Conversion of a negative capital account into debt

The Supreme Court has quashed a judgement made by Den Bosch Court regarding the implications of the conversion of negative capital account in a general partnership into debt owed by the partner to the general partnership.

The general partnership was composed of a married couple and the husband’s father.  Upon leaving the general partnership, the father’s negative capital account was converted into debt of 116,603 EUR.  In 2011, the father had paid off part of his debt with the proceeds of the sale of his private residence.  The remaining debt of 60,555 EUR was irrecoverable and was written off against profits of 2011.  The Court in Den Bosch did not allow this, as there was evidence of a non-commercially viable loan.  By providing the father with the loan, the remaining partners took the risk of default that an independent third party would not have taken.  According to the Court, that very risk was accepted due to the family relationship.

The Supreme Court assumed, in appeal, that the mutual legal relationships between the partners in the general partnership were founded on commercial grounds.  The claim on an outgoing partner due to the discharge of his negative capital account is a direct consequence of the partnership relationships.  This claim cannot be compared to a loan to an outgoing partner.  The loss of capital on a deficient claim on the outgoing partner has not been caused by accepting an uncommercial risk.  As long as the nominal value of the claim, when it came into existence, is higher than the value in the course of trade, the loss on the claim is borne by the profits of the remaining partners.  That does not apply for a possible further loss on the claim subsequent to leaving the partnership.  In relation to that loss, there can certainly be evidence of a loss on a non-commercial loan.

Arnhem-Leeuwarden Court must deal with the case further. Feel free to contact us for more information on converting negative capital into a debt.

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