Partnerships en nom collectif and en commandite – Demise of unlimited liability of members?
It is fair to say that companies have become the favoured vehicles for operating businesses, both in the local and international context however partnerships emerge as attractive corporate forms in the private equity and venture capital industry. In fact, partnerships are widely used for the purpose of operating Collective Investment Schemes (“CIS”) mainly due their flexibility and their favourable tax treatment under Maltese fiscal rules.
By way of introduction, the Maltese Companies Act provides for three types of commercial partnerships, namely limited liability companies, general partnerships and limited partnerships. For the purpose of this article, we shall focus on general partnerships and limited partnerships, which are also styled as partnerships en nom collectif and partnerships en commandite respectively.
The principal distinction between the two forms of partnerships under review is the extent of liability of their respective members. In a general partnership, all the (general) partners unlimitedly guarantee the obligations of the partnership. Whereas in the case of a limited partnership, at least one general partner shall unlimitedly guarantee the partnership’s obligations while the liability of other partners, known as limited partners, is capped by the amount of unpaid contributions, if any.
In consonance with Malta’s forward-looking policies in the financial services industry, recent amendments have been introduced to allow for greater flexibility in the structuring of private equity vehicles. To this effect, on 3rd October 2014, amendments to the Maltese Companies Act (“the Companies Act”) and supplementary regulations were brought into force by virtue of Legal Notice 356 of 2014 and Legal Notice 358 of 2014.
The key characteristics of the amendments to the Companies Act relate to the extent of liability of general partners, more precisely, the members of such general partners.
The Legal Position Prior To The Amendments
The Companies Act contemplates that both individuals and bodies corporate may be appointed as general partners. However, the Companies Act creates an added requirement for bodies corporate as their obligations should be unlimitedly guaranteed by one or more members of such bodies corporate.
This principle is best illustrated by way of a practical example. Suppose that the general partner in a Limited Partnership is a limited liability company having three shareholders. Prior to the introduction of the amendments, one or more shareholders in the company would be required to (unlimitedly) guarantee all the obligations of the general partner vis à vis the undertakings of the partnership. In essence, the effect of such arrangement would be exposing the members of a general partner to unlimited liability to the potential obligations and claims both of the general partner and the partnership itself. This characteristic rendered partnerships less attractive when compared to other legal vehicles, as in cases where the general partner is a limited liability company, at least one shareholder in the company had to guarantee the obligations of such company qua general partner, thus encroaching on the principle of limited liability.
The recent amendments have brought about a marked improvement by virtue of the introduction of two new articles to the Companies Act, namely Articles 7A and 51A. These novel provisions create a conditional exemption to the former compulsory requirement of unlimited liability by at least one member of a general partner. Under the new provisions, it is no longer necessary for the obligations of the general partner to be guaranteed by one of its members, subject to satisfaction of a novel statutory conditions.
By application of the new Articles 7A and 51A, members of a general partnership may be excluded from the direct liability formula. However, the general principles at law regulating liability of members of bodies corporate subsist.
The key statutory conditions for general members to qualify for the exemption are modelled on statutory conditions currently applicable to limited liability companies. The following are the salient conditions, all of which have to be fulfilled:
Filing of a notice in the prescribed form to the Malta Registry of Companies, either on formation or at any time during the lifetime of the partnership, when such partnership becomes or ceases to be subject to the conditional exemption. To this effect, Legal Notice 358 of 2014 introduces three new official statutory forms to the Companies Act (Forms) Regulations (Subsidiary Legislation 386.01) – namely Forms A1, A2 and A3;
Appointment of auditors to the partnership;
Financial reporting in terms of the Companies Act. Partnerships availing of the exemption will be required to prepare and file audited accounts;
Filing of annual returns with the Malta Registry of Companies on each anniversary of the partnership’s registration.
The limitation to unlimited liability resulting from the new (conditional) exemptions also requires the adoption of more formal liquidation procedures when compared to the traditional partnership setups. These procedures are designed to instil a higher degree of protection to the partners and creditors of a partnership. By virtue of the recent amendments, the main provisions regulating liquidations and winding up of limited liability companies are extended to partnerships qualifying under the new exemptions. By way of example, under the “traditional” partnership setup the liquidator could be appointed in terms of the deed of partnership or by common accord of the partners. In the event a partnership avails of the Article 7A and 51A exemptions, the partners would be invariably bound to follow the procedures applicable to limited liability companies when appointing a liquidator.
An added requirement for those partnerships qualifying under the new exemption relates to the appointment of auditors to scrutinise the liquidation accounts. Again, this condition was introduced to enhance transparency of the liquidation and winding up of partnerships in the light of the limitation of liability of general partners.
Albeit the amendments to the Companies Act may be considered as minor, their ramifications are rather far reaching as they represent a marked improvement in partnership setups, particularly in the light of the widespread use of partnerships in the private equity sector. The changes highlighted in this article also reflect Malta’s ambitious policies and commitment which are targeted to improve the Maltese financial services sector. Through these recent amendments, which complement the transposition of the AIFM Directive (Directive 2011/61/EU), Malta continues to consolidate its position as a prime private equity hub particularly when coupled with an attractive fiscal landscape. Benefit may also be derived from Malta’s wide extensive network of double taxation treaties.
Article By: Dr Matthew J. Grech, Legal Associate, Spiteri Bailey and Co.