Limited Liability Partnership (LLP) Disputes: Exploring Various Options to Resolve the Dispute Between Partners

Navigate Limited Liability Partnership (LLP) disputes effectively! Explore resolution options, LLP Agreement significance, removal possibilities, and entitlements. Get insights into capital contribution, interest, rent, and choose between arbitration and commercial litigation for dispute resolution.

Limited Liability Partnership (LLP) Disputes: Exploring Various Options to Resolve the Dispute between Partners

Introduction.

Limited Liability Partnerships (LLPs) happen to be one of the most lucrative business structures in India, particularly because of their hybrid nature. Akin to a company form of business, they keep the liabilities of the partners limited. At the same time, they are simple as a general partnership as far as the question of regulatory reporting and compliance is concerned. However, they can pose several challenges which might be difficult to tackle. One such challenge is the dispute between the partners. It becomes more complex when an LLP has only two partners, as there would not be a clear majority in relation to a particular decision, which might give rise to discontent between the partners. This paper discusses how the partners can avoid disputes from arising, and if it does arise, what options are available to them. I have assumed that there are only two partners in an LLP and both of them are designated partners. I have also assumed that one of the partners is a disputing partner. I have also explored the possibility of removal or expulsion of a partner including the payment of entitlement such as capital contribution along with interest and rent.

The Importance of the LLP Agreement in Dispute Resolution

The LLP Agreement happens to be the most important document per which an LLP is governed. The Limited Liability Partnership Act 2008 (LLP Act 2008), which provides the legal framework for the formation of the LLPs in India gives much importance to the agreement entered into between the partners and indicates what matters it needs to include. Among others, it provides that the relationship between the parties shall be governed based on the LLP Agreement. If, however, a particular matter is not covered in the agreement, then the First Schedule of the LLP Act 2008 shall become operative. The First Schedule states that any dispute between the partners shall be referred to an arbitration panel constituted under the provisions of the Arbitration and Conciliation Act 1996. Accordingly, the LLP Agreement must contain necessary provisions in relation to the dispute resolution between the parties. In the absence of the same, the dispute between the partners shall be dealt with per the provisions of the First Schedule of the LLP Act 2008, which provides for arbitration as a means of dispute resolution.

Whether it is possible to expel or remove the disputing partner.

The LLP Act 2008 does not contain any provision about the expulsion or removal of the partners as a result of a dispute. Therefore, it is difficult to remove a disputing partner. Nonetheless, a person can voluntarily leave the partnership if he or she wishes to do so, as per section 24(1) of the LLP Act 2008. However, he or she must provide a 30-day notice concerning the same. Since an LLP must have a minimum of two partners as per section 6(1) of the LLP Act 2008, someone else would be required to be appointed as a partner in the LLP. In general, the appointment is done within six months from the date on which the number of partners fell below two.

However, at the same time, it is also important to note that an LLP also needs to have a minimum number of two designated partners as per section 7(1) of the LLP Act 2008 and whenever there is a change in the designated partners, a new designated partner must be appointed within 30 days of such change or vacancy. Having regard to the above, the resignation of the disputing partner can be sought and someone else can be appointed as a new partner within 30 days from the date the person ceases to be a partner. The remaining partners would be required to comply with the reporting-related requirements in this regard. I have stipulated the 30-day requirement particularly because an LLP also needs two designated partners.

Whether the person ceasing to be a partner claim capital contribution along with interest of the same and rent.

Capital Contribution:

As per section 24(5), when a person ceases to be a partner in an LLP, he shall be entitled to receive an amount equal to the capital contribution made to the LLP and his share in the accumulated profit and the deduction of accumulated losses as at the date when he ceased to be a partner in the LLP. If for example, the disputing partner has contributed Rupees 1 lakh, he or she shall be entitled to claim once he or she ceases to be the partner. The disputing partner shall also be entitled to receive his share in the accumulated profit (if any). On the other hand, the accumulated losses as of the date when the person ceases to be the partner shall be deducted. If the LLP is running at a loss, it is important to ascertain the losses, determine the share of the disputing partner in such losses, and adjust the same with the capital contribution.

