I often receive in my practice inquiries regarding the General Partnership companies – mainly arising from the necessity to undertake steps for carrying out or registering certain changes in their membership. Quite often such inquiries relate to matters revealing various specific moments – mostly in comparison to the more common similar instances in terms of the limited liability companies (LLC).
Very often there isn’t sufficient legislative clarity and non-conflicting judicial practice to compensate for that. Moreover, views and conceptions expressed in the legal doctrine concerning some of the relevant issues are often not recognized in the practice of both the Registry Agency and the courts of law.
This article is aimed at outlining some of the more interesting matters and also at suggesting commentary on some of the related disputable or unclear issues.
Changes in the Membership
In the case of an LLC it is very common for shareholders to terminate their participation in the company by transferring the shares they own to third parties or other shareholders. Is there such option in terms of the General Partnership companies? The answer seems to be negative following from the legal nature of the General Partnerships. The latter are a typical representative of the so called “personal companies” (in contrast to the limited liability companies which belong to the group of the so called “capital companies”) – in the case of personal companies trust between the partners in view with their personal qualities is required and personal participation in the company’s business is essential for the company itself. For this reason the shares of the partners are non-transferable.
The above does not mean that changes in the membership of a General Partnership are impossible to occur. Such changes may occur when admitting a new partner or upon termination of a current partner’s participation.
Admitting a new partner should be considered a permissible option. Such conclusion follows directly from the provision of Art. 92 of the Commerce Act referring to situations which involve entering into an existing partnership. Art. 97, par. 1 of the Commerce Act also refers to “entering into” when providing for the right of heirs to replace their decedent as a partner in the company. Those willing to become partners need to explicitly state their request in writing; heirs need to do that within 3 months from the opening of the estate for distribution. It is important to be noted that according to the Commerce Act the partner joining an existing partnership will bear liability for all company’s debts – equal to the liability of the other partners.
In my opinion the admission of a new partner would require the consent of all current partners for that – such consent will also cover the contribution of the new partner (where applicable), who will also have to sign the Articles of Partnership or an annex to the latter (with notarization of the signatures). In the special situation where heirs wish to join the partnership an interesting question may arise as to whether or not the partners are legally required to admit the heirs if they are not willing to do so. In my opinion the law should not be interpreted in such way – partners should be considered as entitled to include in the Articles of Partnership clauses allowing them to deny the admission of the heirs willing to join as partners.
The Commerce Act does not contain explicit provisions about the partners being entitled to withdraw from the partnership by means of a unilateral notice. In my opinion the termination of the membership of a partner by withdrawing from the partnership should be considered a permissible option – such conclusion follows logically from the provision of Art. 98, par. 2 of the Commerce Act referring to “the withdrawal of the partner”. The partner wishing to withdraw from the partnership needs to file a notice to such effect. If the exit procedure is not explicitly set forth in the Articles of Partnership, then in my opinion the consent of the other partners would also be required. It should be, however, considered a permissible option for the partners to set forth in the Articles of Partnership that no consent will be necessary and that the unilateral notice by the respective withdrawing partner will become effective upon the expiration of a certain period of time.
The membership of a partner may be terminated on other grounds as well. Expulsion is among such other grounds – what’s being specific about the expulsion from a General Partnership, is that the same needs to be conducted pursuant to judicial proceedings and sanctioned by the court. The participation of a partner may also be terminated when the other partners repay such partner’s debt that has resulted into the attachment of his liquidation share.
Dissolution of a General Partnership
The termination of the membership of a partner usually entails dissolution of the General Partnership itself. Such result is an expression of the personal nature of the General Partnership which is formed on the basis of the trust existing between the partners. Art. 97, par. 1 of the Commerce Act provides for an exception to that rule – such exception allows the continuation of the company irrespective of the termination of the membership of one or more of the partners. In order to avoid dissolution of the company partners need to explicitly include such clause in the Articles of Partnership. The absence of such clause will lead to the dissolution of the company – that’s why and in order to avoid unnecessary complications, partners should consider agreeing explicitly on the consequences of a partner terminating his/her membership.
In my opinion there are no legal barriers for the partners to decide (unanimously) on the continuation of the company even after the membership of a partner has been terminated. The legal doctrine has recognized such understanding but according to a certain part of the judicial practice such subsequent consent is insufficient and may not ensure the continuation of the General Partnership company.
For the continuation of the company it is necessary that there are at least two partners left in it – that follows from the nature of the General Partnership which may not take the form of a single-person company (in contrast to the limited liability company, for example). In general, that would also prevent the possibility of undertaking transformation of the company (partnership) into a single-person LLC – aimed at avoiding the dissolution. However, there are certain court judgments considering such option as permissible – that in turn may result into the Registry Agency changing in future its practice of issuing refusals to allow entries of such requested transformations.
Art. 94 of the Commerce Act entitles each of the partners to request the dissolution of the company by means of a unilateral notice – where the company has been formed for an indefinite period of time. The said notice should be in writing and served to all other partners at least 6 months prior to the termination. In my opinion it should be considered a permissible option for the other partners to decide on dismissing the partner who has given them the notice and thus avoiding the dissolution of the partnership.
Upon termination of his/her membership in a General Partnership the partner acquires the right to receive a share of the company’s property and annual profits for the period up to the termination of the membership. There are significant differences with the limited liability companies in this respect. Such differences have been clarified in detail in the recent judicial practice of the Supreme Court of Cassation1 and refer mainly to the method for determining the amount of the share of a partner with terminated membership of the company’s property in cases under Art. 97, par. 2 of the Commerce Act.
Unlike the provision of Art. 125, par. 3 of the Commerce Act, according to which the property consequences arising from the termination of a membership in a limited liability company should be settled on the basis of a balance sheet for the last day of the month of termination of the participation, the provision of Art. 97, par. 2 of the Commerce Act does not set forth the mechanism for settling the property consequences arising from the termination of a membership in a General Partnership and for determining the amount of the share of the respective partner of the company’s property.
Considering the legal nature of the General Partnership and the scope and objective of the right under Art. 97, par. 2 of the Commerce Act, as well as taking into account the similarity with the right to a liquidation share, the court assumes that the value of the share of a partner with terminated membership in cases under Art. 97, par. 2 of the Commerce Act should be determined on the basis of the net property (assets) owned by the company at the time of termination of the participation, valued at the current market prices.