Sunday, April 02, 2017 01.20PM / Olubunmi Abayomi-Olukunle*
In 2009, Lagos State made certain amendments to its Partnership Law to allow individuals to carry on business as a Limited Partnership or as a Limited Liability Partnership in Lagos State. With these amendments, Lagos State gained significance particularly in the professional services industry and in the private fund formation industry as the preferred place for setting up professional service partnerships, private equity and venture capital funds and other close-ended private funds.
However, one of the salient issues growing out of the debate around an overhaul of the legal framework for private equity and venture capital in Nigeria is the question as to whether the introduction of Limited Liability Partnerships and Limited Partnerships to the Partnership Law of Lagos State, is not, when properly considered, null and void and unconstitutional to the extent of its inconsistency with the relevant provisions of the 1999 Nigerian constitution.
Whereas the legislative competence of the Lagos State House of Assembly (and other Houses of Assembly in Nigeria) to enact a law regulating partnerships is not in question, there are serious doubts as to the legislative competence of States in Nigeria to enact rules for the formation of Limited Partnerships or Limited Liability Partnerships. It will be useful, for context, to restate some of the features of a Limited Liability Partnership and a Limited Partnership as provisioned under the Partnership Law of Lagos State.
Limited Liability Partnerships
The object of the provisions of the Partnership Law of Lagos State in relation to Limited Liability Partnerships as per intendment of section 58 and 75 is to (a) limit the liability of individuals who choose to be organised as a Limited Liability Partnership to the amounts contributed by the individual partners to the assets of the Limited Liability Partnership (b) confer the benefit of separate legal personality on a Limited Liability Partnership with the legal effect that a Limited Liability Partnership can sue and be sued in its name.
Further, with the legal effect that the individual partners in a Limited Liability Partnership will not be personally liable for the debts and obligations of the Limited Liability Partnership and may only be liable in their personal capacity only in the case of fraud, misrepresentation or other improper conduct or where it is in the interest of the public for an action to be taken against an individual limited liability partner.
It is useful to note that Limited Liability Partnerships are required to have a share capital equal to 10% of the value of the assets of the Limited Liability Partnership from time to time. Also, a judgement against a Limited Liability Partnership is not a judgement against the individual partners. It is important to further note that Limited Liability Partnerships are to be treated in accordance with the provisions of the Personal Income Tax Act. Presumably, this provision is the basis for the position that a Limited Liability Partnership is a pass through entity.
The object of the provisions of the Partnership Law of Lagos State in relation to Limited Partnerships as per intendment of section 41 and 54, is to limit the liability of individuals who choose to be organised as a Limited Partnership to the amounts contributed by the individual partners to the assets of the Limited Partnership within a framework that allows individual partners who are identified as general partners to be liable for all the debts and obligations of the Limited Partnership. Except for the benefit of limited liability conferred upon the limited partners in a Limited Partnership, there is no requirement to have a share capital and there is no express conferment of the benefit of separate legal personality on an entity level.
Fundamentally, the Limited Partnership structure is a shift from the general principle underlying partnerships which stipulate that every partner in a firm is liable jointly with the other partners for all the debts and obligations of the firm incurred while he is a partner and after his death, his estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, subject to the prior payment of his separate debts.
Whereas the introduction of Limited Liability Partnerships and Limited Partnerships are welcome innovations, it is crystal clear that the legal effect of the provisions on Limited Liability Partnership is to confer the incidents and benefits of incorporation on a Limited Liability Partnership registered with the Lagos State. There is hardly a shred of doubt that a Limited Liability Partnership as constituted is a body corporate.
It is trite that the core incidents of incorporation centre around separate legal personality and limited liability. To the extent therefore, that the aforementioned provisions relating to Limited Liability Partnerships confer the incidents and benefits of incorporation on a number of individuals who are associating for the purpose of business, I am of the view that these provisions ought to be declared null, void and inconsistent with the relevant provisions of the 1999 constitution.
The primary legal basis and justification for this opinion is item 32 of the exclusive legislative list in the 1999 Nigerian constitution. By that provision, ‘the incorporation, regulation and winding up of bodies corporate’ sits within the exclusive preserve of the Federal Government. Although, item 32 excludes ‘co-operative societies, local government councils and bodies corporate established directly by any Law enacted by a House of Assembly of a State from exclusive federal legislative competence, it does seem abundantly clear that the reference to ‘bodies corporate’ in the said latter part must be interpreted to exclude any reference to a private association of individuals for the purpose of business as a corporate entity.
