Investment Limited Partners

Introduction

An Investment Limited Partnership (ILP) is a regulated common law partnership structure. ILPs are tailored specifically for investment in a collective investment fund, one of five such investment fund vehicles in Ireland. An ILP is formed under the Investment Limited Partnership Act 1994 and established on receiving authorisation by the Central Bank of Ireland (Central Bank).

An ILP is constituted according to the limited partnership agreement entered into by one or more general partner(s), who manage the business of the partnership, and any number of limited partners. In an ILP, the general partner is responsible for managing the business of the ILP and is ultimately liable for the debts and obligations of the ILP to the extent the ILP does not have sufficient assets. The general partner must: (i) be authorised by the Central Bank to act as a general partner; or (ii) avail of the right to manage an Irish alternative investment fund (AIF) on a cross-border basis under the Alternative Investment Fund Managers Directive (AIFMD).

The ILP Act has been in use since 1994 and it is widely acknowledged that it is needs to be modernised to take account of EU funds legislation, anti- money laundering developments and changes to the international financial services area since it was published. The intervening years have seen seismic changes to the investment fund and non-bank financing landscape. This is a timely opportunity to modernise Ireland’s private equity offering by amending the ILP as well as a strategic priority set out in “Ireland for Finance – Strategy for the development of Ireland’s international financial services sector to 2025”.

The 2020 Act amends the Act of 1994 to update and add definitions of new terms – these include ‘alternative foreign name’, ‘beneficial owner’, ‘depositary’, and ‘limited partner’. It transfers responsibility for the Act from the Minister for Enterprise, Business, and Innovation to the Minister for Finance. It  replaces the word “custodian” with “depositary” throughout the Act of 1994 to align it with other funds legislation.

It  amends the 1994 Act by updating the wording ‘fair market value of the property’ to ‘fair and appropriate value of the property’ in order to track the language in Article 71 of the EU Directive on Alternative Investment Fund Management and its implementation. This amendment permits the establishment of umbrella funds.

The 2020 amends the Act of 1994 with new requirements for the Central Bank to maintain records of all Investment Limited Partnerships authorised. This is to align the requirements with records maintained with other funds legislation.

White List

The 2020 Act  permits a limited partner to participate on boards and committees related to an investment limited partnership. This adds board participation to the “White List,” a list of activities which, if undertaken by a limited partner, will be deemed not to be taking part in the conduct of the business and so do not result in loss of liability for a limited partner.

This “White List” concept is common to limited partnership regimes in other jurisdictions like the Legislative Reform (Private Fund Limited Partnerships) Order 2017 in the UK, which clearly sets out the actions that are not regarded as taking part in the management of the partnership business for the Limited Partner.

Alterations & Transfers

The 2020 Act requires all partners to be notified prior to an alteration and provides for alterations in writing via the agreement of the majority of partners, provided the existing partnership agreement allows for changes via majority. It  allows for alterations to the partnership agreement to be implemented if the depositary certifies in writing that the alteration does not prejudice the interests of the limited partners, provided that the alteration is not one which the Bank stipulates must be made and that the partnership agreement provides that the depositary has the power to certify that the alteration does not prejudice the interests of the limited partners. The Act outlines what the majority of limited partners comprises.

There is a statutory transfer of assets and liabilities on the admission or replacement of a general partner, so that all rights or property of the investment limited partnership shall vest in the incoming partner or existing general partners. There are similar provision on the withdrawal of a general partner, wherein all rights or property of the investment limited partnership shall vest in the remaining partner or existing partners.

The words ‘investment limited partnership’ or ‘ILP’, o ‘Comhpháirtíocht Theoranta Infheistíocta’, or ‘CTI’ must be used at the end of the name of every investment limited partnership. It also states that where an investment limited partnership is permitted to use an alternative foreign name, it must use the words ‘investment limited partnership’ at the end of the name in the same language as the alternative foreign name. The amendment deletes a restriction on the limited partner bearing the same name or part of a name as the investment limited partnership. This aligns with the naming provisions in the Limited Partnership Act 1907.

Register

There is provision for the maintenance of the register by the general manager of the investment limited partnership. It also sets out the information to be recorded in the register along with details of access to it. It also corrects a typographical error and to ensure that contributions both contributed and agreed to be contributed are recorded in the register.

There are details of penalties in the event of non-compliance with the requirements regarding the maintenance of the register. Procedures for the rectification of errors or omissions and rights of those affected by errors are also set out.

This takes account of EU developments since 1994. The liability for prospectuses is set out in the Prospectus Directive and the Alternative Investment Fund Managers Directive.

