LIMITED LIABILITY PARTNERSHIP-PART-XII - (Unlimited Liability in case of Fraud)

[Dr. Sanjiv Agarwal]

Section 30 of LLP Act, 2008   seeks to provide for unlimited liability of the LLP and its partners in case LLP or any of its partners carry out an act with intent to defraud creditors of the LLP or any other person or if they carry out an act for any fraudulent purpose. The clause further seeks to provide that in case any such act is carried out by a partner, the LLP is liable to the same extent as the partner unless it is established by the LLP that such act was without the knowledge or the authority of the LLP. This clause further seeks to provide that any person who knowingly carries such act shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees. The clause further seeks to provide that where an LLP or any partner or designated partner or employee of such LLP has conducted the affairs of the LLP in a fraudulent manner, then without prejudice to any criminal proceedings which may arise under any law for the time being in force, the LLP and any such partner or designated partner or employee shall be liable to pay compensation to any person who has suffered any loss or damage by reason of such conduct.

Section 30 of LLP Act, 2008  is a kind of exception to the limited liability situation of an LLP and provides for the circumstances in which an LLP and also its partners can have unlimited liability.

Unlimited Liability in Frauds [Section 30(1)]

In the event of an act carried out by a limited liability partnership, or any of its partners, with intent to-

(a) defraud creditors of the limited liability partnership, or

(b) defraud any other person, or

(c) for any fraudulent purpose the liability of the limited liability partnership and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the limited liability partnership.

A view of the above provision reveals that it is very broad in its coverage as to the kind of fraud - as the fraud could be against creditors or against any other person, or it could be for fraudulent purpose.

Further, the unlimited liability of LLP and the partner involved in the fraud is unlimited not only with respect to the liability arising out of the fraud but also for all or any of the debts or other liabilities of the limited liability partnership. This provision simply takes away the limited liability characteristic of an LLP in case any fraud is established and thus creates the risk factor for an LLP for retaining its limited liability position.

The expressions 'fraud' and 'fraudulent purpose' have not been defined under the LLP Act. Section 17 of the Indian Contract Act, 1872 defines the expression 'fraud' as under- "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent  to deceive another party thereto of his  agent,  or  to induce him to enter into the contract:-

1) the suggestion, as a fact, of that which is not  true, by one who does not believe it to be true;

2) the active concealment  of  a  fact  by  one   having knowledge or belief of the fact;

3) a promise made without any intention of performing it

4) any other act fitted to deceive;

5) any such act or omission as the law specially  declares to be fraudulent.

Explanation.- Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

It may be noted that that in case any fraudulent act in question is carried out by a partner, the limited liability partnership is liable to the same extent as the partner unless it is established by the limited liability partnership that such act was without the knowledge or the authority of the limited liability partnership.

Penalty for Non compliance of sub section 1 [section 30(2)]

This sub-section defines penalty for the offence committed under sub-section (1) by every person who was knowingly a party to the carrying on of the business in the fraudulent manner. Such person shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

It may be noted that this liability can extend to any person - and not restricted to partners of the LLP. Thus an employee of LLP may also be subjected to such fine and criminal penalties if his involvement in fraud is established.

Right of the Defrauded Person [Section 30(3)]

This sub-section takes care of the right of the defrauded person to recover damages from the LLP/the partner involved in fraud against such person. It provides that where a limited liability partnership or any partner or designated partner or employee of such limited liability partnership has conducted the affairs of the limited liability partnership in a fraudulent manner, then the liability of the LLP and the related partner is not limited to the fine and criminal proceedings specified under section 30(2), it extends to the payment of compensation to any person who has suffered any loss or damage by reason of such conduct.

Again, it has categorically been made clear that such LLP shall not be liable if any such partner or employee has acted fraudulently without knowledge of the limited liability partnership.