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Investment Limited Partnerships (Amendment) Bill 2020

  • Ireland
  • Investment funds and asset management
  • Financial services - Asset managers and funds

24-11-2020

In this update we consider the Investment Limited Partnership (Amendment) Bill 2020 (the “ILP Bill”), which as of 16 December 2020 has successfully passed through both the Seanad and Dáil Éireann. The final stage is for the ILP Bill to be presented to the President for signing into law and this is due to occur imminently.

1. Investment Limited Partnerships: Background to the Bill

The Irish Investment Limited Partnership product (the "ILP") was originally established pursuant to the Investment Limited Partnerships Act 1994 (the "1994 Act"). The ILP allows investors to hold a variety of assets through a common law limited partnership agreement structure.

The updated ILPs can offer limited liability to investors, authorised and regulated by the Central Bank of Ireland (the “CBI”), as well as beneficial tax treatment of assets depending on the structure of the fund. The purpose of the new ILP Bill is to update the 1994 Act and align it with recent domestic and EU legislation such as the Companies Act 2014 (the “Companies Act”) and the AIFMD.

The government’s finance strategy is to make Ireland a more attractive domicile for private equity funds. The ILP Bill is key to that strategy. Once the ILP Bill is passed, ILPs will be the preferred vehicle for investment in property, energy, infrastructure, private equity and private debt, particularly for American managers who are familiar with the structure.

The ILP Bill also makes a number of technical amendments to the Irish Collective Asset Management Vehicles Act 2015 (the “ICAV Act”) to enhance the efficiency of the ICAV structure and similarly align it with the Companies Act.

2. Main Changes Proposed by the Bill

2.1 “White List” of Permitted Acts

A Limited Partner (“LP”) is restricted in the extent to which they can take part in the management of the ILP, and risk losing the benefit of limited liability if they exceed these restrictions. The ILP Bill would expand the list of permitted managerial acts of an LP, or “white list”, which will not result in this loss of limited liability. Allowing LPs further permission to engage in the management of the ILPs without fear of losing limited liability will be a welcome change. The attached table outlines the proposed white list, including acts already permitted to LPs.

2.2 Amendments to a Limited Partnership Agreement (the “LPA”)

The requirements for amending the LPA are due to be changed by the ILP Bill. Where previously an LPA could only be amended by approval of all LPs, the ILP Bill would allow for amendment by a majority of the limited partners, or on certification by the depositary that the changes would not prejudice the LPs. The use of these options will be dependent on the LPA permitting changes in such a manner. Particular focus should be paid to whether the LPA stipulates that all LPs must be in favour of amendments before they can be implemented. If permitted in the LPA, the attached flowcharts show the options open to LPs.

2.3 Statutory Transfer of Assets and Liabilities

The ILP Bill provides for an automatic statutory transfer of assets and liabilities on the admission or replacement of a general partner, which will save partnerships the time and expense of documenting such transfers. This reduction in transfer costs and friction will differentiate ILPs from Luxembourg SICAVs and UK limited partnerships.

2.4 Beneficial Ownership Requirements

Earlier this year EU regulations were introduced to ensure a register of Beneficial Ownership was created and maintained by corporate entities in an effort to strengthen anti-money laundering practices. These regulations are currently applicable to ICAVs and Unit Trust Funds. The passing of the ILP Bill would render ILPs and Common Contractual Funds (“CCFs”) equally subject to these requirements. These rules require the general partner of the ILP to create and actively maintain a register of beneficial ownership of the ILP which is submitted to the CBI. Penalties in line with the Companies Act are set out in the Bill for non-compliance with these requirements, as well as the procedures for rectifying any errors.

2.5 Case Law Holding Penalty Clauses in LPAs as Void to be Repealed

The courts in Ireland and other common law jurisdictions have determined that provisions in an agreement which impose additional obligations on a party in the event of default may be unenforceable if they are later deemed to be “penal in nature.” Proposals in the ILP Bill expressly state that any sanctions imposed on LPs due to failure to perform their obligations or breach of the partnership agreement would still be enforceable, even if found to be penal in nature. Therefore LPs must be aware of their obligations and perform them with care, as penalties against them will be enforceable even if they would have been deemed “penal” in the past.