Partners

There are provision for capital contributions by limited partners and liability of limited partners for partnership debts operates. The  Bankruptcy Act 1988 only applies where the general partner adjudicated bankrupt is the sole general partner.

The 2020 Act permit the investment limited partnership to purchase insurance for a general partner or auditor (or former general partner of former auditor) to indemnify him against any liability in the event of a case of negligence or default where the general partner or auditor is found not be negligent or in default.

If the partnership agreement provides that where a partner fails to perform any of its obligations under or otherwise breaches the partnership agreement, the sanctions applicable for the failure of performance or breach will not be unenforceable solely because they are penal in nature. This is because courts in Ireland and other common law jurisdictions have previously determined that provisions in an agreement which impose additional obligations on a party in the event of a breach or a default may be unenforceable if they are subsequently adjudicated to be penal in nature.

The general partner to notify the limited partners of a direction from the Bank immediately upon receipt.

There must be at least one general partner, The  partnership is not immediately dissolved in the case of death, but within a time period as specified by the Bank.

The limited partner does not have unlimited liability for the debts of the partnership once the partnership is dissolved unless the limited partner purports to carry on the business of the partnership after the dissolution. Limited partners who do not take any part in the conduct of the business of the partnership cannot be prosecuted for any offences committed in the management of the partnership.

Beneficial Owners ILP

The 2020 Act  places the obligation to compile a beneficial ownership register on the general partner of an ILP, as well as outlining the proper interaction with designated persons, and the procedure for occasional transactions. It also notes offences for non-compliance and notice to be given where a natural person is considered a beneficial owner. This aligns with regulation 6 of S.I. No. 110 of 2019 and requires the general partner of an ILP to give notice to natural persons reasonably believed to be beneficial owners.

The general partner of an ILP is to maintain a beneficial ownership register and establishing that it is an offence to fail to comply. An officer or employee of the ILP, or a person who is not an officer or employee of the ILP, but acting on the general partner’s behalf, to deliver information to the registrar.

The Bank is the Registrar of Beneficial Ownership of Investment Limited Partnerships.  This aligns with regulation 19 of S.I. No. 110 of 2019, establishing a central register of beneficial ownership for ILPs. This aligns with regulation 20 of S.I. No. 110 of 2019, and requires the general partner of an ILP to deliver the information (below) within 6 months of the commencement of this Act.

Section 52 in the Act of 1994. This aligns with regulation 21 of S.I. No. 110 of 2019, outlining the information that must be delivered to the registrar, and the procedures for the registrar in holding that information.

The general partner of the ILP is to keep the register up to date with any changes in the beneficial ownership register.

Migration of Partnerships

This Part governs the migration of investment limited partnerships in to and out of Ireland as well as their conditions of solvency, and inserts 3 Chapters. The first Chapter covers sections 60-63. It provides definitions for the terms “general partner”, “ILP”, ‘‘migrating body’’ and ‘‘relevant jurisdiction’’ for the purposes of this Chapter.

These definitions are similar to those in the Companies Act 2014 and the Irish Collective Asset-management Vehicles Act 2015. It is also provided that the Minister for Finance may, by regulation, prescribe places outside the State as a ‘‘relevant jurisdiction’’ in certain circumstances.

The 2020 Act gives a definition for ‘‘registration documents’’, again mirroring provisions in the Companies Act 2014. This section sets out the technical documentary requirements which a migrating body needs to comply with before it can be registered as an ILP and authorised by the Central Bank.

The Act  sets out the principal elements of the migration process and copies the provisions of the Companies Act 2014 and the Irish Collective Asset-management Vehicles Act 2015. It permits the general partner of a migrating partnership registered in prescribed jurisdictions to apply to migrate the investment limited partnership to Ireland without having to wind up in their existing jurisdiction first (although they must do so subsequently).

Migrating partnerships may apply to the Central Bank to be registered as an ILP in the State by way of continuation. Before a migrating partnership can be registered by the Central Bank, it must have satisfied all the requirements in this Act in relation to registration as an ILP. In addition, a migrating partnership must give the Central Bank notice of the proposed address of its registered office.

Furthermore, an application from a migrating partnership to be registered in the State must be accompanied by a statutory declaration that states that all requirements mentioned in this section have been complied with. The Act does not operate to create a new legal entity and will not affect contracts made or rights and liabilities of the migrating partnership or other persons.

There are further practical requirements in relation to the registration of migrating partnerships in the State. The key point is that authorisation to carry on business as partnership (having of course, satisfied all the relevant regulatory requirements) is automatic upon acceptance of an application to migrate.

