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.
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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
International Journal of Pure and Applied Mathematics Special Issue
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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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