Death of a Partner in a Company – what to do in this situation?

In practice**,** proper preparation for the scenario of a partner’s death helps to avoid decision-making paralysis and conflicts between the partners and the heirs. Given the multitude of possible scenarios, it is essential to adopt a case-by-case approach, taking into account both the wording of generally applicable legal provisions and the provisions of the partnership agreement.

In partnerships, as a general rule, the death of a partner poses a serious challenge both for the remaining partners and for the functioning of the partnership itself. Such an event usually leads to significant changes in the internal structure, necessitates a reorganisation of the rules of cooperation, and may require a series of organisational decisions to be taken. In such partnerships, it is the partners who form the foundation of their operations. They are usually directly involved in the running of the partnership’s affairs, participate in its day-to-day management and represent it in dealings with third parties. For these reasons, the death of one of the partners has not only legal consequences but also practical and business implications, affecting the balance within the partnership.

The death of a partner in a partnership differs significantly from the consequences of the death of a shareholder in a company. In the case of capital companies, the death of a partner, particularly in companies with a complex ownership structure, does not affect the legal existence of the company or its operation, as the shares of the deceased partner generally form part of the estate and are inherited by the heirs, which enables business continuity to be maintained. In partnership companies, however, where the personal element constitutes the very essence of such companies, the absence of appropriate provisions in the partnership agreement or a failure by the remaining partners to act appropriately may even lead to the dissolution of the company.

The remainder of this article analyses the consequences of a partner’s death in both partnerships and companies, and outlines possible courses of action to prevent the destabilisation of the company’s operations following a partner’s death.

Consequences of the death of a partner in a partnership:

In principle, the death of a partner in a partnership results in the dissolution of the partnership agreement and the need to carry out its liquidation, ultimately leading to the cessation of its legal existence. This follows directly from Article 58 § 1(4) of the Commercial Companies Code, according to which one of the grounds for the dissolution of a general partnership is the death of a partner. This provision also applies mutatis mutandis to other partnerships, i.e. professional partnerships (Article 89 of the Commercial Companies Code), limited partnerships (Article 103 of the Commercial Companies Code) and limited joint-stock partnerships (Article 146 of the Commercial Companies Code).

In the case of a limited partnership, the death of any general partner generally constitutes grounds for the dissolution of the partnership. This stems from the fact that it is the general partners who play a key role in its operation – they manage the partnership’s affairs, represent it externally and bear unlimited liability for its obligations. In contrast, limited partners are generally more passive investors, whose involvement in day-to-day management is limited.

In a limited joint-stock partnership, the situation is somewhat different. The partnership is dissolved only in the event of the death of the sole general partner. However, the partnership’s articles of association may provide for different arrangements in this regard. If the partners decide that the partnership is to continue despite the death of the sole general partner, it is necessary to appoint another person to take on that role at the same time. Only then is it possible to maintain the continuity of the partnership’s operations.

It should be emphasised, however, that the legislator leaves the partners free to shape contractual provisions concerning the future of the company in the event of a partner’s death. This stems primarily from the provisions of Articles 59 and 64 of the Commercial Companies Code. In particular, the articles of association may contain a so-called continuation clause, which precludes the dissolution of the company in the event of a partner’s death, stipulating that the company shall continue to operate in such a situation and that the rights of the deceased partner shall pass to his or her heirs. Even in the absence of a so-called continuation clause in the articles of association, a resolution by the partners on the continued existence of the company, adopted without delay in accordance with the procedure referred to in Article 64 of the Commercial Companies Code, may have the same effect.

However, if the partnership agreement does not contain a so-called continuation clause or the partners do not adopt a resolution on the continued existence of the partnership immediately following the death of a partner, it is necessary to conduct liquidation proceedings in accordance with the provisions of Article 67 et seq. of the Commercial Companies Code, and, in the case of a limited joint-stock partnership, Articles 459 et seq. of the Commercial Companies Code.

