Rights of partners and third parties in continuing and dissolving Dubai General Partnerships
By J. Richard Duke, Duke Law Firm, P.C., Alabama, USA
This column is the final discussion of a Dubai General Partnership and includes the continuance of a General Partnership in certain circumstances, rights of third parties and rights of partners, sharing of profits on dissolution, general contraventions and miscellaneous provisions.
Continuance in Certain Circumstances
The Court1 may order the removal of a partner in certain circumstances that it deems appropriate on application of a partner or the General Partnership under Article 44(1) of the Dubai General Partnership Law of 20042 (Law). This order by the Court does not, however, dissolve the General Partnership.
Article 45(1) provides that the General Partnership is dissolved upon the retirement, death, incapacity or removal of a partner unless the agreement provides for the continuance of the Partnership or, without such a continuation provision, the remaining partners elect to continue the General Partnership. Under Article 45(2), for a General Partnership that continues in accordance with the foregoing, the partners are required to provide the Registrar3 with a copy of an indemnity for the liabilities of the outgoing or deceased partner; and the Registrar may refuse to allow the continuance of the General Partnership in the absence of such an indemnity. Under Article 46(1), a General Partnership that continues after its definite or specific venture is completed or its term has expired may continue without any express new agreement with the rights and duties of the partners remaining the same as they were at the expiration to the extent consistent with the terms of the General Partnership. Article 46(2) provides that a continuation of such of the partners as regularly acted for the General Partnership without any settlement or winding up of its affairs is presumed to be a continuance of the business of the General Partnership.
A third party receiving an assignment by a partner of his shares in the General Partnership, either absolute or by way of mortgage or redeemable charge, is an assignee. Under Article 47(1), an assignee is not entitled during the continuation of the General Partnership to: (a) interfere in the management or administration of the General Partnership business or affairs; (b) require any accounts of the General Partnership transaction; or (c) inspect the General Partnership’s records or books. Under Article 47, the assignee does receive the share of profits that the assigning partner would have received but the assignee must accept the accounts of profits agreed to by the General Partnership. In addition, in the event of dissolution of the General Partnership, the assignee is entitled to receive the share of profits that the assigning partner would have received. The assignee is liable for the debts for which the assigning partner would have been liable, and the assignee must accept the amount of the debt agreed to by the General Partnership.
Rights of Third Parties
A person continuing to deal with the General Partnership after a change in its constitution or dissolution is entitled to treat all apparent members of the old General Partnership as the continuing members of the General Partnership until he has notice of the change under Article 48(1). Sufficient notice of the changed constitution of the General Partnership may be given to persons by an advertisement prescribed in the Regulations to persons who previously dealt with the General Partnership before the date of the dissolution or change so advertised under Article 48(2).
Rights of Partners
Under Article 49, the authority of each partner to bind the General Partnership and the other rights and obligations of the partners continue after the dissolution of the General Partnership with respect to two purposes: first, taking such actions that are necessary to wind up the affairs of the General Partnership; and second, completing transactions begun but not finished at the time of the dissolution. The partners cannot bind the General Partnership after dissolution for any other reasons.
Under Article 50, upon the dissolution of a General Partnership, every partner, unless otherwise agreed by all the partners, is entitled to have the General Partnership property used to pay its debts and liabilities. Next, after deducting any amounts due from a partner to the General Partnership, surplus assets are distributed to the partners in payment for their interests. Also, unless otherwise agreed by all of the partners, any partner or his representatives may apply to the Court to wind up the business and affairs of the General Partnership on dissolution.
A partner may pay a premium to another upon entering a General Partnership for a fixed term. Under Article 51, in such event, if the General Partnership dissolves before the expiration of the term, the Court may, by considering the terms of the General Partnership agreement and length of time of the Partnership, make an order or orders with respect to the premium or such part of it as it deems appropriate.
A partnership agreement may be rescinded on the ground of the fraud or misrepresentation of one of the parties. The party entitled to rescind the General Partnership agreement under Article 52 is, without prejudice to other rights, entitled to: (a) a lien on or right of retention of the General Partnership’s surplus assets, after satisfying its liabilities with respect to any sum paid by him for the purchase of a share in the General Partnership and for any capital contribution he made; (b) stand in the place of the creditors of the General Partnership for any payments made by him with respect to the General Partnership liabilities; and (c) be indemnified against any loss suffered by him as a result of the wrongdoing to the General Partnership by the person guilty of the fraud or making the false representation.
