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ANALYSIS OF THE LIMITED LIABILITY PARTNERSHIP ACT, 2008
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ANALYSIS
OF THE LIMITED LIABILITY PARTNERSHIP ACT, 2008
AUTHORED BY - DR. POOJA AGRAWAL
There
are different forms of business organization prevalent in India and the world
with ownership, control, liability, membership and capital distinguishing them
from each other. One chooses a form of business organization depending upon the
nature of business, duration of business, size of operation, level of control
required, capital structure and its requirement, participation of non promoter
group, government regulation and control, distribution of profit, risk
management and management structure.
NATURE AND STRUCTURE
OF LLP
LLP
is an alternative corporate business form of business organisation that gives
the benefit of limited liability of a company and the flexibility of a
partnership. It has a separate legal entity where the liability of partners is
limited to their agreed contribution in the LLP. It has perpetual
succession and a common seal and can sue and be
sued in its own name.
It has
a continued existence irrespective of the changes in the constitution of
partners. It is capable of entering into contracts and holding property in its
own name. Further, no partner is liable on account of the independent or
un-authorized actions of other partners, thus individual partners are shielded
from joint liability created by other partner’s wrongful business decisions or
misconduct. The mutual rights and duties of the partners within the LLP are governed
by an agreement which is the basis for the formation of LLP. Thus, LLP is a
hybrid form of business organization which contains elements of both ‘a
corporate structure’ and ‘a partnership firm structure’. Also, it provides the flexibility without
imposing detailed legal and procedural requirements, enabling professional
expertise and initiative to combine with financial risk taking capacity in an
innovative and efficient manner.[1] The
advantage of the LLP form would be that it will not impose detailed legal and
procedural requirements intended for large widely held companies on such
enterprises. In this way it will also be useful for small enterprises.[2]
LIMITED
LIABILITY PARTNERSHIP BILL, 2008
Due
to the advantages and the needs of the business environment the Limited
Liability Partnership Bill, 2008 was drafted and introduced in the Rajya Sabha.
Minister of Corporate Affairs, presented the Bill for consideration and passage
by the House. All members supported it, thereby giving it the nod of the Rajya
Sabha.[3]
Thereafter Bill was introduced in the Lok Sabha and same was passed by the
House on 11 December, 2009.
LIMITED
LIABILITY PARTNERSHIP ACT 2008
The LLP
Bill received the assent of the President of India on January 7, 2009 and it
became the LLP Act, 2008. The Government of India vide Notification S.O.
891(E), in the Official Gazette of India, has appointed the 31st Day of March,
2009 as the date on which the various sec of LLP Act become applicable. Now any two or more persons engaged
in a lawful activity for profit may avail of the LLP form of organization.
FORMATION OF THE LLP
Section 2(k) of the LLP Act has
defines “limited liability partnership” to mean a partnership formed and
registered under this Act. This stipulates two requirements:
·
a
partnership and;
·
the
need for its registration.
Thus the registration of the LLP has
been made compulsory under the proposed Act.
Clause 3 of the Act provides that a
limited liability partnership is a body corporate formed and incorporated under
this Act and which has legal entity separate from that of its partners; and
which has perpetual succession; and any change in the partners of a limited
liability partnership shall not affect the existence, rights or liabilities of
the limited liability partnership. Since the LLP would be a partnership having
distinct legal identity, the provisions of the Indian Partnership Act, 1932
would not be applicable to LLPs as provided under Section 4 of the LLP Act.
INCORPORATION OF LLP
Section 11 and 12 of the Act contain
provisions concerning the formation and incorporation of the LLP. The LLP may
be incorporated by two or more persons associated to carry on a lawful business
with a view to profit. The registering authority will be the Registrar of
Companies under the Companies Act. The ROC would register the incorporation
document and issue a certificate of incorporation within fourteen days on
completion of all formalities specified under the Act. After incorporation,
every LLP shall ensure that its name, address of its registered office,
registration number and a statement that it is registered with limited
liability is mentioned on all its invoices, official correspondence and
publications. Section 13 confers the status of an incorporated body.
Accordingly, the LLP shall, by its own name have the power of—
·
suing
and being sued;
·
acquiring,
owning, holding and developing or disposing of property, both movable and
immovable;
·
having
a common seal; and
·
doing
and suffering other such other acts and things as bodies corporate may lawfully
do and suffer.
LIMITED LIABILITY PARTNERSHIP
AGREEMENT
The most
important document of a limited liability partnership is the limited liability
partnership agreement. “Limited liability partnership agreement”[4]
has been defined under Sec. 2(l) 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 limited liability
partnership’. The mutual rights and duties of partners of an LLP inter se and
those of the LLP and its partners shall be governed by an agreement between
partners or between the LLP and the partners subject to the provisions of the
proposed legislation. In absence of any agreement the rights and obligations of
the partners shall be governed by the provisions of the Act.
PROCEDURE
FOR INCORPORATING LIMITED LIABILITY PARTNERSHIP ACT
The LLP Act provides a framework for regulating the
business affairs of limited liability partnerships. It also defines what
constitutes a partnership, how it can be formed, dissolved, and other important
terms related to this type of entity.
