Analysis Of Limited Liability Partnership Act
There are different forms of business organization prevalent in India and the world with ownership, control, liability membership, and capital distinguishing them from each other. One chooses a form of business organization depending upon the nature of business, duration of business, size of operation, level of control required, capital structure and its requirement, participation of non promoter group, Government regulation and control, distribution of profit, risk management and management structure.
Types Of Business Organization
Sole Proprietorship Form: These kinds of business are generally small in size and owned, controlled unregulated and managed by individuals, ie., sole proprietors. Such from have absolute control over business with hundred percent ownership and unlimited liability.
Partnership Form: In law, a partnership is not an entity distinct from its partner; it is simply a legal characterization of their relationship. In case of partnership, two or more person (natural and juristic) join together to form a partnership and share risk, capital and rewards in the agreed ratio. The salient features of a typical partnership firm includes the following: (i) Number of partners( minimum 2 to maximum 20), (ii) written agreement, (iii) Pooling of resources, (iv) Sharing of risk and rewards, (v) principle-agent relationship between firm and partner, (vi) no separation of ownership, control and management, (vii) unlimited, joint and several liabilities of partners. A major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of firm, any partner can bind the firm and the firm is liable for all the liabilities incurred by any partner on behalf of the firm. If the partnership assets are insufficient to satisfy a creditor’s claims, the partners personal assets are liable subject to attachment and liquidation to pay the business debts.
Joint venture: A joint venture is a general partnership typically formed to undertake a particular transaction or project rather than one intended to continue indefinitely. Most often, joint venture are used in real estate, large manufacturing organization, infrastructure projects, etc. where two or more person or bodies corporate come together for a specific project.
Cooperative society: Cooperative form of organization is an association of individuals having common interest to earn collectively. It is an association of weak who gather for a common economic need and try to lift themselves from weakness into strength through a business organization and these are registered under Cooperative Societies Act.
Company: company is the association of person formed for the purpose of doing business, having a distinct name and limited liability. A company is a jurist person having a separate legal entity distinct from its member. The liability of its member is limited to the extent of capital contributed by them.
One person company: According to clause 2(zkk) of the proposed companies bill, 2008, one person company which has only one person as a member. The concept of ‘one person company’ (OPC) is proposed to be introduced which will be registered as a private company with one member and may also have at least one director. Adequate safeguard in case of death of a person should be provided, Letter ‘OPC’ to be suffixed with the name of one person Companies distinguishes from other companies.
Need For Enactment Of Limited Liability Partnership Act
“With the growth of the Indian economy, the role played by its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. It is felt opportune that entrepreneurship, knowledge and risk capital combine to provide a further impetus to India’s economic growth. In this background, the need has been felt for a new corporate form that would provide an alternative to the traditional partnership, with unlimited personal liability on one hand, and statute based governance structure of the limited liability company on the other, in order to enable professional expertise and entrepreneurial initiative to combine, organize and operate in flexible, innovative and efficient manner.”
The existence of Limited Liability Partnership (LLP) which has its genesis in general partnership is now a reality in India with the enactment of the Limited Liability Partnership Act, 2008, (LLP Act) from March 31, 2009.It was felt that the Companies Act, 1956 (Companies Act) is not suited to the liability and governance structure intended for LLPs. The overall intent of the legislation to regulate widely-held companies is different. Therefore, in accordance with the recommendations of the Irani Committee, it was felt appropriate to bring a new legislation for LLPs. According to the concept paper on Limited Liability partnership prepared by the Government of India in 2005, in view of the increasing role of service sector in Indian economy, a need was recognized for introduction of a new corporate entity- Limited Liability Partnership that would combine the characteristics of corporate and non corporate entities. The administration and enforcement of partnership firms under the Indian Partnership Act, 1932 (Partnership Act) is at the State level. Besides, a partnership firm involves full joint and several liabilities of the partners. Because of this, many enterprises engaged in biotech, information technology, etc find traditional partnerships unsuitable. Also, the traditional partnership firms are very unsuitable for multi-disciplinary combinations like the combination of lawyers and accountants, which is the hot combination today. Thus, the LLP Act is intended to remove the gulf which exists between a company governed by the Companies Act and a general partnership firm governed by the Partnership Act. The limited liability partnership 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 partnership based on a mutually arrived agreement. The LLP form would enable entrepreneur, professional, 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 for and for investment by venture capital.