Sharing of Profits on Dissolution
Article 53 provides for the rights of any member of the General Partnership who has died or ceased to be a partner and the surviving or continuing partners carrying on the business of the General Partnership with its capital assets and without any final settlement of accounts between the General Partnership and the outgoing partner or his estate. In the absence of an agreement to the contrary, the Court determines the share of profits made since the dissolution that the outgoing partner or his estate is entitled to receive based on what is just under the circumstances. Under Article 54, the amount due from surviving or continuing partners to an outgoing partner or the representatives of a deceased partner with respect to such partner’s share is a debt accruing at the date of the dissolution or death unless otherwise agreed by all the partners and subject to any agreement between the partners.
Unless otherwise agreed by all the partners, Article 55 applies the following rules when accounts are being settled between the partners after a dissolution of the General Partnership: (a) losses, including deficiencies of capital losses, are paid first from profits then from capital and last, if necessary, by the partners individually in proportion to how they were entitled to share profits; and (b) the assets of a General Partnership, including contributions by the partners to make up for losses or deficiencies of capital, are applied in following manner and order: (i) satisfying debts and liabilities to persons who are not partners of the General Partnership; (ii) paying to each partner rateably the amount due to the partnership for advances made, as distinguished from capital; (iii) payment to each partner rateably the amount due from the Partnership to the partner in respect of capital; and (iv) the remaining amount or residue is divided among the partners in the proportion in which the profits are divisible.
Money may be advanced to a General Partnership by way of unsecured loans or for the purchase of goodwill in consideration for a share of profits of the business. In such case, if the General Partnership becomes insolvent, the lender or buyer is not entitled to recover any amount until the claims of all other creditors are satisfied under Article 56.
Contravention of Law Provisions
Article 57 contains a general contraventions provision. It first defines a person under Schedule 1, paragraph 3, Defined Terms, by stating that it has the meaning given in Schedule 1-1(b), of this Law. Schedule 1-1(b) states: “a person includes any natural person, body corporate or body unincorporated, including a company, partnership, unincorporated association, government or state.” Under Article 57(1), a person commits a contravention of the Law if he: (a) does an act or thing that the person is prohibited from doing by or under an Article of this Law; (b) does not do an act or thing that the person is required or directed to do under an Article of this Law; or (c) otherwise contravenes an Article of this Law. Article 57(2) specifically states that the definition of “person” does not include the Dubai International Financial Centre Authority (DIFCA), Registrar or President. The contravention provisions also specifically apply in relation to each of the partners when dealing with each other under Article 57(3).
Article 58 provides for administrative imposition of fines with respect to contraventions of the Law. Article 58(1) provides that Regulations procedures for imposition and recovery of fines shall be prescribed by the board of directors of the DIFCA with respect to contraventions of the Law. If the Registrar determines that a person has contravened a provision of the Law, the Registrar may impose a fine, by written notice to the person with respect to the contravention, of such amount as the Registrar considers appropriate, but not exceeding the amount of the maximum fine specified in Schedule 2, titled “Contraventions with Fines Stipulated,” in respect of each contravention. The remainder of this paragraph will state the fine for the contravention of a specific article. Article 10, “Carrying on the business of the partnership without registration,” results in a fine of USD20,000; Article 13, “Limited Partnership or Recognised Limited Partnership failing to lodge notice of changes,” USD2,000; Article 18, “Failure of Limited Partnership to keep accounts or prepare accounts as required,” USD15,000; Article 36, “Failure to deliver a statement of dissolution to the Registrar,” USD5,000; Article 52, “Providing false or misleading information to the Registrar,” USD15,000; and Article 54, “Failure to comply with the direction of the Registrar,” USD15,000.
Under Article 58(3)(a) if the person pays the prescribed fine to the Registrar within the period specified in the notice, then no Court proceedings may be commenced by the Registrar against such person; or (b) if the person fined takes action in Court to object to the imposition of the fine or does not pay the prescribed fine to the Registrar, the Registrar may then apply to the Court, and the Court may order the payment of the fine or so much of the fine as is not paid and make any further order as the Court deems advisable for recovery of the fine. Article 58(4) provides that a certificate purporting to be signed by the Registrar and stating that a written notice was given to a person pursuant to Article 58(2) imposing a fine on the basis of specific facts is, in any proceedings commenced under Article 58(3): (a) conclusive evidence of the giving of the notice to the person; and (b) prima facie evidence of the facts contained in the notice.
