Limited Liability Partnerships

Vinod Kothari
1012 Krishna
224 AJC Bose Road
Calcutta 700 017. India
Phone 91-33-23233863/23233864/22811276/22817715/22813742
Fax: 91-33-23233863
E-mail:vinod@vinodkothari.com; vinodk@vsnl.com

Emerging trends in Company law by Vino 1

d Kothari
 Concept paper on LLPs in India
Based on the recommendations of the NC
Gupta committee, and the Irani committee,
the Govt had come out with a concept paper
and a draft of the LLP bill in late 2005.
LLP Bill has been placed before
 Lok Sabha on 7th Dec 2006
 Rajya Sabha on 15th Dec 2006.
The Constitution (entry 44, List 1 of Seventh
Schedule) has put “corporations law” in the
Union List:
 As LLPs are to be given an incorporated status,
they will fall under this list.

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 Concept of LLPs
The word “partnership” in LLPs is a misnomer, as the entity is
not merely a collective coming together of two persons:
 Results into creation of a new entity with its own existence
LLPs are a hybrid between a company and a partnership:
 Externally, they have all features of a company
 Internally, they are run and managed by the members, hence they
are like partnerships
 The idea is to clothe a partnership with
 Limited liability
 Incorporeal existence and therefore personality of its own
The concept of LLPs has inherent inconsistencies, as it has not
had benefit of seasoning over centuries:
 US law also relates to 1990s – Delaware model is the most
commonly used one.

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 LLP legislation in other countries
In UK, LLP law was passed in 2000
The campaign for LLPs was initiated by accounting firms (PwC and
E&Y) to limit their liability:
 Though UK Companies Act did allow professions to register as companies,
accounting firms were reluctant to publish accounts, be subject to
inspections etc
The argument was first rejected by the Law Commission
The accounting firms used their power to have this law passed in
Jersey in the midst of political uproar:
 In view of the agreements between Jersey and UK, the accounting firms
could still do business in UK
 This forced the DTI to put the LLP bill on the agenda in 1996
 After a series of consultations, the Bill was passed in 2000; with tax clarity,
the structure got into offing in April 2001
The UK move set the ball rolling in other countries too:
 Canada (Ontario) introduced LLP law in 1998
 Singapore issued consultation paper in 2002, enacted the law in 2005
In UK, the LLP model is available for all businesses; in New York, it is
open only for selected professions.

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 What happened after the LLP law
In UK, accounting firms were quick to
capitalise on the new law:
 Major accounting firms (KPMG, PWC, E&Y)
registered themselves as LLPs
 Of the top 50 law firms, 14 already registered as
LLPs, and 24 more have plans to convert [Legal
Week, 25th Aug 2005]
Advantages of LLPs:
 Very cheap to incorporate
 Lot of flexibility, very little accountability
 All benefits of a partnership business, though with
a new entity
 Taxation as general partnerships

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 Overview of the UK LLP law
Most obvious feature: the law is very short, very simple:
 Just 19 sections, no schedules
The law could afford to be simple, as chunk of the corporate law
provisions arise from separation of ownership and management
Owners and managers are the same: one member designated
as “designated member”
 May be a founding member or may change
Unlimited business capacity
Principle of agency/principalcy applicable:
 Every member is an agent of the LLP
Limited liability must always come with protected capital:
 The law provides for capital of each partner, but does not restrict
drawing
Capital or liability not mentioned in incorporation documents

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 Overview of the Singapore model
Singapore LLP Act of 2005 has 61 sections and 5
schedules, fifth schedule being elaborate with
provisions on winding up
Provides for transferable partners’ interest, eligibility
to convert a partnership and private company into an
LLP
Requires manager
Requires declaration of solvency
 Makes debt owed to partners to be subordinated to the claim
of the outsiders
 Surprisingly, however, a loan made by a partner is not so
subordinated
Provides for disqualification of persons who have
managed insolvency partnerships

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Salient features of the LLP Bill - Constitution
Indian law seems based on the Singapore law
LLP is a body corporate, separate entity, perpetual succession:
 To ensure perpetuality, transferability of membership is a must
Members constituting it are members:
 Individuals and corporates may be members:
 Since body corporate will include an LLP, an LLP may also be a
member
 At least 2, maximum unlimited
Existing firms and Companies may convert themselves in LLPs
– Schedule 2 and 3 provide for the same:
 Eligibility in case of a company – no security interest on the assets
of the company
 No such eligibility condition in case of firms

