In this blog post, Irshaan Singh Kakar, Advocate and Legal Consultant at Legacy Law Offices and a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the role of a partner and designated partner in limited liability partnerships. 

 

A Brief Introduction to Limited Liability Partnerships

Limited Liability Partnerships (“LLP” or “LLPs”) are a form of alternate corporate structuring that combines the flexibility of a partnership firm and the advantages of limited liability of a company at lower compliance costs. As a hybrid corporate business vehicle, LLPs provide the limited liability of a company while at the same time allowing its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, such as in the case of a partnership firm. LLPs fill the need of organisation while subsequently providing flexibility without imposing onerous/ detailed legal and procedural compliances. They enable professional/ technical expertise and initiative to be integrated with limited financial risk taking capacity in an innovative and efficient manner.

In India, LLPs are governed by the provisions of the Limited Liability Partnership Act, 2008[1] (the “LLP Act”), however, Limited Liability Partnership is not a concept that is indigenous to India. Where there are variations in concepts related to LLPs across different national jurisdictions, the basic concept of an LLP, however, is the same, which is that some or all partners of an LLP have limited liabilities, and a partner of the LLP is not responsible or liable for another partner’s misconduct or negligence.

One of the major variations across national boundaries, which is relevant to the scope of the present report is that some countries require an LLP to have at least one partner having unlimited or increased liability.

 

Concept and Historical Overview

LLPs are a fairly recent concept, and a Limited Liability Partnership was formed for the first time in global history in the aftermath of collapse of real estate and energy prices in Texas in the United States of America in the 1980’s, which led to a large wave of insolvency of various bank/ savings/ loan firms. Efforts were made to recover assets from lawyers and accountants who had advised the banks. Law firms and accounting firms, hence, were subject to the possibility of huge claims which could potentially bankrupt them, including those partners who were not responsible for the failure of the banks/ savings/ loan firms. As a result, the first limited liability partnership laws were passed to shield the innocent members of these partnerships from liability.[2]

Other states in the United States of America followed suit and soon afterwards, England, Japan, Singapore, China, Canada, Germany, Greece, Kazakhstan, Poland also enacted LLP Laws.

 

Hence, LLPs are the preferred vehicle of business, particularly for service industry or for activities involving professionals, whose legal entity structure is regulated and who are also governed by the governing statutes of which they are members. The need for LLPs was felt in those cases where the Company form of business was not permitted or where professionals were not allowed to operate as a corporate body. On the other hand, only a partnership firm was not enough as it does not provide limited liability and the personal property of all the partners was always at risk.

 

LLPs in India

 

Legislative History

In India, various expert groups and committees, including the Abid Hussain Committee 1997, The Naresh Chandra Committee on Audit & Corporate Governance 2003 and Dr J.J. Irani Committee on Company Law in 2005 had examined and recommended the need for a law enabling the setting up of LLPs. After considering all these recommendations, the Ministry of Company Affairs, Government of India issued a concept paper on limited liability partnership on 2nd November, 2005 observing therein that the regime of LLP would provide a platform to small & medium enterprises & professional firms of Chartered Accountants, Company Secretaries, Advocates, etc. to conduct their business operations efficiently, which would, in turn, increase their global competitiveness.

After considering the comments and suggestions on the concept paper, the Govt. of India finally introduced the “Limited Liability Partnership Bill, 2006” in the Rajya Sabha on 15th December 2006. After being referred to the Parliamentary Standing Committee on finance, a revised Bill, namely, the “Limited Liability Partnership Bill, 2008” was introduced in the Rajya Sabha on 21st October 2008. The House passed it on 24th October 2008. After that as soon as parliament resumed its function in December 2008, the bill was presented in Lok Sabha, and on 12th December 2008, the Lok Sabha passed the Bill, resulting in the formation of the LLP Act presently in force.