Miscellaneous
Article 59(1) provides that the board of directors of the DIFCA may make Regulations for purposes of the Law under the power conferred upon it under Article 116 of the Companies Law of 20044. Article 59(2) provides that without limiting the generality of Article 116 of the Companies Law, the Regulations may be made in relation to: (a) the objectives, powers or functions of the Registrar under this Law; (b) forms, procedures, notice and requirements under this Law; (c) the filing of certain material; (d) the manner in which such material shall be filed; (e) which material, or parts of the material, shall be made available for viewing by the public during the normal business hours; (f) the use of electronic or computer-based systems for the filing, delivery or deposit of documents or information required under or governed by the Law and Regulations; (g) the circumstances in which persons shall be deemed to have signed or certified documents on an electronic or computer-based system for any purpose under the Law; and (h) the payment of fees to the Registrar.
Article 59(3), any legislation with respect to this Law that purports to be made in the exercise of a particular power or powers is also applicable to all powers under which it may be made. Under Article 59(4), draft Regulations shall be published by the board of directors of the DIFC in the manner prescribed under Article 117 of the Companies Law of 2004.
Article 60 provides that the powers to waive and modify the Law or Regulations made pursuant to the Law are set forth in Article 130 of the Companies Law. Article 61 states that a person shall not: (a) provide false, misleading or deceptive information to the Registrar; or (b) conceal information from the Registrar where the concealment of such information is likely to mislead or deceive him.
The Registrar may make directions to comply with Partnership Law or Regulations, and a person shall comply with any direction made by the Registrar under this Article or any other provision of the Law as required under Article 62.
Under Article 63, upon application of a person who is aggrieved by a decision of the Registrar, a Court may make one or more of the following orders: (a) an order affirming all or part of a decision of the Registrar; (b) an order modifying or substituting all or part of a decision of the Registrar; (c) an order as to the manner in which a decision of the Registrar or an order of the Court is to be effective; (d) an order remitting a decision to the Registrar with direction; (e) an order as to cost; or (f) any other order that the Court may deem appropriate in the circumstances.
Under Article 64, the Registrar shall maintain a public register that includes current and past registrations of General Partnerships in such manner as may be prescribed in the Regulations. Also, the Registrar shall publish and maintain current registers and past registration of Recognised Partnerships in such manner as may be prescribed in the Regulations. The Registrar shall make a reasonably current version of any register maintained under this Article available without cost for viewing by the public during normal business hours of the Registrar.
Article 65 provides for payment of fees. The board of directors of the DIFCA may make Regulations requiring the payment to the Registrar of such fees as may be prescribed with respect to: (a) performance by the Registrar of functions under the Law as may be specified in the Regulations, including receipt of any document under the Law that is required to be delivered to the Registrar; and (b) the inspection of documents or other material held by the Registrar under the Law. The Registrar may charge a fee for any services provided by him otherwise than in pursuance of an obligation imposed on him by the Law. No action need be taken by the Registrar where a fee is provided for or charged under this Article until the fee is paid. Where the fee must accompany a document required to be delivered to the Registrar, the Registrar is deemed not to have received the document until the fee is paid.
Qualified Intermediary Rules
The US Treasury Regulations (Treas. Regs.) state that a foreign entity law providing that no owner has personal liability is classified as a foreign corporation for US tax purposes. See Dubai Digest, “US Tax Classification of Foreign Entities,” p.7, Offshore Investment, Issue 190 (October 2008). The Dubai General Partnership Law states that a general partner has personal liability; therefore, under the Treas. Regs., a Dubai General Partnership is classified as a flow-through entity and a partnership for US tax purposes. A Dubai General Partnership must provide a Form W-8IMY to the withholding agent as a flow-through entity, and each US partner is required to provide a Form W-9 to the withholding agent, as US beneficial owners. However, a Dubai General Partnership can file a Form 8832 with the IRS electing to treat the entity as a foreign corporation for tax purposes. If this election is made, the Dubai General Partnership, as a foreign corporation for US tax purposes, provides a Form W-8BEN, as beneficial owner, to the withholding agent. The tax classification of the Dubai General Partnership also determines the federal income tax returns that must be filed. The General Partnership must file a Form 8865 if is it classified as a flow-through entity partnership. The partners of a Dubai General Partnership classified as a corporation, through the filing of a Form 8832, are required to File a Form 5471 with respect to the operations of the entity and potentially a Form 926 with respect to transferring appreciated property to form or capitalise the General Partnership.
This completes the discussion of the Dubai General Partnership. The next issue of Dubai Digest will discuss the Limited Liability Partnership Law.
END NOTES:
1. The DIFC Court as established under Schedule 1 to the Dubai General Partnership Law, DIFC Law No. 11 of 2004.
2. General Partnership Law, DIFC Law No. 11 of 2004.
3. Registrar is appointed under the Dubai Companies Law, Article 7.
4. Companies Law, DIFC Law No. 3 of 2006.
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