Legal Alert – Finnish Supreme Court Ruling In A Criminal Case Discusses The Circumstances Where A Limited Partner Of A Partnership May Lose Its Limited Liability Status
In a recent case the Finnish Supreme Court found that a registration offence had been committed, arguing that certain limited partners of a Finnish limited partnership should have been registered as general partners as they in practice participated in the decision-making of the partnership and as the business of the partnership was primarily managed by one of the limited partners. Although the case is primarily a criminal case which seems to relate to other criminal conduct as well, the ruling in essence also seems to discuss whether a limited partner may lose its limited liability status in a limited partnership. Although the ruling may be criticized in many aspects, and although it does not directly address liability towards the creditors of a limited partnership, in practice it may change the way that limited partners may participate in the management of a Finnish limited partnership, and therefore it may also affect the fund management industry.
In many jurisdictions a limited partner of a limited partnership may lose its limited liability status (and become liable for the obligations of the partnership as a general partner) if it participates in the management of the partnership. This is commonly known in the private equity industry where the role of limited partners in a limited partnership fund is usually restricted accordingly.
The question has not been relevant in Finnish limited partnership structures since the Finnish Partnerships Act does not set forth any rules that would even imply that a limited partner could be treated as a general partner, nor does it provide any limitations on the ways that a limited partner could participate in the decision-making in a limited partnership.
In case KKO 2012:41 (www.kko.fi/58199.htm), however, the Finnish Supreme Court has surprisingly found that in a certain limited partnership, two limited partners should have been registered as general partners and that registering them as limited partners constituted a registration offence. The Finnish Criminal Code provides that a person who, in order to cause a legally relevant error in a public register kept by a public authority, provides false information to that authority, shall be sentenced for a registration offence to a fine or to imprisonment for three years at most.
In essence the ruling seems to be based on the thought that certain criteria would mean that a partner is a general partner irrespective of the status agreed in the limited partnership agreement. As the Finnish Partnerships Act contains no such criteria, disregarding the partnership agreement and constituting criminal liability on that basis is somewhat surprising. The ruling contains different arguments but does not specify what factors have been finally relevant in making the conclusion. The ruling inter alia notes that the partnership arrangement had been made in order to enable the limited partners to engage in a business that they, due their background (previous bankruptcy), could not have engaged in in their own name, but the key point seems to be the fact that the limited partners participated in the administrative and business decision-making together with the general partner and that in fact the operations of the partnership were primarily managed by one of the limited partners. In practice the general partner had also given that limited partner a power of attorney to represent the partnership.
It should be emphasized that this case is a criminal case and does not take any stand on whether the limited partners in this case should be deemed to have become subject to unlimited liability for the obligations of the partnership. In any event it could be used as an argument for trying to breach the limited liability of partners that have been registered as limited partners if they actively participate in the management of a limited partnership. In this respect it seems that Finnish partnership law now comes closer to the partnership law in some other jurisdictions. In practice the ruling presumably means that in different partnership structures the role of the limited partners may be analyzed in more detail, and may be possibly limited further compared to the existing decision-making models. As regards fund structures where the limited partners do not participate in investment decisions or other material decisions, the ruling does not necessarily change much. There may however be cases where the limited partners may wish to reconsider their role in order to protect their limited liability. This spill over effect from the ruling to private equity has most likely been something that went unnoticed by the court.