The first LLP in India was incorporated in the first week of April 2009, ‘R K Handoo and Associates’.[3]

The Limited Liability Partnership Act, 2008

The basic salient features and characteristics of the LLP Act are briefly highlighted herein below:-

• Name – The LLP Act mandates the use of the words “Limited Liability Partnership” or its acronym “LLP” as the last words of the name of an LLP[4]. Similar to the procedure envisaged under the Companies Act, 2013, during the incorporation process of an LLP, the name of the LLP first has to be reserved for application with the Registrar under the LLP Act[5]. Section 20 of the LLP Act imposes a penalty for the improper or illegal use of the words “Limited Liability Partnership” or its acronym “LLP” in the name/ title of any business undertaking unless such undertaking is registered under the LLP Act.
• Nature – An LLP is a body corporate and legal entity having perpetual succession separate from its partners[6]. An LLP is capable of suing and being sued in its name; acquiring, owning, holding and developing or disposing of property, whether movable or immovable, tangible or intangible in its name; having a common seal (optional); and doing and suffering such other acts and things as bodies corporate may lawfully do and suffer[7].
• Partnership Act – The LLP Act categorically excludes the applicability of the Indian Partnership Act, 1932 to LLP’s under the LLP Act and such LLPs are regulated by the contractual agreement between the partners.[8]
• Relationship – Under the LLP Act the partners are an agent of the LLP firm, however, not of other partners[9]. However, it is pertinent to note that according to section 23 of the LLP Act, the mutual rights and duties of the partners of an LLP and the mutual rights and duties of an LLP and its partners shall be governed by the LLP agreement between the partners, or between the LLP and its partners. The contribution of partners to the LLP business, whether any kind of property, money, promissory notes, agreements to contribute cash or property and contracts for services to be performed shall be as per the agreement between the partners[10].
• LLP Agreement – An LLP agreement is not mandatory and in the absence of LLP agreement, mutual rights and liabilities of partners shall be determined as provided under Schedule I to the LLP Act[11].
• Incorporation – Incorporation of an LLP requires the filing of an incorporation document with the Registrar under the LLP Act, along with the requisite fees (under section 11(b) of the LLP Act) along with the documents mentioned in section 11(c) of the LLP Act by two or more persons for carrying on a lawful business with a view to profit. Upon compliance therewith, the Register shall retain the incorporation document and within a period of fourteen days register the incorporation document and issue a certificate of registration containing the Registrar’s signature and official seal, which shall be conclusive evidence of incorporation of an LLP[12]. An existing firm, private company or unlisted private company can also be converted into an LLP under the LLP Act[13].
• Liability of LLP – The LLP Act envisages a limitation on the liability of an LLP for unauthorised acts of its partners, whether such acts are willful or under a mistaken belief. However, liability arising from the wrongful acts or omissions of a partner in the course of business of an LLP shall be binding on the LLP[14]. Further, an LLP will be liable for obligations arising from holding out and for all credit extended to the LLP from such holding out[15].
• Liability of partners – Obligations of an LLP, whether arising in contract or otherwise, shall be solely the obligation of the LLP and shall be only met out of the property of the LLP[16]. Section 28 of the LLP act categorically excludes partners of an LLP from direct and/or indirect personal liability for obligations of the LLP solely by reason of being a partner of the LLP, however, this will not affect the personal liability of a partner arising from his own wrongful acts/ omissions, as distinguished from the wrongful acts/ omissions of another partner.
• Fraudulent Activities & Whistle Blowing – Under section 30 of the LLP Act, the liability of an LLP and every partner who acted with intent to defraud its creditors or any other person, shall be unlimited, along with the imposition of imprisonment for a term which may extend to two years with a fine of Rs. 50,000 to Rs. 5,00,000. However, a court or tribunal has been given the discretion to reduce or waive liability of partners/ employees for providing information, and further such employee/ partner has been provided protection from acts which may be construed to be discrimination as listed in the Act, in such an eventuality[17].
• Designated Partners – Under the LLP Act, every LLP needs to have at least two designated partners being individuals, at least one of whom needs to be resident in India[18]. This is discussed in detail below.
• Procedures, Compliances and Financial Disclosures – Under the provisions of the LLP Act, comparatively reduced compliances exist than those which might be applicable to a company, such as maintenance of books of accounts, other records and audits, annual returns, etc[19]. Provisions for amalgamation, winding up, etc. of an LLP are provided for in the LLP Act in sections 51, 52, 60 to 65 of the LLP Act.

