WHEHTER LIMITED LIABILITY PARTNERSHIP FIRM CAN BECOME A PARTNER OF A PARTNERSHIP FIRM?

[Mr. M. GOVINDARAJAN]

Partnership

Section 4 of the Partnership Act, 1932 defines the term ‘partnership’ as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.  The Partnership firm is not having a legal status.  It is not a separate entity as that of a company.    The liability of a partner in a partnership is not limited.  Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.

Limited Liability Partnership

Section 3 of the Limited Liability Partnership Act, 2008 provides that a limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.  It shall have perpetual succession.  Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.    The provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability partnership.   The liability of a partner in an LLP is limited.

Issue

The issue to be decided in this article is whether an LLP may become a partner of a partnership firm or not with reference to decided case law in ‘Jayamma Xavier v. Registrar of Firms’ – 2021 (4) TMI 749 – Kerala High Court.

Facts of the case

The petitioner, in the above case, is the designated partner of Sleeplock LLP (‘LLP’ for short).  The LLP formed a partnership firm along with one Gourav Raj in the name and style of Morning Owl Sleep Solutions.   A partnership deed executed on 18.09.2020 was submitted for registration before the Registrar of Firms.   The partnership is formed in order to carry out the business of processing, manufacturing, trading, importing, exporting, distribution and sales of furnished and semi-furnished mattress, latex form cores, pillows, rubberized coir, coconut rubber, other rubber and coir products, through retail outlets and through online platforms.  The Registrar of Firms rejected the application on the ground that LLP cannot be a partner of a firm.

The petitioner filed a writ petition before the High Court, Kerala, challenging the order of Registrar of Firms rejecting the application for the formation of a partnership by the petitioner along with one other person.  

Submissions of parties

 The petitioner submitted the following before the High Court-

• a partnership along with an LLP is not prohibited under the Partnership Act;
• LLP is a legal entity, as defined under the LLP Act and it is separate from its partners having perpetual succession and is having a common seal.
• LLP is capable of suing and being sued, on its registration.
• Therefore, the LLP is liable to be treated as a person and there cannot be any objection for registering a partnership with an LLP which is a person.

The petitioner relied on the judgment of Kerala High Court in ‘M.M. PULIMOOD VERSUS REGISTRAR OF FIRMS [1984 (3) TMI 439 - KERALA HIGH COURT] in which it was held that the rejection of   application to form a partnership is illegal and without understanding the provisions contained in the LLP Act.

The Registrar of Firms submitted the following before the High Court-

• Some of the provisions of the Limited Liability Partnership Act 2008 are inconsistent with that of the Indian Partnership Act, 1932, pertaining to the liability. 
• Section 25, 26 and 49 of the Indian Partnership Act, 1932 makes the partners to be jointly and severally liable with all the other partners and also severally liable for the acts of the firm, of which such person is a partner.
• Under the LLP Act, the liability of the partner is restricted only to the extent provided in the agreement; such a provision runs contrary to Section 25 and 49 of the Indian Partnership Act, 1932.
• Under LLP foreign investment is permissible whereas it is not permissible under the Partnership Act.
• A firm cannot enter into a partnership with LLP. It is their case that though LLP is a kind of partnership having the nature of company the provisions in the LLP are completely frustrating the purport of Section 25 and 49 of the Indian Partnership Act, 1932.

The Registrar of Firms relied on the judgment in DULICHAND LAXMINARAYAN VERSUS COMMISSIONER OF INCOME-TAX, NAGPUR [1956 (2) TMI 4 - SUPREME COURT]

Analysis by High Court

The High Court considered the contentions made by both the parties to the petitioner.  The main question to be considered is whether LLP can be treated as a person which can be permitted to form a partnership with an individual.  The High Court observed that in ‘M.M. Pulimood’ case (supra) the Kerala High Court was considering a case where a partnership deed was executed with a Private Limited Company, incorporated by the Registrar of Companies, as one of the partners. After analyzing the provisions contained in Section 4 of the Partnership Act as well as the definition of person in Section 3 (42) of the General Clauses Act, this Court found that there was no impediment in executing a partnership with a Private Limited Company incorporated under the Companies Act which comes under the definition of Person.

The High Court observed that in ‘Duli Chand Laxmi Narayanan’s case (supra) the Supreme Court after analyzing the provisions contained in Section 26A of the Income Tax Act as well as the provisions contained in the Partnership Act and the definition of 'person' in Section 3(42) of the General Clauses Act arrived at a conclusion that a partnership cannot be formed between 3 firms, a Hindu Undivided Family and an individual. It was found that a firm is not a legal entity.  At the time of this judgment the LLP Act has not in existence and has no application to the present case.

The High Court analyzed the provisions of ‘The Partnership Act’ and ‘The Limited Liability Partnership Act, 2008’.   The High Court observed that according to Section 4 of the Partnership Act persons who have entered into partnership with one another are called individually ‘partners’ and collectively ‘a firm’ and the name under which their business is carried on is called the ‘firm name’.  The term ‘person’ is not defined either in the Partnership Act or in the LLP Act.   Section 3(42) of the General Clauses Act, 1897 provides that the term ‘person’ shall include any company or association or body of individuals, whether incorporated or not.

In the present case an individual agreed with an LLP to share the profits of the business. LLP is a body corporate, independent legal entity having a common seal and perpetual succession, capable of suing and of being sued. Once a partnership is formed the LLP, which is a partner would have to abide by the partnership Act.   The objection of Registrar of Firms is based on the liability of the partners of LLP, stating that the same is confined to the terms in the agreement.   The liability of partners of LLP and liability of the LLP as a partner under the Partnership Act would be different. The liability of partners in an LLP cannot have any relevance when the LLP itself becomes a partner, when it would be bound by the provisions in the Partnership Act. The liability of the LLP would be as in the case a company which joins a firm after entering into a partnership.  The individual liability of the partners of LLP would not be relevant when the LLP itself would have liability independent of the liability of the partners. Therefore, the difference in the provisions under the Partnership Act relating to liability of the firm or the individual partners would not stand in the way of constitution of a partnership with an LLP. 

Therefore the High Court found that LLP cannot have a disqualification from entering into a partnership with individual or other persons.  The High Court set aside the order of Registrar of Firms.  The High Court further directed the Registrar of Firms to reconsider the request of petitioner for registration and to take appropriate action on the same.