Short Reads

Dutch Supreme Court further defines the liability of limited partners in a limited partnership

Dutch Supreme Court further defines the liability of limited partners

Dutch Supreme Court further defines the liability of limited partners in a limited partnership

23.12.2016 NL law

A limited partner in a limited partnership ("commanditaire vennootschap") is prohibited from exerting management authority over the partnership by statute. If a limited partner exerts management authority, this partner could be jointly and severally liable for the debts of the partnership.

In its decision of 4 November 2016 (ECLI:NL:HR:2016:2516), the Dutch Supreme Court confirmed its earlier decision that this sanction should not be applied automatically. The court should, among other things, take into account whether the limited partner has acted imputable. In addition, the Supreme Court introduced a rebuttable presumption in cases of a so-called "personal union". If management authority is exerted by a person who can represent both a general partner and a limited partner, this person is presumed to have acted on behalf of the general partner. As long as this presumption is not rebutted, the limited partner could therefore in principle not be held jointly and severally liable, since there is (presumably) no exertion of management authority by the limited partner.

A public-private partnership for the development of a business park

The Province of Noord-Holland entered into a public-private partnership with a number of private entities, with the purpose of developing a business park. This public-private partnership, Distriport Noord-Holland C.V., was a limited partnership, consisting of one general partner ("beherend vennoot") and three limited partners ("commanditaire vennoten"). In order to develop the business park, it was agreed that the Province would acquire parcels of land with a view of delivering these to the partnership. The partnership, however, refused to take delivery of these parcels. The Province terminated the agreement and sued the partnership, its general partner and two of the three limited partners (the third was related to the Province itself) for damages.

Exception to the limited liability of limited partners

In principle, the two limited partners would be liable towards the Province only to the extent of their contribution in the partnership. Yet the Province argued that, in this case, the two limited partners were jointly and severally liable as well. To that end, the Province invoked Article 21 of the Dutch Commercial Code ("DCC"). This article provides that limited partners are jointly and severally liable for the debts of the partnership, if (inter alia) they violate the prohibition in Article 20(2) DCC for limited partners to exert management authority.

Directors wearing two hats

To make the case that Article 21 DCC applied, the Province argued that the management authority of the partnership was actually exerted by two persons only. These persons were not only directors of the general partner in the partnership, but also directors of the two limited partners. In addition, the Province argued, these directors did not clarify in which capacity they acted in relation to third parties. The Court of Appeal followed the Province in its conclusion that, in these circumstances, the acts of the directors counted as – prohibited – exertion of management authority by the limited partners. Therefore, the limited partners were jointly and severally liable together with the general partner and the partnership.

Decision of the Dutch Supreme Court

However, in its decision of 4 November 2016 (ECLI:NL:HR:2016:2516) the Dutch Supreme Court set aside the award of the Court of Appeal. The Supreme Court referred to an earlier case dated 29 May 2015 (ECLI:NL:HR:2015:1413). In this case, the Supreme Court had decided that the sanction of joint and several liability in Article 21 DCC should not be applied automatically, but only if it is proportional and justified. In the case of the Province of Noord-Holland, the Supreme Court again held that in assessing this, the court (i) could take into consideration whether a third party was or should have been aware of the capacity of the limited partner, and (ii) should take into consideration whether the limited partner has acted imputable ("verwijtbaar handelen").

A rebuttable presumption in cases of a personal union

In the case of the Province of Noord-Holland, the Dutch Supreme Court went on to add that the mere presence of a "personal union" does not automatically result in joint and several liability of a limited partner. Yet such a union may be relevant in answering the question whether third parties could have reasonably misinterpreted the capacity of the limited partner. In this respect, the Dutch Supreme Court introduced a rebuttable presumption in terms of evidence. A person who exerts management authority and who is authorized to represent both a general partner and a limited partner is presumed to have acted on behalf of the general partner.

Further defining the liability of limited partners

By that, the Dutch Supreme Court has further defined the liability of a limited partner exerting management authority in cases of a personal union. As long as the presumption that a director of both a limited partner and a general partner acted on behalf of the latter, is not rebutted by the plaintiff, the limited partner could in principle not be held jointly and severally liable. In that case, on the basis of this presumption, the limited partner has not exerted management authority at all. Nevertheless, to avoid discussion it is advisable for all parties involved to always verify the identity and capacity of the person one's dealing with.

Draft proposal for reform of limited partnership announced

In addition to the foregoing, it should be noted that on 9 December 2016 the Dutch Minister of Security and Justice announced a draft proposal for the reform of the statutory provisions on limited partnerships. In the announcement, the Minister refers to a report by a Working Group of academics and practitioners. This Working Group proposes, among other things, lifting the prohibition against limited partners exerting management authority to the extent that a limited partner is allowed to perform legal acts on behalf of the partnership by power of attorney. To avoid abuse, the Working Group proposes that a limited partner is jointly and severally liable for the remaining debts of partnership, in the event of a bankruptcy of the partnership due to the limited partner acting under a power of attorney. For the moment, though, we will have to await the public consultation of the draft proposal. Only then we will know to what extent the Minister really intends to reform the law on limited partnerships.

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