LIABILITY OF THE SILENT PARTNER

The Supreme Court can give its opinion

I will first describe Dutch law in this respect. A limited partnership (commanditaire vennootschap: ‘CV’) is a contractual, legal relationship between two or more persons or legal entities to carry on a business under a joint name, whereby the aim is to gain proprietary benefits on the basis of their contributions. The CV (with multiple managing partners) is therefore a special form of the general partnership (vennootschap onder firma: ‘VOF’). This special status consists of the business operations also being carried on at the expense of one or more silent partners (limited partners), who only run a risk up to the amount of their contribution. Therefore the CV is also called ‘partnership by way of money lending’ (‘vennootschap bij wijze van geldschieting ’).

Pursuant to Section 20 subsection 2 of the Dutch Commercial Code (WvK-NL) the silent partner is not allowed to carry out acts of management and disposition on behalf of the CV. In that connection, this is usually referred to as the control or management prohibition. A silent partner must strictly comply with the rule that he should refrain from acts of management and disposition. He should not act externally in the name of or explicitly at the expense of the CV. He is not even allowed to act externally pursuant to a power of attorney provided to him by the managing partner.

Violation of this prohibition results in joint and several liability for all the debts and obligations of the CV (Section 21 WvK-NL), even those which relate to the period before he acted in violation of this prohibition. For the purpose of the prohibition it is irrelevant whether the counterparty of the CV knew that he acted with a silent partner and therefore knew that the latter was only liable up to the amount of his contribution.

It does not happen often, but on 30 January 2015 cassation in the interest of the law (ECLI:NL:PHR:2015:46) was lodged against a ruling of the Appeal Court in ‘s-Hertogenbosch of 6 May 2014 (ECLI:NL:GHSHE:2014:1276). This means that the parties did not lodge cassation themselves but that the Procurator General of the Supreme Court did. This also means that the ruling of the Supreme Court is irrelevant to the parties to the extent that the ruling of the Appeal Court remains binding with regard to the dispute they had between them. In more formal wording: the Procurator General demands “that the Supreme Court set aside the contested judgment in the interest of the law and rule that the setting aside shall not disadvantage the rights acquired by the parties involved “.

The Procurator General in his demand for cassation in the interest of the law defends the circumstance that the counterparty being aware of the silent partner’s status should indeed be relevant to the answer to the question of whether the silent partner violated the control prohibition of Section 20 subsection 2 WvK-NL and as a result of this is jointly and severally liable toward the counterparty pursuant to Section 21 WvK-NL. On the basis of a comprehensive (historical) analysis he argues that it is doubtful whether the sanction of violation of the management prohibition is really meant as a severe penalty. He continues:

Section 20/21 WvK can also be read as a provision protecting third parties which was created to counter abuse of the silent partner’s status to the disadvantage of an unwitting counterparty. This relates to situations whereby the silent partner performs reckless or irresponsible acts in the light of his limited liability, to the disadvantage of third parties or that the silent partner either consciously or unconsciously creates the impression amongst third parties, or leaves such an impression intact, that he has committed himself with all his assets for the debts of the partnership and in the event of non-fulfillment by the partnership successfully hides behind his silent partner status. For such a more flexible approach good historical and comparative law arguments can also be put forward. In addition to this, if Section 21 WvK must be considered as a penalty provision, it is doubtful whether it can have any effect when the managing partner is solvent, since the silent partner who violated the management prohibition can according to the general view take recourse on the managing partners for the amount he paid to third parties exceeding his contribution on account of Section 21 WvK. In such a case there will not be any (heavy) penalty at all for the silent partner.

Now the Supreme Court has the floor. On 1 January 2012 the National Ordinance on Partnerships (Landsverordening personenvennootschappen) was introduced in Curaçao. This took place in St. Maarten on 1 April 2014. In our legal system the CV is no longer provided for in the Commercial Code but in Book 7 of the Civil Code (Sections 7:836 et seq. of the Civil Code). But how is the liability of the silent partner provided for according to the law of Curaçao and St. Maarten?

Here the law provides that the ordinary partners of the limited partnership are jointly and severally bound to the obligations of the CV; the silent partners are not bound to such obligations.

But the law provides furthermore that a silent partner who (i) acts in the name of the CV whether or not pursuant to a power of attorney or (ii) by his acts exerts a decisive influence on the managing partners acting on behalf of the CV, will be bound to third parties for the obligations of the CV created during his acts or subsequently, unless his acts do not or do not fully justify this joint and several liability.

In connection with the point mentioned under (ii) for instance the case comes to mind of abuse whereby the position of the managing partners is undermined to the extent that they become front men who when acting externally must dance entirely to the tune of the silent partners, according to the Explanatory Memorandum.

The cassation proceedings currently pending can also be relevant to the case as referred to above under (i) when a silent partner acts on behalf of the CV without any authorization. Should the court in such a case have the discretion to involve in its assessment the question of whether it is relevant that the counterparty of the CV was aware of the status of the silent partner?

Because the law provides here that the joint and several commitment (liability) will not become effective in the event that the acts of the silent partner “do not or do not fully justify this joint and several liability” I think that the court here will be able to involve the knowledge of the third party as a relevant factor in its assessment.

For that matter, the Explanatory Memorandum also indicates that the prohibition does not mean that the silent partner could not have a say in the management of the CV. For instance, unless otherwise agreed, his agreement would be required for major acts of disposition at the expense of the CV not covered by the normal business operations. And it can also be agreed that the silent partner will supervise the management board and that for certain categories of major external acts by the managing partners he has to give his approval or agreement.

Finally, I just want to state that if the name of the silent partner is included in the name of the CV, the silent partner will be jointly and severally liable for the obligations of the CV, arising in the period that the CV has this name. This does not apply if a partner whose name is incorporated in that of the CV, becomes a silent partner (Section 7:837 subsection 3 Civil Code).

Karel Frielink
(Attorney / Partner)

24 April 2015

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