This article discusses Limited Liability Partnerships in India, meaning and definition of Limited liability partnerships, liability of partners in an LLP and other relevant information. This article is written by Aditya Sharma, a 3rd year law student from Symbiosis Law School, Pune.
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| Limited liability partnerships in india |
Limited Liability Partnership
A Limited Liability Partnership is a corporate body which combines the flexibility of a partnership with the limited liability of a company. The overarching tenets of free trade infused with a desire for less bureaucratic burden has led to the growing popularity of Limited Liability Partnerships as forms of business association. Limited Liability Partnerships are governed by the provisions of The Limited Liability Partnership Act,2008[1]. This act was passed by the legislature pursuant to recommendations of the J.J. Irani Committee and the Naresh Chandra Committee and was modelled after the British LLP Act of 2000.
A Limited Liability Partnership shall be registered with the Registrar of Companies after following the process and provisions under The Limited Liability Partnership Act,2008[2]. Change in partners does not hamper the existence of the limited liability partnership. Thus, it can continue its existence even after the retirement, insanity, insolvency or even death of one or more partners[3]. An LLP is also capable of holding property and is capable of entering into contracts.
Unless specifically provided for, the provisions of The Indian Partnership Act,1932[4] shall not apply to a Limited Liability Partnership[5]. The rights and duties of the partners are governed by an agreement between them. They can also be governed by an agreement between the partners and the LLP. However, an obligation of the LLP which arises in contract or otherwise, is solely the obligation of the limited liability partnership.
Liability of Partners in an Limited Liability Partnership
A Limited Liability Company is considered to be a separate legal entity and is completely liable for its assets. This principle of separate legal standing was also recognised in the British case of Re, Rogers[6]. An advantage often associated with an LLP is the fact that the liability of the partners is limited to their agreed contribution in the Limited Liability Partnership. Furthermore, a partner is not liable for independent or un-authorized actions of other partners. This shields individual partners from joint liability created by another partner’s wrongful business decisions or misconduct. The partners are considered the agents of the Limited Liability Partnership and not of the other partners. This puts an Indian LLP on the same pedestal as a company within the meaning enshrined under the Indian Companies Act[7] as far as the personal liability of the partners is considered.
The case of Dubai Aluminium Co Ltd v Salaam and Others[8] is a testament to the fact that in a general partnership, the partners who have not committed any wrongdoing are also liable for the acts of the defaulting partner which depicts the risk liability involved with a general partnership firm. Whereas, in the case of BFI Optilas v Blyth & Others[9], the court refused to grant an injunction against the LLP while granting it against the partners constituting the LLP. It was held that restrictions enforceable against the partners are not automatically enforceable against the LLP as it is a separate legal entity.
By virtue of the legislation, every LLP must have at least two partners and at least two individuals as designated partners. Furthermore, at any given point of time, at least one designated partner should be a resident in India. If the number of partners of the LLP is reduced to below two and the LLP still carries on business for more than six months, then the partner who is carrying on with the business with the knowledge that he is the sole partner is personally liable for the obligations incurred by the LLP during that period of functioning.
Differences between a Limited Liability Partnership and a Company
The most vital difference that exists between a Limited Liability Partnership and a Company is with regards to the internal structure and rules that govern them. The internal governance of a company is in line with the rules and procedures laid down under The Companies Act,2013[10] and its previous iterations. However, the internal corporate governance and structure of an LLP is determined by the contractual agreement drawn up by the partners of the Limited Liability Partnership.
The nomenclature of the business associations is also considered to be of utmost importance, especially under judicial and contractual scrutiny. As held in the case of Dermatine Co Ltd v. Ashworth[11], deliberate or negligent omission of the entire name of the business association warrants serious legal consequences. In light of this both LLPs and Companies have to ensure that their name indicates their nature. For example, it is mandatory for a Private Limited company to use Private Limited at the end of the name of the company[12]. Similarly, a Limited Liability Partnership is required to use Limited Liability Partnership or LLP at the end of its name[13]. In the same vein, the constituents of an LLP are often referred to as partners while those of a Private Limited Company are referred to as members.
By virtue of Limited Liability Partnerships being corporate bodies, the Central Government is empowered to make certain provisions of the various Companies Acts applicable to them by means of notifications. The power to make changes and modifications in such notifications is also vested with the Central Government. There exists a difference in the business charter documents between a Company and an LLP. Memorandum of Association and Article of Association are essential for a Company while a Limited Liability Partnership is required to produce an LLP Agreement. The divide that exists in a company due to the inherent management-ownership separation is not an automatic feature of an LLP.
