Limited Liability Partnership

This article studies the origin and the concept of Limited Liability Partnership (LLP). This article also studies the global legislations and Indian laws on LLP with decided case laws.
Estimated Reading Time: 8 minutes

Introduction

The Indian Law of Partnership in India is based on the provisions of the English law of Partnership. Until the English Partnership Act of 1890 was passed, the law of Partnership even in England was largely based on legal decisions and custom. There were very few acts of Parliament relating directly to partnership. The Indian Partnership Act of 1932 (Partnership Act) was the result of a Report of a Special Committee consisting of Shri Brojender Lal Mitter, Sir Dinshaw Mulla, Sir Alladi Krishnaswami Iyer and Sir Arthur Eggar.[1]

Origin

The Limited Liability Partnership (LLP) concept originated in the US in the early 90s in unincorporated form. It was inspired by litigation against professional firms that had done work for failed savings and loan associations. Claims against all partners, including many who had nothing to do with the failed associations, were a strong incentive for the development of a mechanism to limit the vicarious liability of partners.[2] Following this, it was also adopted in United Kingdom (2000) and now through the Naresh Chandra Committee Proposed the same for India.

Advantages of LLP

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its member the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. Keeping in mind the need of the day, the Parliament enacted the Limited Liability Partnership Act, 2008 which received the assent of the President on 7thJanuary 2008.

Global Perspective and Legislations

US and UK legislations

Claims against all partners, including many who had nothing to do with the failed associations, were a strong incentive for the development of a mechanism to limit the vicarious liability of partners. [3]In a short period of time, all US jurisdictions adopted legislation sharing the theme that an LLP limits, or eliminates, joint and several liability of partners for some, or all, liabilities, and obligations of the partnership. The National Conference of Commissioners on Uniform State Laws approved the Uniform Limited Liability Partnership Amendments (ULLPA) to the Revised Uniform Partnership Act (RUPA) in 1996.

In the UK, most professional firms are structured as partnerships. Prior to the Introduction of LLP’s, England followed the traditional system of Partnership. But the unlimited nature of liability on partners and the increasing globalization necessitated a change. Two large accountancy firms, assisted by a law firm, began steps to obtain a limited liability partnership (LLP) statute in Jersey, which received Royal Assent in November 1996. “By mid-1996 it was plain that the option of offshore registration as a Jersey LLP was being very seriously considered by a number of large professional partnerships. It was this prospect, combined with the perceived possibility that a successful mega-claim could in due course precipitate the failure of a major firm, that led to the November 1996 decisionto bring forward LLP legislation in the UK.”[4]

The Limited Liability Partnership Act 2000 (the Act) received Royal Assent on July 20, 2000. Subsequently, the Limited Liability Partnerships Regulations and the Limited Liability Partnerships (Fees) (No.2) Regulations (the Regulations) were promulgated. Since April 6, 2001, LLPs may be registered in the United Kingdom under the Act. Notwithstanding the term “partnership” in its designation, the law of partnership will in general not be applicable to an LLP, although it will be taxed as a partnership to ensure that the choice between using an LLP or a partnership is a tax neutral one. The LLP will be required to disclose information, inter alia, on its finances and members, similar to that required of companies.[5]The Limited Liability Partnership Act 2000[6] received royal assent on July 20, 2000. Since April 6, 2001, limited liability partnerships may be registered in the United Kingdom under the Act.

LLP In India

In an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to say the least, risky, and unattractive. In India, some bodies of professionals have been prohibited from practicing under an incorporated form. E.g. Development of legal profession in India has been restricted in India on account of the number of impediments in the current regulatory system which hinders Indian law firms from competing effectively against foreign firms.

 The ‘general partnership’ or partnership simpliciter has traditionally been the entity of choice to provide services by professionals such as lawyers, accountants, doctors, architects, and company secretaries.[7] The unlimited liability of general partnerships under the Indian Partnership Act 1932 has become a cause for concern in the light of increase in the incidence of litigation for professional negligence, the size of the claims and the risk to a partner’s personal assets when a claim exceeds the sum of the assets of the partnership.

On November 2, 2005, the Ministry of Company Affairs in the Government of India circulated a concept paper on LLP’s with a view to stimulating public debate over ideas which will be incorporated in the proposed Limited Liability Partnership Bill (the “Bill”). The proposed Bill is drafted on the lines of the United Kingdom’s Limited Liability Partnerships Act 2000.[8]

Cases Involving LLP

Megadyne Information Systems v. Rosner, Owens & Nunziato,[9]