History And Origin Of Limited Liability Partnership Abroad And In India
Limited partnerships can be traced to early French law. Its development can be distinguished into different stages: starting with the development of the concept of general partnership, moving on to the idea of limited partnership which finally led to the concept of limited liability partnership. The legal concept of LLP originated in 1991 in Texas, mainly in response to the liability that was imposed on partners in partnership sued by Government agencies in relation to massive saving and loan failures in the 1980. The Texas statues protected partners from personal liability for claims related to a co-partner’s negligence, error, omission in competency, or malfeasance. It is also permanently limited the personal liability of partners for the errors, omission, incompetence, or any negligence of the partnership’s employees or other agents. In 1996, all other states adopted the concept by Uniform Partnership Act, 1996. Similarly in UK in the 1990s the accountancy firm advocated to secure proportional liability in the LLPs. This led to the passing of the Limited Liability Partnership Act, in the year 2000. The issue of LLP has been a matter of discussion in India for over a decade now. Various comities have been set up for giving the recommendation; among those are Abid Hussain Committee, Irani committee, and Naresh Chandra Committee. Consequently, the Limited Liability Partnership Bill 2006 was introduced in the Rajya Shabha on 22nd October 2008 for the formation and regulation of limited liability partnership and for matter connected therewith or incidental thereto.
Nature And Structure Of Limited Liability Partnership
LLP is an alternative corporate business form that gives the benefit of limited liability of a company and the flexibility of a partnership. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. It has perpetual succession and a common seal and can sue and be sued in its own name. It can continue in existence, irrespective of the changes in the constitution of partners. It is capable of entering into contracts and holding property in its own name. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. It is organized and operates on the basis of an agreement, without imposing detailed legal and procedural requirement of a joint stock company. The mutual rights and duties of the partners within a LLP are governed by this agreement. Thus, since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.
Significance Of LLP Form Of Organization
LLP provides a new corporate form in the country. Thus now the Indian entities also have an alternate choice in corporate organization to compete internationally on level playing field. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals. It is widely accepted as being an advantageous business model because it is organized and operates on the basis of an agreement. Also, it provides the flexibility without imposing detailed legal and procedural requirements, enabling professional expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner.
Under the LLP structure, the liability of a partner is limited to his stake and no partner is liable on account of independent or unauthorized acts of other partners. Individual partners are shielded from the joint liability created by another partner’s wrongful acts or misconduct. On the other hand, in the traditional law on a partnership firm, every partner is liable, jointly with all other partners and also severally, for all acts of the firm done while he is a partner, irrespective of his stake.
Under the LLP model, chartered accountants, company secretaries or even advocates can set up multi-disciplinary firms that will act as “one-stop” shop for people to avail of various professional services. Existing laws impose the restriction that these professional services cannot be carried out through companies but only through partnership firms. This is specially going to help the lawyers and accountants because it will help them to organize their business better and enlarge the number of partners.
The framework of LLP is not restricted to professional services alone and several business activities can be undertaken through the structure. Services sector is playing a major role in the national economy and there is a growing diversity in the range of services being offered. The services sector would also find this form very useful. The advantage of the LLP form would be that it will not impose detailed legal and procedural requirements intended for large widely held companies on such enterprises. In this way it will also be useful for small enterprises. Thus, the applicability of the LLP Bill is huge, especially in the near future and thus can be used for many enterprises, such as:
Ø Person providing services of any kind
Ø Small sector enterprises (including Micro, small and medium enterprises)
Ø Venture capital funds where risk capital combines with knowledge and expertise.
Ø Enterprises in new knowledge and technology based fields where the corporate form is not suited.
Ø Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and production of services
Ø For professionals such as CA, Cost and Works Accountants, CS, Advocates, etc.
Apart from the above mentioned merits in the Act, there are some further observations with regard to LLPs. These are briefly given below:
Ø With LLP professionals would be able to form multidisciplinary partnerships.
Ø Business can be expanded depending upon the increase in area of operations.
Ø Flexibility of operations as broad/general and extraordinary general meetings are not required to be conducted.
