Author Name:   manoranjan ayilyath

Partners, their rights, duties and extent of liabilities under Limited liability partnership Act 2008...

Partners Under The Limited Liability Partnership Act, 2008

The concept of limited liability partnership had evolved in the aftermath of the collapse of real estate and energy prices in Texas in the 1980s. This collapse led to a large wave of bank and savings and loan failures. Because the amount recoverable from the banks was small, efforts were made to recover assets from the lawyers and accountants that had advised the banks in the early-1980s. State statutes passed in 1991 were a response to numerous lawsuits filed by government agencies and individual citizens against small investment companies.

The Limited Liability Partnership (LLP) Act, 2008 is largely based on the Singapore LLP Act and also includes features of the UK LLP Act. According to the concept paper on limited liability partnership prepared by the Government of India in 2005, in view of the increasing role of the service sector in Indian economy, a need was felt for introduction of a new corporate entity—Limited Liability Partnership, that would combine the characteristics of corporate and non corporate entities . Limited Liability Partnership (LLP) is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.

S 2 (n) of the Limited Liability Partnership Act, 2008 defines Limited liability partnership as a partnership formed and registered under the Act. By virtue of S 3(1) of the Act, Limited Liability Partnership is a body incorporate formed and incorporated under this Act.

• It 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

Partners In Limited Liability Partnership
S 6(1) requires that the limited liability partnerships shall have at least two partners. If a limited liability partnership carries on business for more than six months, after the number of partners of a limited liability partnership is reduced below two, the surviving partner shall be liable personally for the obligations of the limited liability partnership incurred during that period. The general rule in a limited liability partnership is that any individual or body incorporate can be a partner in it. The proviso to S 5 of the Act provides for three exceptions.

If an individual,
# Has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;
# Is an undischarged insolvent; or
# Has applied to be adjudicated as an insolvent and his application is pending

By virtue of S 22 of the Act, the persons who had subscribed their names to the incorporation document, at the time of the incorporation, shall be its partners. Any other person may become a partner of the LLP, by and in accordance with the terms of the limited liability partnership agreement.

Designated partners and Appointment of designated partners:
A designated partner under the Act, according to S 2 (j), means, any partner designated as such pursuant to S 7. By virtue of the proviso to S. 7 of the Act, in the case of a limited liability partnership, where all the partners are individuals or bodies incorporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners, i.e., an LLP must have at least two designated partners who must be individuals and in the case of a body incorporate, it may nominate the partners.

A designated partner may be appointed in two ways:
1. Through the incorporation document;

2. According to the provisions of the limited liability partnership agreement

1. Through the incorporation document : The incorporation document, the partnership may assign who may be made designated partners (S 7 (2) (i)). It may either.,

• Specify that who are to be designated partners; or

• State that each of the partners of the limited liability partnership, from time to time, is to be designated partner.

2. According to the provisions of the limited liability partnership agreement : A partner may become a designated partner by and in accordance with the limited liability partnership agreement. The agreement shall also provide for the grounds by which a partner may cease to be a designated partner (S 7 (2) (ii)). The consent of the individual, who is to act as the designated partner, has to be obtained before his appointment. He has to obtain DPIN [Designated Partner Identification Number] from Central Government. By virtue of S 7(4), every limited liability partnership shall file with the Registrar, the particulars of every such individuals who has given his consent to act as designated partner in such form and manner as may be prescribed, within thirty days of his appointment. Designated partners shall be –

• Responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership under this Act including the filing of any document, return, statement etc;

• Liable to all the penalties imposed on the limited liability partnership for any contravention of those provisions Thus the designated partner is liable for all compliances as required under the Act and is liable to penalty for contravention of those provisions .

By virtue of S 23(1) of the Act, the mutual rights and duties of the partners of a LLP inter se, and the mutual rights and duties of a LLP and its partners shall be governed by the limited liability partnership agreement between the partnership and its partners. In the absence of any such agreement the mutual rights and duties of the partners of a LLP inter se, and that of a LLP and its partners, shall be governed by the provisions relating to that matter as are set out in the First Schedule of the Act. Liability of Partners in a LLP By virtue of S 26 of the Act every partner of a limited liability partnership shall be an agent of the LLP, for the purpose of the business of the LLP. Though, by virtue of S 27 (3) of the Act, an obligation of the LLP whether arising in a contract or otherwise, is the sole obligation of the limited liability partnership, a partner of the LLP is not, either directly or indirectly, personally liable for it . Liability in the case of Holding out (S 29) Where a person permits himself to be represented as a partner of a LLP, by words spoken or written or by conduct and any person on the faith in such representation, gives credit to the LLP, the former shall be liable to the latter. Liability in the case of Fraud By virtue of S 30 of the Act, any act, carried out by the LLP or any of its partners with the intent to defraud the creditors, the LLP and, its partners who had acted with the intent to defraud creditors or for any fraudulent purposes, shall be having an unlimited liability with respect to all or any of the debts or other liabilities of the LLP. By virtue of the proviso of S 30 (1), where any such act is carried out by a partner, the LLP shall be 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.

Modes of Cessation of the partnership interest (S 24)
Under the following conditions a person shall cease to be a partner of a limited liability partnership:
i. On his death; or ii. On the dissolution of the LLP; or iii. If he is declared to be of unsound mind by a competent court; or iv. If he has applied to be adjudged as an insolvent or declared as an insolvent.

A person may cease himself to be a partner of a LLP in accordance with an agreement with other partners.

In the absence of any such agreement with other partners, he may, by giving a notice of not less than thirty days to other partners of his intention to resign as partner. Such a notice must be in writing.

Rights and liabilities of Former Partners

A person who has ceased to be a partner of a LLP is termed as a former partner .

# By virtue of S 24 (5), of the Act, a former partner, at the time of the cessation of the partnership interest, is entitled to receive from the LLP-- a) An amount equal to the capital contribution of the former partner actually made to the LLP; and b) His right to share in the accumulated profits of the LLP, after the deduction of the accumulated losses of the LLP, determined as at the date of the cessation of his partnership interests. In the case of death or insolvency of the former partner, the person who is entitled to receive his share on the event of such consequences is entitled to such right.  But the former partner or any other person claiming under him, shall not have any right to interfere in the management of the LLP.  The former partner shall be, in relation to any person dealing with the LLP, regarded as still being a partner of the LLP unless., a) The person has notice that the former partner has ceased to be a partner of the LLP; or b) Notice that the former partner has ceased to be a partner of the LLP has been delivered to the Registrar.

Reference:
1. Robert W. Hamilton (1995). "Registered Limited Liability Partnerships: Present at Birth (Nearly)". Colorado Law Review 66: 1065,1069.
2. Dr Sanjiv Agarwal & Rohini Aggarawal ’Limited liability Partnership, Law and Practice’, LexisNexis Butterworths,2009,Ed.1
3. www.llp.gov.in
4.Taxmann's Companies Act, 14th edition, 2009

The  author can be reached at: manuayilyath@legalserviceindia.com

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