Dutch Partnerships and the Art of Judicial Maintenance
Judicial innovation: in three successive rulings the Dutch Supreme Court changed course regarding key aspects of Dutch general and limited partnerships.
The year 2015 is turning out to be a marvellous year for Dutch partnerships. In three successive rulings the Dutch Supreme Court radically changed course regarding the almost ‘ancient’ legislation of legal partnerships. Judicial innovation at its best.
First, bankruptcy of the general partnership no longer automatically implies bankruptcy of all general partners. Second, a new general partner joining a partnership assumes liability for all existing debts of the partnership incurred by dealings in the past. And third, the legal consequences for a limited partner acting on behalf of a limited partnership will no longer inevitably be full (personal) liability for any and all dealings of the partnership.
So there you go: three keystone issues, all standing firmly for decades, now strongly modified or even departed. All within a few months. Which by the way is to be admired, since our partnership legislation dates from 1838 and is in need of innovation.
I discussed the first ruling in my blog from 6 May 2015. For now, let me clarify these second and third rulings to you briefly.
The consequences of assuming liability whilst joining as a (general) partner are discussed in the ruling (of 13 March 2015; “Arlande Dienstverlening C.V.”). The basic rule seems simple: upon joining the partnership the new partner ‘assumes liability for the commitments of the partnership’. Fair enough, but what does it imply? Will a new partner also assume liability for past dealings of the partnership? This question was answered by the Supreme Court.
The Supreme Court first of all confirmed that a new general partner assumes liability for all future debts of the partnership. Further it ruled that this new partner is also liable for all (existing) debts from dealings incurred by the partnership in the past. So, in terms of sharing liabilities in a partnerships by joining, the Supreme Court clarified and settled this historical uncertainty concerning the interpretation of articles 18 and 19 of the Dutch Commercial Code. In practice this means that conducting a due diligence before joining as a (general) partner is obligatory.
The third relevant Supreme Court ruling dates from 29 May 2015 (“De Voer en Partners C.V.”). Based on a cassation appeal by the Dutch Attorney-General (“PG” or “Procureur-Generaal”) ‘in the interest of law’, it dealt with the all-important question of the legal consequences a limited partner faces upon acting for a limited partnership. By law, the consequence hereof is severe: a compulsory joint and several liability towards all creditors of the partnership for existing and future debts.
The Dutch PG reflected that two questions needed to be answered. Does the degree of awareness of the counterparty of the position of this partner as a limited partner create any ‘room to manoeuvre’ for the court in deciding if the aforementioned severe sanction for such violation is appropriate? Is a court at liberty to decide not to impose that sanction if the partner is not blameable? The sanction should in any case apply if the partner has misused its position as a limited partner (thus benefitting from limited liability). Moreover, the PG desired that the judicial arrangement in the Netherlands be more similar to the arrangement in the surrounding jurisdictions, such as England and France.
The Supreme Court honoured the appeal of the Dutch PG. It ruled that the sanction of full liability for a limited partner acting for the partnership can and should be extensive and severe. Nevertheless, this is justified if a limited partner knowingly abuses its position. It can however not be disproportionate. Further, the sanction is not to be implemented if not fully justified by the misuse of the limited partner. A court therefore has ‘manoeuvrability’ in this area.
It furthermore may very well be that a court rules that the sanction should not or not fully be imposed, based on all relevant circumstances of the particular case. Whether or not the limited partner in question is to blame for its actions is relevant for any such ruling, according to the Supreme Court.
That leaves us with great clarifications of two – actually three – principle issues as described above. Although perhaps colliding a bit with our sense of legal security, it’s judicial innovation in optima forma, and should be encouraging for the use of Dutch legal partnerships.