Ø The Liability of an LLP is met out of the property of the LLP, the partner is not personally liable.
Thus, this 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.
Partners And Their Relations In LLP
First Partner: Section 22 of the LLP Act, 2008 provides that on the incorporation of a LLP, the person who subscribed their names to the incorporation documents shall be its partners and other person may become a partner of the LLP by and in accordance with the LLP agreement.
Relationship of partners: Section 23 provides for Relationship of partners, save as otherwise provided by this Act, the mutual rights and duties of the partners of a LLP, and the mutual rights and duties of a LLP and its partners, or between the LLP and its partners.
Cessation of Partnership Interest: Section 24(1) of the LLP Act, 2008 provides that a person may cease to be a partner of a LLP in accordance with the other partners or, in the absence of agreement with the other partners as to cessation of being a partner, by giving a notice in writing of not less than thirty days to the other partner of his intention to resign as partner.
Circumstances for automatic cessation of partner from LLP: An individual partner shall be cease to be a partner of a LLP (i) on his death or dissolution of LLP, (ii) if he is declared to be of unsound mind by a competent court, (iii) if has applied to be adjudged as an insolvent or declared as an insolvent.
Extent And Limitation Of Liability Of Limited Liability Partnership And Partners
Limited liability means an obligation of the LLP whether arising in contract or otherwise, is solely the obligation of the LLP. The liabilities of the LLP shall be made out of the property of the LLP, thus, the claim can be made against a LLP to the full extent of its assets. Partners will not be jointly and severally liable either in contract or in tort for the acts, omission of any other partner simply by virtue of their partnership of the LLP; Every partner of LLP is its agent but partners are not agent for each other, and thus joint and several liabilities is avoided. Individual partner may incur personal liability under the general law in addition to that of the LLP. For example, it is likely that a professional who is a partner could still be personally liable for his own negligence to the extent of his personal assets, even though fellow innocent partners will have no personal liability.
Liability Of Partners
According to the section 26 of the Limited Liability Partnership, every partner of a limited liability partnership is, for the purpose of the business of the limited liability partnership, the agent of the limited liability partnership but not of other partners.
Analysis of Section 26
Section 26 of the LLP Act provides that for the purpose of the business of LLP every partner of the LLP is the agent of the LLP and not of other partners. Liability of partners shall be limited to except in case of unauthorized acts, fraud and negligence. This is one of the important features that are likely to cause formation of a large number of LLPs in India. One of the most distinguishing features of the LLP is that partner shall not be personally liable for the wrongful acts or omission of any other partner of the LLP. This is because, in an LLP, a partner does not act as an agent for other partner(s). Unlike traditional partnership, a partner of LLP will not be regarded as the agent of other partners of the LLP. In other words, if there is any wrong doing or gross negligence by any one of the partners, the liability of such acts shall not traverse to the other partners.
Section 211 of the Indian Contract Act, 1872 provides that an agent is bound to conduct the business given by the principle, or in the absence of any such direction according to the custom which prevails in doing a business of the same kind at the place where the agent conducts such a business. When the agent acts otherwise, if ant loss is sustained, he must make it good to his principal, and if profit accrues, he must account for it.
Section 18 of the Indian Partnership Act, 1932 provides that, subject to the provision of this Act, a partner is the agent of the firm for the purpose of the business of the firm. Further, section 25 of the Indian Partnership Act 1932 provides that every partner is liable jointly with all the other partners and also severally for all acts of the firm done while he is a partner.
Every Partner is an Agent of LLP For The Purpose Of Business of LLP
An agent is a person who has capacity to bind his principal by his acts done within the authority granted by the principal. In case an agent beyond his authority and the third party dealing with the agents knows that the agent is acting beyond his authority or his person to believe that he is acting so, and still deals with such agent, he cannot bind the principle for the acts of such agent. This is the broad principle of agency enunciated under the Indian Contract Act 1872.
In the normal course of business, a partner has the capacity to represent partnership and undertake business transactions on its behalf. Thus, the LLP Act categorically states that a partner is an agent of LLP; however, this agency is restricted for the purpose of business of LLP only. Accordingly if a partner undertakes usual business transactions or enter into contracts for business of LLP, third party would be able to bind LLP for his acts, however, if he undertakes a transaction which is not in the normal course of business, say a partner of a trading partnership executes a contract to buy hotel property ( such transaction on the face of it reflects that it may not be related to the business of LLP,) the related third party may not be able to bind the LLP for the acts of the partner in this regard.