Interest on Capital Contribution and Rent:

I have already discussed that as per section 23 of the LLP Act 2008, the partnership agreement is the prime document based on which the relationship between the partners is governed. If there is a particular matter that has not been covered by the LLP Agreement, it is specifically dealt with per the provisions of the First Schedule of the LLP Act 2008. If the LLP Agreement is silent about the issues such as rent and interest on capital contribution, the First Schedule of the LLP Act 2008 becomes operative.

The First Schedule does not provide anything about the payment of interest to a partner. As per the Income Tax Act 1962, however, interest is often paid on the capital contributed and there are rules about its deduction/taxability. However, at the same time, it needs to form part of the partnership agreement. If the interest on capital is not mentioned in the partnership agreement, the disputing partner is not entitled to receive the same.

Similar is the case of rent. It would not be paid unless a) there is a specific provision about the same in the partnership agreement, OR b) there is a rent agreement. Assuming that there is nothing about the rent in the partnership agreement or a rent agreement between the non-disputing partner and the disputing partner, he or she is not entitled to receive any rent on the property. Thus, the total entitlement of the disputing partner is equal to his capital contribution increased by his or her share in the profits and reduced by his or her share in the accumulated losses of the firm.

Option to ask the disputing member to share the losses.

The First Schedule provides that all the partners of a limited liability partnership are entitled to share equally in the capital, profits, and losses of the limited liability partnership. Accordingly, one option is that the non-disputing partner can request the disputing partner by way of a notice to make contributions to make up for the losses suffered by the LLP. However, this option can be exercised only when the LLP is running in a loss and such losses are one of the reasons for the dispute between the partners. If he or she refuses to do so, his or her resignation can be asked and the matter may be referred to the arbitration, as the case may be.

Whether the existing partner should opt for arbitration or commercial litigation as a means to resolve the dispute.

One might be required to raise a dispute if a) the partner does not resign, b) he does not share the losses, and c) he keeps claiming interest and rent (among others). Now, regarding the disputes between the partners, the First Schedule of the LLP Act 2008 says that the matter shall be referred to an arbitration panel constituted under the provisions of the Arbitration and Conciliation Act 1996. Accordingly, an arbitrator may be appointed and the dispute may be referred to him/her for resolution. The appointment of the arbitrator and the proceedings, including the payment of the fees shall be governed by the provisions of the Arbitration and Conciliation Act 1996.

The other option is going to the court per the provisions of the Commercial Courts Act 2015. Recently, in the case of Aanchal Mittal v Ankur Shukla [CM (M) 1086/2021 and CM No. 42689/2021], the Hon’ble Delhi High Court has stated that the dispute between the partners of an LLP can also be tried as a commercial suit under the provisions of the Commercial Courts Act 2015. However, as per section 3 of the Commercial Courts Act 2015, there should be a minimum amount of 3 lakhs involved in the dispute for it to be suitable for admission.

Conclusion:

In conclusion, it can be said that the LLPs are indeed lucrative business structures. However, they can pose serious challenges in relation to the resolution of disputes between the partners. Nonetheless, such situations can be prevented from arising by having a well-drafted LLP Agreement that covers every aspect of the relationship between the partners including how the dispute shall be resolved. This is mainly because the LLP Act 2008 does not provide anything about the expulsion or removal of a disputing partner. However, the non-disputing partners may seek the resignation of the disputing partner and comply with the relevant legal provisions in this regard. As of now, the partners have the option to refer the dispute to an arbitration panel per the provisions of the Arbitration and Conciliation Act 1996. Besides, the case of Aanchal Mittal v Ankur Shukla [CM (M) 1086/2021 and CM No. 42689/2021] also provides that a dispute between the partners of an LLP may be tried as a commercial suit under the provisions of the Commercial Courts Act 2015.

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Disclaimer: This is not professional advice. You may not rely on this document and the matter contained therein to make any decision.