REGULATION AND NATURE OF LIMITED LIABILITY PARTNERSHIPS

[Dr. Sanjiv Agarwal]

A limited liability partnership in India would be regulated by LLP Act 2008 and several other enactments such as Companies Act, 1956, Income Tax Act, 1961, Indian Partnership Act, 1932,  Information Technology Act, 2000, General Clauses Act, 1897, SEBI Act, 1992, Code of Civil Procedure 1908,etc.

In India, the LLP Act 2008, creates a new form of legal entity, the LLP, which will be a body corporate and exist as a legal person separate from its members. The members of LLP benefit from the limited liability partnership as LLP is a separate legal person. As a general rule, LLP and not its members will be liable to third parties.

According to Press release issued by Ministry of corporate Affairs, Government of India, on enactment of LLP Act, 2008, LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner. It states that for a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.

The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals.

LLP is a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus all having individual partners to be shielded from joint liability created by another partner's wrongful business decisions misconduct.

The salient features of the LLP Act, 2008 are as under :-

(i) The LLP is an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.

(ii) The Act does not restrict the benefit of LLP structure to certain classes of professionals only but would be available for use by any enterprise which fulfills the requirements of the Act.

(iii) While the LLP is a separate legal entity, liable to the full extent of its assets, the liability of the partners is limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner's wrongful business decisions or misconduct.

(iv) LLP is a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike a ordinary partnership firm where the maximum number of partners can not exceed 20.

(v) An LLP is under obligation to maintain annual accounts reflecting true and fair view of its state of affairs.

(vi) Provisions have been made in the Act for corporate actions like mergers, amalgamations etc.

(vii) While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Act, detailed provisions in this regard would be provided by way of rules under the Act. 

 Limited liability partnership to be body corporate (Section 3)

 Section 3 provides that -

(1) A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.

(2) A limited liability partnership shall have perpetual succession;

(3) Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.

This section seeks to provide that Limited Liability Partnership (LLP) is to be a body corporate having perpetual succession and a legal entity separate from its partners and any change in the partners of such partnership shall not affect its liabilities. It provides for the most significant characteristic of a limited liability partnership is that it is a body corporate - an artificial person recognized by law capable of holding property in its name and capable of suing and being sued in its name. This characteristic makes it a different personality from its partners so that any change in the partners of an LLP does not make any difference to LLP and it has a perpetual succession regardless of the status of its partners.

A limited liability partnership is -

-   a body corporate formed and incorporated under the LLP Act and

- is a legal entity separate from that of its partners.

An LLP is a body corporate incorporated under the LLP Act. Under the LLP Act, a 'body corporate' has been defined under Section 2(1)(d) in terms of the specified form of entities which can be considered as a body corporate

A body corporate comes into existence by virtue of its incorporation under a statute capable of providing body corporate status to the entity getting so incorporated. An LLP becomes a body corporate by virtue of its registration or incorporation under the LLP Act. One of the effects of incorporation is stated under Section 14 of the Act which provides that on registration ( i.e. on incorporation), an LLP shall be capable of suing and being sued, acquiring, owning, holding and developing or disposing of property, having a common seal and doing and suffering such other acts and things as bodies corporate may lawfully do and suffer. The merits of corporate form of organization are that large capital base could be created, perpetual succession is ensured, liability of members is limited, there is liquidity due to free transfer of shares, protection of investor's interest and control is done in a democratic way.

An LLP is a legal entity separate from its partners. On incorporation, an LLP becomes a body corporate and is capable of functioning as an incorporated individual. The enterprise acquires its own entity. It becomes impersonalized. No partner can say that he is owner of the LLP. The business now belongs to an institution. Also, LLP being a separate person from its partners, they do not carry personal liability for the acts of the firm their names and identity is open to the public.

In the context of an LLP, the Act makes a partner personally liable for his own wrongful act or omission. Thus the situation of lifting of corporate veil may not arise to uncover the fraud, if any committed by an LLP.  

