Withdrawal from a limited partnership: Options and risks
Commercial partnerships, including limited partnerships, operate in principle on the basis of mutual trust and close cooperation between the partners. The composition of a limited partnership is most often fixed, but this does not mean that the partnership has to be dissolved whenever a partner decides to leave. There are several possibilities for a partner to withdraw from a limited partnership. Two of them are provided for expressly in the Commercial Companies Code, but they may prove inadequate to the dynamic needs of commercial practice. The third, non-code way of leaving a partnership, however useful, raises some doubts.
Under the current law in Poland, the Commercial Companies Code provides two main options for a partner to withdraw from a limited partnership (spółka komandytowa). The partner can sell all of his rights and obligations in the partnership, or terminate the partnership agreement. These solutions are subject to regulations designed to protect the interests of the remaining partners, but sometimes prove too rigid and do not allow partners to regulate their mutual relations more comprehensively and individually.
The inconveniences associated with the application of these code-based solutions have given rise in practice to allowing a partner to withdraw from a limited partnership pursuant to an agreement among all the partners amending the partnership agreement. But this method has raised certain doubts, including in the decisions from the Polish courts.
Transfer of totality of partner’s rights and obligations
In the classic view, as partnerships, limited partnerships are entities characterised by the immutability of their composition. The Commercial Companies Code provides an exception to this general rule in the form of a transfer of the totality of a partner’s rights and obligations to another person. It should be noted that the provisions foresee only the possibility of transferring all the rights and obligations, not a selected part of the rights and obligations.
The parliament has ruled out the possibility of disposing of individual powers or dividing all rights and obligations within a partnership, as the totality of rights and obligations constitutes a single transferable whole, which is a collection of elements with different characteristics. It consists of both property rights (such as the right to a capital share), as well as non-property rights and obligations, including corporate rights (e.g. the right to conduct the partnership’s affairs or the right to personally inquire into the state of the partnership’s assets and request presentation of financial documents).
However, the possibility of disposing of all rights and obligations is subject to fulfilment of additional conditions. The basic condition is to include in the partnership agreement an appropriate provision allowing the partners to sell all of their rights and obligations. Another condition for the effectiveness of the disposal of all rights and obligations is to obtain the consent of the remaining members of the partnership. As a basic rule, the code provides that consent should be expressed by all remaining partners in written form, but the issue may be regulated differently. For example, the partnership agreement may provide that:
- Disposal of all rights and obligations does not require the consent of any of the remaining partners
- The consent of a certain number of remaining partners is required
- Only the consent of the partners having the right and obligation to run the partnership’s affairs is required.
If all rights and obligations are disposed of without the required consent, the transfer is subject to a sanction of suspended ineffectiveness and has no effect. An interested person may set a reasonable time limit for all remaining partners (or other entities, if the partnership agreement so provides) to express their consent. If they refuse to give consent, or the deadline passes without an expression of consent, the transfer becomes completely invalid.
If all of a partner’s rights and obligations are effectively transferred to another person, the withdrawing partner and the partner joining the partnership are jointly and severally liable for the obligations of the withdrawing partner related to participation in the limited partnership and the obligations of the partnership.
Termination of the partnership agreement
In the case of a limited partnership, as for other partnerships under the Commercial Companies Code, the provisions on the general partnership (spółka jawna) apply as relevant, and therefore it is possible for any partner to terminate the partnership agreement (e.g. Z. Jara (ed.), Commercial Companies Code: Commentary, 4th ed., Warsaw 2022). This possibility is exclusively provided for partnerships entered into for an indefinite period, and a partner can provide notice of termination of the agreement six months before the end of the fiscal year.
Termination of the agreement by a partner of a limited partnership is a unilateral act of the partner allowing the legal relationship between the partners to be shaped on an individual basis. Termination may extinguish the relationship between all partners of the limited partnership, as one of the reasons for dissolution of the partnership, or only in relation to the partner terminating the agreement, when the remaining partners decide to continue the partnership despite termination of the agreement by one of the partners. The possibility of termination of the partnership agreement is an institution peculiar to partnerships; by contrast, in the case of companies, participation in the company is closely linked to ownership of shares and termination is considered impermissible.
Notice of termination is to be made in the form of a written declaration, which should be submitted to the remaining partners or to a partner authorised to represent the partnership. Under the code, any partner of a limited partnership may terminate a partnership agreement entered into for an indefinite period. A similar possibility is not foreseen for partners in limited partnerships entered into for a fixed term, which explicitly limits the possibility of a partner who is not interested in further participation in the partnership leaving the partnership.
At the same time, the possibility of terminating the partnership agreement of a limited partnership is provided with additional security in the form of a notice period. The code provides that the notice of termination must be given no later than six months before the end of the partnership’s fiscal year. If the fiscal year coincides with the calendar year, the deadline for issuing a notice of termination of the partnership agreement is 30 June of each year.
