The Supreme Court of the Netherlands has recently resolved a historically pending issue regarding Dutch general and limited partnerships (“commanditaire vennootschap” or “C.V.”, and “vennootschap onder firma” or “V.O.F.”). It concerns the consequential bankruptcy of the general partners in the event of the bankruptcy of a partnership.
This matter was dealt with by the Supreme Court on 6 February 2015. The bankruptcy of a Dutch general partnership used to imply the automatic bankruptcy of its individual (general) partners. No longer so: the Supreme Court ruled that the rule is “hereby” revised. The bankruptcy of a general partnership itself does not – any longer – inevitably imply bankruptcy for its (general) partners. Instead an individual insolvency procedure for each separate partner is required.
The case regarded the general partnership ‘VDV Totaalbouw V.O.F.’. The plaintiff (defendant in the appeal) filed for the bankruptcy of both the general partnership and its partners. One of the partners requested a statutory debt re-scheduling arrangement. It did not come to a judgment on that request, since the general partnership was declared bankrupt. Consequentially and in accordance with the general practice based on the historical rule from 1927, the Court in First Instance (confirmed by the Court of Appeal) also declared its partners bankrupt.
The Supreme Court however explicitly chose a different direction.
Quite remarkably so, since the Supreme Court deviated from the historical rule and used this case to abandon the (old) rule in its entirety. How so?
A general partnership is not a legal entity, but it does nevertheless have its own equity separate from that of the partners. Though not being an actual legal entity, it is nonetheless treated as a distinct legal subject in several segments of the law, most importantly as an individual party in court proceedings.
Also, the Bankruptcy Code “no longer requires” that a petition to file for bankruptcy of the general partnership also mentions the names and addresses of all its partners. It thus “no longer inevitably causes” the bankruptcy of its partners if the general partnership is declared bankrupt.
The Supreme Court furthermore stated that partners in a partnership can for example, contrary to the general partnership itself, own sufficient private equity to fulfil the needs of both their own creditors and those of the general partnership. Claims towards the general partnership and claims against the partners are “separate claims”, to be executed on their own merits.
The Supreme Court in this respect confirmed that “maintaining the rule from 1927 is no longer justified”, given the implementation of new rules concerning a statutory debt rescheduling arrangement. Article 6 of the EVRM also gives cause for the need to revise the historical rule, as established in earlier jurisprudence. And so, being supreme, the Supreme Court set a new course, and there it was: a change to the historical rule.
Partners in a general and limited partnership no longer run the risk of automatically being declared bankrupt in the event of the bankruptcy of the partnership itself. This is an improvement in the legal position of a (general) partner. And all improvements are more than welcome, since the laws of the Netherlands in this area date back to 1838, and are (still) all we have.