Analysis of Limited Liability Partnership Act · Chandra Committee. Consequently, the Limited...

Analysis of Limited Liability Partnership Act 1A. Premkumar and

2R. Arya

1Saveetha School of Law,

Saveetha Institute of Medical and Technical Sciences,

Saveetha University, Chennai. [email protected] 2Saveetha School of Law,

Saveetha Institute of Medical and Technical Sciences,

Saveetha University, Chennai. [email protected]

Abstract 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. LLP is an alternative corporate business form that gives the

benefit of limited liability of a company and the flexibility of a partnership.

The LLP is a separate legal entity, is liable to the full extent of its assets but

liability of the 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 can continue in 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 another partner’s

wrongful business decisions or misconduct. It is organized and operates on

the basis of an agreement, without imposing detailed legal and procedural

requirement of a joint stock company.

Key Words:Organisation, succession, government, partnerships,

contribution.

International Journal of Pure and Applied MathematicsVolume 119 No. 17 2018, 1833-1843ISSN: 1314-3395 (on-line version)url: http://www.acadpubl.eu/hub/Special Issue http://www.acadpubl.eu/hub/

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1. Introduction

“With the growth of the Indian economy, the role played by its entrepreneurs as

well as its technical and professional manpower has been acknowledged

internationally. It is felt opportune that entrepreneurship, knowledge and risk

capital combine to provide a further impetus to India‟s economic growth. In this

background, the need has been felt for a new corporate form that would provide

an alternative to the traditional partnership, with unlimited personal liability on

one hand, and statute based governance structure of the limited liability

company on the other, in order to enable professional expertise and

entrepreneurial initiative to combine, organize and operate in flexible,

innovative and efficient manner”.

Limited partnerships can be traced to early French law. Its development can be

distinguished into different stages: starting with the development of the concept

of general partnership, moving on to the idea of limited partnership which

finally led to the concept of limited liability partnership. The legal concept of

LLP originated in 1991 in Texas, mainly in response to the liability that was

imposed on partners in partnership sued by Government agencies in relation to

massive saving and loan failures in the 1980. The Texas statues protected

partners from personal liability for claims related to a co-partner‟s negligence,

error, omission in competency, or malfeasance. It is also permanently limited

the personal liability of partners for the errors, omission, incompetence, or any

negligence of the partnership‟s employees or other agents. In 1996, all other

states adopted the concept by Uniform Partnership Act, 1996. Similarly in UK

in the 1990s the accountancy firm advocated to secure proportional liability in

the LLPs. This led to the passing of the Limited Liability Partnership Act, in the

year 2000. The issue of LLP has been a matter of discussion in India for over a

decade now. Various comities have been set up for giving the recommendation;

among those are Abid Hussain Committee, Irani committee, and Naresh

Chandra Committee. Consequently, the Limited Liability Partnership Bill 2006

was introduced in the Rajya Shabha on 22nd October 2008 for the formation

and regulation of limited liability partnership and for matter connected

therewith or incidental thereto.

2. Aim of the Study

To analysis of limited liability of partnership act.

3. Material and Method

The research has used secondary source of study. The study is collected from

national and international journals, books, and publications from various

websites which give importance to the topic.

International Journal of Pure and Applied Mathematics Special Issue

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Types of Business Organization

Sole Proprietorship Form: These kinds of business are generally small in size

and owned, controlled unregulated and managed by individuals, ie., sole

proprietors. Such from have absolute control over business with hundred

percent ownership and unlimited liability.

Partnership Form: In law, a partnership is not an entity distinct from its

partner; it is simply a legal characterization of their relationship. In case of

partnership, two or more person (natural and juristic) join together to form a

partnership and share risk, capital and rewards in the agreed ratio. The salient

features of a typical partnership firm includes the following: (i) Number of

partners( minimum 2 to maximum 20), (ii) written agreement, (iii) Pooling of

resources, (iv) Sharing of risk and rewards, (v) principle-agent relationship

between firm and partner, (vi) no separation of ownership, control and

management, (vii) unlimited, joint and several liabilities of partners. A major

disadvantage of partnership is the unlimited liability of partners for the debts

and liabilities of firm, any partner can bind the firm and the firm is liable for all

the liabilities incurred by any partner on behalf of the firm. If the partnership

assets are insufficient to satisfy a creditor‟s claims, the partners personal assets

are liable subject to attachment and liquidation to pay the business debts.