The purpose of liquidation is to settle all the company’s liabilities, wind up its current affairs and realise its assets, as provided for in Article 67(1) of the Commercial Companies Code. Only after the creditors have been satisfied are the assets remaining after liquidation divided between the partners and the heirs of the deceased partner – in proportions resulting from the provisions of the partnership agreement, and in the absence thereof, in accordance with the rules set out in Article 82 of the Commercial Companies Code.

As indicated above, the legislator has granted partners in partnerships considerable freedom in shaping the provisions of the partnership agreement in the event of a partner’s death. It is permissible not only to exclude the very premise of the partnership’s dissolution, but also to regulate the matter of succession in detail. The partnership agreement may, for example, specify particular heirs (named individually) who, by operation of law, will succeed to all the rights and obligations of the deceased partner. Alternatively, the partners may provide in the agreement for a complete exclusion of the possibility of heirs joining the partnership. In such a case, the remaining partners are obliged to make an appropriate payment to the entitled persons – in an amount corresponding to the value of the deceased partner’s capital share, calculated in accordance with Article 65 § 1 of the Commercial Companies Code.

Furthermore, the entirety of a partner’s rights and obligations may also be the subject of a testamentary disposition in the form of both a simple bequest and a specific bequest. In such a situation, the legatees take the place of the deceased partner on the same terms as statutory or testamentary heirs.

The inheritance of the entirety of the rights and obligations of a deceased partner in a partnership entails that the heirs of the deceased partner do not acquire the status of separate partners, but act in the partnership jointly as a single entity, a so-called collective partner. If the entirety of rights and obligations is inherited by several persons, pursuant to Article 60 § 2 of the Commercial Companies Code, the heirs are obliged to appoint a single joint representative. It is this representative who will exercise all rights and obligations arising from the inheritance share within the partnership, representing the interests of the entire group vis-à-vis the remaining partners. This solution is crucial for maintaining decision-making fluidity and avoiding procedural disputes.

However**,** another scenario is also possible – as part of the division of the estate, the heirs may agree that all rights and obligations in the company will fall to one of them. Such an arrangement eliminates the need for collective representation, but its implementation requires the full consent of all parties concerned regarding the division of the estate and the company’s continued operation.

Otherwise, a lack of agreement among the heirs may lead to the paralysis of the company’s operations. Ongoing conflicts and the absence of a designated representative prevent effective decision-making and may completely deprive the heirs of any real influence over the management of the business.

Consequences of the death of a shareholder in a capital company:

Firstly, it should be noted that, unlike in partnerships, the death of a shareholder in a capital company does not result in the automatic dissolution of the company and the need to carry out liquidation proceedings.

On the contrary – given that a shareholder’s shares in a capital company constitute their assets, upon the death of a shareholder of a capital company, they form part of the estate and are subject to inheritance by the heirs.

Pursuant to Article 922 of the Civil Code:

• 1. The deceased’s property rights and obligations pass, upon his or her death, to one or more persons in accordance with the provisions of this Book.
• 2. Rights and obligations of the deceased that are strictly personal to him or her, as well as rights which, upon his or her death, pass to designated persons regardless of whether they are heirs, do not form part of the estate.
• 3. The debts of the estate also include the costs of the testator’s funeral to the extent that such a funeral corresponds to the customs accepted in the community concerned, the costs of the probate proceedings, the obligation to satisfy claims for a reserved share, and the obligation to execute ordinary bequests and instructions, as well as other obligations provided for in the provisions of this Book.

In accordance with the general principle of inheritance law set out in Articles 924 and 925 of the Civil Code, heirs acquire the inheritance by operation of law upon the opening of the succession, i.e. at the time of the testator’s death. In a substantive sense, the acquisition of rights therefore takes place automatically, without the need for any further action.

In practice, however, in order to be able to effectively assert their rights against third parties, including the company, heirs are required to initiate one of two proceedings:

• court proceedings to confirm the acquisition of the estate (Article 1025 of the Civil Code), or
• obtaining a certificate of inheritance drawn up by a notary.

Only these documents formally confirm the circle of entitled persons and constitute proof of rights to shares in the company.

