Limited Liability Partnerships in India

Raghav Sharma

Table of Contents
Introduction ..................................................................................................................................... 2
LLP Structure in Foreign Jurisdictions ........................................................................................... 3
Historical Background ................................................................................................................ 3
The LLP Act, 2000 ..................................................................................................................... 4
Legal Position in U.S.A. ............................................................................................................. 6
Proposed LLP Structure in India..................................................................................................... 6
Reasons for Introduction ............................................................................................................. 7
Scope ........................................................................................................................................... 9
The Concept Paper ................................................................................................................ 10
Features akin to Companies ............................................................................................... 11
Modified Features of Partnership.......................................................................................... 20
Conclusion .................................................................................................................................... 24
Bibliography ................................................................................................................................. 28

Raghav Sharma is a B.Sc. LL.B. (Corporate Law Hons.) student in National Law University, Jodhpur (India). He
may be contacted at <raghavsharma1986@gmail.com>.

Electronic copy available at: http://ssrn.com/abstract=1291854

Introduction
Sometimes the difference between the clear, standard case or paradigm for the
use of an expression and the questionable case is only a matter of degree. A man
with a shining smooth pate is clearly bald ; another with a luxuriant mop clearly
is not ; but the question whether a third man , with a fringe of hair here and there
, is bald might be indefinitely disputed , it if were thought worth while or any
practical issue turned on it...Sometimes the deviation from the standard case is
not a mere matter of degree but arise when the standard case is in fact a complex
of normally concomitant but distinct elements , some or one of which may be
lacking in the cases open to challenge. Is the flying boat a vessel? Is it still
chess if the game is played without a queen? Such questions may be instructive
as they force us to reflect on, and make explicit, our conception of the
composition of the standard case1
-Professor H.L.A. Hart

The legal quandary expressed above in the precise words applies to the concept of Limited
Liability Partnerships (hereinafter called LLP), new commercial vehicle floated to address the
vacuum that existed between partnership law and company law. LLP is a marriage of principles
of company law and partnership law in order to address the deficiencies in both the areas for
small scale business and professional firms. The present project attempts a deeper understanding
of the basic concepts underlying LLP and the way in which company and partnership has been
fused to produce this new entity. Chapter II outlines the legal system and structure as it exists in
the jurisdictions abroad specifically the U.K and traces the course of its historical development.
Chapter III outlines the form and structure of an LLP as proposed by the second Naresh Chandra

H.L.A. HART , THE CONCEPT OF LAW 4 (2nd ed. , 2005)

Electronic copy available at: http://ssrn.com/abstract=1291854

Committee on Regulation of Private Companies and Partnership Report with a consequent

endorsement of the same by the J.J. Irani Committee and the Concept Paper issued by the
Ministry of Company Affairs. It attempts to understand the fusion process resulting in formation
of LLPs and the pros and cons associated with the form in which the vehicle is being floated for
commercial adaptation. The author concludes the project with a hope that the introduction of the
proposed new commercial LLP vehicle will be advantageous to the Indian business sector and
will promise a rosy future for the small scale industries in particular.

LLP Structure in Foreign Jurisdictions

Historical Background
The formation of companies with limited liability led to introduction of limited liability
concept in partnership law. A limited partnership (LP) consists of one or more general partners
liable for all the debts and obligations of the firm and who alone are entitled to manage the firm's
affairs, and one of more limited partners whose liability for the debts and obligations of the firm
is limited in amount but who are excluded from all management functions.2 In contrast, an LLP
combines multiple features of a company with a partnership and enables partners who are
actively involved in the business of their partnership to limit their liability for the partnership's
debts and obligations. A limited partnership is still a partnership with a slight modification and
the concept is not very new. As early as 1837 a commission headed by Bellenden Kerr had
considered whether elements of limited liability might be introduced into partnership law and in

J.J. Henning, Partnership Law Review: The Joint Consultation Papers and the Limited Liability Partnership Act in
Brief Historical and Comparative Perspective, Comp. Law. 2004, 25(6), 163-170,p. 168 [ the concept of limited
partnerships and limited liability partnership has its historical roots in the French partnerships en commandite or the
Italian commenda of the Middle Ages which was in substance an arrangement by which an investor entrusted capital
to a trader for employment in mercantile enterprises on the understanding that the investor, while not in name a
party to the enterprise and though entitled to a share of the profits, would not be liable for losses beyond the amount
of his investment]