Joint venture: A joint venture is a general partnership typically formed to

undertake a particular transaction or project rather than one intended to continue

indefinitely. Most often, joint venture are used in real estate, large

manufacturing organization, infrastructure projects, etc. where two or more

person or bodies corporate come together for a specific project.

Cooperative society: Cooperative form of organization is an association of

individuals having common interest to earn collectively. It is an association of

weak who gather for a common economic need and try to lift themselves from

weakness into strength through a business organization and these are registered

under Cooperative Societies Act.

History and Origin of Limited Liability Partnership Abroad and in India

Limited partnerships can be traced to early French law. Its development can be

distinguished into different stages: starting with the development of the concept

of general partnership, moving on to the idea of limited partnership which

finally led to the concept of limited liability partnership. The legal concept of

LLP originated in 1991 in Texas, mainly in response to the liability that was

imposed on partners in partnership sued by Government agencies in relation to

massive saving and loan failures in the 1980. The Texas statues protected

partners from personal liability for claims related to a co-partner‟s negligence,

error, omission in competency, or malfeasance. It is also permanently limited

the personal liability of partners for the errors, omission, incompetence, or any


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negligence of the partnership‟s employees or other agents. In 1996, all other

states adopted the concept by Uniform Partnership Act, 1996. Similarly in UK

in the 1990s the accountancy firm advocated to secure proportional liability in

the LLPs. This led to the passing of the Limited Liability Partnership Act, in the

year 2000. The issue of LLP has been a matter of discussion in India for over a

decade now. Various comities have been set up for giving the recommendation;

among those are Abid Hussain Committee, Irani committee, and Naresh

Chandra Committee. Consequently, the Limited Liability Partnership Bill 2006

was introduced in the Rajya Shabha on 22nd October 2008 for the formation

and regulation of limited liability partnership and for matter connected

therewith or incidental thereto.

Nature and Structure of Limited Liability Partnership

LLP is an alternative corporate business form that gives the benefit of limited

liability of a company and the flexibility of a partnership. The LLP is a separate

legal entity, is liable to the full extent of its assets but liability of the 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 name1. It can continue in

existence, irrespective of the changes in the constitution of partners. It is

capable of entering into contracts and holding property in its own name2.

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 another partner‟s wrongful business decisions or

misconduct. It is organized and operates on the basis of an agreement, without

imposing detailed legal and procedural requirement of a joint stock company.

The mutual rights and duties of the partners within a LLP are governed by this

agreement. Thus, since LLP contains elements of both „a corporate structure‟ as

well as „a partnership firm structure‟ LLP is called a hybrid between a company

and a partnership3.

Company: company is the association of person formed for the purpose of

doing business, having a distinct name and limited liability. A company is a

jurist person having a separate legal entity distinct from its member4. The

liability of its member is limited to the extent of capital contributed by them.

One person company: According to clause 2(zkk) of the proposed companies

bill, 2008, one person company which has only one person as a member. The

concept of „one person company‟ (OPC) is proposed to be introduced which

will be registered as a private company with one member and may also have at

least one director. Adequate safeguard in case of death of a person should be

provided, Letter „OPC‟ to be suffixed with the name of one person Companies

1 Supra note 2

2 www.cisd.soas.ac.uk/.../limitedliabilityconference_preconffinalprogramme_160707.pdf

3 Ibid

4 Salmon v. Salmon & Co. Ltd (1897) AC 223


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distinguishes from other companies.

Nature and Structure of Limited Liability Partnership

LLP is an alternative corporate business form that gives the benefit of limited

liability of a company and the flexibility of a partnership. The LLP is a separate

legal entity, is liable to the full extent of its assets but liability of the 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 name5. It can continue in

existence, irrespective of the changes in the constitution of partners. It is

capable of entering into contracts and holding property in its own name6.

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 another partner‟s wrongful business decisions or

misconduct. It is organized and operates on the basis of an agreement, without

imposing detailed legal and procedural requirement of a joint stock company.

The mutual rights and duties of the partners within a LLP are governed by this

agreement. Thus, since LLP contains elements of both „a corporate structure‟ as

well as „a partnership firm structure‟ LLP is called a hybrid between a company

and a partnership7.

Liability for Cheques, etc.

If a partner signs or authorizes the signature of cheques, order, etc. on which the

LLP‟s name is incorrectly presented is liable to the holder of the instrument

unless the amount is paid by the LLP.

