Introduction

This note briefly outlines key legal aspects of limited partnerships in the Astana International Financial Centre (the "AIFC") that can be used as investment vehicles.

Hedge funds, private equity funds and venture capital funds are vehicles in which cash funds of investors are pooled with a view to making a profit. Such vehicles are typically formed as limited partnerships. The AIFC has the legal framework for the establishment, management and winding up of funds structured as limited partnerships. Limited partnerships in the AIFC are governed by the AIFC Limited Partnership Regulations 2017 and the AIFC Limited Partnership Rules 2017.

What is a limited partnership?

A limited partnership can be described as a relationship which exists between two or more persons for the purposes of carrying on a lawful business or activity with a view to making a profit.

Partners of a limited partnership

There is no limit on the maximum number of partners that a limited partnership can have ("partnership" or "fund"). Likewise, AIFC law does not impose any restrictions on the nationality (residency) of partners. However, a limited partnership must have at least two partners, one of whom must be a general partner and another one must be a limited partner ("investor").

In relation to a fund, a fund manager that is authorised by the financial regulator in the AIFC can perform the role of a general partner. In some foreign jurisdictions, a special purpose company will typically be formed by an authorised fund manager to act as a general partner. A general partner is responsible for the management of the limited partnership and is fully liable for all debts and liabilities of the partnership.

Other partners of a limited partnership – investors – are required to make contributions to the capital of the partnership, they may not take part in the management of the partnership and are not liable for the debts and liabilities of the partnership beyond the amounts of their contributions.

The details of general partners and limited partners are publicly available and are entered in the public registers of limited partnerships maintained by the registrar of companies (currently, the AFSA).

Legal status

As with Scotland, a limited partnership in the AIFC is a legal person. It can sue and be sued in its own name. This must be contrasted with England and Wales, where a limited partnership does not have its own legal personality.

Registration and office

The registration of an AIFC limited partnership is mandatory. An AIFC limited partnership may not conduct any business in or from the AIFC unless it has been registered in the AIFC as an AIFC limited partnership on its establishment or has been established outside the AIFC and has been formally recognised in the AIFC as a recognised limited partnership.

An AIFC limited partnership must always have a registered office in the AIFC. An AIFC limited partnership must conduct its principal business, purpose or activity in the AIFC, unless the AFSA permits otherwise.

Limited partnership agreement

The constitution of an AIFC limited partnership is documented in a limited partnership agreement. A limited partnership agreement must be made in writing in the English language. An AIFC limited partnership may adopt a standard limited partnership agreement set out in the AIFC Limited Partnership Rules 2017 or adopt a bespoke limited partnership agreement.

Capital contribution

An AIFC limited partnership must have capital to be paid by investors. At the same time, there is no minimum capital requirement.

The requirement for an AIFC limited partnership to have capital stems from the legal requirement that investors have to assume capital commitments to contribute in money or property to the partnership in the future as and when required by the partnership or otherwise in accordance with the limited partnership agreement. Nevertheless, investors of an AIFC limited partnership are not required to make contribution to the fund on their admission to the partnership.

An AIFC limited partnership must keep the statement of capital committed and contributed by its limited partners. The details of capital contributions made by each partner must be recorded in the public register kept by the AFSA; however, as at the date of this note, such information in relation to existing AIFC limited partnerships has not yet been entered into the public register.

A general partner may not be a limited partner at the same time in the same limited partnership. However, a general partner may have skin in the game, and it may make substantial equity commitment to the limited partnership in the form of cash. This supports the alignment of interests between the general partner and limited partners. Further, in the event of the insolvent dissolution of a limited partnership, the general partner who is also an investor rank behind the limited partners in relation to any debts, capital and profits.

Return of contribution

A limited partner may withdraw capital contributions made to the limited partnership upon the dissolution of the limited partnership or otherwise in accordance with the terms of the limited partnership agreement. Therefore, providing there is appropriate provisions in the limited partnership agreement, the limited partners may receive their distributions equal to their contributions during the life of the limited partnership. Such a provision on the return of contributions would enable a fund structured as a limited partnership to realise investments and to distribute the proceeds in respect of the realised investments among the investors in the return of their capital contributions and to pay them profits during the life of the fund.

However, there is a caveat on potential clawback. The return of capital contributions to the investors can be made so long as the general partner reasonably believes that the limited partnership is solvent or will remain solvent during the next 12 months following the return of the contributions to the investors. Therefore, for the return of capital to be lawful, it is incumbent for the general partner to form a reasonable view as to the solvency of the fund, because, if the limited partnership becomes insolvent within the aforesaid period, there could be a risk that the return of the contributions could be clawed back from the limited partners.