 The plaintiff sued a law firm LLP and its partners for malpractice and breach of fiduciary duty. The court granted the defendants summary judgment on the malpractice claim but determined there were fact issues regarding a breach of fiduciary duty claim. The court also determined that there were fact issues relating to the personal liability of the partners. The court cited the California LLP provisions for the proposition that partners in an LLP do not have vicarious liability for the torts of another partner, and the court stated that the plaintiff could only hold a partner liable who was “involved in the handling of the matter.” All three partners claimed that one of them was the “sole attorney” who handled the matter and that the other two had no involvement. However, the court found there were fact issues as to the involvement of the other two. The fact issues were raised by the admittedly-involved attorney’s testimony that “there might have been discussions” with the other two partners that the plaintiff had a viable malpractice claim against the lawyers that had previously represented the plaintiff on their claim against OCTA. The court said these discussions could support an inference that the partners knew the plaintiff’s claim against OCTA was time-barred and that they participated in the decision not to tell the plaintiff while the firm continued its representation. In addition, the name of one of the partners who claimed he was not involved appeared on the caption page of the claim filed with OCTA, suggesting his involvement in the case.

Schaufler v. Mengel, Metzger, Barr & Company, LLP,[10]

Apparently confusing LLP with limited partnership in stating that defendants had submitted insufficient evidence to establish that managing partner of accounting firm had no liability as a matter of law on buy-out agreement negotiated with plaintiff partner because the limited partnership act imposes joint and several personal liability on a general partner and on a limited partner who participates in the control of the business).

Williams v. Natural Life Health Foods Ltd[11]

The extent to which an individual member or employee of the LLP will be liable in tort for his or her own misstatements is in some doubt. The case is related to a limited company and the House of Lords held that the director of the company would only be liable in negligence if:

  • he or she assumed personal responsibility for the advice; and
  • the claimant relied on this assumption of responsibility, and
  • the claimant’s reliance on this assumption of responsibility was reasonable.

Thus, individuals in an LLP will not incur liability in tort except in exceptional cases.

Advantages of LLP

The main advantage of LLP is that limited partners do not take on personal liability for the obligations of the entire partnership, but only to the extent of the money contributed to the firm by such partners. Whereas, under Sec. 25 of the Indian Partnership Act, a partner is jointly and severally liable.Further, a partner’s liability is not limited when the misconduct is attributable to him or to an employee under the supervision or control of that partner

The members of an LLP would have the option to have a general partner or more with unlimited liability, but it would not shield the partners from legal liability arising out of their own personal acts which are not done for and on behalf of the LLP, that is, any act done beyond the acts and powers of the partners as laid down in the incorporation document.

The main benefit in an LLP is that it is taxed as a partnership,[12] but has the benefits of being a corporate, or more significantly, a juristic entity with limited liability.

Conclusion

Though good in parts, the implementation of this concept may give rise to certain tricky issues. How would one prove that a particular partner is responsible for an act of felony? This would give rise to disputes amongst the partners themselves. In a situation wherein there are two or more joint auditors who have signed a problem balance sheet, to whom would one pin the responsibility? Even if we say that a partner would only be liable for his acts, how can one distinguish which partner has done which act? The main problem will arise is to where should one draw the line? These are big issues which need to be resolved before implementing or allowing firms to form LLP’s.[13]

But the situation is not that bad after all. If the Partnership Act is amended to permit unlimited partners, clauses in the partnership deed fit together limited liabilities of the partners, there is an insurance policy that covers all business risks associated with a partnership and corporate governance practices are introduced for partnerships above a pre-defined size, would then there be a requirement for a separate law relating to LLPs? Your guess is as good as mine.


[1] Law Commission of India, 178th Report, 2001, Recommendations for amending various enactments, both Civil & Criminal

[2]Johan Henning, The Deadlocked Limited Liability Partnership – Arbitration or Winding Up, Comp. Law. 2005, 26(10)

[3] Supra note iii

[4] House of Commons Select Committee on Trade and Industry Report 1998. H.C. 59, para.82.

[5] DTI, Limited Liability Partnerships Bill. A Consultation Document. Regulations to Accompany the Limited Liability Partnerships Bill (URN 99/1025), Part IV, para. 2.

[6] Limited Liability Partnership Act, 2000, Act No. 12

[7] Naresh Chandra Committee Report, (Aug. 7, 2012), https://www.gktoday.in/current-affairs/naresh-chandra-committee-recommendations/

[8] Aparna Viswanathan, India considers introduction of Limited Liability Partnerships, I.C.C.L.R. 2006, 17(5), 141

[9] No. B213137, 2002 WL 31112563 (Cal. App. Sept. 21, 2002).

[10] 745 N.Y.S.2d 291

[11] [1998] 1 WLR 830; [1998] 2 All ER 57.

[12] State of Punjab v. Jullender Vegetables Syndicate 1966 (17) STC 326 (SC); CIT v. A W Figgies AIR 1953 SC 455; CIT v. G Parthasarthy Naidu (1999) 236 ITR 350 

[13] Mohan R. Lavi, One Person Company- Concept Still in making, The Hindi Business Line, (Dec. 27th, 2012),

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