Game changer: bankruptcy of partnership ≠ bankruptcy of partners (anymore).

The rule was that the bankruptcy of a general partnership, in Dutch a “vennootschap onder firma” or “v.o.f.” would automatically entail the bankruptcy of its partners. The Netherlands Supreme Court recently decided that this is not the case, at least not automatically (HR 6 februari 2015, ECLI: NL: HR:2015: 251). It took the Supreme Court more than 88 years to change its view on this matter, but a couple of months after the judgment it’s importance is already showing in practice. This court case has consequences for general partners in both general as well as limited partnerships. For questions on the use and position vis-à-vis partnerships, either as partner or as business creditor, please contact us at +31 20 3109980 or at info@meritadvocaten.com.

Background

The Netherlands Commercial Code stipulates that a “v.o.f.” is a partnership entered into for the purpose of carrying on a business under a joint name, making it clear that the “v.o.f.” is a special form of partnership.

The following are the three elements of a “v.o.f.”:

·       it is a partnership;

·       for the purpose of carrying on a business;

·       under a joint name.

The partners of a “v.o.f.” are all jointly and severally liable for any obligation of the “v.o.f.”. The partners are free to agree internally that a certain partner is not or only partly liable. However, the partner concerned remains fully liable vis-à-vis third parties for agreements entered into by his co-partners. This means that the partners of a “v.o.f.” are exposed to great risks as they are unable to determine or limit the financial consequences of the partnership’s activities themselves.  It should be noted that the partners of a “v.o.f.” are liable for all the partnership’s obligations vis-à-vis third parties, including those resulting from tortious acts within the partnership’s management or tax debts.

Furthermore, the liability of partners is not subsidiary but direct. This means that a creditor of a “v.o.f.” can, if he prefers to do so, go directly to any of the partners without first having to seek recourse against the partnership’s separate own funds. On November 26, 1897, the Dutch Supreme Court ruled in the “Boeschoten/Besier” case that a “v.o.f.” has separate own funds in addition to the funds that each of the partners has contributed as his share in the co-ownership of the “v.o.f.”  This means in the first place that business creditors of the partnership have recourse to the partners’ total contribution to the “v.o.f.” plus any gains and less any losses.  A partner’s private creditors only have recourse to that portion of the partner’s assets which have not been contributed to the “v.o.f.” and to funds and / or assets, if any, which are distributed to the partner either upon the partnership’s liquidation or during its existence.

The liability of partners should be distinguished from their internal obligation to contribute. The partners are free, in principle, to agree to any division they like, provided each of them is at least entitled to a portion in the partnership’s profits, if any. Partners who have paid any debts in excess of their obligation to contribute have recourse against their co-partners.

It should be borne in mind, however, that the amount of these funds are difficult for third parties to trace or estimate. There are no legal requirements, similar to those applicable to limited liability companies, such as “BV’s” and “NV’s”, which compel the partners, where possible, to form certain reserves and publish them. The partners are free, at their own discretion, to contribute large or small amounts to the joint funds, and to add or withdraw funds by mutual agreement at any given time, without the creditors’ knowledge.

Court Case

In this case, the request was filed for the bankruptcy of the partnership, also to arrange for one of the partners to go bankrupt. The Supreme Court decided, contrary to the Court of Justice, that should a business creditor wish to have the partners of the partnership declared bankrupt as well, a separate bankruptcy request needs to be made. The Supreme Court also pointed out that all requirements for a bankruptcy of a partner has to be fulfilled individually before being able to decide that the partner is bankrupt. Should the business creditor decide to file a bankruptcy request in first instance for the partnership, such creditor may decide to complete the request and include the partners as well. The competent court will have to allow the partners to defend themselves, for example by arguing that the partner is still entitled to compensation for work performed or deliveries made to and on behalf of the partnership which the partner wishes to offset against any obligation it may have vis-à-vis the partnership. Such defense may lead to a situation in which the partnership may be declared bankrupt, but not the partners.

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