The Lok Sabha passed the Limited Liability Partnership Bill on 13 December 2008 thereafter it received the assent of the President on 7 January 2009 and thereby it has received legal status as Limited Liability Partnership Act, 2008 (“the act”). As per Ministry of Company Affairs Notification S.O 891(E) with effect from 31/03/2009 the following sections have been put into effect ie. Section 1, Section 2 except clauses (c) and (u) of its sub-section (1), Sections 3 to 30 , Section 31 except to the extent of its application in context of the 'Tribunal', Sections 32 to 50, Sections 52 to 54, Sections 59 to 62, Sections 66 to 71,Sections 74 to 80, Section 81 except clauses (b) to the extent of its application to Sections 51, 63 and 64 and clause (c) and the First Schedule have been put into effect. The rules and forms are also ready and have been made public. The rules have been put into effect from 01/04/2009.
The concept of Limited Liability Partnership (“LLP”) has emerged out of the Naresh Chandra Committee report on ‘Regulation of Private Companies and Partnership” and of the Dr. J. J. Irani Committee report on ‘Company law’. In India, businesses mainly operate as companies, sole proprietorship and partnership. The introduction of LLP will provide a platform to small and medium enterprises and professional firms of company secretaries, chartered accountants, advocates etc. to conduct their business/profession efficiently which would, in turn, increase their global competitiveness.
At present, under partnership law, the maximum numbers of partners a partnership firm can have is twenty also the partners are liable jointly and severally and most importantly their liability is unlimited which means that the personal property of the partners can also be attached for the satisfaction of the debts, in addition to the capital contributed by the partners in the firm.
This is the principal reason why partnerships firms of professionals have not grown in size to meet the challenges posed today. Not only are the firm’s assets completely liquidated under the standard principles of the partnership law, but the partners are also jointly and severally liable for the entire liabilities of the partnership. Thus, the present system acts as a deterrent for the growth and expansion of service based organizations.
Object of the Limited Liability Partnership Act 2008
The LLP is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organising their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital.
What is Limited Liability Partnership?
“LLP shall be a body corporate and a legal entity separate from its partners. It will haveperpetual succession. While the LLP will be a separate legal entity liable to the full extent of its assets, the liability of partners would be limited to their agreed contribution.”
The salient features of the Limited Liability Partnership Act, 2008, inter alia, are as follows:—
(i) the LLP shall be a body corporate and a legal entity separate from its partners;
(ii) the mutual rights and duties of the partners of the LLP inter se and those of the LLP and its partners shall be governed by an agreement between the partners inter se or between the LLP and the partners subject to the provisions of the Act. The Act provides flexibility to devise the agreement as per their choice. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of the Act;
(iii) the LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP. No partner would be liable on account of the independent or unauthorised actions of other partners or their misconduct. The liabilities of the LLP and its partners who are found to have 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 LLP;
(iv) every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India.
(v) the LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government;
(vi) the Central Government shall have powers to investigate the affairs of a LLP, if required, by appointment of competent inspector, for the purpose;
(vii) the compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the act;
(viii) a firm, private company or an unlisted public company would be allowed to be converted into a LLP in accordance with the provisions of the act.
(ix) the winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High Court;
(x) the act confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses;
(xi) the Indian Partnership Act, 1932 shall not be applicable to LLPs.
Nature of a LLP
The LLP act has incorporated definitions which has explained various expressions used in the Act for the purposes of certainty in the interpretation of the Act, e.g., ‘foreign limited liability partnership’ as limited liability partnership which is formed, registered or incorporated outside India and establishes a place of business in India; ‘limited liability partnership’ as a partnership formed and registered under the said Act; ‘limited liability partnership agreement’ as a 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 such partnership; and ‘partner’ in relation to limited liability partnership, as any person who becomes a partner in the limited liability partnership in accordance with the limited liability partnership agreement.
The LLP act seeks to provide that LLP is to be a body corporate having perpetual succession and a legal entity separate from its partners and any change in the partners of such partnership shall not affect its liabilities.
Any individual or a body corporate may become a partner in a LLP provided the said person is of sound mind, is not insolvent, and has not applied for adjudication for insolvency. A LLP shall consist of at least two partners and there is no restriction on the maximum number of partners. The Act provides that in a situation where the number of partners is reduced to one and such LLP carries on business with such sole partner for more than six months and then such partner, if having knowledge of such a situation, shall be liable personally for the obligations of the LLP. The LLP act has made provisions that a LLP shall have at least two designated partners who shall be individuals and at least one of them shall be resident in India.
An individual shall not become a designated partner in any LLP unless he has given his prior consent to act as such to the LLP in the prescribed form and manner. The particulars of every designated partner who agrees to act as such shall be filed with the Registrar. Any partner may become or cease to be designated partner in accordance with the LLP agreement. It also seeks to empower the Central Government to make rules for prescribing the conditions and requirements for an individual to be a designated partner. It also provides that every designated partner shall obtain a Designated Partner Identification Number (DPIN) from the Central Government.
The responsibilities and liabilities of the designated partner are as provided—
(a) responsible for the doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the said Act; and
(b) liable to all penalties imposed on the LLP for any contravention of those provisions.
The LLP Act has provided for a 30 days period for filling up of a vacancy of a designated partner. If no designated partner is appointed, or if at any time there is only one designated partner, each partner of the LLP shall be deemed to be a designated partner.
If the LLP fails to appoint designated partners, then the LLP and its every partner shall be punishable with fine The Act provides that any agreement, made before the incorporation of the LLP, between the partners who subscribe their names to the incorporation document may impose obligation on LLP, if ratified by all the partners after its incorporation.
