23 September 2010
By David W.P. Cooke
When is a limited partner’s liability potentially unlimited? One answer may be: whenever the limited partnership operates outside its jurisdiction of formation – unless care is taken at the time of its formation.
Limited partnerships are established in many jurisdictions, often for the purpose of investing or carrying on business in another jurisdiction. The essence of a limited partnership is that the liability of the limited partners is limited to the amount that those partners have contributed or agreed to contribute.
What many limited partners do not realise is that the limitation of liability afforded them pursuant to the laws of the jurisdiction under which the limited partnership was formed (the “Formation Jurisdiction”) may not be given effect under the laws of other jurisdictions in which the partnership may do business (the “Trading Jurisdiction”). Nor are many involved in setting up the structures aware that Bermuda limited partnerships offer a simple way of obtaining limited liability in foreign jurisdictions.
The Issue
In many common law jurisdictions (including England) the provisions of the laws of an overseas Formation Jurisdiction limiting the liability of limited partners of a limited partnership may not be enforced if the limited partnership is not a separate legal entity - as is often the case. This is a result of the application of conflicts of laws principles.
Those principles often distinguish between partnerships that are separate legal entities and those that are not. Where the partnership has separate legal personality under the laws of the Formation Jurisdiction, the law of the Trading Jurisdiction will generally give effect to the legal incidents which attach to the entity under the laws of the Formation Jurisdiction (such as limited liability of its partners). Where the partnership does not have separate legal personality under the laws of the Formation Jurisdiction, the law of the Trading Jurisdiction will generally view the partnership as simply a contractual relationship between the partners. Accordingly, while the law of the Trading Jurisdiction may recognise that the laws of the Formation Jurisdiction govern issues arising between the partners, it will not necessarily apply the laws of the Formation Jurisdiction to rights and obligations arising between partners and third parties under the laws of the Trading Jurisdiction.
Put another way, if the partnership is a separate legal entity, the limitation on its partners’ liability will be seen as a constitutional characteristic inherent in the entity wherever it does business; however, if the partnership is not a separate entity, such matters will be viewed as contractual matters which are not necessarily imported into dealings between the partnership and third parties in another jurisdiction.
The Solution
For those that are structuring new deals (or restructuring old deals), it is fairly simple to avoid this issue if a Bermuda limited partnership is being used: the limited partnership can simply elect to have separate legal personality. The ability to elect to have separate legal personality is a relatively recent development under Bermuda law, having become possible for the first time in 2006, and Bermuda is one of only a few offshore jurisdictions in which this is possible.
The procedure for doing this is quite straightforward, merely requiring an election at the time that the limited partnership is formed. Once such election is made, the partnership will be regarded as a separate legal entity with the power to own and deal with its property separate from its partners. Such an election, however, is irrevocable once made.
Conclusion
When forming a limited partnership, the focus is usually on limiting liability under the laws of the Formation Jurisdiction. For example, great care will often be taken to ensure that limited partners are not able to participate in management of the partnership in a way that would jeopardise their limited liability pursuant to the laws of the Formation Jurisdiction. Often, however, very little thought is given to potential liability in other Trading Jurisdictions where, arguably, the partnership and its partners are more likely to incur liability. By utilising a Bermuda limited partnership that elects to have separate legal personality, the limited partners can enjoy limited liability “at home and abroad”.
David Cooke, Conyers Dill & Pearman
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.
Notes to Editors
Conyers Dill & Pearman advises on the laws of Cayman Islands, British Virgin Islands, Bermuda and Mauritius. The Firm specialises in company and commercial law, commercial litigation and private client matters. Conyers provides responsive, timely and thorough offshore law advice from 11 locations including offices in Europe, Asia, the Middle East and South America. Founded in 1928, Conyers comprises over 550 staff including more than 150 lawyers. Affiliated companies (Codan) provide a range of trust, corporate secretarial, accounting and management services.
For further information please contact:
Naomi J. Little
+1 441 298 7828
naomi.little@conyersdillandpearman.com
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