A Partner Is Not an Agent of the Other Partners
In a general partnership, every partner is an agent of the other partners and mutual agency between the partners is a critical test of partnership. Due to this, each partner is jointly and severally responsible for the liabilities of the general partnership firm and the level of risk of a partner for the acts of the firm (as also of other partners) is very high. This feature becomes a cause of concern for large partnership particularly those of professionals and it became harder for many to reconcile their firms’ increasing size and specialization with the traditional partnership structure. Many felt that to acquire each partner in a large, highly specialized firm to accept unlimited financial responsibilities for the actions of his or her partner had become an unrealistic proposition. The concept of LLP form of organization emerged in this backdrop where it was proposed that a partner should not be liable for the wrongful acts or omission of other partners in an LLP. Thus, this feature of LLP categorically provides that the partner do not have any mutual agency relationship inter-se in an LLP.
Extension Of Partner’s Liability
Section 28(1) provides that a partner is not personally liable, directly or indirectly for an organization refereed to in sub section (3) of section solely by reason of being a partner of limited liability partnership.
However the personal liability of partner shall be for his wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the LLP. As LLP is a new type of entity, the precedents have not yet been set. In a professional firm scenario, if a partner of a LLP were to give bad advice or otherwise act negligently towards a client and the client suffered a loss as a result, the client may be able to take the LLP to Court/Tribunal and be awarded appropriate compensation either from the partner who gave the advice or the partnership as a whole. It is unlikely that the other partners who were not directly involved in the advice will have any personal liability, unlike a traditional partnership where they would have had joint and several liability for these actions. It is essential to note that this concept has not yet been tested in a court of law and it should not preclude anyone in this type of situation from having the appropriate insurance indemnity cover.
It should also be noted that where the partnership becomes insolvent but continues to trade, the partners can be prosecuted for this offence and disqualified in the same way as a director of a limited company.
Financial liability of partners
The financial liability of the partners of a LLP, in the event of winding up, should encompasses any present or past partner, who is being liable to contribute financially to the extent that they have agreed with the LLP or with other partners. However, a person who has ceased to be partner will not be liable if the LLP agreement between them and the firm exempts them from continuing liability.
For instance, if the agreement between the partners requires each to pay Rs. 100 on the winding up, this is the amount which the law requires them to pay to the liquidator. To this extent, the position of the partner as regards personal liability and is comparable to that of the partner of a company limited by guarantee. It will be up to each LLP, when drafting its own agreement, to decide how it wishes to deal with this aspect.
Liability of Partner falling below two
The Act provides for the minimum of two partners to carry on LLP. If at any time the number of partners of a limited liability partnership is reduced below two and the limited liability partnership carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited liability partnership during the time that it so carries on business after those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be liable personally for the obligations of the limited liability partnership incurred during that period.
Liability for cheques, etc.
If a partner signs or authorizes the signature of cheques, order, etc. on which the LLP’s name is incorrectly presented is liable to the holder of the instrument unless the amount is paid by the LLP.
Liability in tort or contract
Keeping an eye over liability in tort or contract, the partner of LLPs should ensure that, in all dealing with the clients or customers and the public, they do not give cause to believe that the activity being undertaken is undertaken other than by its agent on behalf of the LLP. The protection which the corporate structure of the LLP offers to individuals, partners should not, however be taken entirely for granted. The partners of a LLP owe a personal duty of care; there must be not only a special relationship between a partner and a client or customer, but a clear assumption of responsibility.
Limitation of partners liability
The liability of partners of a LLP, if it is wound up, is limited. Liability of partners under LLP is restricted to the extent of the money contributed to the firm by such partners. LLP provides each of its individual partner’s protection against personal liability for certain partnership liability unlike partnership firm where they are personally liable for the obligations of the entire partnership.
Vicarious liability of partners
In particular, innocent partners of a LLP are not subject to personal “vicarious liability” for malpractices liabilities of the LLP merely because they are its partners. In the case of Megadyne Information System v. Rosner, Owens & Nunziato, No the court determined that there was facts issue relating to the personal liability of the partners. The court cited the California LLP provisions for the proposition that partners in a 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”.