Liability in Tort or Contract

Keeping an eye over liability in tort or contract, the partner of LLPs should

ensure that, in all dealing with the clients or customers and the public, they do

not give cause to believe that the activity being undertaken is undertaken other

than by its agent on behalf of the LLP. The protection which the corporate

structure of the LLP offers to individuals, partners should not, however be taken

entirely for granted. The partners of a LLP owe a personal duty of care; there

must be not only a special relationship between a partner and a client or

customer, but a clear assumption of responsibility.

Limitation of Partner’s Liability

The liability of partners of a LLP, if it is wound up, is limited. Liability of

partners under LLP is restricted to the extent of the money contributed to the

firm by such partners. LLP provides each of its individual partner‟s protection

against personal liability for certain partnership liability unlike partnership firm

where they are personally liable for the obligations of the entire partnership.

5 Supra note 2

6 www.cisd.soas.ac.uk/.../limitedliabilityconference_preconffinalprogramme_160707.pdf

7 Ibid


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Vicarious Liability of Partners

In particular, innocent partners of a LLP are not subject to personal “vicarious

liability” for malpractices liabilities of the LLP merely because they are its

partners. In the case of Megadyne Information System v. Rosner, Owens &

Nunziato, No8 the court determined that there was facts issue relating to the

personal liability of the partners. The court cited the California LLP provisions

for the proposition that partners in a LLP do not have vicarious liability for the

torts of another partner, and the court stated that the plaintiff could only hold a

partner liable who was “involved in the handling of the matter”.

Exception to the Limited Liability

The LLP‟s existence as a corporate entity means that the effect of the general

law is different in comparison with a partnership. For example, it is anticipated

that a third party will usually contract with the LLP whereas, in general, a

partner contracts as principle on behalf of the other partners. Partners of LLP

are afforded the protection of limited. The notable exceptions to this protection

are as follows:

● Personal Negligence: if an individual partner is purported to have been

negligent, it may be possible to bring a civil negligence action against

that individual. However the court/tribunal has indicated that they would

have regard to whether the allegedly negligent advice was given in a

personal capacity or whether the LLP assumed responsibility for the

advice.

Partner’s Obligation

All partners, not just the designated partners, are agents of the LLP, and as such

owe the duties of an agent to the LLP, although the precise content of those

duties will need to be developed by the court/tribunal. The typical obligations of

agents include obligations to act in the interest of the principal (i.e. the LLP), to

avoid conflict of interests and a prohibition on the making of secret profits, and

some elements of these requirements are reflected in the default provisions.

While partners are agent of the LLP, they are not agents of one another and the

legislation does not regulate the relationship between the partners. The reason

for the omission was the potential conflict between the duty, which the partner

owe to the LLP (as agents) and any duty, which they one another. The solution

adopted was to impose the former duty as a matter of statutory obligations and

to leave it to the partners to address their internal relationship in a separate LLP

agreement.

Liability of the Ceased Partner Shall Continue against Third Party in Specific Circumstances

When a person has ceased to be a partner of a LLP( herein referred to as

“former partner”), the former partner is to be regarded( in relation to any person

8 B213137, 2002 WL 31112563 (Cal. App. Sept. 21, 2002)


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dealing with the LLP) as still being a partner of the LLP unless:

(a) the person has noticed that the former partner has ceased to be a partner

of the LLP; or

(b) Noticed that the former partner has ceased to be a partner of the LLP has

been delivered to the Registrar.

Partner Shall Not Be Discharged From the Obligation for the Period of His

Being a Partner of LLP.

The cessation of a partner from the LLP does not by itself discharge the partner

from any obligation to the LLP or to the other partners or to any other person,

which he incurred while being a partner.

Partner Is Entitled To His Share and Accumulated Profit/Losses after Cessation

from LLP

Where a partner of a LLP ceases to be a partner, unless otherwise provided in

the LLP agreement, the former partner or a person entitled to his share in

consequences of the death or insolvency of the former partner, shall be entitled

to receive from the LLP:

(a) an amount equal to the capital contribution of the former partners

actually made to the LLP; and

(b) His right to share in the accumulated profits of the LLP, after the

deduction of accumulated losses of the LLP, determined as at the date

the former partners ceased to be a partner.

Extent of Liability of an LLP

Section 27 defines the extent of liability of an LLP.