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 Management of LLPs
Singapore law requires a manager:
 Manager to be an individual
Indian law requires at least two designated partners
 Who are individuals
 The position of designated partners seems to be the same as in
case of directors
The designated partner is the scapegoat:
 Answerable for all acts matter or things, done or to be done by the
LLP, and shall be personally liable for all penalties on the LLP
 The LLP is liable for only the contravention of this section (appointment
of a manager)
 This section is ridiculous:
 by not appointing a designated partner, the only implication is the
penalty of this section,
 appointing one, the designated has all implications of all laws
 UK law talks of designated member; if no member is designated,
then every member is a designated member

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 Preservation of capital
One of the most important pillars of the limited liability is definite capital:
 Capital is the foundation on which the assets are built
The LLP law, limiting liability, leaves the issue of preservation of capital
very vague:
 Capital is not mentioned in the Incorporation document; hence not a public
knowledge
 Capital of partners may be drawn
 Sec 26 leaves the issue of contribution on winding up completely open
 to be provided in the partnership agreement – which is not a public document
 Sec 19 (4) provides the liability of the partnership to be met solely from the
property of the partnership:
 Obviously, property means, net property, that is, net worth, which is the capital
 If there is no capital maintenance clause, the whole concept may be totally flawed
The basis of contracting external liabilities is only a declaration of
solvency:
 Which does not serve the purpose of credit enhancement, as solvency is
only as on the date on which it is made
In absence of capital maintenance, LLP might be NLP – no liability
partnership

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Preservation of capital or capital insurance

UK law requires partners to contribute

to the extent of drawings made within 2
years prior to winding up
Insolvency rules in India are applicable
to only individuals
LLPs may be subject to corporate
bankruptcy rules:
 Undue preference rules may require
returning of drawings made 1 year before
winding up [sec 531A]
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 Partners and their relationship
Initial partners are subscribers to organic document
Any one can be partner in accordance with agreement:
 Individuals and bodies corporate may be partners
 Designated partners must at least be two individuals
 In case of bodies corporate as partners, at least two individuals to be designated
 Insistence comes from the need for individuals to be directors
 Partnership interest is not a transferable security but requires agreement
with all partners
Mutual rights of partners are allowed to be governed by the partnership
deed
Cessation:
 Death, etc
 Mutual agreement
 Resignaion by 30 days’ notice
 A retiring partner shall be entitled to receive the credit of his capital and
share of accumulated profit determined to the date of his cessation:
 The law should provide – subject to mutual agreement
Changes in partners to be notified to the registrar

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 Partnership principle
Every partner to be agent of the LLP, not of other
partners
Partnership interest interestingly split into:
 Economic interest
 Non economic interest
Economic interest defined in sec. 2 (8) means right to
share in profits
Economic interest assignable, but assignee is not
treated as a partner, nor gets any right of
participation in management:
 Creates interesting situation:
 Partner may be X, assignee of economic interest may be Y
 X incurs liabilities, Y has all economic interest, but no
obligation, as does not have any partner status
 Companies Act, on the contrary, recognises no trusts or
equities on the shares
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 Transferability of partners’ interest

Seems the share of the partner in the

capital of the firm, and share in profits,
are two separate interests
Share in profits a transferable interest:
sec 41
 This has clearly followed the Singapore
model

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 Accounting and reporting

LLPs are required to maintain records,

but not:
 Hold meetings and lay accounts
 File accounts

 Publish accounts

They only make an annual declaration

of solvency
 Liability for the declaration is on the
manager
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 Taxation

In line with UK law, Bill for provides for

taxation of income as in case of general
purpose partnerships

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 Inspection and investigation

Provisions analogous to sec. 234 and

235/ 237 of Companies Act
Prosecution powers of the Central Govt

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 Winding up

Winding up may be either voluntary or

mandatory:
 Regulations to be provided
Notably, Singapore has a huge set of
rules applicable to winding up of LLPs,
almost on line of Companies Act

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 Applicability of Companies Act

UK has extended a large chunk of

Companies Act provisions to LLPs too:
 Power contained in sec. 57 to extend
Companies Act provisions:
 Very likely that several of the administrative
provisions may, over time, be extended