Additionally, it should be mentioned that the withdrawal of a partner from a limited partnership involves the obligation to settle that partner’s capital share, in the manner expressly set forth in Art. 65 of the Commercial Companies Code. In that case, the value of the partner’s capital share is determined on the basis of a separate balance sheet, taking into account the marketable value of the partnership’s assets as of the last day of the fiscal year in which the notice period expired.
The capital share of a withdrawing partner of a limited partnership shall be paid in money, while things which the partner lent to the partnership for its use shall be returned in kind. If the calculated capital share shows a negative value, the withdrawing partner is obliged to compensate the partnership for the shortfall attributable to him. At the same time, the withdrawing partner participates in the profit and loss from matters not yet completed, while he no longer has a say in their conduct. In this regard, the only safeguard for the withdrawing partner is the ability to demand explanations, accounts and the distribution of profit and loss at the end of each fiscal year.
Withdrawal of a partner pursuant to an agreement with other partners
The case law and the legal literature recognise that the possibility of a partner’s withdrawal from a partnership pursuant to an agreement with other partners constitutes an alternative to the two foregoing methods of exiting the partnership, i.e. the sale of all partner’s rights and obligations and issuing a notice of termination of the partnership agreement by the partner in accordance with the procedure provided for in Art. 61 §1 of the Commercial Companies Code (G. Nita-Jagielski, commentary to Art. 61, in J. Bieniak (ed.), Commercial Companies Code, 2022; Łódź Regional Court order of 8 January 2020, case no. XIII Ga 658/19). At the same time, it is pointed out that the withdrawal of a partner by agreement is permissible in accordance with the principle of freedom of contract under Art. 3531 of the Civil Code in conjunction with Art. 2 of the Commercial Companies Code.
The procedures for exiting a partnership provided in the Commercial Companies Code focus on a situation where the concerted cooperation of partners is not needed; for example, in the situation of issuing a notice of termination of the partnership agreement, a partner can leave the partnership even against the will of the remaining partners. However, if the partners agree on the exit of one of them from the partnership, according to some holdings in the case law, there is no legal basis to disregard their intention (Łódź Court of Appeal order of 3 December 2019, case no. XIII Ga 840/19).
Some of the cases and commentaries also take the position that if a partner withdraws from a partnership with the consent of all remaining partners, the notice period may be shortened (ibid.; B. Borowy, commentary on Art. 61, in Z. Jara (ed.), Commercial Companies Code, 2022). At issue here is the termination period specified in Art. 61 §1 of the code, which indicates that a partner may give notice of termination of the partnership agreement six months before the end of the fiscal year. The possibility of shortening the period is justified by the second sentence of Art. 62 §2, which states that if the partnership agreement provides for a shorter notice period, a creditor of the partner may take advantage of the contractual period and terminate the partnership agreement (and thus the parliament itself allowed for this period to be shortened). It is also pointed out that the shortening of the period occurs by mutual agreement of all partners of the partnership through an amendment to the partnership agreement, and not by a unilateral act carried out arbitrarily by the interested partner, as in termination of the partnership agreement under Art. 61 §1.
It is also assumed that in the situation described above, the rules in Art. 65 of the code should apply to settlements between the withdrawing partner and the partnership, unless other settlement rules are provided for and despite the withdrawal of the partner, the partnership continues to do business. It is also asserted that it is possible to contractually determine the amount to be paid by the partnership to settle with the resigning partner (G. Nita-Jagielski, commentary on Art. 65, in J. Bieniak (ed.), Commercial Companies Code, 2022).
For the record, it should be pointed out that some courts hold that the composition of a partnership cannot be changed pursuant to an agreement of all parties to the partnership agreement and consent to the partner’s withdrawal with immediate effect, on the grounds that the partner’s methods of withdrawal from a partnership are exhaustively regulated in the Commercial Companies Code (e.g. Łódź Court of Appeal order of 3 June 2016, case no. XIII Ga 1120/15). Nevertheless in more recent rulings, the courts in Łódź departed from the previous line of case law and interpretation of the provisions governing the exit of a partner from a partnership and allowed the possibility for a partner to withdraw from the partnership with the consent of all the partners along with amendment of the partnership agreement (Łódź Court of Appeal order of 3 December 2019, case no. XIII Ga 840/19; Łódź Regional Court order of 8 January 2020, case no. XIII Ga 658/19).
Summary
The methods of withdrawal from a limited partnership provided for by the Commercial Companies Code (i.e., sale of all the partner’s rights and obligations, and termination of the partnership agreement pursuant to Art. 61 §1) are limited to defined sets of facts specified in the code. Alternatively, the rules for a partner’s exit from a limited partnership may be established as a matter of freedom of contract, pursuant to an agreement among all partners through amendment of the partnership agreement. This procedure appears to be the most flexible among those currently available, in particular with regard to settlement of the contribution made by the withdrawing partner.
Wiktor Zborowski, adwokat, Jan Kaźmierczak, M&A and Corporate practice, Wardyński & Partners
