LIMITED LIABILITY PARTNERSHIP AGREEMENT

[Mr. M. GOVINDARAJAN]

The Limited Liability Partnership Bill, 2008 provides that the limited liability partnership ('LLP' for short) is a body corporate as defined in Section 3 of the Companies Act, 1956.   The companies registered under the Companies Act are having Memorandum of Association which speaks about the objects of the companies and Articles of Association which deals with the internal affairs of the company.  The partnership firm under the Partnership Act is to have a partnership deed.  The LLP is a hybrid of Companies Act and Partnership Act.   The bill provides for the limited liability partnership agreement ('agreement' for short).

The term 'partner' is defined in the bill in relation to a limited liability partnership as any person who becomes a partner in the limited liability partnership in accordance with the limited liability partnership agreement.   Becoming a member in a LLP, is therefore, in accordance with the agreement

'Limited Liability Partnership Agreement' is defined in the bill as any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership.   Thus the bill provides for two types of agreements.

Thus the agreement is an important document in a LLP but it is not required to be filed along with the document for incorporation of the LLP  with the Registrar of Companies.   The agreement further provides for the 'designated partner'.  Any partner may become a designated partner by and in accordance with the limited liability partnership agreement and a partner may cease to be a designated partner in accordance with limited liability partnership agreement.

On the incorporation of a LLP, the persons who subscribed their names to the incorporation document shall be its partners and any other person may become a partner of the limited liability partnership by and in accordance with the agreement.   

The mutual rights and duties of the partners of a LLP and the mutual rights and duties of a LLP and its partners, shall be governed by the agreement between the partners, or between the LLP and its partners.   The agreement and any changes, if any, made therein shall be filed with the Registrar in such form, manner and accompanied by such fees as may be prescribed.   

An agreement in writing made before the incorporation of a LLP between the persons who subscribe their names to the incorporation document may impose obligations on the LLP, provided such agreement is ratified by all the partners after the incorporation of the LLP.   This provision is similar to ratifying the contracts made by the promoters before the incorporation of the company.

The rights of a partner to a share of the profits and losses of the LLP and to receive distributions in accordance with the LLP are transferable either wholly or in part. 

The bill provides that the partners of an LLP are free to decide the terms of the agreement subject to the provisions of the proposed legislation.   The Bill, if enacted, would provide flexibility to devise the agreement as per their choice.  In the absence of agreement as to any matter, the mutual rights and duties of the partners and the mutual rights and duties of the LLP and the partners shall be determined by the provisions relating to that matter as are set out in the First Schedule of the Bill.

The provisions regarding matters relating to mutual rights and duties of partners and LLP and its partners applicable in the absence of any agreement on such matters as set out in first schedule of the bill are as follows:

1   The mutual rights and duties of the partners and the mutual rights and duties of the LLP and its partners shall be determined, subject to the terms of any LLP agreement or in the absence of any such agreement on any matter, by the provisions in this schedule;

2   All the partners of a LLP are entitled to share equally in the capital, profit and losses of the LLP;

3   The LLP shall indemnify each partner in respect of payments made and personal liabilities incurred by him-

(a) in the ordinary and proper conduct of the business of the LLP; or

(b) in or about anything necessarily done for the preservation of the business or property of the LLP.

4. Every partner shall indemnify the LLP for any loss caused to it by his fraud in the conduct of the business of the LLP;

5. Every partner may take part in the management of the LLP;

6. No partner shall be entitled to remuneration for acting in the business or management of the LLP;

7. No person may be introduced as a partner without the consent of all the existing partners;

8. Any matter or issue relating to the LLP shall be decided by a resolution passed by majority in number of the partners, and for this purpose, each partner shall have one vote.   However no change may be made in the nature of business of the LLP without the consent of all the partners;

9. Every LLP shall ensure that decisions taken by it are recorded in the minutes within thirty days of taking such decisions and are kept and maintained at the registered office the LLP;

10. Each partner shall render true accounts and full information of all things affecting the LLP so any partner or his legal representatives;

11. If a partner, without the consent of the LLP carries on any business of the same nature as and competing with the LLP, he must account for and pay over to the LLP, he must account for and pay over the LLP all profit made by him in that business;

12. Every partner shall account to the LLP for any benefit derived by him without the consent of the LLP from any transaction considering the LLP, or from any use by him of the property, name or any business connection of the LLP;

13. No majority of the partner can expel any partner unless a power to do so has been conferred by express agreement between the partners;

14. All disputes between the parties arising out of the LLP which cannot be resolved in terms of such agreement shall be referred for arbitration as per the provisions of the Arbitration and Conciliation Act, 1996.

In the bill introduced during the year 2006 there were 11 provisions in the first schedule.  The point numbers 4, 9 and 14 are added in the present bill.  Point No. 2 provides for the equal distribution of profit and loss of the LLP which is similar to the provision of Partnership deed.  The profit and loss of the firm shall be distributed equally unless there is an agreement in this regard as to which proportion it shall be shared.  When there is a loss the liability of the partners are equal which is against the concept of limited liability.  This provision should be reconsidered.

The bill does not provide for maximum number of partners in an LLP.  Point No. 7 provides that no person may be introduced as a partner without the consent of all existing partners.   Whether this is feasible when partners are more? 

Point No. 5 provides that every partner may take part in the management and they shall not be entitled to remuneration for acting in the business or management of the LLP.  Whether these provisions will be made successful in a business concern?  Whether these provisions are in the interest of the business of LLP? 

Point No. 9 provides that every LLP shall ensure that decisions taken by it are recorded in the minutes within thirty days of taking such decisions and are kept and maintained at the registered office of the LLP as to those provisions applicable to the companies in the Companies Act.   In respect of companies there is a detailed procedure in conducting of meetings and recording of the minutes and the responsibility for complying with the same are on the Company Secretaries appointed by the Company.  Such procedures in the bill are absent.   This aspect is to be taken care of.