Incorporation and name of the LLP
Two or more persons are required to file an incorporation document for incorporating a LLP with the Registrar of Companies (ROC) in the State in which the registered office of the LLP is situated.
There shall be filed, along with the incorporation document, a statement in the prescribed form, that all the requirements of the act and the rules have been complied with. Once the incorporation documents of the LLP are registered and a certificate of its incorporation is issued by the Registrar, the said certificate of registration shall be conclusive evidence that the LLP is incorporated by the name specified therein.
Every LLP needs to have a registered office to which all communications will be made and received. The act has imposed an obligation on every LLP to suffix “limited liability partnership” or “LLP” with its name. The clause also seeks to provide that no LLP shall be registered with an undesirable name or a name which is identical or nearly resembles to that of any other partnership firm or an LLP or a body corporate or a registered trade mark or a trade mark, the application of which is pending.
The act has made provisions for the application for the reservation of proposed name of the LLP or change of its existing name to the Registrar who may reserve the name for a period of three months. Further, the Central Government is empowered to give directions to the LLP to rectify its name if the name registered is undesirable or so nearly resembles the name of any other LLP or body corporate or other name as to be likely to be mistaken for it.
Extent and Limitation of Liability
The act provides that every partner of the LLP is, for the purpose of business of the LLP, an agent of the LLP but not of other partners. The LLP shall not be bound by anything done by a partner in dealing with a person if that partner has no authority to act for the LLP in doing a particular act and the person with whom he is dealing also knows that the partner has no authority for such ac.t It, further, provides that an obligation of the LLP, whether arising out of contract or otherwise shall be solely the obligation of the LLP.
It also seeks to provide that liabilities of the LLP are to be met from the property of the LLP and that a LLP shall be liable for a wrongful act or omission by a partner in the course of the business of the LLP or with its authority. The partner is not personally liable, directly or indirectly for an obligation of the LLP solely by reason of his being a partner of the LLP. It, further, provides that the obligation of a LLP shall not affect the personal liability of a partner for his own wrongful act or omission but a partner shall not be personally liable for wrongful act or omission of any other partner.
After a partner’s death, the business is continued in the same LLP, the continued use of that name or of the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death. In case, the LLP or any of its partners carry out an act with intent to defraud the creditors of the LLP or any other person or if they carry out an act for any fraudulent purpose then there exists unlimited liability for the LLP and its partners. 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.
Contribution by the partners
The contribution may consist of money, tangible or intangible property, or any other benefits such as promissory notes, contracts for services performed or to be performed. The obligation of a partner to contribute money or property to a LLP shall be as per the LLP agreement.
Proper books of account are to be maintained by the LLP relating to its affairs for each year and for filing of an Annual Statement of Accounts and Solvency with the Registrar in such form and manner as may be prescribed. The accounts of the LLPs shall be audited as provided by the rules which are made by the Government. Every LLP shall be required to file with the Registrar an annual return duly authenticated every year. Incorporation document, names of partners and changes, if any, made therein, Statement of Account and Solvency and Annual Return filed by each LLP with the Registrar shall be available for inspection in the office of the Registrar by the public.
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 a 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.
Investigation of affairs of LLP
The act provides for the circumstances under which investigation of the affairs of a LLP may be ordered by the Central Government. The act also empowers the Central Government, if it feels it is necessary in public interest, to initiate proceedings against the LLP for recovery of property and damages.
Conversion of existing firms into a LLP A partnership firm may convert itself into an LLP as per Section 55 and second schedule of the act. A private company may convert itself into an LLP as per section 56 and third schedule of the act. A unlisted Public company may be converted into an LLP as per section 57 and the fourth schedule of the act. Upon such conversion, on and from the date of certificate of registration issued by the Registrar in this regard, the effects of the conversion shall be such as are specified in the act. On and from the date of registration specified in the certificate of registration, all tangible (movable or immovable) and intangible property vested in the firm or the company, all assets, interests, rights, privileges, liabilities, obligations relating to the firm or the company, and the whole of the undertaking of the firm or the company, shall be transferred to and shall vest in the LLP without further assurance, act or deed and the firm or the company, shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be.
Provisions for incorporation of Foreign LLP
Foreign LLP can establish a place of business in India and its regulatory mechanism will be as per the rules prescribed by the Central Government.
Compromise, arrangement or reconstruction of LLP
The LLP act provides compromise or arrangement including mergers and amalgamations, winding up and dissolution of LLP. These should be agreed by majority of members and creditors of LLP representing three-fourths in value and confirmed by the National Company Law Tribunal (“NCLT”).
Winding up and dissolution of LLP
The winding up of LLP may be either voluntary or by the NCLT under certain circumstances. The NCLT can order for the winding up of the LLP on the grounds of inability of the LLP to pay its debts, or default in filing the statement of account or solvency or annual return with the Registrar of Companies (“ROC”) for five consecutive financial years or any other ground which is just and equitable in the opinion of the NCLT. The Central Government will make rules for provisions relating to winding up and dissolution of LLP
The LLP will act as an engine of growth for economic development of the country and would lead to the growth of professional services in the country. With the liberalisation and globalisation of Indian economy, the LLP, as an alternate mode of carrying business, will encourage joint ventures and would make Indian service sectors globally competitive. LLP structure will enable Small & Medium Enterprises and family partnerships to expand as they will be able to admit outsiders with capital or skill as partners. The hybrid structure of LLP will facilitate entrepreneurs, service providers and professionals to organize and operate in an innovative and efficient manner for effectively competing in the global market.