LIMITED LIABILITY PARTNERSHIPS - PART VIII - (Cessation of Partnership Interest)

[Dr. Sanjiv Agarwal]

Section 24 of LLP Act, 2008 seeks to provide for the circumstances and disqualifications under which or pursuant to which a person may cease to be a partner of an LLP. It also seeks to provide for a partner's obligation to the LLP or to the other partners or to other persons incurred during the period when he was a partner of the LLP. It also seeks to provide that a former partner or a person entitled to his share in case of death or insolvency of former partner shall not have any right to interfere in the management of the LLP.

Section 24 of LLP Act, 2008 deals with the issue of cessation of a partner from an LLP and provides for the circumstances causing cessation, and rights and duties of LLP and partners in such circumstances.

Modes of Cessation [Section 24(1)]

This sub-section provides for the modes in which a partner can formally cause cessation of his partnership from an LLP -

1. If the partnership agreement provides for the mode of cessation of partner from LLP, a person may cease to be a partner of a limited liability partnership in accordance with such agreement - LLP Act does not categorically envisages the situation of resignation or expulsion of a partner (as is provided in the Indian Partnership Act) - usually cessation of partnership interest happens with reference to the resignation of partner, however, it depends upon the partnership agreement if there is any situation/procedure prescribed for expulsion of a partner, and if so is there, cessation of partnership interest may be a result of expulsion of  a partner also.

2. If there is no partnership agreement or the agreement does not provide for the mode/circumstances for cessation of a partner from LLP, a partner may opt to move out of partnership by giving a notice in writing to the other partners of his intention to resign as partner. The notice should be given at least 30 days before the date on which the partner wants to opt out of the partnership.

As per Rule 15 read with Section 13 of the Act, a document (as also a notice) can be served on a LLP or a partner through electronic transmission or through courier (for detailed discussion on mode of serving of document, refer commentary of Section 13 of the Act).

The above provision is similar to the provisions contained in Section 11 of the Singapore LLP Act.

Circumstances Necessitating Cessation [Section 24(2)]

This sub-section provides for the circumstances, which necessitates cessation of a partner from the LLP. It provides that a person shall cease to be a partner of a limited liability partnership in any of the three circumstances discussed below-

(a) On the death of partner or dissolution of the limited liability partnership - This provision mentions two different circumstances necessitating cessation of partnership interest. One is death of a partner - as a natural consequence of which, such partner would stop having any partnership interest in LLP, and the other is - dissolution of LLP.

The corresponding provision in the Singapore LLP Act (i.e. Section 11(2)) provides that a partner of a limited liability partnership shall cease to be a partner upon the death or dissolution of the partner.

The provision provides that a partner of a limited liability partnership shall cease to be a partner upon his death (the expression dissolution is used in context of LLP and not in context of partner). Thus for cessation of partnership interest, the Indian LLP provision talks about death of partner only, it does not consider a situation of dissolution of a corporate body being a partner of LLP. The moot question is that whether the expression 'death of partner' can be construed as 'dissolution of a partner'.

Dissolution of LLP is a situation whose natural consequence is cessation of interest of all the partners therein.

 (b) If partner is declared to be of unsound mind by a competent court - As per the Indian provisions, if a partner is declared to be of unsound mind, he ceases to be a partner of the firm. In many countries like Singapore, a person does not cease to be a partner in such situation.

(c) If partners have applied to be adjudged as an insolvent or declared as an insolvent - An un-discharged insolvent and the one who has applied for adjudication as an insolvent cease to have partnership interest in an LLP. The purpose of these provisions is firstly to set some standards of corporate manager ship, a degree of competency and responsibility and to save the co-partners and the community at large from the consequences of mismanagement. Thus the prohibition on insolvents from being a partner of an LLP is not intended to punish him, but to protect the community. In this context, Section 12 of the Partner's Responsibility [Section 24(3)]

This sub-section broadly infers that unless the third parties dealing with an LLP have a notice of the fact that a particular partner is no more a part of the LLP, such partner shall continue to be responsible for the acts of the firm vis-à-vis these third parties. Further, the third parties would be deemed to have notice of the fact of cessation of a partner from LLP, if -

(a)   such third party has notice that the former partner has ceased to be a partner of the limited liability partnership; or

(b)   notice that the former partner has ceased to be a partner of the limited liability partnership has been delivered to the Registrar.

As per Section 25 read with Rule 22, where a person ceases to be a partner or where there is any change in the name or address of a partner, the limited liability partnership shall file with the Registrar, a notice in Form 5. However, if the partner ceasing relationship with LLP has reasonable cause to believe that the LLP may not file the notice with the Registrar, he may himself file with the notice of his cessation of partnership interest with the Registrar and in case of any such notice filed by a partner, the Registrar shall obtain a confirmation to this effect from the limited liability partnership. Where no confirmation is given by the limited liability partnership within fifteen days, the Registrar shall register the notice made by a person ceasing to be a partner.

Discharge of Obligation [Section 24(4)]

The cessation of a partner from the limited liability partnership does not by itself discharge the partner from any obligation to the limited liability partnership or to the other partners or to any other person which he incurred while being a partner. This provision is similar to that of the resignation of director from company where a director is liable for the acts done by the company before the date of his resignation.

Rights of a Former Partners [Section 24(5)&(6)]

These provisions deal with the rights of a former partner/person entitled to the share of former partner in consequence of his death or insolvency.

As per the provisions a former partner/person entitled to the share of former partner in consequence of his death or insolvency shall be entitled to receive from the limited liability partnership—

(a)   an amount equal to the capital contribution of the former partner actually made to the limited liability partnership; and

(b)   his right to share in the accumulated profits of the limited liability partnership, after the deduction of accumulated losses of the limited liability partnership, determined as at the date the former partner ceased to be a partner.

Thus the rights of a former partner or a person entitled to his share in consequence of the death or insolvency are limited to the beneficial interest in the LLP, and do not extend to the right to interfere in the management of the limited liability partnership.