The death of a member: Uncertain fate of a registered partnership with heirs involved | In Principle

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The death of a member: Uncertain fate of a registered partnership with heirs involved

When a member of a partnership dies, it can have serious legal consequences for the future existence of the firm. Depending on the type of partnership, the death of a partner may even result in dissolution of the partnership.

The rights and obligations of heirs to a person who was a member of a partnership in Poland can be affected by contractual and statutory provisions, and the heirs will not always be permitted to join the partnership.

Under Art. 60 of the Commercial Companies Code, it is not entirely clear whether the rights and obligations of a deceased member of a registered partnership (spółka jawna) are part of the estate and subject to inheritance under general rules, or pass to the heirs (or other persons) on the basis of the partnership agreement.

The Commercial Companies Code provides that the death of a partner in a registered partnership is one of the grounds for dissolving the partnership. Alternatively, when the surviving partners learn of the death of the partner they should promptly resolve to continue the partnership with the remaining partners. In order to avoid practical problems and disputes with heirs, and to ensure the continued smooth operation of the firm after the death of a partner, the partnership should consider including in the partnership agreement well thought-out and precise clauses governing the admission of heirs to the partnership after the death of a partner.

Contractual clauses in the event of death

The partners may decide in the partnership agreement whether all of a partner’s heirs, whether by will or intestacy, can join the partnership, or only one or more of the heirs. In that case, upon the death of the partner the heir or heirs indicated in the partnership agreement will take the decedent’s place in the registered partnership, on condition that they do not reject or waive the inheritance and are not held to be undeserving heirs. If the partnership agreement provides that all of the heirs are jointly entitled to the rights that were held by the deceased partner, one of the heirs should be designated to exercise those rights, but actions taken by the other partners before such designation is made are effective against the heirs.

A solution is permissible in which the set of heirs by will or intestacy differs from the heirs indicated in the partnership agreement as joining the partnership in the deceased partner’s place. For example, the partner may make a will naming all of his children as heirs entitled to the entire estate, while at the same time the partners provide in the partnership agreement that only one of the partner’s heirs (e.g. his oldest daughter) will be entitled to the partnership rights of the decedent. The set of persons joining the partnership in place of a deceased partner may also be defined negatively (e.g. by excluding specific heirs from the partnership). The partnership agreement may also provide that the future partner must hold certain qualifications.

Given the specific legal nature of a partnership agreement, making a will alone is not sufficient for the partner’s heirs to become partners after the partner’s death, if this is not provided for in the partnership agreement. It is also highly doubtful whether participation in a partnership may be the subject of a specific bequest.

To avoid disputes with heirs, the partnership agreement should precisely define the rules under which the heirs of a partner will join the partnership. For example, if the partnership agreement includes a clause reading, “In the event of the death of a partner, his eldest child shall join the partnership,” and the partner’s children do not survive but leave grandchildren who are not mentioned in the partnership agreement, the grandchildren will not enter the partnership even if they are the heirs under general rules and obtain a claim for payment of the value of the deceased partner’s capital share.

Difficult settlements with heirs

It should also be pointed out that if some of the heirs join a partnership in place of a deceased partner, this does not deprive the other heirs of their rights under the inheritance. The heir indicated by the partner acquires the corporate (non-property) rights, thus assuming the position of membership in the partnership. But the deceased partner’s property rights are subject to inheritance under the general rules pursuant to Art. 922 of the Civil Code. Thus even if the shareholder indicates only one of his heirs as the person who will join the partnership in his place, the value of the decedent’s property rights in the partnership (known as the capital share) will become part of the decedent’s estate. The heir who is joining the partnership will then have to settle the difference with the other heirs according to their share of the inheritance.

It should also be borne in mind that joining a registered partnership is connected with assumption of personal liability for its operations and participation in its management. If the heir is not interested in taking on this responsibility, he or she may demand that the partnership be converted from a registered partnership to a limited partnership (spółka komandytowa) in which the heir will obtain the status of a limited partner. Alternatively, it can be converted into a joint-stock limited partnership (spółka komandytowoakcyjna), with the heir becoming a shareholder.

Aldona Leszczyńska-Mikulska, Tax Practice and Private Client Practice, Wardyński & Partners