Exception to the limited liability
The LLP’s existence as a corporate entity means that the effect of the general law is different in comparison with a partnership. For example, it is anticipated that a third party will usually contract with the LLP whereas, in general, a partner contracts as principle on behalf of the other partners. Partners of LLP are afforded the protection of limited. The notable exceptions to this protection are as follows:
(a) Personal Negligence: if an individual partner is purported to have been negligent, it may be possible to bring a civil negligence action against that individual. However the court/tribunal has indicated that they would have regard to whether the allegedly negligent advice was given in a personal capacity or whether the LLP assumed responsibility for the advice.
All partners, not just the designated partners, are agents of the LLP, and as such owe the duties of an agent to the LLP, although the precise content of those duties will need to be developed by the court/tribunal. The typical obligations of agents include obligations to act in the interest of the principal (i.e. the LLP), to avoid conflict of interests and a prohibition on the making of secret profits, and some elements of these requirements are reflected in the default provisions. While partners are agent of the LLP, they are not agents of one another and the legislation does not regulate the relationship between the partners. The reason for the omission was the potential conflict between the duty, which the partner owe to the LLP (as agents) and any duty, which they one another. The solution adopted was to impose the former duty as a matter of statutory obligations and to leave it to the partners to address their internal relationship in a separate LLP agreement.
Liability of the Ceased Partner Shall Continue Against Third Party in Specific Circumstances
When a person has ceased to be a partner of a LLP( herein refereed to as “former partner”), the former partner is to be regarded( in relation to any person dealing with the LLP) as still being a partner of the LLP unless-
(a) the person has noticed that the former partner has ceased to be a partner of the LLP; or
(b) Noticed that the former partner has ceased to be a partner of the LLP has been delivered to the Registrar.
Partner Shall Not Be Discharged From the Obligation for the Period of His Being a Partner of LLP
The cessation of a partner from the LLP does not by itself discharge the partner from any obligation to the LLP or to the other partners or to any other person, which he incurred while being a partner.
Partner Is Entitled To His Share and Accumulated Profit/Losses after Cessation from LLP
Where a partner of a LLP ceases to be a partner, unless otherwise provided in the LLP agreement, the former partner or a person entitled to his share in consequences of the death or insolvency of the former partner, shall be entitled to receive from the LLP:-
(a) an amount equal to the capital contribution of the former partners actually made to the LLP; and
(b) His right to share in the accumulated profits of the LLP, after the deduction of accumulated losses of the LLP, determined as at the date the former partners ceased to be a partner.
Extent Of Liability Of An LLP
Section 27 defines the extent of liability of an LLP.
(1) Limited liability partnership is not bound by anything done by a partner in dealing with a person if-
(a) The partner in fact has no authority to act for the limited liability partnership in doing a particular act; and
(b) The person knows that he has no authority or does not know or believe him be a partner of the limited liability partnership.
(2) The limited liability partnership is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority.
(3) An obligation of the limited liability partnership whether arising out in contract or otherwise, shall be solely the obligation of the limited liability partnership.
(4) The liability of the limited liability partnership shall be met out of the property of the limited liability partnership.
Objective: According to the notes on clause to the LLP bill 2208 explaining the statutory provisions, this section seeks to provide that the LLP shall not be bound by anything done by a partner in dealing with a person if that partner has no authority to act for LLP in doing a particular act and the person with whom he is dealing also known that the partner has no authority for such act and to provide that an obligation of LLP, whether arising out of contract or otherwise will be solely be the obligation of LLP. It also seeks to provide that liabilities of LLP are to be met from the property of LLP. It further seeks to provide that LLP shall not be liable for a wrongful act or omission by a partner in the course of the business of the LLP within his authority.
The crux of section 27(1) is that if the third party deals with a person knowing that such person does not have authority to the subject deal or that such person are not at all a partner of the LLP while he is representing so, then such person cannot make LLP liable for the deal. This is based on the principle of agency under the Indian Contract Act 1872.
The above condition are simultaneous which focus on the question of existence of dealing capacity of third party about the fact of dealing capacity of a partner on behalf of LLP. If both these factors can be established in such case, an LLP may not be held liable for the acts of the partner toward the third party.