If an applicant fails to comply with the requirements of section 12(3), the Central Bank will give it 30 days to remedy the failure and if it fails to do so the Central Bank may start proceedings to strike the migrating partnership off the register of ILPs.

Deregistration

There are  detailed provisions relating to deregistration of ILPs that wish to continue as a partnership in prescribed jurisdictions. These provisions reflect the Companies Act 2014 and the Irish Collective Asset-management Vehicles Act 2015. Before granting de-registration, the Central Bank must be satisfied that all the requirements of this Act in relation to deregistration have been complied with by the ILP and that all fees and levies due to the Central Bank have been paid.

The application to de-register must be accompanied by a statutory declaration stating that these requirements have been met. This also provides that the de-registration of the ILP by the Bank is without prejudice to the rights of any partner to have recourse to the courts to challenge the migration-out of the ILP.

There is provision for a declaration of solvency in Chapter 3 of Part VIII. This section is based on the relevant provision of the Companies Act 2014 and the Irish Collective Asset-management Act 2015. It states that, where an application is made either by partnership to be registered in the State, or by a partnership seeking to be migrate out of the State, the general partner of migrating partnership or the general partner of the ILP must make a statutory declaration that the partnership is solvent.

It also sets out requirements in relation to the making of the declaration, which must include a statement as to the assets and liabilities of the ILP. In addition, the declaration must be accompanied by a report of an independent person giving an opinion as to the reasonableness of the opinion of the general partner and the statement of the assets and liabilities. It will be an offence for a general partner to make a declaration under this section if he or she does not have reasonable grounds for believing that the ILP can pay its debts as they fall due. A lack of reasonable grounds will be assumed if the ILP is wound up and is found to be insolvent within 1 year of the application to the Central Bank.

Umbrella Funds

The 2020 Act provides for the use of “Umbrella” or sub-funds in Investment Limited Partnerships. These sub-funds permit the establishment of a fund with several distinct sub-funds that are traded as individual investment funds but are not liable for the debts of the other sub-funds under the umbrella. These funds will share a general partner but are ring fenced from each other in the event of insolvency. This “umbrella” framework also exists in other investment fund vehicles, including ICAVs and Common Contractual Funds.

Register Beneficial Owners

The  management company of a common contractual fund to maintain a beneficial ownership register and it is  an offence to fail to comply. The  Bank is the Registrar of beneficial ownerships of common contractual funds.

The 2020 Act provides for the inclusion of Registrar of Beneficial Ownership of Investment Limited Partnerships, Registrar of Beneficial Ownership of Irish Collective Asset-management Vehicles, Credit Unions and Unit Trusts and Registrar of Beneficial Ownership of Common Contractual Funds in the list of bodies specified in Schedule 5 of the Social Welfare Consolidation Act 2005. Bodies that are specified for the purposes of Schedule 5 are authorised to use the Personal Public Service (PPS) Number. The purpose of the inclusion of the Registrars listed is to verify beneficial ownership

The 2020 Act amends the Act of 2005 to add definitions of new terms – these relate to ‘Act of 2010’, ‘beneficial owner’, ‘competent authority’, and ‘designated person’. It places the obligation to compile a beneficial ownership register on the management company of a common contractual fund, as well as outlining the proper interaction with designated persons, and the procedure for occasional transactions. It also notes offences for non-compliance and notice to be given where a natural person is considered a beneficial owner.

The management company of a common contractual fund to give notice to natural persons reasonably believed to be beneficial owners. It also aligns with regulation 7 of S.I. No. 110 of 2019 and sets out the details of the notice referred to earlier, including exemptions and offences for failure to comply.

The 2020 Act requires the management company of a common contractual fund to give notice to any person with knowledge of any natural person who is the beneficial owner of the server of the notice, or any person likely to have that knowledge. It also aligns with regulation 9 of S.I. No. 110 of 2019 and sets out the details of the notice referred to in this section.

It requires the management company of a common contractual fund to keep the register of beneficial ownership up to date with relevant changes, as well as a requirement to notify the natural person that the change has occurred. It also aligns with regulation 11 of S.I. No. 110 of 2019 and sets out the details of the notice referred to in this section.

Duties of Beneficial Owners

The 2020 Act requires the beneficial owner(s) of a common contractual fund to notify, in writing, the management company of the common contractual fund that it is the beneficial owner and details the specifics that need to be supplied, as well as the timeframe.

A natural person whose details are entered on the common contractual fund’s beneficial ownership register is to notify the management company of the common contractual fund of a relevant change (unless the natural person has already received a notice ). It is an offence for a person to whom a notice has been given under to fail to comply.