A Limited Liability Partnership also enjoys the fact that it has fewer compliance requirements when compared to a Company. A Private Limited Company is required to audit and file its account annually with the Ministry of Corporate Affairs. However, a Limited Liability Partnership is exempted from such rigid auditing
if it has an annual turnover which does not exceed forty lakh rupees. This leads to a more flexible state of affairs in an LLP when compared with a company. In a Limited Liability Partnership, the voting rights are decided and governed by the LLP Agreement whereas the voting rights in a company are derived on the basis of the number of shares a shareholder holds. Similarly, the transfer rights in a Limited Liability Partnership are also governed by the LLP Agreement.
if it has an annual turnover which does not exceed forty lakh rupees. This leads to a more flexible state of affairs in an LLP when compared with a company. In a Limited Liability Partnership, the voting rights are decided and governed by the LLP Agreement whereas the voting rights in a company are derived on the basis of the number of shares a shareholder holds. Similarly, the transfer rights in a Limited Liability Partnership are also governed by the LLP Agreement.
Viability, Present Scenario and Conclusion
The preceding sections highlight the features of Limited Liability Partnerships like
- Flexible State of Affairs
- Lesser Compliance Requirements
- Existence of LLP as a separate legal entity
- Liability of Partners limited to the contribution in the LLP
These features make the setting up of Limited Liability Partnerships a very alluring option, especially for practice of law, practice of public accountancy and practice of architecture.
While the rise in the number of Limited Liability Partnerships is very heartening for the Indian Economy, a number of lacunas still remain unlatched when it comes to the execution, governance and monitoring of these business associations. For example, the website of the Ministry of Corporate Affairs, which is supposed to be a watchdog for the activities of these business associations, only has data updated till the financial year 2014-2015. This is a very disappointing fact given that the Ministry of Corporate Affairs is also responsible for representing Indian interests in the global arena with an aim to attract investments and capital.
Though the ease of formation and dissolution are intended to work in favour of LLPs, a majority of corporate entities are still swaying towards incorporating companies. Even though the governmental policy is aimed at increasing India’s rank on the Ease of Doing Business Index, its actions suggest otherwise. Even after eleven years of passing the LLP statute, public sector undertakings often post tenders on the condition requiring the tenderer to be a registered company.[14]
The rise of India on the economic scale is very highly dependent on developing a potent manufacturing sector. However, due to the ambiguity surrounding the processes involved with the Limited Liability Partnerships and the capital-intensive nature of this sector, the government is pursuing a policy of promoting Small Companies by giving them a five percent rebate compared to LLPs. This effectively vitiates the efficiency of LLPs in all but the service sector. Prior to the passage of the 2015 amendment to The Companies Act,2013[15], Section 11 of the statute posed a hurdle to the formation of an LLP with more than 20 partners. Fortunately, the legislature heeded to the suggestions of various jurists and corporations and did away with such restrictions, which is a step in the positive direction.
The above discussion evidently demonstrates that a Limited Liability Partnership is a complicated legal entity, whose status and nature cannot be conclusively determined on the basis of either the principles of company law or law of partnerships alone . Undoubtedly, there is great potential in this entity: potential both for business as well as litigation. And with the already excessive burden on our judicial system, our country and the economy cannot bear the burden of incessant litigation caused due to ambiguity in law.
[1] The Limited Liability Partnership Act,2008, No.6 of 2009
[2] The Limited Liability Partnership Act,2008, No.6 of 2009
[3] Section 3(3), The Limited Liability Partnership Act,2008, No.6 of 2009
[4] The Indian Partnership Act,1932, No.9 of 1932
[5] Section 4, The Limited Liability Partnership Act,2008, No.6 of 2009
[6] Re, Rogers [2006] EWHC 753 (Ch)
[7]The Companies Act,2013, No. 18 of 2013
[8] Dubai Aluminium Co Ltd v Salaam and Others [2002] UKHL 48
[9] BFI Optilas v Blyth & Others [2002] EWHC 2693 (QB)
[10] The Companies Act,2013, No. 18 of 2013
[11] Dermatine Co Ltd v. Ashworth, (1905) 21 TLR 510
[12] Section 4(1), The Companies Act,2013, No. 18 of 2013
[13] Section 15, The Limited Liability Partnership Act,2008, No.6 of 2009
[14] Deepshika Shikarvar, Limited Liability Partnership framework revamp in the works, Economic Times, April 16 2019
[15] The Companies Act,2013, No. 18 of 2013+