LIMITED LIABILITY PARTNERSHIP-PART-XXVII - (INVESTIGATION - RECOVERY OF DAMAGES/ PROPERTY)

[Dr. Sanjiv Agarwal]

Proceedings for recovery of damages or property (Section 52)

Section 52 of LLP Act, 2008 provides that If, from any report under section 49, it appears to the Central Government that proceedings ought, in the public interest, to be brought by the limited liability partnership or any entity whose affairs have been investigated,

(a) for the recovery of damages in respect of any fraud, misfeasance or other misconduct in connection with the promotion or formation, or the management of the affairs, of such limited liability partnership or such other entity; or

(b) for the recovery of any property of such limited liability partnership or such other entity, which has been misapplied or wrongfully retained,

the Central Government may itself bring proceedings for that purpose.

Section 52 seeks to provide that if from any report of inspector, it appears to the Central Government that proceedings ought, in the public interest, to be brought by the LLP or any entity whose affairs have been investigated for the recovery of damages in respect of any fraud, misfeasance or other misconduct in connection with the promotion or formation, or the management of the affairs, of such LLP or such other entity or for the recovery of any property of such LLP or such other entity, which has been misapplied or wrongfully retained, the Central Government may itself bring proceedings for that purpose.

Action by Government

Section 52 provides for recovery of damages or property by bringing in proceedings by the Central Government. The report of investigation issued under section 49 should warrant such action to be taken in the public interest against the concerned LLP or other entity which has been investigated.

Power to Institute Civil Proceedings

This section gives power to the Central Government to institute civil proceedings for recovery of damages in respect of any fraud, misfeasance or other misconduct, or for recovery of any property which has been misapplied or wrongfully retained. Such proceedings can be initiated by the Central Government if on the receipt of report of the inspector, it appears that in the public interest proceedings ought to be brought by the LLP or any entity whose affairs are investigated under section 43. The Central Government may itself bring proceeding in the name of such LLP or against the person who is guilty for any of the charges, specified in clause (a) or (b) of the section.

If it appears to the Government that proceedings ought to be brought by the LLP or any other entity for the recovery of damages in respect of fraud, misfeasance or other misconduct in connection with the promotion or the management of the affairs of LLP, it may itself bring proceeding for that purpose Similarly, it may initiate proceedings for the recovery of any property of the LLP or other entity, which has been misapplied or wrongfully retained.

Actions under section 52

The action under section 52 is two fold - recovery of damages and recovery of any property. The proceedings have to be brought by the Central Government it self and against the LLP or other entity. No action can be taken under this section against partners or designated partners or any other person.

Damages

So far as damages are concerned, as per clause (a), it may be claimed in monetary terms in respect of -

a) fraud, or

b) misfeasance, or

c) other misconduct

in connection with any of the following -

(i) promotion or formation or

(ii) management or affairs

of any LLP or other entity.

The term "other misconduct" in clause (a) is to be construed ejusdem generis and includes misconduct of the nature of fraud and misfeasance but not moral turpitude. Selangor United Rubber Estates Ltd. v Cradock, (1968) 1 Comp LJ 26. Further, it was held that the term in connection with the promotion of formation or management of the affairs of such a company do not include the bankers of the company: SBA Properties Ltd v Cradock (1967) 2 Comp. LJ 254:(1967) 2 All E R 610.

The damages must relate to above acts and activities and pertain to any LLP or other entity which has been investigated. Moreover, such action or proceedings to claim damages must be taken against LLP or entity, in the public interest. Such action can not be taken against partners or designated partners.

Recovery of any property (movable as well as immovable) of any LLP or other entity which has been investigated can be made as per clause (b) of the section. The recovery of property shall be of such property which belongs to LLP or other entity and has been misapplied or wrongfully retained. Thus, it is not that any property of LLP or entity can be recovered but only those properties shall be subject to recovery by the Central Government under section 52 which have been misapplied or wrongfully retained.

The cost of such recovery proceedings shall not be payable by LLP but shall have to be borne by the Central Government as the proceedings are contemplated keeping in mind the public interest. This is, however, subject to section 53(3) of the LLP Act treating it as expenses of investigation.

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