The above situation may arise in the following circumstances:
(1) when the third party deliberately deals with a partner without authority/ a person who is not a partner but still acting on behalf of LLP, and later on holds LLP liable for the deal- this is a clear cut position where LLP is not liable;
(2) When third party does not know the position of the partner incapacitating him to make the deal but the party is presumed to know such fact because of it being an open fact LLP being mentioned in the documents registered with the Registrar which are accessible for public inspection- in this position, an LLP may not be held liable.
(3) When third party does not know the position of the partner incapacitating him to make the deal and the party is not in a position to know such facts about LLP, for where a partner ceases his interest from partnership and proper public notice has not been made in this regard and third person acting on behalf of the firm- in this position, the LLP may be held liable for the acts of such partner.
Reference to point 2 above, the question arises what are the facts as to the capacity of partner which a person dealing with an LLP is supposed to have knowledge of by default and which are the facts where the dealing person need to enquire before making the deal.
In case of companies, the memorandum and article of associations of every company are registered with the Registrar of companies. The office of the Registrar is a public office and consequently the memorandum and article of association become the public document. They are open and accessible to all as per section 610 of the Companies Act 1956 which provides right to inspection of public documents. It is therefore duty of every person dealing with the company to inspect its public documents and make sure that his contract is in conformity with their provisions. But whether a person actually reads them or not, ‘he is to be in the same position as if he reads them’. Thus it is presumed that the person dealing with the company has knowledge about the facts of the company as are mentioned in its memorandum. This kind of presumed notice is called constructive notice. The effect of this rule is that a person dealing with the company is ‘taken not only to have read those documents but to have understood them according to their proper meaning’. He is presumed to have understood not merely the company’s power but also those of its officers.
Section 27(2) elaborates on the fact that given the position that an LLP is liable for the acts of its partners done in the course of business, this liability would exist even in a situation where a partner thereof commits a wrongful act or omission in the course of business or with the authority of LLP. The personal liability of the partner in this regard would also exist and the liability of the partner and the LLP would be to the same extent. Thus broadly the point is that the LLP would remain liable even for wrongful acts of its partners for the acts of done in the course of business within the authority given by the LLP.
In context of the corporate law, it has been held that if a director of a company acts within his ostensible authority and defrauds third parties; still the company would be held liable for the acts of its director. In Ford Motor Credit Co Ltd v Harmack, one Y was in control of three companies. He acquired a car on hire purchase in the name of one company, gave it to the sales manager of the second company for the liquidation of debt of a third company. The recipient thought that Y owned all the three companies and they all seemed to be one company. Lord Denning MR said: where there is a group of companies all controlled by the same person who was in full control of everything- it had to be supposed that he was the chairman and managing director of each. It seemed that he had not only actual but also ostensible authority.
The above decision has been described to be ‘in harmony with the modern tendency to afford protection to a third party contracting in good faith with a director having ostensible authority. The principle may apply in case of LLPs.
Section 27(3) & (4) whenever a partner acts for an LLP in the course of business, an obligation whether arising in contract or otherwise, is solely the obligation of the LLP which is to be met out of its property. However the LLP shall not be bound by anything done by a partner in dealing with a person if that partner has no authority to act for LLP in doing a particular act and the person with whom he is dealing also knows that the partner has no authority for such act and to provide that an obligation of LLP.
An LLP Is Liable For the Acts of Its Partners If Done In Course Of Business And Within Its Authority
Every partner of an LLP is considered in law to be an agent of the LLP, and as such may represent and act on behalf of LLP in all its business. But as a agent, a partner can make the principal legally responsible for his acts only when he is authorized by the principal (LLP) to act that way. To know the extent to which a principal can be liable for the acts of an agent, it is required to know all dimension of the agent’s authority which is provided under Indian Contract Act 1872.
The obligation of LLP is to be met out of partnership property
An LLP is a separate legal entity and is capable of holding, acquiring, or disposing off its own property. However, the expression partnership property has not been defined in this Act. As a contrast, a general partnership is not a separate legal entity but the partnership act 1932, under section 14 thereof provides that the property of the firm shall in the absence of a contract to the contrary shall include- ‘ all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired by the firm.’ Though section 3 of the LLP Act specifically provides that the partnership Act 1932 will not apply in to LLPs in default, however, the definition of partnership property under the said Act gives a broader idea as to the substance of the property.
