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En commandite partnerships

13 February 2014

Of late I came across several instances where en commandite partnerships wanted to register matters in a deeds office. There have been a few conference resolutions now which did not provide, in my humble opinion, the correct answers to the registration of land or real rights in the name of such a partnership, or really were of no assistance at all.

Following the passing of Registrars Conference Resolution 22/2012 (RCR22/2012) I sent a submission to the acting Chief Registrar of Deeds (CRD), who undertook to submit the submission to conference. That he did, but with no result besides the fact that the matter would be referred to the Regulations Board for a decision.

The matter was duly referred to the Regulations Board and upon me inquiring as to whether the matter was discussed at that Board’s meeting I received a simple reply, namely:

“Board decided not to amend the Act and thus the status quo remains. We will not permit such vestings. It is now the opportune time to approach Court”

I decided to write an article based almost entirely on the submission that was sent to the acting CRD and would like to hear other opinions and inputs as well. In my opinion the matter was incorrectly decided at conference and by the Regulations Board. Let me mention that the cases which I was asked about recently all involved en commandite partnerships who act as moneylenders, and all the matters concerned rather big loans by such partnerships to borrowers. The incorrect decisions have a severe influence on the business of such partnerships and the matter needs to be resolved properly without that convenient little statement “...approach the Court...”.

The word “partnership” is usually employed to denote either a legal relationship arising from a contract of a particular kind, or a particular association of persons or a specific form of business organisation, for certain specific purposes. It is a sort of quasi-persona separate from the partners composing it. As the word is derived from the Latin noun partiarius (“one who shares with another”) it creates the inherent notion of participation among the partners. Partnership may be defined as a legal relationship arising from a contract between two or more persons each contributing to a business or undertaking carried on in common, with the object of making and sharing profits, although various other definitions have also been put forward. That is however not important for the matter at hand.

Historically partnerships are of great antiquity and various kinds of partnerships developed. The law of partnerships in South African law consists of South African common law, derived mainly from Roman-Dutch law, with the French jurist, Pothier regarded as an authority of great importance in the Netherlands toward the eighteenth century. His treatise was translated to English and Dutch and regarded by the courts as an important authority on this branch of the law.

The mediaeval commenda was an arrangement by which a capitalist (commendator) entrusted capital to a trader (commendatorius) for employment in business, on the understanding that the commendator, while not in name a party to the the business of the commendatorius and entitled to share in the profits, would not be liable for losses beyond the capital the commendator originally invested. This concept of limiting the liability of non-managing investors spread from Italy to French commercial law, becoming the société en commandite, the predecessor of the present limited or commanditarian partnership. It was incorporated into Roman-Dutch law retaining its French name (Van Der Linden Koopmans Handboek 4 1 12 and Van Der Keesel Prael 3 21 7).

Writers attempt to categorise partnerships (see e.g. Nathan Partnerships and Private Companies 26 – 33; Maasdorp Institutes vol 2 278 – 284) but this often creates confusion. South African law accommodates partnerships of all sorts of partnerships, to some extent also professional and trading partnerships. The biggest distinction between various types of partnerships for the current purpose is however between ordinary and extraordinary partnerships. Commanditarian and silent (or anonymous) partnerships are extraordinary partnerships and attract special rules.

Three kinds of extraordinary partnerships existed in South Africa. Two of these, the commanditarian and silent partnerships were known in the Roman-Dutch law and may still be formed (see De Wet and Van Wyk, SA Kontraktereg en Handelsreg p417 fn 323). The third kind was created in terms of legislation in the old Cape Province (The Special Partnership’s Liability Act 24/1861(Cape) as amended by the Special Partnership’s Limited Liability Amendment Act 12/1906(Cape)) and in Natal (The Special Partnerships Limited Liability Act 1/1865(Natal). However these acts were both repealed by the Pre-Union Statute Law Revision Act 36/1976 (not with retroactive effect) as a result of the provisions rarely being used. Up to 1958, after almost a century, only 70 limited partnerships had been registered in the Cape and 240 in Natal.

