transfer of partnership

In this article, Uday Agnihotri pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Transfer of Partnership Rights under the LLP Act.

Introduction

A business entity can take the shape of any of the accepted forms of business organization. With respect to India, there are a number of business organizational forms legally accepted. These include, but are not limited to, sole proprietorship, Hindu undivided family (HUF), partnership, cooperatives, limited liability partnership, companies etc. Out of these, the most commonly accepted and recognized business organizational forms are Partnerships, Limited Liability Partnerships, and Companies. LLPs are the most recent form of organization.

A Limited Liability Partnership (LLP) is a form of organization having the advantages of both a company as well as a partnership. Like a company, each partner in an LLP has limited liability to the extent of his/her contribution and is not liable to for another partner’s misconduct or negligence. Furthermore, an LLP, just like a corporate entity, has perpetual succession and a separate legal entity. However, unlike the complex procedural requirements for the establishment and working of a company, the establishment and working of an LLP is relatively simpler. LLPs are governed by the LLP Agreement signed among the partners, in the absence of which, by the framework provided in Schedule 1 of Limited Liability Partnership Act, 2008. Further, unlike a corporate entity and like a partnership, the partners have a right to take part in the management and functioning of the firm directly. An LLP is relatively a newer concept than both partnership (Indian Partnership Act, 1932) and company (The Companies Act, 1956) that was introduced in India in 2008 in the form of the Limited Liability Partnership Act, 2008.

Even though an LLP cannot raise funds from the public (as is the case with a corporate entity), it offers numerous other advantages. These advantages include, but are not limited to, low cost of formation, no requirement for a minimum capital contribution, no restriction as to the number of members, limited liability, less governance interference, less compliance requirements, easy to dissolve or wind up etc.

As mentioned above, LLPs in India are governed by the Limited Liability Partnership Act, 2008 and various Rules made thereunder. The Act (and the relevant rules) provide for compulsory registration with the ROC. Furthermore, the suffix ‘LLP’ or Limited Liability Partnership has to be added to the name of the partnership. An important point to keep in mind is that the partners of an LLP are agents of the LLP (and not of other partners). Thus, on one hand, it implies that the ownership of the assets is with the LLP and the partners merely have capital contribution in the LLP and on the other hand, it means that a partner of an LLP is not responsible or liable for the misconduct or negligence of another partner.

The Limited Liability Partnership Act, 2008

The LLP Act came into effect by way of notification dated 31st March 2009. It lays down the matters dealing with mutual rights and duties of partners of the LLP as well as of the limited liability partnership and its partners. The Act consists of 81 sections which are divided into XIV Chapters. The act also contains 4 Schedules. Chapter I deals with title, extent and definitions. Chapter II deals with the nature of the limited liability partnership whereas Chapter III deals with the incorporation of an LLP. Chapter IV of the act covers the eligibility of the partners and their relations. Chapter V deals with the extent and limitations of the liability of LLP and the partners. Chapter VI deals with the contribution of a partner in an LLP. Chapter VII deals with financial disclosures. Chapter VIII deals with the assignment and transfer of partnership rights (Section 42 deals with a partner’s transferable interest). Chapter IX deals with the investigation and prosecution in respect to LLPs. The Act provides for the conversion of a partnership firm (Section 55), a private company (Section 56) or an unlisted public company (Section 57) into a Limited Liability Partnership (LLP). Chapter XI lays down the concept of a Foreign LLP. Chapter XII of the Act deals with compromise, arrangement or reconstruction of LLPs whereas Chapter XIII deals with the winding up and dissolution of LLPs. Chapter XIV contains miscellaneous provisions such as Electronic filing of documents (Section 68), Enhanced Punishment (Section 70), General Penalties (Section 74) etc.

Transfer of Partnership Rights

Section 42 of the Act deals with the provisions related to the assignment and transfer of partnership rights in an LLP. The relevant section is extracted herein under:

42. Partner’s transferable interest.—(1) The rights of a partner to a share of the profits and losses of the limited liability partnership and to receive distributions in accordance with the limited liability partnership agreement are transferable either wholly or in part.

