LLP PARTNERS & THEIR RELATIONSHIP PART-VII

[Dr. Sanjiv Agarwal]

Partners and their relations

Chapter 4 of the LLP Act, covers Section 22 to Section 25. Section 22 prescribes who would be considered as a partner of an LLP. Section 23 provides that the mutual rights and duties amongst the partners' inter-se and between partners and LLP shall be governed by the LLP agreement and in the absence of such agreement, shall be governed by the relevant provisions of the LLP Act. Section 24 prescribes the circumstances when a person may cease to be a partner of an LLP and governs the rights and duties of the person who is ceased to be a partner as well as of the LLP. Section 25 emphasizes on the requirement of public information regarding the fact of cessation of a partner from LLP and provides the mode in which such information has to be disseminated to the Registrar or third parties. The Section also prescribes penalties for default made in relation to its provisions.

Eligibility to be partners (Section 22)

Section 23 of LLP Act seeks to provide that the persons who subscribe their names to the incorporation document shall be partners of LLP and any other person may also become partner of the LLP in accordance with its agreement.

This section provides that there are two ways in which a person can become a partner in an LLP - one is by subscribing his name to the incorporation document and other is by following the procedures/norms prescribed in the partnership agreement for this purpose.

The first partners of an LLP are those who signed the incorporation document. Section 41 of the Companies Act, 1956 also contains a similar provision with respect to the members of a company. It provides that the subscribers of the memorandum of association shall be deemed to have agreed to become members of the company, and on its registration shall be entered as members in the register of members. In this regard, it was held in Official Liquidator v. Suleman Bhai (AIR 1955 MB 166), that the subscriber of the memorandum is to be treated as having become the member by the very fact of subscription. Neither application form, nor allotment of shares is necessary. Even an absence of entry in the register of members cannot deprive him of his status. He acquires, as soon as the company is registered, the full status of a member with all the rights and liabilities. 

After incorporation, any person may become a partner of an LLP by agreement with the existing partners. The agreement may prescribe any mode for taking a person as a partner in the LLP. It could be an admission of partner with the consent of three fourths of the partners or a partner having 10 years of (specified) professional experience and consent of majority of partners or any other criteria specified in the agreement. In the absence of partnership agreement or in the absence of a clause to this effect in the agreement, a new partner can be admitted to an LLP with the consent of all the existing partners as per the default provisions under Schedule I of the LLP Act, 2008.

Thus, a person can become a partner in an LLP in either of the above two modes. Thus a person who may be holding beneficial interest of a partner or a nominee of a deceased partner would not be considered as partner in LLP despite having interest therein. In context of the Companies Act, 1956, in Balkrishan Gupt v. Swadeshi Polytex Ltd. (1985) 58 Comp. cas 563 SC, it was held that a pawnee of shares or a receiver appointed under Section 182A of the Land Revenue Act, or the person in whose favour, the order for attachment of shares has been passed by the court does not acquire any rights of a member.

Relationship of Partners (Section 23)

Section 23 of the LLP Act seeks to provide that the mutual rights and duties of the partners of the LLP inter se and that of the LLP and its partners shall be governed by the LLP agreement and in absence of any such agreement, such mutual rights and duties shall be determined as set out in the First Schedule of the Act. It also seeks to empower the Central Government to prescribe, by rules, the form, manner and fees for filing the LLP agreement and informing changes therein. This clause further seeks to provide that any agreement, made before the incorporation of LLP, between the partners who subscribe their names to the incorporation document may impose obligation on LLP, if ratified by all the partners after its incorporation.

Section 23 of the LLP Act provides that the relationship of partners with LLP and as also between themselves is governed by the partnership agreement and in the absence thereof, is covered by the default provisions in this regard given under Schedule I of the Act.

Section 23(1)

As regards the management of the internal affairs of the LLP there is a parallel with the system that operates for partnerships. As in case of partnership, the mutual rights and duties of the partners of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partners are governed by the limited liability partnership agreement.

Partners are not obliged to enter into a formal agreement among themselves and there is no obligation to publish any agreement which is entered into. As in the case of partnerships, however, there will, in general, be clear advantages in having a formal written agreement between partners to regulate the affairs of the undertaking and to avoid disputes between them. The formal procedures needed to establish an LLP, including the need for an application to the registrar of companies, are likely to encourage the partners to set up a formal arrangement before the LLP commences business.

As per Rule 21 of the LLP Rules, every limited liability partnership shall file information with regard to the limited liability partnership agreement in Form 4 with the registrar within 30 days from the date of agreement.

1.      Here, notable point is that under the LLP rules, the partnership agreement to be submitted to the Registrar is supposed to be in a given format (i.e. Form No. 4) rather than in the usual form of a legal agreement.

In case, an LLP decides to make an LLP agreement; it would require determining parameters under above heads and Form 4 filled in with the above details is to be filed with the Registrar within 30 days of the agreement. It may be noted that though the law has provided a time limit to submit partnership agreement to the Registrar, however, forming and filing a partnership agreement as such is not a mandatory requirement.

Section 23(2)

This sub-section provides that limited liability partnership agreement and any changes, made therein shall be filed with the Registrar in such form, manner and accompanied by such fees as may be prescribed.