This client briefing seeks to address the issues involved when security is granted over limited partners' interests in exempted limited partnerships.
This client briefing is intended to provide a general summary of the position in law as at the date shown above, and is not to be taken as specific legal advice applicable to particular issues or circumstances. If such advice is required, please contact your usual Ogier contact or one of our partners listed here.
Limited partnership interests
Limited partnership interests are recorded in a register of limited partners which is maintained by the general partner of the partnership. The register of limited partners may be inspected by any person, with the consent of the general partner, during all usual business hours. Each limited partnership interest comprises both rights and obligations under the partnership agreement and the Exempted Limited Partnership Law, Revised (the ELP Law).
Just as there are two ways of taking security over the shares of an exempted limited company, either by a “legal charge” or an “equitable charge”, a similar regime applies to charges of limited partnership interests in exempted limited partnerships.
The most common way of securing a limited partner’s partnership interest is by way of an equitable charge. It is considered an equitable charge because there is a right on the part of the secured party to call for the transfer of the limited partnership interest into the secured party’s name, that is, there is a contractual right to a transfer of ownership, which equity will enforce. An equitable charge (whether in law or in equity) does not involve the transfer of ownership of the secured assets.
Section 32(6) of the ELP Law, requires that, subject to the terms of the limited partnership agreement, the general partner must provide written consent to the grant by a limited partner of any security interest in, or the transfer of, the whole or any part of its limited partnership interest.
Any security interest over a limited partnership interest is perfected by notice to the partnership's registered office and has priority in accordance with the time that written notice is validly served under section 31(4) of the ELP Law. Section 32(9) of the ELP Law further specifies that such written notice may be given by the grantor or the secured party.
Under section 32(10) of the ELP Law, such notice is not valid unless it specifies:
- the agreement pursuant to which the security interest is granted;
- the date of the agreement;
- the parties to the agreement;
- the grantor and grantee of the security interest; and
- the partnership interest or part thereof that is subject to that security interest.
Section 31(1) of the ELP Law requires the general partner to maintain a register of security interests in respect of all security interests registered and this register may be inspected by any person during all usual business hours.
It is advisable that the consent of the general partner to the grant of security over a limited partnership interest and to the transfer of that limited partnership interest on enforcement of the security is included as a condition precedent to any financing where such security is required. It should also be noted that such consent, subject to any express provision of the partnership agreement to the contrary, may be withheld in the general partner’s sole discretion.
A common closing deliverable to any financing secured by a charge over a limited partnership interest would be a signed but undated transfer of limited partnership interest (much in the same way as a signed but undated share transfer form in the case of share security) – this transfer would only be dated upon enforcement. It is always important to check the terms of the limited partnership agreement as it may also require consent from other limited partners before any security interests can be granted over other limited partnership interests.
In the case of a legal charge the secured party takes an absolute transfer of a limited partnership interest and becomes registered as a limited partner in the register of limited partners, against an undertaking to reassign the limited partnership interest upon satisfaction of the secured obligations. Once the secured party accedes to the partnership agreement in accordance with section 32(1) of the ELP Law, it then becomes a limited partner and has the rights and is subject to the obligations contained in the partnership agreement and the ELP Law.
As with the granting of security by way of an equitable charge over the limited partnership interest, subject to the terms of the limited partnership agreement, no transfer of such an interest as a result of a legal charge may be effected unless the general partner has provided its consent (section 32(6)(a) of the ELP Law).
The primary benefit of a legal charge is that if it becomes necessary to enforce the security, the secured party is already in control as the registered owner of the limited partnership interest. However, the significant disadvantage with legal charges is that the secured party is registered as a limited partner and subject to any rights or obligations of a limited partner under the relevant limited partnership agreement and the ELP Law. Secured parties, and financial institutions in particular are generally not comfortable with this position and taking an equitable charge remains the more common way of obtaining security over a limited partnership interest.
Security over a limited partner's rights under the limited partnership agreement
The security regime described above relates to security over all or part of a limited partnership interest (i.e. both rights and obligations). It is also possible for a limited partner to grant security over a particular right or rights under the partnership agreement (e.g. the rights to receive distributions of profit or returns of contributed capital). Such security is given in the same way as security over any other intangible right, by means of an assignment in writing of the right(s), of which notice in writing is given to the partnership. It is likely that a limited partner's ability to make such an assignment will be limited by the terms of the partnership agreement.