Liability Of Partner By Holding Out
Section 29 of LLP Act provides for partnership by holding out. It states that when;
(1) any person (not being a partner in any LLP), who by words spoken or written or by conduct, represents himself, or knowingly permits himself to be represented to be a partner in a LLP (known as ‘partner by Holding out’) is liable to any person who has on the faith of any such representation given credit to the LLP, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit”.
Provided that where any credit is received by the LLP as a result of such representation, the LLP shall, without prejudice to the liability of the person so representing himself or represented to be a partner, be liable to the extent of credit received by it or any financial benefit derived thereon.
(2) where after a partner’s death the business is continued in the same LLP name, the continued use of that name or of the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death.
The above provision is similar to Section 28 of the Indian Partnership Act 1932. It provides that if the behavior of person causes misunderstanding to the third party that he is a partner in a firm ( when actually he is not), later on such person is estopped from denying the fact that he is a partner in context with dealing with such third parties.
‘Holding out’ means that a person holds himself out to the world as a partner of the firm while actually not being so. This situation frequently occurs when a partner retires from a firm and notice is not given properly to the third parties. In Seraf v. Jardine, a partner retired from a partnership firm and a creditor continued to give advances to the firm. It was held that the firm as well as the retired partners was liable to repay the amount advanced by such creditor. A third party may also bring an action against a partner by ‘estoppel’’ or ‘holding out’ only when he has acted on the belief that the person so representing himself to be a partner. However, where after a partner’s death the business is continued in the same LLP name, the continued use of that name or of the deceased partner’s name as a part of thereof shall not of itself make his legal representative or his estate liable for any act of the limited liability partnership after his death. This provision is similar to the corresponding provisions under the general partnership Act. To refer judicial precedents on the point, in Bengal v. Miller, it was held that the estate of deceased partner was not liable because the firm did not owe the price of the goods in his lifetime.
Exception To Limited Liability Of An LLP
(Unlimited Liability In Case Of Fraud)
Section 30(1) of LLP seeks to provide for unlimited liability of the LLP and its partners in case LLP or any or any of its partners carry out an act with intent to defraud creditors of the LLP or any other person or if they carry out an act for any fraudulent purposes. The clause further provides that in case of any such act is carried out by a partner; the LLP is liable to the same extent as the partners unless it is established by the LLP that such an act was without the knowledge or the authority of the LLP. This clause further seeks to provide that where an LLP or any partner or designate partner or employee of such LLP has conducted the affairs of the LLP in a fraudulent manner, then without prejudice to any criminal proceedings which may arise under any law for the time being in force, the LLP and any such partner or designated partner or employee shall be liable to pay compensation to any person who has suffered any loss or damage by reason of such conduct.
It is best to say that a limited liability partnership not only renders protection to the partners but also retains all the benefits of a partnership. Although the traditional partnership holds one advantage that it is not compulsory for a partnership to get registered before any statutory authority while on the other hand a Limited Liability Partnership has to get registered under the Limited Liability Act, 2008, the process of which may be cumbersome. Still in my opinion the balance is tilted in the favour of the latte. Further, although the partnership form has been in use for a long time, and the law applying to partnerships was codified into statues more than one hundred years ago, features of the law on partnership can present serious drawback to their use today. In the eye of law, Partnership is merely a way of describing the individual partner who makes up their partnership, Today the world is in the grip of unprecedented financial crisis, which is adversely affecting economies of most of the countries, including our own. In such a situation availability of LLP as an alternative business vehicle to our trade and industry will be an important step. Service industry has grown considerably in India and it accounts for nearly half of our GDP. We believe that the LLPs would further contribute to the growth of the service industries in the future.
The LLP form would enable entrepreneur, professional, and enterprises providing services of any kind engaged in scientific and technical disciplines, to form commercially efficient vehicle situated to their requirement. Owing to the flexibility in its structure and operation, the LLP would also be suitable vehicle for small enterprises and for investment by venture capital. The LLP structure would bring India at par with business practices followed in developed nations of the world.