In this blog post, Angela D’souza, a student pursuing her LL.B (4th year) from School of Law, Christ University, Bangalore and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes how a partner can be fired from a limited liability partnership or a LLP.
An accurate and comprehensive definition of a partnership is hard to come by. However, the definition formulated by Chancellor Kent provides a basic understanding of what a partnership entails. He said that a contract of two or more competent persons, to place their money, effects, labour, and skill, or some or all of them, in lawful commerce or business, and to divide the profit and bear the loss, in certain proportion[1] is a partnership.
Simply put, a partnership is an agreement or a contract wherein individuals concede to pool their resources and utilize them towards a cause to gain monetary benefit. In the event of profits, the proceeds are shared among the members or partners and in a case of losses, each of the partners is liable to make good the loss. However, there is no ceiling as to what extent every partner is liable. It is in this scenario that a limited liability partnership comes into the picture.
A limited liability partnership is similar to a partnership in many ways. However, the limitations that it imposes on its partners are what that makes it different from an ordinary partnership.
WHAT IS MEANT BY A LIMITED LIABILITY PARTNERSHIP?
A Limited Liability Partnership is one of the most common business structures in the UK, US, and Australia. In India, the LLP was given legal recognition by way of the Limited Liability Partnership Act, 2008.
As defined by the Limited Liability Partnership Act, a LLP is:
…a body corporate and a legal entity separate from its partners. It will have perpetual 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.[2]
Therefore, a limited liability partnership seeks to strike a balance between the operational mechanism of a regular partnership and a separate legal entity like a company, thus seeking to gain the best of both the worlds. The compliance requisites for a LLP are more than that of a normal partnership but lesser than that of a limited liability company. The low compliances and tax deductions make a LLP the most preferred choice in today’s day and age.
The salient features of a Limited Liability Partnership are as follows:
- Akin to a company, it has perpetual existence. Its status does not alter due to the change of partners.
- Being a separate legal entity, it can hold property and enter into contractual obligations under its name. This clearly lessens the burden on the partners unlike in the case of a regular partnership.
WHAT IS A LIMITED LIABILITY PARTNERSHIP AGREEMENT?
A Limited Liability Partnership Agreement is an agreement entered into by the partners of an LLP to determine their rights and duties on each other and the LLP.
Now, entering into an agreement is not compulsory; in the absence of an agreement, the rights and duties are governed by Schedule 1 of the Limited Liability Partnership Act. However, an agreement allows for formulating regulations by the convenience of the partners and therefore a LLP agreement is advisable.
WHO IS A PARTNER?
An individual or a corporate body can be a partner in a LLP. However, such individual or corporate body should be of sound mind, should not be insolvent and should not have applied for being adjudicated as an insolvent.
HOW CAN A PARTNER OF AN LLP BE REMOVED?
The primary grounds on which a partner can be removed or rather disqualified from continuing as a partner is if he is found to be of unsound mind or has been adjudicated as an insolvent or has filed an application to be adjudicated as an insolvent.
However, when it comes to firing a partner, a completely different course of action has to be adopted.
It has first to be borne in mind that the Limited Liability Partnership Act, 2008 does not lay down any provisions for the firing of a partner of a LLP. The sole document that regulates this is the LLP Agreement entered into by the partners at the initial stage of the partnership. The LLP Agreement should, therefore, contain provisions that specify the criteria and procedure that should be adopted in case the need to fire a partner of the LLP arises.
WHAT IF A LIMITED LIABILITY PARTNERSHIP AGREEMENT HAS NOT BEEN ENTERED INTO?
A major problem arises if an agreement is not entered into or if the agreement does not specify any course of action to fire a partner. Since the LLP Act also does not suggest anyway, reliance has to be placed on alternate means.
At this juncture, it is essential to note that most often; a partner is also an investor in the business. Therefore, firing him/her would not serve the purpose of being an investor; he will continue to be associated with the LLP and its business. The best way out is to buy out the partner.
Buying out a partner entails offering him a sum equivalent to or more than his contribution to the business and obtain the shares he/she holds. In this way, the partner gets his investment back and automatically gets disassociated from the business. However, this is usually applicable if the partner is a small contributor. If the partner is a majority shareholder, it becomes nearly impossible to oust him out. In such case, the only solution is to dissolve the partnership.
Ousting of the majority shareholder would normally require court assistance to dissolve the partnership. Once the partnership is dissolved, the partners are redeemed from their rights and liabilities. Those who wish to continue can form a new partnership.
CONCLUSION
Therefore, a Limited Liability Partnership has a dual nature. It has the operational mechanism of a regular partnership but possesses a separate legal entity like a company.
The Limited Liability Partnership Act does not specify any mode for firing of a partner of a LLP. Therefore, the primary way of firing a partner is by way of the LLP Agreement entered into at the start-up stage. However, such an agreement should provide for the firing of a partner.
In the absence of such provisions or in the absence of the agreement, buying out of the partner’s shares or the dissolution of the partnership itself serves as alternate solutions.
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Footnotes:
[1]J.P. Singhal, Law of Partnership (7th ed. Universal Law Publ’g Co. Pvt. Ltd. 2016), 42.
[2] Section 3(1), Limited Liability Partnership Act 2008.