Incorporating a limited liability partnership is a
procedure to create the legal entity known as a limited liability
partnership. The articles of incorporation for a limited liability
partnership must include the following:
·
The name,
address, and registered agent of the LLP
·
The name,
address, and registered agent of each general partner
·
The name
and address of each member
·
The date
when formed the LLP was formed
·
A brief
statement about what type of business or profession is being conducted by the
LLP.
PARTNERS OF THE LLP
In accordance with Section 6 (1) every
LLP must have a minimum of two partners[5].
If at any time, the number of partners of a limited liability partnership is
reduced below two and the limited liability partnership carries on business for
more than six months while the number is so reduced, the person who is the only
partner carrying on business after the six months and having the knowledge of
being so, shall be personally liable for the obligations of the limited
liability partnership incurred during that period[6].
In the LLP Act there is a concept of ‘designated partner’, which is defined as
a partner designated as such[7].
According to Sec 7(1), every LLP must have at least two designated partners,
both of whom must be individuals and at least one of them must be a resident of
India. If there is a vacancy to the post of a designated partner for more than
30 days or if there is only one designated partner at any period of time, then
every partner shall be a designated partner. Thus the Act seeks to create a special status
for a designated partner.
·
Extent
and Limitation of Liability
The LLP will be a legal entity which
trades with limited liability for its members. Chapter V Act comprising Sections
26 to 30, deals with the ‘Extent and Limitation of Liability’ of members of the
LLP. Section 26 provides that every partner of LLP is the agent of LLP, but not
of the other partners. According to Section 27 a limited liability partnership
is not bound by anything done by a partner in dealing with a person, if,
·
the
partner in fact has no authority to act for the limited liability partnership
in doing a particular act; and
·
the
person knows that he has no authority or does not know or believe him to be a
partner of the LLP.
An obligation of the LLP, whether
arising in contract or otherwise, is solely the obligation of the LLP. The
liabilities of the LLP have to be met out of the property of the LLP. Under Section
28, a partner is not personally liable, directly or indirectly, for an
obligation referred to in Section 27(3), solely by reason of being a partner of
the LLP. By Section 29, in the event of an act carried out by the LLP, or any
of its partners, with the intent to defraud creditors of the LLP or any other
person, or for any fraudulent purpose, the liability of the LLP and its
partners who acted with the intent to defraud creditors or for any fraudulent
purpose shall be unlimited for all or any of the debts or liabilities of the
LLP. The obligation of a partner to contribute money or property for a LLP
shall be as per the LLP agreement. In the absence of any provision to contrary
in the LLP Agreement, all partners are entitled to share equally in capital,
profits and losses of LLP.[8]
BOOKS OF ACCOUNT, OTHER
RECORDS AND AUDIT
Each LLP is required to maintain
books of account at its registered office for the financial year3. Every LLP
shall be required to file an annual return signed by designated partners with the ROC
within 60 days of closure of its financial year. Every LLP shall be required
to get its accounts audited as per the prescribed rules. As per Rule 24 (8) a limited liability partnership whose turnover
does not exceed, in any financial year, forty lakh rupees, or whose
contribution does not exceed twenty-five lakh rupees shall not be required to
get its accounts audited. However, if partners of such LLP decide to get the
accounts of such LLP audited, the accounts shall be audited in accordance with
the rules prescribed under the LLP Rules 2009. Provided also that where the
partners of such LLP do not decide for audit of the accounts of the LLP, such
LLP shall include in the Statement of Account and Solvency a statement by the
partners to the effect that the partners acknowledge their responsibilities for
complying with the requirements of the Act and the Rules with respect to
preparation of books of account and a certificate in the form specified in Form 8.The statement of accounts and
solvency and annual return filed by each LLP shall be available for inspection
with the ROC.
ASSIGNMENT AND TRANSFER OF PARTNERSHIP
RIGHTS
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 agreement are transferable either wholly or in part. The transfer
of any rights by any partner would not by itself cause the disassociation of
the partner or a dissolution and winding of an LLP. The transfer of rights
would not entitle the transferee or assignee to participate in the management
or conduct of the activities of the LLP or access information concerning the
transactions of the LLP.[9]
MERGERS AND WINDING UP OF LLPS
Section 58 of the LLP Act provides
for compromise, arrangements or reconstruction of LLPs. Section 59-61 talk
about the winding up and dissolution of a limited liability partnership.