The intention of item 32 is not in my view, to delegate to State governments, the powers to create a framework or platform on the back of which a number of private individuals may associate for the purpose of carrying on business as a limited liability enterprise or on a separate legal personality basis. The aforementioned item in my view settles the issue very clearly as to which level of government has legislative authority with respect to the conferment of the benefits and incidents.
Developments from other jurisdictions where Limited Liability Partnerships have been introduced support the position that a Limited Liability Partnership is a body corporate. To site an instance, the Limited Liability Partnership Act of the United Kingdom clearly defines a Limited Liability Partnership as a ‘body corporate (with legal personality separate from that of its members) which is formed by being incorporated under this Act’. For some reason, the drafters of the Partnership Law of Lagos State ostensibly omitted the definition of Limited Liability Partnerships from the Partnership Law.
If we agree that a Limited Liability Partnership is a body corporate, we must agree that, the establishment of rules relating to the formation of a Limited Liability Partnership is outside the legislative competence of a State House of Assembly. In the same vein and for the same reasons, I will chance the view that the Lagos State House of Assembly cannot legitimately establish rules for the formation of Limited Partnerships to the extent that a Limited Partnership confers upon a number of the individuals the benefit of limited liability, which of itself, is an incident of incorporation. On this basis, it should be of no consequence that another set of individuals i.e. general partners, are responsible for the liabilities of the Limited Partnerships.
Based on the division of legislative powers under the Constitution as aforementioned, a State House of Assembly cannot legitimately confer any of the incidents and or benefits of incorporation on a private association of individuals, as such, by whatsoever name called or means devised, will be unlawful, unconstitutional and will constitute a usurpation of federal legislative powers. The only entity that can legitimately confer the benefit and or incidents of incorporation on an association of individuals is the entity which ab intio has the exclusive legislative and regulatory preserve over incorporation in Nigeria.
On the basis of the foregoing, it is extremely important for investors, private funds, professional service firms or other entities currently registered as Limited Partners or as Limited Liability Partnerships under the Partnership Law to reconsider their exposure and create legal structures around a potential liability exposure as there exists a good chance that the benefit of limited liability may not be available to investors and to other limited partners under the Partnership Law of Lagos State.
In a dispute scenario, it shouldn’t be difficult for a plaintiff to make the limited partners in a Limited Partnership or the ‘shareholders’ in a Limited Liability Partnership jointly and severally liable regardless of the provisions of the Partnership Law.
The most important takeaway from the foregoing really is the urgent need for the Federal Government to enact laws allowing individuals, law firms and other professional service firms to engage in business using limited liability structures or other alternative investment/business formation structures. Jurisdictions that are serious about establishing a regulatory and tax climate that is conducive for raising investment from foreign investors continue to use Limited Partnership-type structures as a frontline strategy.
The Nigerian private equity and venture capital industry will benefit significantly from a legal framework that suits private equity investments at the fund formation level and at the investment (portfolio) level. From a fund formation perspective, a clear and predictable framework for establishing alternative investment and business formations structures will not only give more comfort to both local and foreign limited partners thereby attracting more foreign inflows, but will also enhance the competitiveness of the Nigerian private funds industry and further establish Nigeria as a centre for private equity and venture capital fund formation within the Sub-Saharan region. Most of all, alternative investment fund structures will do a lot in moderating the historical spate of regulatory arbitrage that sees local fund managers turn to foreign jurisdictions to pool investment funds.
About the Author
*Olubunmi Abayomi-Olukunle is a Barrister & Solicitor of the Supreme Court of Nigeria and Partner, Private Equity ,Venture Capital & Emerging Companies with Balogun Harold Legal. He can be reached vide www.balogunharold.com | firstname.lastname@example.org | +234-806-081-7371
1. Financing Innovation in Africa: The Last Middle by Olubunmi Abayomi-Olukunle
2. A review of limited liability partnerships under the partnership law of ..SPAAjibade & Co.
3. Partnership LAW CAP.P1 2009 - Lawscope Online
4. Partnership Law | Lagos State Laws
5. Legal Alert – June 2012 – Limited and General Partnerships – Proshare Jun 24, 2012
6. Legal Guide for Small & Medium Business(es) in Nigeria - Proshare
7. Registering a Business in Nigeria: Preliminary Considerations – Proshare Mar 08, 2017
8. Advancing the Role and Effectiveness of Audit Committees
9. House Passes Federal Competition Commission Bill
10. PEBEC approves 60-day action plan on Doing Business in Nigeria
11. Annual Minimum Corporate Compliances
12. While Nigeria Dithers, 3 in 4 African Countries Improve Business Environment