 

Partners under the LLP Act

Under the LLP Act, there should be a minimum of at least two partners in an LLP and in case the number falls below two; the remaining partner becomes personally liable for the obligations of the LLP[20]. Further, there have to be at least two designated partners, who are individuals, not legal entities, and one of whom should be resident in India.

However, in case there are only two partners in an LLP, they do not have to be individuals. According to the proviso to section 7(1) of the LLP Act, in case all the partners are bodies corporate 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. It is also important to note that in case no designated partners are specified in the incorporation document, and instead, it is specified that each of the partners from time to time shall be the designated partner, then every such partner shall be a designated partner.

Apart from such a situation, any individual or body corporate may be a partner in an LLP, whether a limited Company, a foreign Company, another LLP, a foreign LLP or a non-resident. The only factors excluding an individual from being capable of becoming a partner of an LLP are[21]:-

1. If an individual has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
2. If an individual is an undischarged insolvent; or
3. If an individual has applied to be adjudicated as an insolvent and his application is pending.

Under section 22 of the LLP Act, those persons who subscribed their names to the incorporation documents (under section 11 of the Act) shall be the partners of the LLP firm. New partners can be admitted in the LLP as per conditions and requirements of LLP Agreement. The procedure/ conditions for the cessation of the partnership is allowed to be mutually decided as per the LLP agreement between the partners, and in the absence of such an agreement, a resignation notice of not less than 30 days needs to be given to the other partner’s[22].

 

Partner and Designated Partner: Roles and Distinction

 

The LLP Act lays down that there shall be at least two partners and also have at least two Designated Partners who shall both be individuals, at least one of whom shall be resident in India.

 

Definitions

A partner has been defined under the LLP Act as “2 (q). “partner”, in relation to a limited liability partnership, means any person who becomes a partner in the limited liability partnership in accordance with the limited liability partnership agreement.” A partner in an LLP who is not a designated partner is not responsible nor can be made liable for the penalties for contravention/ non-compliance of the provisions of the LLP Act, and such liability/ obligations cannot be recovered personally from such a partner of an LLP.

In seemingly subtle but highly relevant contrast, a designated partner has been defined as “a partner designated as such pursuant to section 7”.[23] What is different about designated partners is that unlike other partners whose liability is limited solely to the LLP agreement and their acts/ omissions as per sections 27 to 29 of the LLP Act, designated partners gain increased liability for all the penalties imposed on an LLP for contravention of the provisions needed to be complied with, as contained in section 8(a) of the LLP Act[24]. A designated partner becomes responsible for compliances under the LLP Act, including the filing of documents, returns, statements, etc. and in a case of contravention/ non-compliance, a designated partner may become liable to punishments/ penalties under the LLP Act personally and severally.

 

Appointment  and requirements

Under section 7 of the LLP Act, those persons who are specified as designated partners in the incorporation document shall be the designated persons, or every such partner who is a partner shall be a designated partner in case no such person is specified. An individual cannot become a designated partner in any LLP without his prior consent, and such a person is also required to obtain a Designated Partner’s Identification Number (“DPIN”)[25].

Further, in the case of a vacancy in the post of a designated partner, an LLP may appoint a designated partner within thirty days of such vacancy arising[26].

Under section 22 of the LLP Act, those persons who subscribed their names to the incorporation documents (under section 11 of the Act) shall be the partners of the LLP firm, and new partners can be admitted in the LLP as per conditions and requirements of LLP Agreement.

