23 January 2006
Bermuda partnership law - like many areas of its law - is based on English principles. The partners of a general partnership will have personal liability for the debts of that partnership. The general partner(s) of a limited partnership will be similarly liable for the debts of that limited partnership, whereas the liability of its limited partners will be limited to the amounts they have agreed to contribute to the partnership.
Bermuda partnerships, including limited partnerships, have no separate legal personality under Bermuda law, but are simply an aggregate of the individuals or companies that comprise them. There is no Bermuda insolvency regime directly applicable to Bermuda partnerships. Consideration of the appropriate insolvency regime will depend on the law of bankruptcy/insolvency pertaining to a particular partner. Section 37 of the Bermuda Bankruptcy Act 1989, which applies mandatory set-off in respect of mutual dealings upon the bankruptcy or insolvency of an individual or company, does not apply to Bermuda partnerships.
The ability of financial institutions to apply set-off both before and after insolvency in dealings with their counterparties is important for purposes of assessing credit risk and in determining compliance with applicable capital adequacy regulations. Where such a counterparty is a Bermuda company, contractual set-off provisions will normally be enforceable in accordance with their terms before insolvency. Following insolvency, mandatory set-off under Section 37 of the Bermuda Bankruptcy Act 1989 will apply to mutual dealings between the parties, which in many cases produces a result similar to the contractual set-off provisions that Section 37 supersedes.
The enforceability of set-off provisions against Bermuda partnerships, however, can be problematic. A precondition of set-off is that the dealings between the parties be mutual - that is they must be made between the same parties in the same right. Each of the parties must be personally liable as regards obligations owing by it and be the owner of obligations owed to it. Since a Bermuda partnership has no separate legal personality, an outgoing partner will not, as a general rule, be freed from liability in respect of the debts and obligations of the partnership incurred prior to the date on which they ceased to be a partner, but their liability for future debts and obligations will cease. Similarly, an incoming partner will not normally be liable for debts and obligations of the partnership incurred prior to the date of their admission. It is therefore likely that a claim by a partnership arising out of a liability owed to it before a change in the composition of its partners may not be set off against a claim against the partnership arising out of a liability incurred by it after such a change, and vice versa.
This issue has not yet been considered by the Bermuda courts. However, in circumstances where the ability to apply set-off is important, it would seem prudent to ensure arrangements are in place to assign or novate the assets and liabilities of the partnership existing immediately prior to any change of partners in favour of the partnership existing immediately following such change.
The Bermuda Partnership Act 1902 is likely to be amended during 2006 to enable general and limited partnerships to elect to have legal personality upon filing with the Registrar of Companies. Such an amendment would eliminate the set off concerns over mutuality described above for those partnerships that elect legal personality.
Roger Burgess is a partner at Conyers Dill & Pearman