(2) The transfer of any right by any partner pursuant to sub-section (1) does not by itself cause the disassociation of the partner or a dissolution and winding up of the limited liability partnership.

(3) The transfer of right pursuant to this section does not, by itself, entitle the transferee or assignee to participate in the management or conduct of the activities of the limited liability partnership, or access information concerning the transactions of the limited liability partnership.[1]

According to Section 42(1), there are specifically two economic rights of a partner that are transferable to a third party. These rights are namely:

  • (a) The rights of a partner to a share of the profits and losses in accordance with the LLP Agreement and
  • (b) the rights of a partner to receive distributions in accordance with the LLP Agreement. These two rights can be transferred from a partner to any person either wholly or in part. This right to transfer is unconditional in nature and thus, it cannot be curtailed even by an LLP agreement. Such a transfer or assignment necessarily has to be a free transfer, which is not qualified by any express or implied conditions, to one or more transferees either in whole or partly.

The 2nd sub-section of Section 42 lays down that a transfer of rights under sub-section 1 will not, by itself, lead to either

  • (a) the disassociation of the partner from the LLP,
  • (b) dissolution of the LLP or
  • (c) winding up of the LLP. Thus, merely the transfer of the economic interests of a partner to others does not lead to the change in the structure of the LLP. If, however, a transfer or assignment of rights results in the change in the LLP agreement or in the partners or it leads to

Thus, merely the transfer of the economic interests of a partner to others does not lead to the change in the structure of the LLP. If, however, a transfer or assignment of rights results in the change in the LLP agreement or in the partners or it leads to cessation of partnership interest, the provisions laid down in Sections 22 to 25 have also to be complied with. Section 24 of the Act deals with the cessation of partnership interest. It lays down the ways in which the cessation of interest in partnership can take place and its consequences.

According to sub-section 3, the mere transfer of economic rights (the rights of a partner to a share of the profits and losses and the rights of a partner to receive distributions in accordance with the LLP Agreement) does not lead to the transfer of non-economic rights (such as participating in meetings, managing and conducting the activities, inspection of books etc.), unless the LLP agreement provides so. As a result, LLP allows the transfer or assignment of economic rights without changing the management of the LLP. Hence, even if rights are transferred or assigned, the transferee does not automatically become a partner. Thus, he cannot participate in management/conduct or inspect the books of the LLP. These non-economic rights are not automatically transferable unless the LLP agreement specifically provides for.

Conclusion

Out of all the business organizational structures, limited liability partnerships (LLP) are the most recent and most popular form of structures. They not only provide the benefits of a corporate entity but also of a partnership firm. Thus, on one hand, they have perpetual succession, separate legal entity, offer limited liability etc. and on the other hand, they have much less procedural requirements, less governmental interference, allow partners to take part in the management and functioning of the firm directly etc. Even though the concept of limited liability partnerships has been there for quite some time, it was only in 2009 that the concept was introduced in India through the Limited Liability Partnership Act, 2008. The act was based on the LLP Act of various nations such as England and Singapore.

Chapter VIII of the act deals with the assignment and transfer of partnership rights (Section 42 deals with a partner’s transferable interest). According to Section 42, economic rights of a partner that of, the rights of a partner to a share of the profits and losses and the rights of a partner to receive distributions in accordance with the LLP Agreement can be transferred or assigned to others. Such a transfer or assignment can be in part or whole. However, this transfer or assignment does not lead to the disassociation of the partner from the LLP, dissolution of the LLP or the winding up of the LLP. Since, it is merely a transfer of economic rights, non-economic rights do not get transferred and therefore, the transferee does not become a partner of the firm. And hence, he has no right to participate in the meetings of the firm or to inspect the books of the firm. However, since these provisions are subject to the LLP Agreement, whatever is agreed by the partners in the agreement has to be followed. Hence, it is advised to carefully draft and negotiate the LLP agreement so as to clearly indicate the intentions of the partners in the case of transfer of partner’s interests.

[1] Section 42, Limited Liability Partnership Act, 2008.

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