LIMITED LIABILITY PARTNERSHIP-PART X - (LIABILITY)

[Dr. Sanjiv Agarwal]

Section 27 of LLP Act, 2008 provide that the LLP shall not be bound by anything done by a partner in dealing with a person if that partner has no authority to act for LLP in doing a particular act and the person with whom he is dealing also knows that the partner has no authority for such act and to provide that an obligation of LLP, whether arising out of contract or otherwise will solely be the obligation of LLP. It also seeks to provide that liabilities of LLP are to be met from the property of LLP. It further seeks to provide that LLP shall be liable for a wrongful act or omission by a partner in the course of the business of the LLP or with its authority.

This section describes the extent of liability of an LLP and provides that an LLP is liable for acts of its partner whether rightful or wrongful if such acts are done within his authority.

Circumstances when LLP not liable [Section 27(1)]

This sub-section infers that though a limited liability partnership is liable for the acts of its partners which are done within the authority and in the usual course of business; however, it is not liable to any person for the acts of its partner(s) in the following circumstances -

the partner in fact has no authority to act for the limited liability partnership in doing a particular act; and

the dealing person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership.

The crux of this is that if the third party deals with a person knowing that such person does have authority to the subject deal or that such person are not at all partner of the LLP while he is representing so, then such person cannot make LLP liable for the deal. This is based on the basic principle of agency under the Indian Contract Act, 1872.

The above conditions are simultaneous which focus on the question of existence of dealing capacity of a partner and knowledge of the third party about the fact of dealing capacity of a partner on behalf of LLP. If both these factors can be established, in such case, an LLP may not be held liable for the acts of such partner towards the third party.

The above situation may arise in any of the following circumstances -

When the third party deliberately deals with a partner without authority/a person who is not a partner but still acting on behalf of LLP, and later on holds LLP liable for the deal - this is a clear cut position where LLP is not liable

When third party does not know the position of the partner incapacitating him to make the deal but the party is presumed to know such fact because of it being an open fact about LLP being mentioned in the documents registered with the Registrar which are accessible for public inspection - in this position, an LLP may not be held liable (a detailed discussion in this regard is made below)

When third party does not know the position of the partner incapacitating him to make the deal and the party is not in a position to know such fact about LLP, for example where a partner cesses his interest from partnership and proper public notice has not been made in this regard and third person dealing with such former partner thinking that he is acting on behalf of the firm - in this position, the LLP may be held liable for the acts of such partner

Section 36 of the LLP Act, 2008 provides the provision for public inspection of incorporation document and other specified records of an LLP. These being open to public for inspection, it may be presumed that the person dealing with an LLP or a partner thereof has knowledge of the facts mentioned in these documents (though the person may not have read these documents on his part).

LLP Liable for Acts of Partners [Section 27(2)]

This sub-section elaborates on the fact that given the position that an LLP is liable for the acts of its partners done in the course of business, this liability would exist even in a situation where  a partner thereof commits a wrongful act or omission in the course of the business or with the authority of LLP. The personal liability of the partner in this regard would also exist and the liability of the partner and the LLP would be to the same extent.

Thus, the point is that the LLP would remain liable even for wrongful acts of its partners for the acts done in the course of business within the authority given by the LLP.

Obligation of LLP [Section 27(3) & (4)]

Whenever a partner acts for an LLP in the course of business, an obligation whether arising in contract or otherwise, is solely the obligation of the LLP which is to be met out of its property. However, the LLP shall not be bound by anything done by a partner in dealing with a person if that partner has no authority to act for LLP in doing a particular act and the person with whom he is dealing also knows that the partner has no authority for such act and to provide that an obligation of LLP.

From the above it can be inferred that -

An LLP is liable for the acts of its partners if done in course of business and within its authority.

The liability may arise on any account - contractual or otherwise

The liability is to be met out of the property of LLP

An LLP is liable for the acts of its partners if done in course of business and within its authority. Every partner of an LLP is considered in law to be an agent of the LLP, and as such may represent and act on behalf of the LLP in all its business. But as an agent, a partner can make the principal legally responsible for his acts only when he is authorized by the principal (LLP) to act that way. To know the extent to which a principal can be liable for the acts of an agent, it is required to know all dimensions of the agent's authority.

The obligation of LLP is to be met out of partnership property. An LLP is a separate legal entity and is capable of holding, acquiring or disposing off its own property. However, the expression partnership property has not been defined in the Act. As a contract a general partnership is not a separate legal entity but the Partnership Act, 1932, under Section 14 thereof provides that the property of the firm shall in the absence of a contract to the contrary shall include - "all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm."

Though Section 3 of the LLP Act specifically provides that the Partnership Act, 1932 will not apply in to LLPs in default, however, the definition of partnership property under the said Act gives a broad idea as to the substance of the property.