Update - Dutch Legislation regarding partnerships

Alert, May 20, 2019

Introduction

On 21 February 2019, new rules on partnerships (the “Bill”) were submitted for consultation in the Netherlands. The Bill seeks to modernize current legislation for:

(i)                  professional partnerships (maatschappen);

(ii)                general/commercial partnerships (vennootschap onder firma’s); and

(iii)               limited partnerships (commanditaire vennootschappen).

The Bill provides, among others, improvements and clarity regarding the liability of partnerships and the possibility to own assets as a partnership. Partnerships will obtain legal personality upon entering into the partnership agreement. This Alert provides an insight in the major aspects of the Bill.

The Bill is a clear attempt to (i) lower costs for entrepreneurs engaging in a partnership, (ii) creates more flexibility for partners doing business, whilst enhancing creditor rights vis-à-vis partnerships.

Starting principle

The Bill no longer formally distinguishes between private partnerships (maatschappen), general partnerships (vennootschappen onder firma) and limited partnerships (commanditaire vennootschappen). The Bill simply recognizes two legal forms, being the partnership (vennootschap) and the limited partnership (commanditaire vennootschap). Both legal forms can be used for the conduct of a business or a profession (such as the legal professional). Entrepreneurs can, however, still opt to designate their partnership as a general partnership or a professional partnership, for business or professional activities. A key feature of the Bill is the large degree of flexibility when forming and conducting a partnership. Many of the provisions of the Bill, once law, will allow partners to ‘tailor-make’ their agreement as the Bill contains many opt-out provisions. E.g. a partner may be restricted or even excluded from any profit sharing.

Introduction legal personality

A partnership is established by entering into an agreement between the partners, who commit themselves to contribute one or more assets, with the aim to benefit jointly from the enterprise. The partners will manage the partnership jointly, unless provided otherwise. The Bill introduces the concept of legal personality (rechtspersoonlijkheid) upon entry into the partnership agreement. This is a clear improvement from current practice as a result of which a partnership can legally own registered goods (such as real estate)[1], and so confirms the existence of a ‘corporate estate’ for the benefit of the partnership’s creditors (see below). Also, the same facilitates accession and termination of a partner’s participation in the partnership without dissolution of such entity. A transfer of the business (bedrijfsoverdracht) will become more straight forward.

Liability

Under (current) Dutch law, the partners of a general partnership are each jointly and severally liable for the obligations of the general partnership. As opposed to the general partnership, the partners of a professional partnership are only liable in pro rata parte.

This is deemed cumbersome, and therefore the Bill provides that in case of insolvency the partnership itself and the partners are, in principle, jointly and severally liable for the obligations of the partnership. A new feature is the possibility, if so contractually agreed upon with a counterparty, that only those named partners entrusted with performance of the assignment shall be liable in case of non-performance along with the partnership. The other (non-performing) partners would then not be liable.

Partnership assets

The Bill makes a clear distinction between partnerships that are registered with the Trade Register and those that are not (with the exception of limited partnerships, which must be registered at all times). Only partnerships that have been registered with the Trade Register can own assets (such as real estate), hold rights and have obligations as being a legal entity. Registered partnerships can convert into other forms or take part in a merger or demerger. This can be considered an improvement for not only registered partnerships, but also for creditors of a partnership or lenders, wishing to secure their loans. Without registration, partnerships cannot obtain title to registered property and in general not act as heir.

Obligations partners

The Bill introduces several norms and codes of conduct in the interest of the partnership. E.g. the partners must behave as a ‘good partner’ vis-à-vis one another. Notwithstanding the same, the partners may contract to allow competing activities by a partner with the partnership. An important element of the Bill is the protection of creditor’s right. The partnership is required to prepare an annual statement of income and expenditures. In addition, the partnership is obliged to keep records properly for a period of seven (7) years.

Furthermore, the Bill specifically permits the creation of usufruct and the right of pledge of a partner’s right and entitlement arising from the partnership, such as its claim for profits. This will give entrepreneurs more opportunities to attract funding, as it will entitle lenders more assets to secure.

Under the Bill, new partners are (only) bound by obligations contracted by the partnership as of the date such partners join the partnership. Exiting partners remain liable for the partnership’s obligations through the date of their departure. In addition, exiting partners will be entitled to an exit fee, based on the value of the participation in the partnership, unless provided otherwise.

Dissolution/liquidation of a partnership

The Bill provides new rules regarding the dissolution of a partnership. All partners, as liquidators, are jointly responsible for the liquidation of the partnership. However, there is the possibility for the court to appoint a liquidator, but the liquidator will always be accountable to the partners or their successors. In the event that a partner intends to continue the business as a sole proprietorship, the Bill provides for an automatic transfer of title of the partnership’s assets.

Conclusion

The Bill introduces a low-entry legal entity with few formalities, at low costs for partners to start an enterprise. We believe the Bill makes good sense and hope it will become law soon (currently expected 2020). 

If you have any questions or appreciate receiving more information on this alert, please contact your regular contact at WLP-Law or any of the undersigned:

Maarten van Buuren at vanBuuren@wlp-law.com or +31 (0)6 - 5244 1991 

Neill André de la Porte at andredelaporte@wlp-law.com or +31 (0)6 - 2611 2772 


[1] Provided such partnership is registered with the trade register of the Dutch Chamber of Commerce (KvK) (the “Trade Register”).