LIMITED LIABILITY PARTNERSHIP-PART-XI - Extent of Liability of Partner

[Dr. Sanjiv Agarwal]

Section 28 of LLP Act, 2008 seeks to provide that the partner is not personally liable directly or indirectly for an obligation of LLP solely by reason of his being a partner of the LLP. It further seeks to provide that the obligation of an LLP shall not affect the personal liability of a partner for his own wrongful act or omission but a partner shall not be personally liable for wrongful act or omission of any other partner.

Section 28 deals with the extent of personal liability of a partner of LLP. It provides that a partner is not liable for LLPs obligation unless the obligation has arisen due to his own wrongful act or omission.

A partner will not be held personally liable, directly or indirectly for an obligation of the LLP, solely by reason of being a partner of the LLP. However, this liability shield will be withdrawn in case of an act carried out by a LLP with the intent to defraud creditors or for any other fraudulent purposes. Further, as each partner of the LLP is an agent of the LLP but not of other partners, therefore, a partner will be held personally liable for his own wrongful act or omission, but will not be liable for wrongful act and omission of any other partner of the LLP.

The basic feature of an LLP is to protect its partners from unlimited liability for the acts of the firm and also for the acts of other partners as is there in case of general partnerships. The protection to the partners of an LLP against the unlimited liability differs from jurisdiction to jurisdiction and can be broadly classified as under:

(a) Partial shield jurisdictions, in which the liability protection afforded to partners extends only to malpractice liabilities, leaving the partners exposed to contractual claims against the partnership; and

(b) Full shield jurisdictions, in which the liability protection afforded to partners extends to all claims against the partnership, whether based on malpractice, breach of contract or general tort liability. 

The LLP Act provides full shield protection to the partners of an LLP. Section 27 thereof defines the extent of liability of an LLP for the acts of a partner and broadly provides that when a partner acts on behalf of LLP within his authority, LLP is bound by it and the liabilities arising there from would be met out of the property of partnership. However, where a partner acts beyond his authority and the third party dealing with the partner knows this fact, in such case, LLP would not be liable for the resulting liability, if any. Also, in case of wrongful act or omission of a partner, LLP and such partner are liable to the same extent.

Though the provisions provide a full shield protection, however as LLP's are a new type of entity, there is very little case history examining the extent of liability and precedents have not yet been set. In a professional firm scenario, if a partner of a LLP were to give bad advice or otherwise act negligently towards a client and the client suffered a loss as a result, the client may be able to take the LLP to court and be awarded appropriate compensation either from the partner who gave the advice or the partnership as a whole. It is unlikely that the other partners who were not directly involved in the advice will have any personal liability, unlike a traditional partnership where they would have had joint and several liability for these actions. It is essential to note that this concept has not yet been tested in a court of law and it should not preclude anyone in this type of situation from having the appropriate insurance indemnity cover.  

Holding Out

Section 29 of LLP Act, 2008 seeks to provide that any person, who by words spoken or written or by conduct, represents himself, or knowingly permits himself to be represented to be a partner in any LLP is liable to any person who has on the faith of any such representation given credit to the LLP, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. It also seeks to provide that where any credit is received by the LLP as a result of such representation, the LLP shall, without prejudice to the liability of the person so representing himself or represented to be a partner, be liable to the extent of credit received by it or any financial benefit derived thereon. The clause further seeks to provide that where after a partner's death the business is continued in the same LLP name, the continued, use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death. 

The section 29 provision is similar to Section 28 of the Indian Partnership Act, 1932. It provides that if the behavior of a person cause misunderstanding to the third parties that he is a partner in a firm (when actually he is not) , later on such person is estopped from denying the fact that he is a partner in context with dealings with such third parties.

'Holding out' means that a person holds himself out to the world as a partner of the firm while actually not being so. This situation frequently occurs when a partner retires from a firm and notice is not given properly to third parties. In Seraf v. Jardine (1882) 7 A.C. 345, a partner retired from a partnership firm and a creditor continued to give advances to the firm with the belief that the said partner was still a partner in the firm. It was held that the firm as well as the retired partner was liable to repay the amount advanced by such creditor.

However, where after a partner's death the business is continued in the same LLP name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the limited liability partnership done after his death. This provision is similar to the corresponding provision under the general Partnership Act. To refer a judicial precedent on the point, in Bagel v. Miller (1903) 2 KB 212, it was held that the estate of deceased partner was not liable because the firm did not owe the price of the goods in his lifetime.