Animal or Vegetable?

  • Author : Simon Howard
  • Date : January 2009
ABOUT THE AUTHORSimon Howard is the Principal of Howard Law and Howard Consulting.

L imited partnerships registered in Jersey under the Limited Partnerships (Jersey) Law 1994 (the 1994 Law) have been used predominantly as collective investment schemes in connection with private equity. But their use is now beginning to extend into areas traditionally associated with private wealth management and corporate holding structures and the question has to be asked: what is the true nature of a Jersey limited partnership? Is it restricted within the confines of the orthodox requirements for a business partnership or can it be used for purposes that are more passive than that envisaged by the mercantile origins of the partnership concept in the United Kingdom as a trading enterprise?

In the United Kingdom the essence of a partnership is that it is a business that is carried on by persons in common with a view to profit (Section 1, Partnership Act 1890) and one of the principal identifying features of a partnership is the sharing of the net profits of the business between the partners. While the 1994 Law enables a Jersey limited partnership (JLP) to adopt these same features, it is not a mandatory requirement of the governing statute that the JLP must carry on a business. A question also exists as to whether under the 1994 Law the sharing of profits is an essential condition.

The 1994 Law is striking in that nowhere in its text does the word ‘business’ appear in relation to a JLP. Instead the statute refers to the ‘activities’ or ’affairs’ of the JLP. This contrasts markedly with the wording of the Limited Liability Partnerships (Jersey) Law 1997 (the 1997 Law), which is the statute that failed in its bid to entice a number of the leading onshore audit practices to relocate to Jersey in the form of LLPs and that was effectively gazumped by the introduction in the United Kingdom of the Limited Liability Partnerships Act 2000. The 1997 Law states that it is a precondition to registration as an LLP in Jersey that persons have determined to carry on business with a view to profit (Article 2 (2), the 1997 Law).

It appears that it is not necessary that an entity that seeks to be registered in Jersey under the 1994 Law as a limited partnership must pre-qualify as a valid partnership as that term is understood from an English law perspective. Instead the 1994 Law sets out the requirements for the formation of a JLP and states that unless inconsistent with the express provisions of the 1994 Law, the pre-existing customary law of Jersey relating to partnerships (contrats de société) will apply (Article 40, the 1994 Law). Jersey customary law principles accordingly apply to fill the gaps, but do not define the process for obtaining registration of a JLP under the 1994 Law. A JLP is therefore largely a creature of statute in terms of its basic structural requirements while its internal workings are coloured by the background customary law jurisprudence.

A limited partner can demand return of his contribution on six months’ notice to the other partners if no time is specified in the partnership agreement either for the return of the contribution or for the dissolution of the JLP

There is no general partnership legislation in Jersey equivalent to the Partnership Act 1890 in England and Wales. Nor is there any substantial body of modern case law on partnership matters in Jersey. Recent judgments of the Jersey court (Cooley v Wood 1993 JLR 24; Bennett v Lincoln 2005 JLR 125) have confirmed that on questions of partnership the court will attach great weight to the writings of the 18th century French jurist Pothier on the basis that the island’s customary law has its origins in pre-Napoleonic Code French customary law rules.

Contrat de société

Pothier defines a contrat de société (partnership) as a contract by which two or more persons place or oblige themselves to place something in common between themselves in order to realise a profit between them in respect of which they reciprocally bind themselves to render an account (Coûtumes d’Orléans (Traité de Contrat de Société) para. 1 at 443 (1827 edition)). The commercial flavour of the contrat de société is clear, but there is no reference in Pothier’s writing to the partnership itself being a vehicle for the active prosecution of a business (although that in many cases will be the end result of the arrangement). The customary law definition focuses on the obligation of each party to bring something to the arrangement for the purpose of realising a profit from the enterprise. The emphasis is on the parties contributing capital or resources to the arrangement rather than on the arrangement that results taking on the character of a business or trade. The customary law definition is clearly broader and capable of encompassing both partnerships formed for the purpose of commerce and non-commercial or civil partnerships. By contrast the historic partnership definition in the United Kingdom was framed predominantly from the viewpoint of merchants and traders. The ability of the 1994 Law to draw on the continental jurisprudence provides clearer authority for the use of JLPs both as active business vehicles and also as more passive asset or investment holding arrangements.

Pre-conditions

Under the 1994 Law the pre-conditions for formation of a JLP are simple. An association of persons comprising at least one general partner and one limited partner must file a registration declaration with the Register of Limited Partnerships in Jersey setting out certain basic details concerning the JLP and they must have received a certificate of registration of the JLP (Article 4(1), the 1994 Law). Accordingly any association of such persons complying with these requirements will be formed into a JLP. The only other express qualifying criteria are that a JLP can only be formed for lawful purpose and that the partnership agreement must be in writing (Articles 3(1) and 1 the 1994 Law).

While there is no express requirement in the 1994 Law that all parties must contribute to the capital or resources of the JLP, the implication that this is essential can be seen not only from the background definition of partnership set out by Pothier, but also the provisions in the 1994 Law that enable a limited partner to make any contribution that they provide in the form of money or other property or in the form of services, as well as in the importance that the 1994 Law attaches to a limited partner being able to receive repayment of his contribution. A limited partner can demand return of his contribution on six months’ notice to the other partners if no time is specified in the partnership agreement either for the return of the contribution or for the dissolution of the JLP (Article 17(5) the 1994 Law). To the extent that it is fundamental to the nature of a JLP that all parties make a contribution to the arrangement it is advisable that SPV general partner companies make some capital contribution if only of a relatively low amount to adhere to this formality and avoid any risk that the contrat de société may be re-characterised as a simple agency relationship (contrat de mandat) between the general partner as agent and the limited partner principals.

While contribution to the capital of the JLP appears to be a vital element, the sharing of profits is not. The default position under the 1994 Law, reflecting the underlying notion of partnership and contrat de société, is that each limited partner is entitled to a share of the profits but this is subject to any contrary provision set out in the partnership agreement (Article 14(1) the 1994 Law). At its most extreme, this provision could be interpreted to allow a fundamental departure from the basic concept and enable the JLP to operate with non-participating limited partners as regards profit. Less radically it would enable the parties to stipulate that certain limited partners will not be entitled to participate in profits until qualifying conditions are satisfied or trigger events occur. But a partnership in which the entire profit is to belong to certain partners to the exclusion of others was treated as manifestly unjust and illegal under Roman law and referred to as a societas leonina, a reference to the fable of the lion who, having entered into a hunting partnership with other animals, appropriated all the prey to itself. On the other hand the view can be taken that a joint business venture that is to achieve commercial advantage other than ‘profit’ in terms of direct financial return may still be a partnership particularly if this is what the partners intend and agree expressly. Perhaps the meaning of profit has to be understood against the nature and purpose of the partnership’s purpose and the further this is removed from a trading activity the stronger the argument becomes that profit can mean some form of advantage or benefit that is not wholly defined in terms of a simple cash return. What is clear and beyond doubt is that the 1994 Law acknowledges the ability for limited partners to have differing rights as to profit share and return of contributions according to the terms of the partnership agreement (Article 16(2) the 1994 Law).

Ultimately, once the simple qualifying conditions for registration as a JLP have been satisfied, the terms of the partnership agreement will be paramount. On both sides of the Channel the partnership is at heart a contract between the parties and the 1994 Law provides a flexible platform for the contribution and use of assets or other resources with a view to profit as the parties determine and order between themselves.


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