Toronto Partnership Lawyer: Limited Partnerships (Part 2) – Limited Partner Losing Limited Liability Status Canada

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

As a follow up to my recent blog post about limited partnerships (what they are, how to create one, partnership name, etc.), I thought I’d follow up with an article about how limited partners can LOSE THEIR LIABILITY STATUS!!!  Remember: I’m only dealing with Ontario limited partnerships.  You should check out your regional legislation dealing with limited partnerships and the case law that interprets that legislation.  Also, be sure to get a lawyer to update you on any new legislation or cases that impact limited partnerships.

So we start off with the idea that limited partners are generally liable only to the extent of their contribution.   Their contribution must be stated in the records of the limited partnership and such records must be kept at the limited partnership’s principal place of business in Ontario: s. 4.

Limited partners have a number of rights in the limited partnership (same as general partner) under the Ontario Limited Partnerships Act, including:

• the right to inspect and copy the books of the limited partnership (s. 10(a)):
• the right to be given a complete and formal account of the limited partnership’s affairs (s. 10(b));
• the right to obtain dissolution of the limited partnership by court order (s. 10(c));
• the right to share in the profits and other compensation of the partnership (s. 11(1)(a)), subject to other provisions of the Act;
• the right to have their initial contribution returned (s. 11(1)(b)), subject to other provisions of the Act;
• the right to examine the “state and progress” of the limited partnership business and advise as to its management (s.12(2)(a));
• the right to act as a contractor for or an agent or employee of the limited partnership or of a general partner (s.12(2)(b));
• the right to act as a surety for the limited partnership (s.12(2)(c)).

Now here’s the kicker: (as previously blogged about) if the surname or a distinctive part of a corporate name of a limited partner is used in the limited partnership’s name, then “the limited partner is liable as a general partner to any creditor of the limited partnership who has extended credit without actual knowledge that the limited partner is not a general partner”: s. 6(2) of the Ontario Limited Partnerships Act.

Even more importantly: if a limited partners “takes part in the control of the business” of the limited partnership, then they shall be fixed with the same UNLIMITED LIABILITY as a general partner: s. 13(1).  Keep in mind that a limited partner, simply by exercising their other rights and powers granted to them under the Act (i.e. above), will not assume the liability of a general partner.  Such liability only attaches to them exercising control beyond the scope of what they are allowed to under the Act.

So what have the Ontario courts said about this whole “takes part in the control of the business” situation?

Well, at present, the leading case in Ontario is Haughton Graphic Ltd. v. Zivot,33 B.L.R. 125 (Ont. H.C.J.), aff’d 38 B.L.R. xxxiii (Ont. C.A.), leave to appeal denied 38 B.L.R. xxxiii (S.C.C.).  Here are the facts of the case:

• The Defendants wanted to launch a magazine to be published in the U.S.
• They represented to a printing company that they were the president and vice-president of a limited partnership under Alberta Law.
• A deal was struck for the printing company to print the Toronto magazine.  In late 1982, it printed the first five issues.
  
• The limited partnership went into bankruptcy, leaving the printing company unpaid for the printing of three issues.
• The printing company decided to sue the limited partners personally to get its money back.
• Importantly: one of the defendants had incorporated a business and made it the general partner of the limited partnership. That defendant controlled the corporation.  That corporation employed both defendants.

So the question in that case came up: should the limited partners – in their personal capacity – be held liable for debts owed by the limited partnership on the basis that they took part in the control of the business? The court was looking at Alberta laws of limited partnership, which were akin to s. 13 of the Ontario Limited Partnerships Act.

The Ontario High Court of Justice essentially said: “Yes, they’re liable”.   Eberle J. said that the defendants were “in complete control of the limited partnership”: one defendant was the directing mind of the limited partnership, was responsible for it, and managed it.  He signed cheques on behalf of the limited partnership (the other defendant had authority to do so).  The fact that they were both employees of the general partner did not save them.

What’s also important in this case is that the Court rejected the defendant’s arguments that they shouldn’t be liable on the basis that the printing company knew it was dealing with a limited partnership.  The idea here is that a limited partner who takes part in controlling the business shouldn’t be liable if the creditor believes that the limited partner was a general partner.  But the court rejected that argument.  Eberle J. stated that that: “If reliance was a necessary precondition to unlimited liability for a limited partner, appropriate words should be in the statute”.

So what’s the moral of the story?  Be cautioned: if you’re both a limited partner and an officer or director of a general partner, your liability will be unlimited if you take part in the control of the business – even if you claim you did so in your capacity as an officer or director of a general partner and not as a limited partner!

Name: Michael Carabash Email: peter@dynamiclawyers.com