Who Owns a Québec Partnership?
November 29, 2010
In Ferme CGR enr., s.e.n.c. (Syndic de) 2010 QCCA 719, the Québec Court of Appeal decided that it is not necessary to put the partners of a Québec general partnership into bankruptcy when the partnership itself is put into bankruptcy. In doing so, the court initially relied upon authorities interpreting the relevant provisions of the Bankruptcy and Insolvency Act. In addition, the court supported its decision with an analysis of the legal nature of Québec general partnerships and, as a result, modified the ownership structure of partnerships in Québec.
The Québec Court of Appeal decided that the property of a general partnership in Québec constitutes an autonomous patrimony analogous, if not identical, to the "patrimony by appropriation" ("patrimoine d’affectation") characteristic of a Québec trust. Thus, while partners have a share in the partnership, according to the Ferme CGR decision they do not have a proprietary or ownership interest in the assets of the partnership. In this regard, the Court of Appeal distinguishes its own 1996 decision in Québec (Ville de) v. Cie d’Immeubles Allard Ltée, which was decided under the Civil Code of Lower Canada (CCLC). This decision held that a general partnership did not have a legal personality distinct from its partners and, therefore, could not have a patrimony distinct from its partners. Accordingly, the partners were undivided co-owners of partnership property.
In Ferme CGR, the Court of Appeal indicated that under the Civil Code of Québec (CCQ), unlike under the CCLC, the notion of patrimony is no longer inextricably linked to and dependent upon legal personality. Therefore, although a general partnership is not a distinct legal person, it is possible for partnership assets to constitute a patrimony separate from those of the partners. For the Court of Appeal, the fact that the contribution of property to the partnership by a partner is made by the transfer of ownership rights indicates a clear legislative intention to create an autonomous partnership patrimony, rather than undivided co-ownership among the partners.
Whether one agrees with the reasoning of the Court of Appeal, or does not, and despite the fact that its decision arises within a bankruptcy context, Ferme CGR represents a clear statement of a new ownership structure applicable to general and limited partnerships under the law of Québec. Henceforth, creditors of a partner will not be able to enforce their rights against partnership assets. The transfer of a partnership interest, an incorporeal movable property, will not entail the transfer of immovable property owned by the partnership. The autonomous patrimony of a partnership also indicates that there should no longer be confusion as to the signatures required for the transfer of rights in partnership property. The signature required would be that of any partner who is the authorized mandatory of the partnership under the circumstances.
The Ferme CGR decision also implies that it may be necessary to rethink transaction structures and possibly tax planning in which the ownership interest of partners in partnership property is important. For example, the exemption under section 10 of the Interest Act from the right to prepay long-term hypothecs if granted by a corporation will no longer likely apply to a hypothec granted by a Québec general or limited partnership in which all of the partners are corporations. According to the Ferme CGR decision, a hypothec on partnership property is not granted by the corporate partners who have no ownership right in partnership assets.
The Ferme CGR decision does not modify the rules governing the personal liability of partners for debts of a general partnership under article 2221 CCQ. Partners are still personally liable for the debts of a general partnership only after they have been enforced against partnership assets. In this regard, the decision raises issues as to when and how autonomous patrimonies can arise. The autonomy of the general partnership patrimony is clearly mitigated by the ultimate personal liability of the partners. By contrast, the patrimony of a limited partnership is autonomous as regards special partners whose liability is limited to their partnership contributions. Would a limited recourse loan permitted under article 2645 CCQ give rise to an autonomous patrimony? How clear must the legislative intent be to permit the creation of autonomous patrimonies?
Finally, the decision in Ferme CGR does not contemplate the application of a divided patrimony to the partnership context. In other words, it might have been possible for the Court of Appeal to reach the same result by deciding that partnership assets are co-owned by the partners but constitute a part of their patrimonies separate from their personal assets.
At this stage, the full impact of the Ferme CGR decision on the law and practice in Québec remains to be seen.
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