News and Insights

The Limited Liability Partnerships (Jersey) Law 2018. Third time lucky?

LLPs were first created in Jersey by the Limited Liability Partnerships (Jersey) Law 1997 (“the 1997 Law”) and much has happened since then.

An LLP is a form of partnership with separate legal personality, meaning that it can own property, sue, and be sued in its own name, rather than that of the individual partners. Furthermore the partners enjoy the protection of limited liability, so that if the partnership business becomes insolvent the partners’ responsibility to meet the debts is limited to the value of their interest in the assets of the LLP. Their personal assets need not be realised to meet the debts of the partnership, as would be the case in a traditional customary law partnership.

The story so far

The 1997 Law was introduced, amid much political controversy, to encourage English firms and specifically members of the magic circle of accountancy practices, to set up off-shore, as there was no suitable equivalent legislation available to them in the UK. However in order to protect these firms’ clients and creditors the 1997 Law included a requirement to deposit a £5 million cash bond with a bank or insurance company upon establishment, thus creating a war chest to mitigate the effect of their partners’ limited liability. Alas it turned out there were few firms around with that sort of money to spare.

To complicate matters further, the UK tax authorities announced, prior to the enactment of the 1997 Law, that they would not recognise the Jersey LLP as a partnership for tax purposes, meaning Jersey LLPs would not benefit from tax transparency in the UK, an essential part of the LLP’s intended appeal.

Finally the UK announced its intention to introduce its own LLP legislation, which came into force in 2001 and did not include the £5 million cash bond requirement.

Over 26,000 UK LLPs were established over the next 7 years but not a single Jersey LLP was ever set up.

In an attempt to compete, in 2013 Jersey abolished the £5 million cash bond requirement replacing it with a requirement to submit an advance annual solvency statement. Similar statements have become an increasingly common feature of Jersey’s company law, used as a means to manage the risks arising from the gradual move away from corporate capital maintenance rules. The statement required the LLP to state that, for the coming 12 months, it expected to be able to continue in business discharging its liabilities as they fell due.

Effect of the new Law

The new LLP Law of 2018 therefore aims to re-launch the Jersey LLP by making four key changes to the current regime, as follows;

• Requirement of annual advance solvency statements: The new Law has no legal requirement to produce advance solvency statements. Instead when a partner wishes to withdraw any property from the partnership, (as for example when he or she takes a monthly drawing, equivalent to an employee’s monthly salary) a solvency statement must be made within 12 months after the withdrawal of such property, failing which he or she may be liable to return that drawing or repay its equivalent value and the LLP will have committed an offence.

• Contribution requirement: While the 1997 Law required that each partner of the LLP contribute “effort and skill” to its business the new Law expands that test to include the contribution of “capital or effort and skill”. Respondents to a consultation conducted in 2008 had maintained that while bringing “something of value” should remain significant to the nature of a partnership, the definition of that value needed to be widened beyond “effort and skill” so as to facilitate the use of LLPs as investment entities, in addition to their other intended use as a clear and comprehensive framework for the activities of professional services firms.
• Requirement to have an LLP Secretary: Under the 1997 Law, an LLP in Jersey was required to have one partner responsible for certain administrative obligations of the LLP but he or she did not have to be in Jersey. To make an LLP more clearly amenable to the reach of local regulators under the new Law, there must be an LLP Secretary to attend to its records and returns who may be a partner resident in Jersey (either an individual or a corporation) or a Jersey regulated business providing professional secretarial services. While the new Law states that every LLP must appoint a secretary as from the date of first registration, the accompanying transitional provisions for existing LLPs allow them to appoint a secretary within 6 months from the date of commencement of the new Law.
• Power of Registrar to dissolve the LLP: In keeping with the theme of closer regulatory oversight the new Law contains provisions allowing for the JFSC’s Registrar of Jersey companies and other entities to dissolve an LLP for a number of reasons, including;

1. Failure to appoint a secretary,
2. Failure to provide the secretary with any accounting record or annual return,
3. Failure to send any annual return or specified solvency statement to the Jersey Financial Services Commission;
4. Failure to pay any Jersey Financial Services Commission fees; and,
5. Failure to have a registered office in Jersey.

So will we see a growth in the use of the Jersey LLP following the new Law?

Jersey finance industry consultations and reports identified that tax transparent Jersey LLPs had potential for use in areas such as securitisation, collective investment funds, and wealth management. With this in mind the new Law also permits a partner of an LLP also to be an employee of the partnership and to be able to enter into transactions with it.

These changes are encouraging and Jersey has certainly played its part in ironing out the wrinkles that afflicted the 1997 Law. However a major hurdle facing Jersey LLPs is that HMRC continues to treat them as opaque for UK tax purposes. Their profits and losses are thus attributed to the partnership itself rather than to the partners. It is therefore unlikely Jersey LLPs will see significant growth from the UK even after implementation of the new Law.

How to create, or convert to, an LLP

To create a new LLP will be fairly straightforward:

1. Application for registration must be in the form of a declaration, made and signed by a person authorised to sign by every person who is to be a partner on registration. The declaration must include:
   1. The proposed name of the LLP
   2. The intended address of the registered office of the LLP
   3. The name and address of each person who is to be a partner of the LLP
   4. The name and address of the proposed Secretary
   5. The duration for which the LLP is to exist (if unlimited, to state so)
2. Such declaration shall be delivered to the registrar as reasonably required by them.
3. If the registrar is satisfied with the application, they will register the LLP and issue a certificate of registration, which states the date on which registration takes effect, as well as a number or identifying code.

However, to convert an existing partnership into an LLP is more complex as this involves the creation of the new LLP separate from the old partnership, and transfer of all existing business, assets and liabilities by the existing partners of the old partherhship to the new LLP. This will consist of a number of things, including:

1. Informing employees they will have a new person as their employer. An employee consultation process will be needed.
2. Notifying all clients, banks, creditors, and debtors that any contracts are to be transferred to the LLP so that henceforth anything owed will be due from the LLP and not from the old partnership. It would be wise to expect resistance to such a development. Who would want to replace a debtor with no limitation on its liability with one that can far more easily impose such a limit? Some form of compensation for the increased risk to which the creditor will be exposed is likely to be required.
3. Set up a new bank account.
4. If the partnership leases land or premises consult with the landlord about the conversion, seek their consent to the assignment of the partnership’s lease to the LLP and establish if they will also need comfort to manage the limitation of liability now involved.
5. Transfer all other assets from the partnership to the LLP.