1. The Limited Liability Partnership Act, 2008 (‘the LLP Act’) was brought into force with effect from 31st March 2009 to permit formation of Limited Liability Partnerships (‘LLPs’) in India. The main focus of the LLP Act is to permit a partnership structure and at the same time, limit the liability of partners which was heretofore unlimited under the provisions of the Indian Partnership Act, 1932 (‘the Partnership Act’). This article discusses briefly the limitation of liability of partners under the LLP Act as compared to the limitation of liability of a shareholder of a limited company formed and registered under the Companies Act, 1956 (‘the Companies Act’) and the manner in which such liabilities are limited under the LLP Act.
2. A company formed and registered under the Companies Act is a separate legal entity distinct from its shareholders and directors. The extent to which the liability of shareholders of a limited company, formed and registered under the Companies Act, towards the debts of such a company is limited, is contained in the Memorandum of Association thereof. Accordingly, if a company is limited by shares, a shareholder is not required to make any contributions for the satisfaction of the debts of the company of any amount over and above the amounts remaining due and payable on the shares held by him. Such amount may be called up by the board of directors of the company in the course of the day-to-day operations of the company or in the event of winding up thereof, as the case may be. Where a company is limited by guarantee, a shareholder is, upon a winding-up thereof, required to contribute the amounts specified in the Memorandum of Association thereof for satisfaction of the debts of such a company limited by guarantee. S. 426 of the Companies Act clearly sets out the aforesaid position.
3. We now examine the provisions of the LLP Act in relation to limitation of liability of the partners of an LLP. The LLP Act does not specifically provide the manner in which liabilities of the partner would be limited. However, the same can be deduced from several provisions of the LLP Act as set out hereinafter.
4. S. 3 of the LLP Act, inter alia, provides that an LLP is a body corporate separate from its partners, unlike a partnership firm constituted under the Partnership Act, which has no separate legal existence. S. 4 of the LLP Act, inter alia, provides that the provisions of the Partnership Act would not apply to an LLP. Ss.(3) and (4) of S. 27 of the LLP Act, inter alia, provide that an obligation of the LLP whether arising out of contract or otherwise is solely the obligation of such LLP and the liabilities of such LLP are to be met out of the property of the LLP. Ss.(1) of S. 28 of the LLP Act provides that a partner is not personally liable for any obligation of an LLP solely by reason of being a partner thereof. Ss.(2) of the said S. 28, inter alia, provides that such partner would be personally liable for wrongful acts or omissions committed by him, but not those committed by any other partner of the LLP. Therefore, in terms of the aforesaid provisions of the LLP Act, a partner of an LLP is not personally liable for the obligations of such LLP, except those arising as a result of his own wrongful acts or omissions.
5. However, unlike the Companies Act, the aforesaid provisions do not specifically indicate the circumstances and extent to which any partner would be required to make contributions to the LLP. The provisions in relation to such contributions are contained in S. 32 and S. 33 of the LLP Act.
6. Ss.(1) of S. 32 of the LLP Act, inter alia, provides that a partner may make contributions to the LLP in the form of tangible or intangible property, money, promissory notes and the like. Ss.(2) of S. 32 of the LLP Act, inter alia, provides that the monetary value of the contribution of each partner is required to be accounted for and disclosed in the manner prescribed. Rule 23 (1) of the Limited Liability Partnership Rules, 2009 (‘the Rules’), inter alia, provides that the contribution of such partner is required to be accounted for and disclosed in the accounts of the LLP along with the nature of contribution and amounts.
7. Ss.(1) of S. 33 of the LLP Act, inter alia, provides that the obligation of a partner to contribute money or other property or to perform services for an LLP is governed by the provisions of the limited liability partnership agreement (‘the LLP Agreement’) executed between the partners. The said provisions are broad enough to enable contractual restrictions to be placed on the obligation of a partner to make contributions, whether on incorporation of the LLP or dissolution thereof or at any time during the continuance thereof. Therefore, generally speaking the LLP Agreement may provide that a particular partner is required to contribute certain amounts upon execution of the LLP Agreement or in the usual course of its business or for that matter perform services in the course of the business of the LLP, but is not required to contribute any amounts upon the winding-up thereof. The LLP Agreement may also provide that a partner is bound to contribute certain sum only upon winding-up thereof and not otherwise. The aforesaid clauses could, in ordinary circumstances, be regarded as sufficient to restrict the liability of a partner.
8. However, the LLP Act does not itself provide for the circumstances in which the obligations of the LLP can be enforced against the partners thereof and we need to consider as to whether provisions such as the aforesaid are sufficient to protect the interests of a partner of the LLP against any personal liabilities. We therefore examine the provisions of the LLP Act which define the circumstances in which an obligation of a partner under the LLP Agreement can be enforced.
9. It is obvious that an obligation in the LLP Agreement can be enforced against a partner by other partners being parties thereto. In addition thereto, Ss.(2) of S. 33 of the LLP Act, inter alia, provides that a creditor of the LLP which extends credit to or acts on an obligation described in the LLP Agreement may enforce the original obligation against such partner. The said Ss.(2) of S. 33 does not restrict the aforesaid right of the creditor to a circumstance in which the LLP is ordered to be wound-up, but appears to extend such right to the creditor in all circumstances. Therefore, an obligation of a partner to contribute any sum to the LLP can be enforced by a third party against such partner at any point of time and is not limited to the event of winding-up as in case of a company formed and registered under the Companies Act. Similarly, in case a partner has agreed to contribute any service to the customer or clients of the LLP, such an obligation may be enforced by the customer or client of the LLP against the particular partner of the LLP. Ss.(4) of S. 24 of the LLP Act in fact provides that the liability of a partner of the LLP to such LLP or its other partners or to third parties would not cease merely by virtue of his ceasing to be a partner of the LLP. Also, questions may arise as regards the contribution made by a partner at the time of setting-up of the LLP, which contributions are eventually refunded to the partner on account of profits made by the LLP. In such a case, it is necessary to consider as to whether the partner would be obliged to once again bring in such contributions in future, which have been refunded upon the LLP having made profits. All these aspects would have to be taken into account while drafting the LLP Agreement which may differ on a case-to-case basis.
10. To summarise the issue, the LLP Act is a very complicated piece of legislation. The LLP Agreement may need to take care of a large number of issues for protection of its members. Moreover, unlike companies formed and registered under the Companies Act, the LLP Act and the Rules do not prescribe the manner in which the liability of a partner of an LLP is limited. It is advisable and essential therefore that the LLP Agreement is carefully drafted by an experienced person so that the same contains all necessary provisions as per the LLP Act, so as to ensure that the liability of a partner thereof to make contributions to an LLP does not extend beyond what is envisaged and the LLP remains as such in law and in spirit.
Author/s : Dhaval K. Vussonji, Advocate and Solicitor