Rights and liabilities

The role of designated partners in case of LLP is on same footage as of Directors in the case of a Company. The designated partners as provided in Section 8 are directly responsible for the compliances of all provisions provided under LLP Act and the provisions specified in the LLP Agreement. Unlike normal partners, designated partners are responsible for doing all acts, matters, and things as are required to be done by LLP in respect of compliances of the provisions of the LLP Act.[27] A designated partner shall be liable to all penalties imposed on an LLP for any contravention of those provisions[28]. Responsibility for compliances under other acts and laws is to be determined as per the agreement between the partners. However, the designated partners shall be solely responsible for all compliances and penalties under the LLP Act.  

A managing partner may also be appointed as per an LLP agreement, for managing the business of the firm apart from the designated partners and therefore it is not necessary that a designated partner is also a managing partner & vice versa.

Rights of designated partner are same as of other partners. Similar to other partners, they are not entitled to any remuneration for their participation in the management of LLP unless otherwise specifically provided in the LLP Agreement, yet they have additional responsibilities to comply with and will become liable for all penalties under the LLP Act for contravention/ non-compliance of the provisions of the LLP Act.

Under section 10 of the LLP Act, If any LLP contravenes the provisions of section 7 (1) of the LLP Act relating to appointment of at least two designated partners, such an LLP and its every partner shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to five lakh rupees. Further, contravention of sections 7(4) [filing of particulars of designated partners with Registrar], 7(5) [non-fulfillment of conditions and requirements for eligibility to be a designated partner], 8 [Liabilities of designated partners] and 9 [Changes in designated partners] of the LLP Act shall entail penalty of fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees to the LLP and its every partner.

Major duties of designated partner

Major duties of a designated partner include:-

• Notify any changes in the LLP’s to Registrar of Companies.
• Notify any changes in the Partners names & residential addresses to Registrar of Companies.
• Notify any change in Registered Office Address to Registrar of Companies.
• Filing of any Annual return, Statement of Accounts and other documents specified under the provisions of LLP Act with the Registrar of Companies.
• Statement of Accounts & Solvency to be signed by the Designated Partners of the Company.
• to preserve and to produce before an inspector or any person authorised by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to, the limited liability partnership or, as the case may be, the other entity, which are in their custody or power
• Responsible for signing all the e-forms filed with the Registrar of Companies.

 

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References:

[1] Published in the official Gazette of India on January 9, 2009, and has been notified with effect from 31 March 2009. Only limited sections of the Act have been notified. The rules were notified in the official gazette on April 1, 2009.

[2] See “Registered Limited Liability Partnership” by Robert W. Hamilton (1995);

[3] http://articles.economictimes.indiatimes.com/2009-04-03/news/28401333_1_llp-form-separate-legal-entity-professionals-like-chartered-accountants

[4] Section 15 of the LLP Act.

[5] See sections 16 – 20 of the LLP Act.

[6] Section 3 of the LLP Act.

[7] Section 14 of the LLP Act.

[8] Section 4 of the LLP Act.

[9] Section 26 of the LLP Act.

[10] See sections 32 – 33 of the LLP Act.

[11] Section 23 (4) of the LLP Act.

[12] Section 12 of the LLP Act.

[13] See sections 55 – 57 of the LLP Act, brought into force on 31.05.2009.

[14] Section 27 (a) & (b) of the LLP Act.

[15] Section 29 of the LLP Act.

[16] Section 27 (c) & (d) of the LLP Act.

[17] Section 31 of the LLP Act.

[18] Sections 7 – 10 of the LLP Act. It has been clarified under section 7 of the LLP Act that for the purposes of the LLP Act, the term ‘resident in India’ means “a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.”

[19]. Sections 34 – 38 of the LLP Act.

[20] Section 6 of the LLP Act

[21] Section 5 of the LLP Act

[22] Section 24(1) of the LLP Act.

[23] Section 2(j) of the LLP Act.

[24] Section 8(b) of the LLP Act.

[25] Sections 266A to 266G (both inclusive) of the Companies Act shall apply mutatis mutandis for the said purposes.

[26] Section 9 of the LLP Act.

[27] Section 8(a) of the LLP Act.

[28] Section 10 of the LLP Act.