The two kinds of extraordinary partnerships, En Commandite and silent partnerships are close together, but they differ in that a silent partner is liable for his pro rata share of all partnership debts, whereas with the en commandite partner is only liable insofar, and limited to, the amount of his agreed capital contribution (see e.g. S Butcher & Sons v Baranov Bros (1905) 26 NLR 589; Eaton & Louw v Arcade Properties (Pty) Ltd 1961 4 SA 233 (T)). The two types of partner are similar in the following respects, namely:

  1. They are undisclosed, which means they are not held out to the world as partners;
  2. They are not liable for partnership debts to creditors of the partnership, but only to their partners in as much as they contributed to the partnership. The fact that such a partner may become known to outsiders does not affect affect situation, but if such a partner was held out as having acted as ordinary partner, he/she loses that protection(see also Butcher V Baranov above; Bale & Green v Bennett (1907) 28 NLR 361; Sacca v Olivier 1954 3 SA 136 (T)). The aim behind keeping the names of such partners secret is to avoid persons dealing with the partnership to have the impression that they are entitled to rely on the credit of the en commandite or silent partner;
  3. They may not participate actively in the business of the partnership (Sabatelli v St Andrew’s Building Society 1933 WLD 55);
  4. They cannot claim repayment of their contributions or payment of their share of the partnership profits in competition with creditors of the partnership (Sabatelli’s case, also Siegel & Frankel v R 1943 SR 13).

The non-disclosure of the name of the en commandite partner is therefor quite settled law in South Africa. The Business Names Act no 27/1960 (now also repealed) referred to both these acts and also dealt specifically with such partners/partnerships and stated in section 3(e) that the name of special partners was not to be disclosed e.g. in trade catalogues, trade circulars, business letters, order for goods or statement of accounts, etc. A clear indication of the recognition the legislator gave to the common law institution of extraordinary partnerships.

The Court says in Siegel’s case about the en commandite partner:

“Although he he may be described as a partner, the essence of of the arrangement is that it must be carefully concealed from the outside world”

One of the principal reasons why deeds office records must as far as possible reflect the correct names of owners and what they own, is to protect creditors. The very nature of the en commandite partner is that his name must be kept secret, so as to not create expectations with creditors which will not be realised (Mmabatho Food Corporation (Pty) Ltd v Fourie 1985 1 SA 318 (T)). The vesting of rights in a bond or land in the name of the en commandite partner must therefor never show the name of the en commandite partner as it will most certainly create an expectation with a creditor that he will be able to look to the en commandite partner in case of insolvency, etc. as he will be seen as being held out to the world as a general partner. Vesting of any right in the name of an en commandite partner, i.e. disclosing his name in a bond or deed of transfer, would be prejudicial to the en commandite partner in that he will lose the special common law protection that the law regarding partnerships provides him/her. It will be in direct conflict of what the Court stated in amongst others Siegel’s case.

In terms of RCR22/2012, which was now effectively been confirmed by default by the 2013 conference, the vesting/description of a partnership may not refer to it being an en commandite partnership at all.

A number of bonds describing the mortgagee along the following lines were registered over the last few years in the Cape Town deeds office:

1. John du Preez

Identity number 550609 5165 08 6

Married out of community of property

2. Peter Janssen

Identity number 340120 5117 08 8

unmarried

the general partners in the Petjohn en commandite partnership

Given the concept of the extraordinary partnership I submit that such registrations were correct. Disclosing the name of an en commandite partner in any vesting clause or description of such a partnership in any deed or document may, or most probably will, cause such partner to be viewed as a general partner and he may, or most probably will, lose the protection afforded him by the common law. It creates a prejudicial situation. This may even cause the Deeds Office to be the subject of a damages claim.

It is not clear why the reference to section 24bis Act 47/1937 was brought into the resolution as justification for the resolution. Section 24bis can only be applied if circumstances specifically permit. Otherwise it simply does not find application. It is important to keep in mind that partnerships may be liquidated in different fashions, e.g. a liquidator may be appointed by the partners, who will take control of the partnership assets and sell/dispose of the assets as instructed (see Killian & Stein v Norden Executor of Horn (1854) 3 M 530 537)), or as the Court may direct (Brighton v Clift (2) 1971 2 SA 191 R). The liquidator may be one or some of the partners or a third party (Kaplan v Turner 1941 SWA 291; Ferreira v Fouche 1949 1 SA 67 (T)) or the Court may appoint one if the partners cannot agree (Robson v Theron 1978 1 SA 841 (A)). It appears that examiners hark to section 24bis at the slightest hint that they are dealing with a partnership that was dissolved, yet as pointed out above the section simply does not always apply. The section will be applied only if the right circumstances exist and the partners apply for the endorsement of the title deed(s) of land and real rights of the partnership.