Although the acquisition of the inheritance takes place automatically upon the death of a partner, the legislator, in order to protect the interests of the company itself and the remaining partners, has introduced additional procedural requirements.

For example, in the case of a limited liability company, such a procedural obligation arises from Article 187(1) of the Commercial Companies Code, which provides that:

• 1. The interested parties shall notify the company of the transfer of a share, part thereof or a fractional part thereof to another person, and of the creation of a pledge or usufruct over a share, presenting evidence of the transfer or of the creation of the pledge or usufruct. The transfer of a share, part thereof or a fractional part of a share, and the creation of a pledge or usufruct, shall be effective vis-à-vis the company from the moment the company receives notification thereof from one of the interested parties, together with proof of the transaction.

It is also worth considering the situation where the shares of a deceased partner are held by several heirs. In such a case, the provision of Article 184 of the Commercial Companies Code applies to a limited liability company, which states that:

• 1. Joint holders of a share or shares shall exercise their rights in the company through a joint representative; they shall be jointly and severally liable for obligations relating to the share.
• 2. If the co-owners have not appointed a common representative, declarations to the company may be made to any one of them.

From the perspective of the remaining partners, it is of paramount importance who will assume the rights and obligations of the deceased partner. In some cases, this is of crucial importance for the company’s continued operation. For this reason, it is advisable to ensure that this matter is properly regulated in the partnership agreement, even at the stage of its formation.

The Commercial Companies Code affords partners considerable freedom in this regard. Pursuant to Article 183(1) of the Commercial Companies Code, the partnership agreement may restrict or even entirely exclude the possibility of heirs joining the partnership in place of the deceased partner. However, for such provisions to be effective, the articles of association must simultaneously set out the rules for compensating heirs who do not join the company. The absence of such provisions renders the restriction or exclusion invalid, and the heirs automatically acquire the status of partners.

A similar provision is set out in Article 183(2) of the Commercial Companies Code, which allows for the inclusion in the partnership agreement of clauses restricting the distribution of shares where the deceased partner held more than one share. This helps prevent the fragmentation of the company’s ownership structure and maintain control over the circle of partners. In this case too, it is mandatory to specify the rules for repaying the heirs so as not to deprive them of the equivalent value of the shares they have inherited.

Although the Commercial Companies Code does not impose specific requirements regarding how the amount of such payments is to be determined, legal doctrine holds that they should correspond to the fair value of the deceased partner’s shares and be paid within a reasonable timeframe. It is therefore unacceptable to formulate these provisions in a manner that is unduly disadvantageous to the heirs.

It is also advisable for the articles of association to specify the fate of the deceased partner’s shares. One possible solution is to include a provision for their redemption – whether automatic or requiring a resolution of the partners. Such a solution allows the company to maintain the stability of its ownership structure and avoid the entry of undesirable persons into it.

Death of a partner in a company – Summary

The death of a partner in a commercial company has different consequences depending on the company’s form. In partnerships (general partnership, professional partnership, limited partnership, and limited joint-stock partnership), the absence of appropriate provisions in the partnership agreement may lead to its dissolution and the need for liquidation, although it is possible to introduce continuation clauses or rules for the repayment of heirs, which allow business continuity to be maintained. In capital companies, the death of a partner generally does not affect the company’s existence – their shares form part of the estate and pass to the heirs; however, proof of inheritance is required for the effective exercise of rights within the company. Appropriate provisions in the partnership agreement or articles of association allow for control over the circle of partners, help avoid conflicts and ensure the stability of the company’s operations.

Author

Adrian Łukasik

Radca prawny, Senior Associate

He gained his professional experience in one of Lublin's renowned law firms, dealing with civil and business law in its broadest sense. At the law firm Hewelt Wojnowski i Wspólnicy spółka komandytowa, he deals on a daily basis with current counseling in the field of business and the development of corporate documentation of companies, such as. Company agreements, bylaws of company bodies, agreements regulating relations between shareholders, resolutions of company bodies, M&A transactions. In addition to…

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