Profit-sharing

A limited partner (investor) will be entitled to a share in profits of the fund. Such an entitlement can be restricted by the terms of the limited partnership agreement. However, the law mandates that limited partners rank, in relation to one another, pro rata to their contributions in relation to profits. This rule does not appear to allow the investors to come to an alternative arrangement over shares in profits (for example, to agree that a special limited partner would be entitled to receive a 20% share of profits regardless of the proportion that its capital contribution bears to the aggregate contributions of all limited partners).

The rule of AIFC law on pro rata sharing of profits has to be contrasted with the legal position in other jurisdictions. For example, in England and Wales, the profit shares of limited partners would normally be specified by the terms of the agreement between the partners (s. 24(1) of the Partnership Act 1890, s. 7 of the Limited Partnerships Act 1907), and this legal position affords the partners the flexibility in terms of profit-sharing. The limit that AIFC law imposes on profit-sharing agreement should be borne in mind when structuring the carried interest payments.

Further, AIFC law provides for statutory basis for challenging the profit distributions made by a limited partnership to its limited partners. Thus, profits distributed to the limited partners can be clawed back, if it was unreasonable for the general partner to conclude that the limited partnership would not become insolvent within the next 12 months following the distribution of the profits.

Investors' liability. Safe harbour

Under the general rule, the liability of an investor is limited to the amount contributed or agreed to be contributed by it to the partnership. However, AIFC law reserves an exception where limited partners may be fully liable for the debts and liabilities of the fund. This exception applies where a limited partner takes part in the management of the fund structured as a limited partnership.

Therefore, as with some other common law jurisdictions, if limited partners take part in the management of the limited partnership, they will forfeit their limited liability and render themselves fully liable for all liabilities of the partnership incurred while they so take part in the management.

At the same time, AIFC law sets out two hurdles of protection of the limited liability status which the creditors must clear before they can sue the investors for the full amount of the debts of the partnership owing to them.

The first hurdle is that AIFC law provides a non-exhaustive list of what a limited partner (investor) can do without harming its limited liability status (the "safe harbour" list). Such permitted activities that fall within the "safe harbour" list, include:

acting as a director or shareholder of the general partner (where, for example, the investors are given ability manage partnership through a shareholding in the general partner formed as a company);

consulting with and advising the general partner (where, for example, the investors have seats on the advisory board);

investigating, reviewing, approving or being advised about the partnership's affairs;

approving or disapproving an amendment of the limited partnership agreement;

voting on, or otherwise signifying approval or disapproval of one or more of the following:

the dissolution and winding up of the partnership;

the purchase, sale, exchange, lease, pledge, creation of a security interest, or other dealing in, any asset by or of the limited partnership;

the creation or renewal of an obligation by the limited partnership;

the admission, removal, or withdrawal, of a general partner or limited partner, and the continuation of the partnership afterwards;

the transactions in which one or more of the general partners have an actual or potential conflict of interest with one or more of the limited partners.

The second hurdle of the protection of limited partners is that where the conduct of the limited partners amounts to taking part in the management of the partnership either because such conduct does not fall within the "safe harbour" list or for any other reason, the full liability of the investor to a creditor of the partnership may arises if that creditor successfully establishes that (a) he dealt with the partnership and at the relevant time he was actually aware of the participation of the relevant investor in the management of the partnership and that (b) he reasonably believed that the investor to be a general partner.

Winding-up

Under the general rule, a fund structured as an AIFC limited partnership must be wound up by the general partner. This position departs from English statutory law which affords partners the ability to come to an alternative arrangements as to the winding up of the affairs of a private fund limited partnership on its dissolution (s. 6(3A) of the Limited Partnership Act 1907), and it is not uncommon for an English law governed limited partnership agreement to provide for the winding up of the affairs of the partnership by a fund manager as a liquidating trustee which is not the general partner. One notes that, under the regulatory requirements in the AIFC, the winding up of a collective investment scheme (this includes a fund structured as a limited partnership) requires the relevant authorisation from the financial regulator in the AIFC.

The exception to the general rule applies where the last general partner has withdrawn from the limited partnership, in which case the limited partnership (unless reconstituted within 90 days) will be wound up in accordance with the limited partnership agreement or in accordance with the directions of the AIFC court, on the application of a limited partner or a creditor of the partnership.

Takeaway

AIFC law allows to establish a fund as a limited partnership. However, one should take into account the particular features of AIFC law relating to limited partnership when structuring the relationship between a general partner and limited partners, and between a general partner and a fund manager.

For further information please contact:

Rashid Junusbekov

Counsel

rashid.junusbekov@zanhub.com

Disclaimer

The information in this article does not constitute legal or professional advice. No part of this articles should be relied on or used as a substitute for legal advice. The information in this articles is for general information purposes only. It should also be appreciated that the law may have changed since the date of this article.

English law is not part of AIFC law and is not a default legal system. The AIFC Court may (but not obliged to) have regard to the case law of England and Wales or any other common law jurisdiction. Therefore, any reference to English law or English case law are provided only for the illustration of how AIFC law could be applied and should not be taken as an assurance that the AIFC Court will eventually apply them.