Since 1949
Claude D Zacharias (Attorney)
1. Background
1.1 The ruling of the Supreme Court of 20 June 2016 in Case no. T 3593-14 represents a classic example of how important it is to regulate the relationship of part-owners engaged in joint activities, regardless of legal form. The case in question involves two part‑owners of a trading partnership. The trading partnership went into bankruptcy, which closed without a surplus. One of the part-owners (‘A’) used her own funds to discharge the debts that the trading partnership had. This part-owner then instituted proceedings against her former partner (‘B’) seeking to recover half of what she had paid on behalf of the trading partnership. As grounds for the action, A claimed that B, as partner, had joint and several liability for the company’s debts under Chapter 2, Section 20 of the Partnership and Non-registered Partnership Act (1980:1102 – HBL) and that A was therefore entitled recover from him half of what she had paid (means a right to be reimbursed for the applicable share of debts settled in relation to a third party – in this case reimbursed by another part-owner of the trading partnership). B, on the other hand, contested the demand and claimed that B’s liability for A’s expenses were limited under Chapter 2, Section 12 HBL. This provision means that during the existence of the partnership a partner is not entitled to make a claim of debt in relation to any other partner owing to expenses incurred on behalf of the company, a claim for management fees or a claim for interest on capital contribution. It is in this context that the author wishes to emphasise the importance of having a partnership agreement.[1]
2. Claim for recovery
2.1 The Supreme Court referred in its judgment to Chapter 2, Section 11 HBL, whereby a partner is not liable to inject funds into the company beyond that agreed between the partners. A partner’s obligations in relation to the company’s creditors are thus the same as the company’s obligations. If a partner were to discharge a company debt owing to their shared responsibility, the partner is entitled to be compensated from the company’s funds by way of recovery. The Supreme Court goes on to explain:
The winding up of a company relationship between the partners requires first that the company is liquidated and second that the partners’ dealings in relation to the company are finally settled through distribution. A trading partnership is deemed to have been dissolved when a distribution has taken place. Such distribution entails a final settlement of the mutual relationship between the partners, when the partners’ shares in the residue of the company are distributed. A partner with a negative equity share at the time of the distribution must inject funds to settle the deficit. Conversely, any partner who has a positive equity share is entitled to be compensated for this within the framework of the distribution.
If the trading partnership has been put into bankruptcy and there is a surplus in the bankruptcy, the company must enter into liquidation and a distribution made […]. The company is only deemed to be dissolved as a legal person when this has taken place […]. The partners’ mutual relationship also ceases upon such distribution. If the bankruptcy was closed without a surplus, the company is through this alone dissolved as a legal person (see same statutory provision). However, in this case, this does not mean that the partners’ mutual relationship has come to an end. A distribution thus comprises a prerequisite for the final settlement of these relationships (see, for example, Stefan Lindskog, Lagen om handelsbolag och enkla bolag [Partnership and Non-registered Partnership Act], 2nd edition 2010 and p. 768 f). A trading partnership basically exists, in the sense referred to in Chapter 2, Section 12, until it is dissolved following liquidation in conjunction with a distribution […]. This also applies following a bankruptcy with a surplus […]. However, when the company is dissolved following a bankruptcy with a deficit, the company’s cessation as a legal person (which occurs upon the closure of the bankruptcy) does not coincide with a final settlement between the partners (which takes place through a subsequent distribution).
3. Aim of the Act
3.1 The Supreme Court referred to the aim of the provision and explanatory statement made when introducing the Bill regarding the relevant rules contained in the Act, and summarised the situation as follows:
From that stated, the conclusion is that a partner who has paid a company debt is not entitled to invoke a claim against any other partner on account of the payment, except as part of the final settlement, which is to be effected when the internal company relationship is wound up through distribution. It is irrelevant to the application of Chapter 2, Section 2 that the company’s legal personality, in the event of a bankruptcy with a deficit, ceases as soon as the bankruptcy closes. However, this does not constitute an impediment to the partner, in accordance with Chapter 2, Section 1, second paragraph, expressly or tacitly agreeing that recovery may be claimed during the existence of the company, i.e. before final settlement through distribution.
3.2 A consequently lost the case as the part-owners had not agreed on any final settlement in the form of distribution or alternatively agreed on any rights concerning mutual rights of recovery between the partners notwithstanding Chapter 2, Section 12 HBL.
4. Concluding comments
4.1 Once again the Supreme Court has ruled on an issue of great commercial importance. The aim of a statutory provision is attributed great importance, perhaps even greater than the wording itself. However, when applying HBL it is vital to understand that the financial dealings between the part-owners – in the absence of a partnership agreement – can only be dealt with in conjunction with a distribution and moreover that this applies regardless of whether or not the company as such as ceased to exist through bankruptcy. However, it also shows that the parties may agree to deviate from the statutory regulation, which may for instance be done through a partnership agreement. In the case in question, the absence of a written agreement between the parties cost A over SEK 100,000, which she learnt about just in time for Midsummer. On top of this litigation costs of over SEK 100,000 are also payable. One might have hoped for a more pleasurable start to the Swedish summer.
At Zacharias Advokatbyrå we work with commercial and company law, including partnership and shareholder agreements, concerning which we have many years of experience. The wording of such an agreement involves familiarising oneself with the activity and understanding the part-owners. This also requires a comprehensive understanding of the core family law implications. Anyone who thinks that a ten-page ‘standard form’ from the Internet or a document that ‘someone’ fishes out of a desk drawer is the solution should prepare themselves for a costly disappointment in the future.
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[1] It should be mentioned that a Swedish trading partnership – for short - (handelsbolag) has legal personality that is separate from its partners, though the partners do not enjoy limited liability, unless they form a limited liability trading partnership (kommanditbolag) in which case some but not all of the part owners will have limited liability.