A juridical legal entity separate from its members may not be a body corporate. The Limited Liability Partnerships (Jersey) Law 1997 creates a new type of legal entity in Jersey: a partnership that is a separate legal person distinct from the partners of whom it is composed but which is not a body corporate. An entity may have a separate legal personality but not be a body corporate. As a matter of English law, for example, the Partnership Act 1890 provides in section 4(2) that in Scotland a firm (which is not a body corporate) is a legal person distinct from the partners of whom it is composed. The Law expressly provides that a limited liability partnership is not a body corporate by including in Article 2(4) the words "other than a body corporate". Such a separate legal personality is also not inconsistent with partnership and does not imply that a limited liability partnership has perpetual succession. In not having perpetual succession a limited liability partnership is fundamentally different in character from a body corporate.

A limited liability partnership, like a company, has perpetual succession. All corporations, however they come into existence, have perpetual succession, i.e., they were not born and so cannot die. They have been created by a process of law and can only go out of existence by a process of law. They will exist even when all their human members are dead, for every corporation is a separate legal person from those who compose it.

Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but does not affect the company's continuity, "in the like manner as the river Thames is still the same river, though the parts which compose it are changing every instant."(Blackstone commentaries, quoted by F. Pollock, Jurisprudence and Legal Essays: The Fiction Theory of Corporations, 219 (1961))

There are numerous judgments and commentaries commenting upon the feature of perpetual succession of a company or a corporation. The same principles as apply to a corporation are also applicable to an LLP as it has been granted the feature of perpetual succession under the law. Thus any change in the partners of a limited liability partnership shall not affect its existence, rights or liabilities.

Non-applicability of the Indian Partnership Act, 1932 (Section 4)

Section 4 seeks to provide that the provisions of the Indian Partnership Act, 1932 shall not apply to an LLP and provides as under-

"Save as otherwise provided, the provisions of the Indian Partnership Act, 1932  (9 of 1932) shall not apply to a limited liability partnership".

A limited liability partnership has its genesis in the general partnership which, in India, is governed by the Partnership Act, 1932 , but it has maximum features of a company form of organization, which is governed by the Companies Act, 1956. Thus under the LLP Act, some of the provisions are similar to those under the Partnership Act and some are similar to those under the Companies Act.

As the LLPs are governed more like companies and even the administrative machinery is same for LLPs and companies in India, they are more near to companies in their administrative requirements, and are markedly different from partnerships because of their separate legal entity and perpetual existence and also because of absence of agency relationship between the partners. Thus, it is important to signify that unless the LLP Act has adopted specified features of general partnerships, the provisions of the Partnership Act, 1932, would not apply to an LLP by default. Section 4 of the Act explicitly provides for the same.

Some of the areas in which the law relating to partnerships is similar to that relating to LLPs are as follows:

1. The acts of partners of both general partnerships and LLPs are binding on the partnership and LLP respectively except where:

(i) the partner had no authority to act; and

(ii) the third party knew of the lack of his authority; or did not know or believe him to be a partner [section 26 of the LLP Act / section 18 of the Partnership Act, 1932]

2. Both LLPs and partnerships require a minimum of two partners [section 6 of the LLP Act / section 4 of the Partnership Act, 1932]

3. Unless otherwise provided in the limited liability partnership agreement or the partnership agreement respectively, partners of both LLPs and general partnerships share equally in the capital and the profits of the business, [section 23(2) read with paragraph 2 of the First Schedule to the LLP Act / section 13 of the Partnership Act, 1932]

4. If any person represents himself as a partner in a limited liability partnership or knowingly permits himself to be so represented, without being so, is liable to the third party who has given credit to the LLP based on such representation. [Section 29(1) of the LLP Act /Section 28 of the Partnership Act, 1932]

5. The transfer of right to share profits/distribution by a partner to a third party does not by itself entitle the transferee to participate in the management or conduct the activities of the LLP or access information concerning the transactions thereof. [Section 42 of the LLP Act /Section 29 of the Partnership Act, 1932]