Section 3(1)(b) of the Deeds Registries Act 47/1937 instructs the registrar deeds (to)

“...examine all deeds or other documents submitted to him for execution or registration, and after examination reject any such deed or other document the execution or registration which is not permitted by this Act or any other law,(my bolding) or to the execution or registration of which any other valid objection exists.....”.

Neither the Deeds Registries Act nor the regulations promulgated under the Act refer specifically to an en commandite or silent (anonymous) partnerships, and in fact only mentions partnerships in general. However, the duty referred to in section 3(1)(b) also refers to any other law. The Interpretation Act 33/1957 states in section 1:

“The provisions of this Act shall apply to the interpretation of every law (as in this Act defined) in force, at or after the commencement of this Act, in the Republic or in any portion thereof...unless there is something in the language or context of the law....repugnant to such provisions or unless the contrary intention appears therein”.

There is nothing in section 3(1)(b) or elsewhere in the Deeds Registries Act that may be seen as repugnant to or intending any other intention to the common law provisions. It is a common principal in our law that if the intention is to amend the common law, a new enactment will state that intention. The provisions of regulation 34 could be viewed as being repugnant to such a registration, but it must also be seen as being ultra vires the common law, should that become an argument in this case. “Law” is defined in the Interpretation Act as meaning

“...any law, proclamation, ordinance, Act of Parliament or other enactment having the force of law”.

Common law can hardly be excluded from this definition.

The rules affecting en commandite partnerships are within the ambits of what the registrar is instructed to register when examining deeds and cannot be ignored because section 24bis falls short of mentioning or mentioning such partnerships. The fact that extraordinary partnerships are not specifically mentioned in the Deeds Registries Act and Regulations is immaterial. Why the Regulations Board considered amending the Deeds Registries Act or regulations is unclear. As the Act and regulations stand registration in the name of an en commandite partnership is clearly possible.

The vesting/description as per my example above is not alien to at least the Cape and Natal deeds offices. In Newall’s Land and Practice of Deeds Registration (second edition, 1964) by W.V. De Beer and R.F. Rorke, written before the repeal of the Cape and Natal Acts referred to above by the Pre-Union Statute Law Revision Act 36/1976, it is stated on page 242, discussing partnerships with reference to the two acts, says, under the heading “Sharing Losses”: “With this is connected Limited Partnerships (Law no. 24 of 1861 (C), Law no. 1 of 1865 (N)) en commandite and Anonymous partnerships. In these cases it seems to be the practice to register in the general partners’ names only (see Sabatelli v St Andrew’s Building Society, 1933 W.L.D. 55)”.

On the basis of what is set out above, RCR 22/2012 should be withdrawn and registrations in the name(s) of the general partner(s) for en commandite partnerships without the mention of the name of en commandite partners, must be accepted, for the following reasons:

  1. Section 3(1)(b) of the Deeds Registries Act 47/1937 instructs the registrar deeds (to) “...examine all deeds or other documents submitted to him for execution or registration, and after examination reject any such deed or other document the execution or registration which is not permitted by this Act or any other law.” It is clear that at common law there is most certainly a firm basis for the description of extraordinary partnerships as set out above, such partnerships being common law institutes; and
  2. If not allowed it will frustrate the registration of land or real rights in the name of extraordinary partnerships or conversely, it will frustrate economic activity by extraordinary partnerships; and
  3. If forced to disclose the name in deeds and documents lodged for registration, it will cause the loss of the common law protection afforded an en commandite partner, resulting in such a partner being prejudiced severely; and
  4. To ignore or not allow for the situation can be interpreted as the registrar failing his duty imposed in section 3(1)(b) of the Deeds Registries Act. There can be no valid objection to vesting land or real rights in the name of an en commandite partnership as proposed.

Dudley Lee
11th February 2014

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