Limited Partnerships – Benefits of Manitoba
By Kristen Wittman on 2014/06/09
Generally speaking, and although there is limited case law to assist us on this point, it is my opinion that the greater the nexus or connection to Manitoba, the more likely the flow of benefits from the Manitoba legislation (and in particular, as further discussed below, Section 63(2) which permits a limited partner to engage in the business of the partnership without losing the limitation of liability). It is usually my recommendation to clients that the general partner be a Manitoba corporation, and that the registered office of the limited partnership be located in Manitoba, in order to support the argument that the formation of the limited partnership should be governed exclusively by Manitoba law. There is always a risk that a judge from another jurisdiction will determine that the business activities of the partnership are in another jurisdiction than Manitoba, and that as a consequence the laws of that jurisdiction should apply to the limited partnership, but to the extent we can establish a connection to Manitoba in respect of its formation, we would always argue that the application of Section 63(2) applies to all limited partners regardless of where they are conducting their business.
Manitoba Limited Partnerships – statutory requirements generally
The statutory provisions dealing with limited partnerships in Manitoba are found in The Partnership Act, R.S.M.1987, c. P30 (the “Act”). Part II of the Act (ss. 51-66), entitled “Limited Partnerships”, applies specifically and exclusively to limited partnerships (s. 51(1)). The Act provides that a limited partnership must be formed by two or more persons, and may consist of one or more persons, who shall be called “general partners”, and of one or more persons who shall be called “limited partners” (s. 52).
In Manitoba, as in other Canadian jurisdictions, a person may be a general and a limited partner at the same time in the same partnership (s. 51(3)). Such a partner has the rights and powers and is subject to the restrictions and liabilities of a general partner, except that in respect of his contribution as a limited partner, he has the same rights against the other partners as a limited partner (s. 51(4)).
Because of a general partner’s exposure to unlimited liability, it is unlikely that many persons will choose to become both a general partner and a limited partner in the same partnership. In most cases the general partner will be a corporate shell formed for the express purpose of carrying out the business venture for which the limited partnership was formed and will hold few, if any, assets of its own.
Although a limited partner is not liable for the debts of a limited partnership beyond the amount that partner contributed to the capital of the limited partnership (s. 53), the limited partner’s limitation of liability may be lost when he or she takes part in the management of the partnership business.
The virtue of creating a limited partnership in Manitoba is primarily in respect of the ability of limited partners to retain limited liability status even while engaging in the management of the affairs of the partnership.
In Manitoba, the limited partner is given the right to “advise” as to the management of the partnership business (s. 62), but where the limited partner takes an “active part in the business of the partnership,” he or she becomes liable as a general partner. However, unlike the legislation of other jurisdictions, the limited partner is only liable to any person with whom he or she deals on behalf of the partnership and who does not have actual knowledge that he or she is a limited partner. Section 63(1) states:
Where a limited partner takes an active part in the business of the partnership, he is liable as if he were a general partner, to any person with whom he deals on behalf of the partnership and who does not know that he is a limited partner for all debts of the partnership. [Emphasis added]
Furthermore, the limited partner’s liability extends only between the time he or she deals with such person and the time the person first acquires “actual knowledge” that he was dealing with the limited partner (s. 63(2)).
Manitoba legislation – formation
In respect of the formation of a partnership, it is a requirement of The Partnership Act (Manitoba) that the formation of a limited partnership be completed by registration of a certificate under The Business Names Registrations Act, (Manitoba) and so, although the terms of The Partnership Act apply to the governance of the partnership, the partnership does not attain its limited liability status until registration is completed pursuant to The Business Names Registration Act.
The registration is granted for a period of three years. Failure to renew the Partnership’s registration results in the limited partnership being deemed to be a general partnership for liability purposes.
The name of the partnership cannot contain the names of one or more of the limited partners. If a limited partner’s name is used in the partnership name, that limited partner is deemed to be a general partner.
Unlike other jurisdictions, it is not necessary to have a partnership agreement to govern the affairs of the partnership. The provisions of The Partnership Act relating to limited partnerships are not extensive, and so there are few statutory restrictions on partners – rather, partners impose restrictions (and benefits) upon themselves by contract.
The Partnership Act contemplates that, without an agreement between the partners, the following will apply:
- a limited partner has the right to demand and receive the return of its capital: upon dissolution; following six months written notice to the other partners; or with the other partners’ consent, but the return of capital can only be in the form of cash, regardless of the nature of the contribution made by the partner, and the partnership is not obligated to return the capital contribution if the partnership’s liabilities to non-partners exceed the assets sufficient to pay them;
- a person is permitted to be introduced to the partnership without the consent of existing partners;
- decisions in respect of the business of the partnership are decided by a majority of the general partners, and limited partners have no right to bind the partnership;
- with the consent of the general partner(s), a limited partner may assign his partnership interest, following which the assignee becomes the limited partner with all rights possessed by the former limited partner;
- no partner can require the dissolution of the partnership simply because any one partner has suffered his interest to be charged for his own debt;
- if a limited partner makes demand for return of capital contribution in compliance with the legislation, and it is not paid, that partner may have the partnership dissolved;
- the partnership will not be dissolved by the death or bankruptcy or insolvency of any one limited partner but absent an agreement it may be dissolved by the death, bankruptcy or insolvency of the general partner.
In respect of capital contributions, there is no requirement at law that the contribution is made in cash. It can be made by way of contribution of assets, including by way of a promissory note if the other partners agree. Contributions of capital must be disclosed in the partnership registration, and changes must be recorded within 30 days, as otherwise they will be deemed not to have taken effect.
With respect to limitations of liability, note that the liability of limited partners is limited in respect of the debts of the partnership. It is, therefore, possible, notwithstanding that limited liability, that a limited partner could be exposed to full liability under legislation (for example, The Workplace Safety and Health Act) that imposes fines and penalties if the limited partner is considered to be engaged in the business of the partnership.
Further, it remains unclear whether a limited partner who takes an active role in the management of the partnership business will be seen to be a fiduciary to the partnership, and thereby owe duties to each of the other limited partners in respect of such matters as competition and accounting for profits. Clarity can be created by the use of an agreement between the parties that identifies whether or not the parties wish to have such standards of care imposed upon them.
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