Liability in an informal partnership

A partner is personally liable for fulfillment of obligations of the partnership

A partnership is formed by people conducting joint business for profit and is not considered to have a separate legal entity, but shares responsibility with the partners whether the business generates losses or profits. It is usually informal when it comes to small-scale business activity. Each partner is responsible and liable for the debts and obligations of the partnership, as opposed to participants in a company where the shareholder’s liability is limited, as the company has an autonomous legal entity independent of its shareholders.

A unanimous judgment issued by the Supreme Court on June 15 dealt with these issues. Five relatives had set up an informal partnership for the purpose of building houses on a co-owned property and were registered in the VAT register under a specific name. Correspondence between them and VAT was done using their own names as natural persons. The commissioner of VAT issued a tax notice to all partners as there was a failure to file tax returns.

Article 46(11) of the Law on Value Added Tax of 2000, Law 95(I)/2000, provides that any person who fails within 30 days of receiving a notice to pay VAT is guilty of a criminal offence. The notice was served only to one partner, who failed to comply. All the partners were prosecuted, but because the four partners were not notified, they were acquitted.

The partner argued before the court of first instance that he refused to sign for the VAT notice because it was addressed to all partners and that he told the officer that the partnership had been dissolved and he did not represent the others. He also considered the calculation of VAT wrong, but he did not file a recourse because he had been waiting for the notice to be served to the others so they could proceed together. The court did not accept this and found him guilty, ordered he pay €615.735,27 and €209.577,17 and sentenced him to six months imprisonment suspended for 3 years.

The Supreme Court said the informal partnership was introduced in the law to include the concept of legal entity, but regardless of this amendment, Law 122(I)/2020, the concept of informal partnership is known in practice but also in law as an association of natural persons engaged in a joint venture. Certainly, it lacks legal personality and could not, before the amending law, be subject to VAT. The natural persons who constituted the partnership had such an obligation and at their application,

requested to be registered under the veil of the partnership. It is an obligation which is joint and several.

The Supreme Court added that the court of first instance correctly referred proportionally to the distinction between the partnership governed by Cap.116 and the limited liability company. Non-registration of the partnership does not differentiate its nature as an association of natural persons, with the persons who constitute it each having a separate liability. This is the noticeable difference between the partnership and the limited liability company, which has an autonomous legal status, . The fulfilment of the obligations of the company is not placed with the shareholders as in the case of the partnership.

The Supreme Court concluded that given that the appellant had liability to pay the tax due, he was rightly called to an apology and in the end, it was considered that the elements of the two offences were substantiated and all his circumstances were taken into consideration upon passing the sentence to him. Therefore, his appeal was dismissed.

George Coucounis is a lawyer practising in Larnaca and the founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]