey limited partnership is generally treated as fiscally transparent for Guernsey income tax purposes and is not itself subject to income tax in Guernsey. The partners are taxed according to their own circumstances and their share of the limited partnership’s income. Non-Guernsey resident limited partners are generally not subject to Guernsey income tax except in respect of Guernsey-source income, subject to applicable tax law and advice on the particular structure.

Security

Security interests can be granted in a limited partnership interest, limited partnership assets and/or contractual rights of the general partner to drawdown monies from limited partners as permitted by and in accordance with the partnership agreement. Such arrangements need to satisfy any relevant terms of the partnership agreement as well as satisfying the requirements of the Security Interests (Guernsey) Law, 1993.

Legal personality

A Guernsey limited partnership may elect to have legal personality on registration. That election cannot be made after registration, so should be considered at the outset when settling the structure and formation documents.