New partner liable for old debts

New partner liable for old debtsThe Supreme Court recently ruled that new partners in a general partnership (or a limited partnership) are also liable for debts incurred before they became partners. You should therefore exercise extra caution if you are considering joining a general partnership or a limited partnership as a partner. For example, you do not want the partnership to end in conflict. This sometimes happens with public limited companies (N.V.) and private limited companies (B.V.) too, resulting in a shareholder dispute. In any case, we recommend seeking advice from a solicitor in advance. This will provide insight into the legal options and allow them to be weighed against other solutions for a shareholder dispute, such as drawing up a shareholder agreement checklist.

The general partnership

The general partnership – or vof – is a legal form commonly used in the Netherlands. A vof is a form of cooperation between multiple parties, which can be either natural persons or legal entities. The vof is a simple legal form and offers parties a great deal of flexibility. This makes it an interesting form for cooperation. To set up a VOF, all that is required is registration with the Chamber of Commerce. No solicitor is required to establish a VOF. Although not necessary, it is strongly recommended that the partners enter into an agreement setting out arrangements regarding the division of work, profit sharing, control, etc. It is also advisable to set out agreements on non-competition and withdrawal in advance in a written agreement.

Liability

One of the characteristics of a general partnership is that the partners are jointly and severally liable for the debts incurred by the partnership. This distinguishes the general partnership structure from that of a private limited company, where the directors can only be held personally liable in exceptional circumstances. The general partnership is therefore not a legal entity. Commitments entered into by the general partnership are also binding on the partners in their private capacity. Even if one of the partners has entered into the commitment, this is also binding on the other partners.

Liability for old debts

The partners in a general partnership were therefore already jointly and severally liable for the debts incurred by the general partnership. The question that the Supreme Court had to answer was whether a new partner was also jointly and severally liable for the debts of the general partnership that arose before he joined? In other words, was the partner liable for old debts? The answer to that question is yes.

The new managing partner

It follows from the judgment that the new partner is personally liable for all obligations entered into by the partnership. This liability also applies to obligations that the partnership had already entered into before the partner joined the partnership. According to the Supreme Court, this broad form of liability serves legal certainty. Legal certainty would not be served if the party seeking redress first had to investigate when the obligation arose, according to the Supreme Court.

Conclusion

It is therefore important to conduct a thorough audit (known as due diligence) before joining a general partnership as a partner. This is because you may be held liable not only for debts incurred after you join, but also for existing debts. In addition, it is important to record the agreements between the partners in a contract. Although partners cannot exclude the joint and several liability of new partners, they can agree on recourse against the old partners. This would allow the new partner – if held liable for old debts – to recover their losses from the other partners. Fruytier’s corporate law solicitors have extensive experience in this area.

If you have any questions about general partnerships, please fill in the form below or contact Fruytier Lawyers in Business in another way. We look forward to hearing from you!