The all-powerful manager of a civil-law partnership: was it always a fiction?

The civil-law partnership has long been a popular control structure among wealth planners. In many cases, donors do not want to give up their assets entirely, and still want to retain some control over what they donate. Definitely in cases of transfers of family companies, the donors (often parents or family members) still want to retain control over the course of the business. 

The advantages of setting up a civil-law partnership structure
For various reasons, the civil-law partnership is considered a suitable instrument. Firstly, the assets contributed by parents can easily be transferred by donating the shares of the partnership. Secondly, the dual technique of managing the company and retaining usufruct on the donated shares allows parents to retain a certain amount of control and revenue. Another attractive advantage is that it is a simple private contract with few formalities and binding legal rules. For example, no intervention on the part of a notary is necessary, and the contribution, board of directors and duration can all be freely arranged. In addition, the civil-law partnership is not subject to corporation tax as it is fiscally transparent, which is often interesting from a tax perspective.

However, the consequences of this structure (incorporation of the partnership, contribution and donation of the shares) should not be underestimated. The parent-donor-manager cannot act as though these transactions never took place, still fully imposing their authority on the contributed assets. Disregarding the established structure in this way can cause problems both in assessing the donation and in terms of the management of the partnership.

Curtailment of management power by the judiciary?
The ruling of the Ghent Court of Appeal of 5 September 2018 concerns the management of the partnership. Although not all the facts of this case are known, we have been informed that it involved a manager who managed the partnership in his own interest, and not in the interest of the common special-purpose assets created by the contribution. The other partners (in this case the children) demanded that the manager's (their father) power to manage the business be withdrawn, and the court agreed with them. Although the power of control of the manager-donor is often set out in very broad terms in the articles of association of the civil-law partnership, it should not be forgotten that the civil-law partnership is and remains a purpose-bound asset. Consequently, not only does the manager of the partnership need to take his own interests into account when managing the partnership, but also needs to take the interests of the other partners into account. The Court of Appeal clearly states that (translation) "it is possible that the statutory manager may exercise his mandate in such a way that there is a risk that the interests of the company (including the proper management of the common special-purpose assets) may be undermined in the process".

The Court of Appeal presumably considered the arguments of the partners convincing enough, because it appointed a provisional administrator who has to take over the management of the civil-law partnership in the interest of all the partners. For the time being, it is not yet clear to what extent the manager had disregarded his obligations vis-à-vis the other partners. Some people now claim that a manager is "no longer the Sun King". It would be more accurate to say that managers never have been the Sun King (although some advisers may have praised managers as though they were). We can therefore say that this ruling does not fundamentally change anything, and is certainly no reason to panic. The ruling simply confirms that a manager must manage the contributed (and donated) assets in the interest of all partners, and not merely in his own interest. So nothing new in fact.

As such, the civil-law partnership remains an excellent structure for wealth planning. In most cases, the manager will exercise his authority reasonably. The courts will also exercise caution with the option of appointing a provisional administrator. This ruling makes it clear to everyone that the rules of the partnership must be respected: management must be exercised correctly in the interest of all partners. If you follow the rules of the game, you have nothing to fear! Since an appeal was lodged against this ruling in Cassation, it will clearly not be the end of the discussion .....

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