27 May 2024

​

Investment Funds, Legal Personality and Opening a Bank Account

​

Is opening a bank account for your investment fund becoming a slow and arduous process? Is it the case that banks hear the word “fund” and start asking for more and more documentation? Perhaps a better understanding of “legal personality” could help to speed things up.

 

When describing investment funds, whether it be the new Hong Kong Limited Partnership Funds (“HK LPFs”), the new Hong Kong Open-ended Fund Companies (“HK OFCs”) or the traditional offshore Cayman and BVI investment funds, it is often stated by legal practitioners that such investment funds have no “legal personality”.

 

However, rarely is it explained what having no “legal personality” means and the implications.

 

Lawyers will often start with the explanation that having no “legal personality” means an investment fund cannot sue or be sued. Rather, it is the general partner (the “GP”) who sues, or is sued, “on behalf of” the investment fund.

 

The GP is oftentimes a newly formed company, whether that be a Hong Kong company or a Cayman company.

 

The investment fund cannot do it itself, due to lack of “legal personality” and therefore the GP acts on behalf of the fund. That is why the GP takes on, potentially, unlimited liability on behalf of the fund.

 

But that explanation seems unhelpful in the practical sense, overly legal focused and far off in the distance when things have gone south and litigation has ensued.

 

Let’s bring it closer to home and more useful.

 

Having no “legal personality” means a fund cannot buy, hold or sell assets. That’s right, every fund across the globe, technically, doesn’t own any assets.

 

Rather, it is the GP, on behalf of the fund, that buys, holds and sells the assets.

 

So when you see a fund in a cap table or as a cornerstone investor, that is technically incorrect. It should, instead, be the GP “on behalf of” the fund that is listed. But that is probably overly legalistic and we can let these references slide and just list the fund as it serves the intended purpose.

 

Furthermore, a fund cannot enter into any agreements. Signing an agreement should always be the GP on behalf of the fund. However, agreements signed directly by the fund are not uncommon, which seems to indicate this point is not widely understood, or simply overlooked.

 

To get to the most useful point: funds cannot open bank accounts. Again, it is the GP, on behalf of the fund, that opens the bank account. Therefore, the bank account should be in the name of the GP, or if one wanted to be strictly accurate, in the name of the GP on behalf of the fund. 

 

But a bank account should not (and cannot) be in the name of the fund itself, due to lack of “legal personality”.

 

At David Cameron Law Office (“DCLO”) we assist with HK LPF and HK OFC set up. It is a streamlined process and, unfortunately, a common sticking point seems to be opening a bank account. Slowing down the process in particular is when the banks start asking for any and all “fund” documentation.

 

How have we recently began advising our clients at DCLO to help avoid this issue?

 

Because the investment fund has no legal personality, you are not opening a bank account for the fund. Instead, you are opening a bank account for the GP (again, a plain vanilla company). 

 

Take your GP entity and apply for a bank account, without mention of the fund. Any mention of an investment fund unnecessarily complicates things, and is technically non-relevant thanks to lack of legal personality.

​

For further information, please feel free to contact the author David Cameron david.cameron@dc-lo.com  

​