2.6 “Umbrella Funds”

The ILP Bill introduces the ability to establish as an “umbrella fund,” allowing for the management of separate portfolios of assets under an ILP umbrella. When structured as an umbrella the assets within each sub-fund belong exclusively to the partners holding an interest in the sub-fund, and cannot be used to discharge the liabilities of another sub-fund as each sub-fund will hold segregated liability from other sub-funds under the umbrella. This provision was opposed in its entirety by members of the Committee, though remains in the Bill as passed by Seanad Éireann on 6 November 2020.

2.7 Curtailing Limited Liability of Partners

The ILP Bill as initiated contains provisions as to how capital contributions by LPs and the liability of LPS for debts are to operate. One such provision would be that an LP would not be liable for the debts or obligations of the ILP beyond the amount pf the partnership property contributed by that LP. This measure mirrors the limited liability benefits of a Limited Company under the Companies Act. Two amendments to this limited liability have been proposed by the Seanad Committee which would curtail this benefit. This would be to the extent that an LP would still be liable for debts and obligations in respect of the Revenue Commissioner and staff of the ILP, or at least to the Revenue Commissioner only.

2.8 Amendments to the ICAV Act

As mentioned above, the ILP Bill makes certain changes to the ICAV Act to bring it in line with the Companies Act, as well as to improve CBI registration of active ICAVs. A key point of note is that under the ILP Bill a new section 2A will be inserted into the ICAV Act affecting the objects of ICAVs authorised under the UCITS Regulations. The current position in the ICAV Act is that the sole object of the ICAV shall be the collective investment of funds in property and giving members the benefit of the results of the management of its funds.

The new ILP Bill proposes that where ICAVs are authorised as UCITS, their sole objective will be governed by the UCITS Regulations. These Regulations state that the sole object of the UCITS is the collective investment in either or both of:

(i) transferable securities; or

(ii) other liquid financial assets referred to in Regulation 68 of the UCITS Regulations of capital raised from the public and which operate on the principle of risk-spreading.

Therefore ICAVs authorised as UCITS will be subject to the objects outlined in the UCITS Regulations, rather than the objects in the ICAV Act.

3. Commercial benefits of the ILP

• An ILP, consistent with other partnership structures, does not have an independent legal existence in the way that a company or unit trust structure does. The assets and liabilities belong jointly to the individual partners. Similarly the income and gains, and indeed losses, are accrued directly by the partners.

• The ILP is regarded as transparent for Irish tax purposes. As a tax transparent vehicle the ILP structure should prevent double taxation and will ensure that the ILP and its investors will not be disadvantaged by investing through the fund rather than investing directly in the underlying asset.

• Any income gains realised by the ILP are not subject to Irish tax at the ILP level. Non-Irish resident partners in an ILP will not normally be deemed to be Irish resident, solely by virtue of participating in an ILP.

• ILP’s are particularly suitable as an investment vehicle for investment in US securities with US advisers and are also frequently used throughout Europe. Their specific partnership features are consistent with other internationally utilised partnership structures. They are particularly suited to private equity and real estate structures, where the investment profile is longer term.

• ILPs can be established as open or close ended, and can be set up as single funds, or as umbrella funds with segregated liability.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice.

UK comment on the ILP Bill

The proposed modernisation of the ILP will be a welcome development to the asset management industry as it will increase the range of competitive and viable products that firms may deploy in the limited partnership sphere. It comes hot on the heels of the new limited partnership fund structure for Hong Kong announced over the summer and also follows updates to the “white list” of matters that an LP can take part in in a UK limited partnership without losing its limited liability. In particular this enables LPs’ representatives to serve on boards and committees of a UK Private Fund Limited Partnership. The different characteristics of UK, Irish and Luxembourg limited partnerships need to be borne in mind in choosing the most suitable structure in any particular case.”

If you would like more information or to discuss any of the topics covered, please feel free to contact a member of our team: