Limited Partnerships Bill - providing a new vehicle for investment in New Zealand

Earlier this month, the Government introduced the Limited Partnerships Bill which will replace the current special partnership regime and provide a new vehicle for venture capital investment. In this note, Annie Cho outlines the key features of the proposed limited partnerships regime and how it differs from its predecessor.

Limited partnerships are a form of partnership involving general and limited partners. General partners transact the business of the partnership while limited partners are passive investors and are liable only to the extent of their capital contribution to the partnership.

New Zealand currently has a form of limited partnership, called the special partnership, which is provided for in Part 2 of the Partnerships Act 1908. The existing regime is commonly viewed as outdated and inconsistent with limited partnership structures in other jurisdictions such as the United States, Britain and Australia. The Limited Partnerships Bill aims to ameliorate this by providing for limited partnerships in New Zealand that have similar features to their overseas counterparts.

Some of the key features of the proposed new regime are:

• A limited partnership can be formed with one general partner and one limited partner.

• General partners are responsible for the management of the business of the partnership while limited partners must not engage in such activity. Doing so results in loss of limited liability; instead, the limited partner will be liable as a general partner (unless the limited partner's actions are covered by a "safe harbour" - see below).

• A general partner is liable for all partnership debts and liabilities to the extent that the limited partnership itself cannot pay such debts and liabilities. The partnership agreement can provide for a greater level of general partners' liability and any limited partner who is liable as a general partner will be liable according to the level set in the partnership agreement.

• Regulations passed from time to time can set out "safe harbour" activities for limited partners. These are activities which may ordinarily amount to "taking part in the management of the business of the limited partnership" but which, by virtue of regulations promulgated, make it safe for limited partners to carry out those activities without losing the protection of limited liability. It is not known at this stage what those activities might be but safe harbour activities will certainly remove some of the current limitations around a limited partner's involvement in the partnership business.

• A partner can change its status i.e. a general partner can become a limited partner and vice versa, but it cannot be both a general partner and a limited partner at the same time.

• The general partner must not make a capital contribution to the limited partnership. A limited partner may, but does not have to, make a capital contribution to be a limited partner. "Capital contribution" is defined as the share of assets contributed by a limited partner to the limited partnership (in property or in money), but does not include a loan by a limited partner to the limited partnership.

• The current special partnerships regime prohibits the withdrawal of capital (including distributions to partners) to the extent that such withdrawal results in a reduction partnership capital. Special partnerships are therefore commonly formed with a nominal sum of capital contribution from the special partners to get around this restriction. The limited partnerships regime abandons this capital maintenance rule in favour of a solvency test, as currently in place under the Companies Act 1993. Distributions to limited partners can be made so long as the general partners are satisfied, on reasonable grounds, that immediately after a distribution is made, the limited partnership will be solvent.

• Limited partners can offset partnership losses against their income from other sources to the extent of their contribution to partnership "capital". For tax purposes, capital includes the partner's capital contribution as well as any loan made to the partnership.

• An online, centralised limited partnership register will be maintained by the Registrar of Companies. This register will be similar to the companies register currently available online. A limited partnership will be created upon registration and general partners will have the responsibility of ensuring the partnership's details on the register are correct. The register is available to the public and accessible for searching.

• Currently, special partnerships have a lifespan of seven years after which time they can either be renewed or dissolved. The new regime does not prescribe any particular lifespan for limited partnerships; limited partnerships continue until a "terminating event" occurs. A terminating event can be provided for in the partnership agreement (e.g. the limited partnership exists for a fixed time).

The Limited Partnerships Bill is expected to take effect as legislation from 1 April 2008. Special partnerships existing at that time can continue as such, but will cease to exist at the end of their prescribed period. Special partnerships can then register as a limited partnership (but can also do so prior to its expiry).

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.