CFM36090 - Loan relationships: partnerships: company partners and connected debtors: definition of ‘connection’ and ‘major interest’

‘Connection’ and ‘major interest’ for company partners

CTA09/S467 extends the definition of ‘connection’ in S466 by providing a ‘look through’ rule, so that where

  • a partnership includes a company (company partner), and
  • the partnership lends to or borrows from another company (not a company partner),

the company partner is treated as the party to the loan relationship, not the partnership, to the extent of its appropriate share.

CTA09/S474 similarly provides that for the purposes of the definition of ‘major interest’, each partner is treated as having all the partnership property rights and powers held severally, to the extent of that partner’s appropriate share.

Appropriate share

The appropriate share of the loan relationship is determined by S467(4) using the partnership profit sharing arrangements in place for the period. When determining whether the partner controls the debtor company S472(6) allocates any property, rights or powers held by the partnership among the partners in accordance with the profit sharing agreement for the period. So a company partner would control another company if it held more than 50% of the rights in or powers over the company following apportionment.

Exclusion for general partner of limited partnerships

CTA09/S467(5) and S474(7) provide that ‘partner’ does not apply to the general partner in a limited partnership that is a collective investment scheme within the meaning of S235 of the Financial Services and Markets Act 2000. So even if a company that is the general partner is entitled to 90% of the profits of the partnership, it will not control a company owned by the partnership by virtue of that entitlement. Note that the interests of other partners are not adjusted as a result of this rule - they would still only have the remaining 10% apportioned to them.

Extended definition of connection: example

GF Ltd and HD Ltd are partners in a partnership that owns 90% of the shares in LJ Ltd. GF Ltd is entitled to 40% of the profits or losses of the partnership and HD Ltd is entitled to 60%. By attributing the shares in LJ Ltd according to their interest in the profits or losses of the partnership

  • GF Ltd effectively owns 36% of LJ Ltd and is not connected to LJ Ltd
  • HD Ltd effectively owns 54% of LJ Ltd, has control and therefore is connected.