May 29, 2015: landmark Dutch Supreme Court decision on liability of limited partner in Limited Partnership (Commanditaire Vennootschap)

A general partner in a limited partnership has unlimited liability for the debts of the business and has the authority to conduct the business of the partnership. The limited partner (sometimes also called silent partner) is not liable vis-à-vis third parties. Internally, he is liable for any losses only to the amount of his capital contribution.

However, a limited partner who acts as general partner vis-à-vis third parties becomes jointly and severally liable for all the partnership’s obligations to third parties. In this case, the limited partner may even be held liable for debts which arose before he violated the above provisions.

In the case at hand, the limited partner, together with the general partner, signed a lease agreement in 1998 and a lease termination agreement in October 2010 before the partners decided to dissolve the partnership in November 2010. A creditor of the partnership argued that as a result of signing the two agreements, the limited partner took an active part in the management of the partnership and therefore is liable for any and all debts of the partnership.

The creditor referred to the general rule laid down in article 20 paragraph 2 and 21 of the Netherlands Commercial Code (Wetboek van Koophandel) as validated by the Supreme Court (January 15, 1943, NLJ 1943/201 (Walvius) and April 11, 1980, NJ 1981/377).  In line with these decisions, the lower court agreed with the creditor that the extension of the limited partner’s liability applies irrespective of whether the third party knew or could be under the impression that the partner concerned is not a general partner.

On May 29, 2015, the Supreme Court decided that the extension of liability does not apply automatically. When having to decide if a limited partner is to be held liable for the consequences of holding himself out as as general partner, a court can take into account if a third party new or was under the impression that the partner concerned is not a general partner. Secondly, a court needs to take into account if the limited partner can be blamed for holding himself out as a general partner.

In conclusion: the harsh sanctions of an extension of liability should apply in those cases in which a limited partner abuses his limited liability against a third party that was under the impression that the limited partner was a general partner when acting on behalf the partnership. If a limited partner can validly argue that the impression was wrongful and, more importantly, that he is not to be blamed for holding himself out as general partner, the liability of the limited partner remains to be limited.

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