Investment made easier – the Limited Partnerships Act 2008

The Limited Partnerships Act 2008 (the Act) came into force on 2 May 2008, providing for the creation of a new legal entity in New Zealand, the limited partnership. Overseas, limited partnerships are used as investment vehicles, as, for investors, they have the liability protection of companies and the tax and confidentiality advantages of partnerships. We expect that we will see many of them in the near future with the introduction of the Act.

In this issue of Counsel we outline some of the key features of New Zealand limited partnerships.

The stated purpose of the new Limited Partnerships Act is to:

“…establish a modern regulatory regime of limited partnerships that –
1. gives the business community in New Zealand the option of a flexible and internationally recognised business structure similar to limited partnerships in use in overseas jurisdictions; and
2. facilitates the development of the venture capital industry in New Zealand.”

As the purpose indicates, the introduction of a limited partnership regime to New Zealand is significant, not only for the venture capital and private equity industry, but for any other business wanting to take advantage of the features associated with this type of entity, as outlined below.

The Act repeals the special partnership regime in Part 2 of the Partnerships Act 1908. Special partnerships need to be renewed every seven years. A special partnership existing on 2 May 2008 will continue to exist, but will not be able to be renewed. Any existing special or general partnerships that wish to become a limited partnership will have to restructure and register as a limited partnership in accordance with the Act.

Key features of a Limited Partnership

  • Separate Legal Personality: Like a company, a limited partnership has separate legal personality from its owners (the partners). This helps protect investors from losses and claims arising from the business activities of the limited partnership.
  • Flow Through Tax Status: Like a general partnership, a limited partnership is transparent for tax purposes, so losses and gains are attributed to partners directly, in the manner agreed between them (although the maximum loss claimable in New Zealand is the total capital contributed plus any guarantees given in favour of the limited partnership).
  • Partners: A limited partnership must have at least one general partner and one limited partner at all times. Any person (including a corporation sole, body corporate or unincorporated body such as a partnership) may be a partner of a limited partnership, but the same person cannot be a general partner and limited partner of the same limited partnership at the same time.
  • General Partners: The general partner is responsible for the management of the limited partnership (and can broadly be likened to a director of a company). The general partner has authority to bind the limited partnership, and is an agent of the limited partnership. The general partner is jointly and severally liable with the other general partners (if any) and the limited partnership for all the debts and obligations of the limited partnership. However, this liability will be residual, as the assets of the limited partnership will be called on first, unless the limited partnership agreement provides otherwise.
  • Limited Partners: Limited partners are usually passive investors in the limited partnership. Generally, their details are kept confidential. Limited partners cannot take part in the management of the limited partnership. Although management is not defined, the Act sets out certain specified 'safe harbours', being activities limited partners can undertake without being deemed to be taking part in the management of the limited partnership. Provided it does not participate in management of the limited partnership (or keeps within the 'safe harbours'), the liability of a limited partner is limited to its capital contribution or investment in the limited partnership.
  • Registration and Limited Partnership Agreement: A limited partnership is formed on registration with the Registrar of Companies. On registration, the general partner must certify that the limited partnership has a written limited partnership agreement, detailing as a minimum the matters set out in the Act (which broadly cover assignment of interests, entry and exit from the limited partnership, meetings, and entitlement to distributions). The agreement is not a public document. Similarly, and as mentioned above, details of limited partners (name, address and date of birth (for individuals)) must be provided on registration but they are not publicly available (and cannot be the subject of an Official Information Act request).
  • Business: In terms of business, a limited partnership may carry on any business or activity and enter into any transaction, subject to the Act, any other enactment, the general law, and any restrictions in the limited partnership agreement.
  • Capital Contributions: Subject to the limited partnership agreement, both general and limited partners may make capital contributions to the limited partnership, entitling them to a share in the partnership interest in that limited partnership. A partnership interest will be a participatory security under the Securities Act 1978, so a public offering will generally require the appointment of a statutory supervisor.
  • Distributions: A partner who makes a capital contribution to a limited partnership has the right to receive distributions from the limited partnership. 'Distribution' is broadly defined in the Act and could include payment to a general partner for the day-to-day running of the limited partnership. Distributions are subject to a solvency test requirement (in a similar way to distributions by companies).
  • Accounts: While a limited partnership is required to prepare accounts, there is no requirement to file accounts with the Registrar (unless the limited partnership is an "issuer"). However, as with companies, the accounts need to be held at the registered office.
  • Termination: A limited partnership will exist until it is deregistered in accordance with the Act. The provisions of the Companies Act 1993 relating to liquidation and voluntary administration are largely incorporated into the Act by cross reference. In addition there are specified terminating events in the Act which automatically trigger termination (including if there is no general partner or limited partner for 10 working days or more). If these events occur, the general partner has no power to undertake activities, except as necessary to wind up the limited partnership and complete transactions begun but unfinished at the time of the terminating event.

Provisions relating to taxation of limited partnerships are set out in the Taxation (Limited Partnerships) Act 2008 which came into force on 1 April 2008. It also deals with other tax matters in relation to general partnerships. While it is not yet known how limited partnerships will be treated by tax authorities in other jurisdictions, it is hoped that as double tax treaties and the like catch up with the Act, New Zealand limited partnerships will also be given transparent treatment offshore.

Although limited partnerships are created by statute, they are relatively unregulated when compared to companies. Because there is a requirement for each limited partnership to have a written agreement, there is plenty of scope for a limited partnership to be self governing within the confines of the Act. Therefore, they may well be an attractive vehicle for a wide range of businesses.

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