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 Penalties and prosecution

The power to impose penalties has

been granted to the Tribunal

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 Comparing LLPs and private companies-
similarities
LLPs Small companies

Incorporated Yes Yes

personality
Perpetual existence, Yes Yes
winding up by law
Plurality of owners yes Yes
Limitation of Yes Yes
contributory
liability
Limits on trading None None – professional
powers companies are
normally not
allowed
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LLPs and small companies -differences
LLPs Small companies

Segregation of management Indian law requires Directors are different from

and ownership designated partners; UK shareholders; different
law does not. powers are vested
Designated partners
generally liable for all
compliances
Law does not lay down
powers of designated
partners
Agency principle Partners represent the LLP Shareholders are distinct
Transferability Partnership is transferable Shares are transferable
only by agreement securities
Fixity of capital LLPs need not have fixed Limited liability companies
capital need to have fixed
capital
Reporting, audit, meetings No requirements Elaborate requirements
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Separation of management and ownership
One of the key features of LLPs is that there is no
separation of ownership and management:
 Hence, the foundations of corporate law, with the owners
reposing trust in the management do not apply
 Much of the reporting and accountability structure of corporate
law arises out of this separation
UK LLP law does not provide for separation of
management:
 In fact, there is a “designated member” who will be
answerable to the regulators
The concept paper in India goes the Singapore way
in separating management and ownership

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 Administrative authorities
Incorporation, striking of defunct LLPs: Registrar of
Companies
Registry record keeping, inspections, etc
 Registrar of companies
Compromise, arrangement, etc
 Central Government
Rule making powers; powers to notify Companies Act
to be applicable
Winding up
 Tribunal
Prosecution for offences:
 Lower courts

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 Compliances required by LLPs
PIN nos for designated partners
Particulars of designated partners are filed
Incorporation – by filing incorporation document with the RoC
Reservation of name, change of name, etc – provisions similar to
companies
Partnership agreement and changes therein to be filed with the RoC:
 Surprisingly, the partnership deed is not one of the documents available for
inspection u/s 35
 While the basic rights of the partners are defined in the document
Registration of changes in partnership (names of partners)
Filing of annual accounts and declaration of solvency
Audit of accounts
Filing of annual return
Powers of the registrar to call for information, inspection and
investigation largely the same as in case of companies
Compromise, arrangements etc as per rules to be made by Central
govt

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 What may the LLP hold
LLPs may hold any property, tangible or
intangible
Interestingly, partners may transfer,
either as contribution or otherwise,
properties in kind also
Unlike in case of companies, no fetters
on transfer of property in kind or a
separate disclosure:
 Valuation of the property not given the
seriousness it deserves
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 Liberties that the LLP enjoys
Accounting:
 May write books on either cash or accrual basis
 Might mean a considerable tax advantage
 Clearly conflicts with the audit requirements – cash basis cannot reflect true and
fair value of the state of affairs
 Accounting standards not applicable
Limitation of liability:
 Best of both the worlds – limited liability and flexible capital
No minimum capital requirements
Audit:
 While auditing is mandatory, there is no substantive detailing in the law
 Perhaps the rules may be much more liberal than for companies
Borrowings:
 No restriction on borrowing from partners, or to partners
 Sec 62 puts amounts owned to partners at par with amounts onwed to others
 Surprising provision – Singapore law subordinates claims of partners
 No need to create charges
 Apparently, not something that lenders will like

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 Ultra vires, agency rule and LLPs
The doctrine of ultra vires apparently is not applicable
to LLPs
 Since the objects are not required to be specified in the
incorporation document
At the same time, the partners are supposed to be
agent of the LLP
 Partner exceeding his authority does not bind the LLP
 In other words, the LLP escapes liability for anything done in
excess of the assigned authority
 Authority of LLPs contained in partnership document
 Those dealing with the LLP cannot get partnership
document as it is not one of the docs that may be inspected
 This leaves those dealing with the LLP at a great risk

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 Conversion into LLPs
Firms, private companies and unlisted public
companies may convert
Firms:
 All partners to continue
 Amount to dissolution of the firm
 Transfer of property by way of vestation – may be stamp
duty may be escaped
Private companies:
 There is no security interest on the property
 All members of the private company continued as partners
 There is no need to seek sanction of the lenders, etc
Public unlisted companies:
 Same as in case of private companies

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