In 1996, the Quebec Court of Appeal, in the case of Ville de Québec v La Cie d'Immeubles Allard Ltée (Allard), found that a general partnership ("société en nom collectif") formed under the former Quebec civil code:
- was not a separate legal person (a separate legal entity like a corporation);
- did not have "juridical personality" (the capacity to have legal rights and obligations); and
- did not have a separate patrimony (a patrimony being the collection of economic rights and obligations associated with a person or attributed to a specific objective, e.g. a trust).
The Court of Appeal in Allard accordingly held that municipal transfer or mutation taxes were payable on the transfer by two of the partners of their partnership interests in a general partnership to another partner because the general partnership "held" immovable property. In the Court's view, since the partnership had no separate legal personality or patrimony, when the partners transferred their partnership interests to the other partner it was as if the transferring partners were disposing of, or selling, an ownership interest in the immovable property ostensibly held by the partnership.
In the years following Allard, Quebec courts were faced with issues arising out of the reasoning and principles set forth in the Court of Appeal judgment and their application to partnerships formed under the new Civil Code of Québec (the "Civil Code"). Generally, Quebec courts held, following Allard, that Quebec limited and general partnerships are not legal persons. However, there was a lack of consensus in the decisions respecting whether or not general and limited partnerships did have some aspects of juridical personality and/or a separate patrimony. The resulting uncertainty raised certain concerns for practitioners when structuring transactions involving Quebec partnerships.
This uncertainty appears to have been to a large degree dispelled by two recent Quebec Court of Appeal decisions. In Laval (Ville de) c. Polyclinique médicale Fabreville, s.e.c., 2007 QCCA 426 ("Polyclinique"), the Court took the important first step of holding that a limited partnership formed under the Civil Code has its own patrimony distinct from the patrimonies of its partners "as long as it is sufficient" ("tant qu'il est suffisant"), even though it is not a "legal person". While helpful, the Polyclinique ruling left certain questions unanswered:
- Does the phrase "as long as it is sufficient" just refer to the possibility of seizing a general partner's assets to pay a partnership debt if the partnership has insufficient assets or does it have any greater significance?
- Does this principle apply to general partnerships?
- Who owns the assets of the partnership?
The second Court of Appeal decision, Ferme CGR enr., s.e.n.c. (Syndic de), 2010 QCCA 719 (Ferme CGR), appears to have answered these questions. The Court of Appeal in Ferme CGR decided that:
- a partnership has a separate patrimony, distinct from that of its partners;
- when a partner transfers property to the partnership (as a capital contribution or otherwise), the partner is transferring to the partnership the partner's right, title, and interest in the applicable property;
- partners do not have any ownership rights in "partnership property";
- a partner's interest in a partnership is considered to be movable property susceptible of hypothecation or sale, subject of course to any restrictions on transfer that may be set out in the partnership agreement or the Civil Code; and
- although partnerships do not have legal personality, there does not appear to be anything in the Civil Code that stands in the way of a general partnership incurring obligations and its property being available for discharging such obligations, even though the partnership does not have legal personality.
While the Court's determination in Ferme CGR was based on an analysis of a Quebec general partnership, each of these principles would also apply to a Quebec limited partnership.
In addition to the principles expressly set out in Ferme CGR, the following conclusions appear to follow logically from the Court of Appeal's determination that partners do not have any ownership rights in partnership assets:
- a transfer of a partnership interest is not a transfer of the underlying property (movable or immovable) held by the partnership; and
- creditors of a partner cannot seize partnership property in payment of a partner's debts, although the partner's partnership interest may be seizable.
Quebec investors and legal practitioners can now draw a greater level of comfort when structuring investments through the use of Quebec partnerships as a result of the Ferme CGI decision and its clear pronouncement that partners in a Quebec partnership do not have any ownership interest in the assets and property held by the partnership. A Quebec partnership will be able to deal with its assets without being concerned that its partners may have conflicting or competing property rights in the assets.
Furthermore, as a result of the clarification by the Court of Appeal of the nature of an interest held by a partner in a Quebec general partnership and the removal of the previous concerns that a partner of a general partnership would be considered the owner of an undivided interest in the assets of the partnership, the liquidity of such partnership interests (i.e. on sales to third parties or to existing partners pursuant to the partnership agreement) has been greatly enhanced.
This article provides a brief summary of the two recent Quebec cases.