(1) Limited liability partnership is not bound by anything done by a partner

in dealing with a person if

(a) The partner in fact has no authority to act for the limited liability

partnership in doing a particular act; and

(b) The person knows that he has no authority or does not know or believe

him be a partner of the limited liability partnership.

(2) The limited liability partnership is liable if a partner of a limited liability

partnership is liable to any person as a result of a wrongful act or omission

on his part in the course of the business of the limited liability partnership or

with its authority.

(3) An obligation of the limited liability partnership whether arising out in

contract or otherwise, shall be solely the obligation of the limited liability

partnership.

(4) The liability of the limited liability partnership shall be met out of the

property of the limited liability partnership.


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4. Findings and Suggestion

(Unlimited Liability In Case Of Fraud) Section 30(1) of LLP seeks to provide

for unlimited liability of the LLP and its partners in case LLP or any or any of

its partners carry out an act with intent to defraud creditors of the LLP or any

other person or if they carry out an act for any fraudulent purposes. The clause

further provides that in case of any such act is carried out by a partner; the LLP

is liable to the same extent as the partners unless it is established by the LLP

that such an act was without the knowledge or the authority of the LLP. This

clause further seeks to provide that where an LLP or any partner or designate

partner or employee of such LLP has conducted the affairs of the LLP in a

fraudulent manner, then without prejudice to any criminal proceedings which

may arise under any law for the time being in force, the LLP and any such

partner or designated partner or employee shall be liable to pay compensation to

any person who has suffered any loss or damage by reason of such conduct.

5. Conclusion

It is best to say that a limited liability partnership not only renders protection to

the partners but also retains all the benefits of a partnership. Although the

traditional partnership holds one advantage that it is not compulsory for a

partnership to get registered before any statutory authority while on the other

hand a Limited Liability Partnership has to get registered under the Limited

Liability Act, 2008, the process of which may be cumbersome. Still in my

opinion the balance is tilted in the favour of the latte. Further, although the

partnership form has been in use for a long time, and the law applying to

partnerships was codified into statues more than one hundred years ago, features

of the law on partnership can present serious drawback to their use today. In the

eye of law, Partnership is merely a way of describing the individual partner who

makes up their partnership, Today the world is in the grip of unprecedented

financial crisis, which is adversely affecting economies of most of the countries,

including our own. In such a situation availability of LLP as an alternative

business vehicle to our trade and industry will be an important step. Service

industry has grown considerably in India and it accounts for nearly half of our

GDP. We believe that the LLPs would further contribute to the growth of the

service industries in the future.

The LLP form would enable entrepreneur, professional, and enterprises

providing services of any kind engaged in scientific and technical disciplines, to

form commercially efficient vehicle situated to their requirement. Owing to the

flexibility in its structure and operation, the LLP would also be suitable vehicle

for small enterprises and for investment by venture capital. The LLP structure

would bring India at par with business practices followed in developed nations

of the world.


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References

[1] Sanjiv Agarwal & Rohini Agarwal, Limited Liability Partnership Law and Practice, first edition, Lexis Nexis Butterworths Wadhwa,Nagpur

[2] Dr. D.K. Jain, Law & Procedure of Limited Liability Partnership, 2nd Edn, Bharat Law House

[3] P.L. Subramanian, Limited Liability partnership, Law, practice & procedure, 4th Revised Edn.

[4] Sanjiv Agarwal, Genesis and Concept of Limited Liability Partnership, Consolidated Commercial Digest, Vol 23

[5] Pollock & mulla, The Indian Partnership Act, p. 439

[6] Kartikey Mahajan, Limited Liability Partnership Act: a long way forward, International Company and Commercial Law Review, Issue 6, 2009, p. 206

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March 1946) reproduced in R Iyer (ed), The Moral and Political Writing of Mahatma Gandhi (1987) vol 3, 197-199

[17] Constitution (Forty-second Amendment) Act 1976 s 9

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[19] 1983 AIR 75, 1983 SCR (1) 9. Noted by J Cottrell, 'Indian Judicial Activism, the Company and the Worker: A Note on National Textile Workers Union v Ramakrishnan' (1990) 39(2) The International and Comparative Law Quarterly 433

[20] "Companies bill would require firms to spend 2 percent profits on poor". reuters.com. 2013-08-13. Retrieved 2014-05-06.

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[24] National Company Law Tribunal, replacing the previous Company Law Board and Board for Industrial and Financial Reconstruction.

[25] Indian Corporate Law Service


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