Winding up of an LLP may be either voluntary or by the Tribunal. The various
grounds of winding up of an LLP by a tribunal are5:
·
If
the LLP decides (by resolution) that the LLP would be wound up by the tribunal;
·
If
the number of partners of the LLP is reduced below two;
·
If
the LLP is unable to pay its debts;
·
If
the LLP has acted against the interests of the sovereignty and integrity of
India, the security of state or public order;
·
If
the LLP has made a default in filing with the Registrar the statements of
accounts and solvency or annual return for any five consecutive financial
years;
·
If
the tribunal is of the opinion that it is just and equitable that the LLP be
wound up.[10]
After the enforcement of the
Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘Code’) the
winding of corporate entities are within the purview of the Code. Section 59 of
the Code deals with voluntary liquidation of an LLP. The rationale is that
voluntary liquidation under the Code is applicable to a corporate person. LLP
which has to undergo voluntary liquidation process must fulfil certain
conditions under the Code and must follow the process as prescribed under IBBI
(Voluntary Liquidation) Regulation, 2017. Code provides provisions which should
be undertaken in restructuring and reviving a corporate debtor. Additionally,
the NCLT has the power to pass any order for liquidation of a corporate debtor
including an LLP. Section 59(1) of the
Code provides that a corporate entity which intends to voluntarily liquidate
itself and shall meet all the conditions and procedural requirement prescribed
by IBBI may proceed to initiate voluntary liquidation under Chapter V of Part
II of the Code.
INVESTIGATION INTO THE AFFAIRS OF AN LLP
Sections 42 to 53 of Chapter IX deal
with provisions relating to investigation into affairs of an LLP on certain
mentioned grounds. The Central Government suo
moto or on recommendations of the NCLT or any Court may appoint inspectors
to carry out the investigations. These provisions also contain powers of
inspectors for search or seizure, and regarding the evidentiary value of their
reports and expense relating to such activities.
CONVERSION INTO LIMITED LIABILITY PARTNERSHIP
The LLP Act contains enabling provisions
pursuant to which a firm which was set up under the Indian Partnership Act,
1932 and private company or unlisted public company incorporated under the
Companies Act, 1956 would be able to convert themselves into LLPs.
Section 55
of LLP Act 2008 provides that- “A firm may convert into a limited liability
partnership in accordance with the provision of this Chapter and the
Second Schedule”. Clause 3 of Second Schedule to LLP Act 2008
provides that- “A firm may apply to convert into limited liability
partnership in accordance with this Schedule if and only if the partners of the limited
liability partnership in to which the firm is to be converted, comprise,
all the partner of the firm and no one else.”
Section 56
of LLP Act 2008 provides that- “A private company may convert into a LLP in
accordance with the provision of this Chapter and the Third
Schedule”; and Sec.57 of LLP Act 2008 provides that- “An unlisted public company
may convert into a LLP in accordance with the provision of this
Chapter and the Fourth Schedule”. Accordingly, Clause 2(2) (b) of
Third Schedule and Clause 3(b) of Fourth Schedule of the LLP
Act 2008 provides that- “A company may apply to convert into limited
liability partnership in accordance with this Schedule if and only if the
partners of the limited liability partnership in to which the firm is to be
converted, comprise, all the shareholders of the company and no one else.”
To sum it up, the Indian Partnership
Act, 1932 sets out special rules relating to the liability of partners to
persons dealing with them. A partner acts as the agent of the firm and of other
partners for the purpose of the business of the firm. Further, every partner is
liable, jointly and severally, with all the other partners, for all acts of the
firm done while he is a partner.[11] The unlimited liability for partners in case
of general partnerships has become an increasing cause for concern in the light
of general increase in the incidence of litigation for professional negligence,
the size of claims and the risk to a partner’s personal assets when a claim
exceeds the sum of the assets of the partnership. The ‘unlimited liability’ of
partners has been the chief reason why partnership firms of professionals, have
not grown in size to successfully meet the challenges posed today by
international competition, WTO, GATS[12].
Bearing in mind the needs of the
buoyant Indian economy, and also to keep pace with international business
standards, the Indian Parliament has in its wisdom seen fit to introduce the
concept of a limited liability partnership in India. This form of business
organization would enable entrepreneurs and professional to form commercially
efficient vehicle situated to their requirement.
[1] Braving The Waters: A Guide For Tennessee's Aspiring Entrepreneurs,
Spring 2007, Tennessee Journal of Business Law, 243
[2] Limited Liability Partnership Bill, 2008 passed by Rajya Sabha, Press Information
Bureau dated Oct. 24, 2008
[3] Supra note 2
[4] Sec. 2(l).
[5] Sec. 6(1).
[6] Sec. 6(2).
[7] Sec 7.
[8] Sec. 32
[9] D.S.R. Krishnamurthi, Added value of LLP Bill 2008, (2008)
SEBI & Corp. Law 120
[10]Vikramditya Singh
Malik, The Latest Hybrid in India:
Limited Liability Partnership, www.cisd.soas.ac.uk/.../limitedliabilityconference_preconffinalprogramme_160707.pdf
[11] S.D.
Singh, J.P. Gupta, Law of Partnership in India, p. 213
[12] Rajesh Dhawan, Limited Liability Partnership – an overview,
(2008) 88 SEBI & Corp. Law (Mag) 133.
Article Information
ANALYSIS OF THE LIMITED LIABILITY PARTNERSHIP ACT, 2008
Authors: DR. POOJA AGRAWAL
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/02/07
- Issue 7
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International Journal for Legal Research and Analysis
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