1851 a select committee of the House of Commons also considered whether limited liability
should be introduced but on neither occasion was there a clear conclusion. In parallel with
increasing concerns on the part of professional advisers as to the potential financial risks
involved in continuing to act within the confines of a partnership structure, was the trend towards
"partnerships" which were much larger than hitherto. In such organisations, where one partner
might not even have met many of the other partners in the firm, the concept of legally binding
relations based upon the principles of mutual trust, agency and good faith became less easy to
justify. Increasingly, the larger partnerships within the accountancy profession in the United
Kingdom began to question the ongoing utility of the 1890 partnership model as a vehicle for
modern professional practices and thus urged for introduction of limited liability concept within
partnership law.3
The limited liability partnership concept finally originated in Texas in 1991, inspired by
government litigation against law and accounting firms that had done work for failed savings and
loan associations.4 The claims were against all partners including many who had nothing to do
with the failed associations, highlighting the joint and several liability of partners for each other's
conduct. The LLP was thus developed as a mechanism and as a device to limit the vicarious
liability of partners as the prospect that all the members in a partnership of attorneys or
accountants may be exposed to hundreds of millions of dollars in liability was too risky and
dreary.

The LLP Act, 2000

Citing the Texas example, major accountancy firms in U.K., wanting to limit the liability of an
individual partner to acts specifically related to that partner, launched a campaign for the creation
3

Stuart R. Cross, Limited Liability Partnerships Act , 2000 : Problems Ahead, J.B.L., 2003, MAY , 268-283
J.J. Henning, Partnership Law Review: The Joint Consultation Papers and the Limited Liability Partnership Act in
Brief Historical and Comparative Perspective, Comp. Law. 2004, 25(6), 163-170,p. 168
4

of the LLP vehicle in the 1980s. As a result, the UK Companies Act, 1989 was amended to allow
accountancy firms to work as limited liability companies. The joint and several liabilities of
general partners, however, remained. In the 1990s, the accountancy firms in the UK again
campaigned to end this, and to secure proportional liability in the LLP. In pursuance of the rising
crescendo of demand, U.K. has enacted the LLP Act, 2000 which has attempted a fusion of
principles of company law and partnership law. The major features of the Act have been
incorporated into the model LLP Act, 2006 in India which have been highlighted in the next
chapter. The explanatory notes to the Act comment that the Act's main purpose is to create a new
legal entity which will have "the organisational flexibility and tax status of a partnership with
limited liability for its members". Thus, the Act of 2000 is based on three broad principles of
limited liability, corporate personality and partnership flexibility. However, two major internal
features of the LLP Act, 2000 deserve mention. Firstly, although the Act introduced a new entity
carrying the designations "partnership" and "limited" which will allow members to limit their
liability while organising themselves internally as a partnership, the limited liability partnership
is not susceptible to either the Partnership Act 1890 or the Limited Partnership Act 1907. Hence
the law of partnership will in general not be applicable to a limited liability partnership.
Nevertheless, it will be taxed as a partnership to ensure that the choice between using a limited
liability partnership or a partnership is a tax-neutral one. Secondly, in spite of the fact that the
driving force behind the limited liability partnership legislation was the perceived vulnerability
to major negligence claims of large professional partnerships, eligibility is not limited to the
regulated professions. The limited liability partnership is available to two or more persons with a
view to make profit; in other words carrying on any lawful business. However, limited liability
partnerships are not available for all activities such as non-profit-making activities.

Legal Position in U.S.A.

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 and that, for other purposes, it remains a general partnership
regulated by either the Uniform Partnership Act 1914 (UPA) or the Revised Uniform Partnership
Act 1994 (RUPA). Eventually the National Conference of Commissioners on Uniform State
Laws approved in the Uniform Limited Liability Partnership Amendments (ULLPA) to the
RUPA in 1996. The Texas LLP statute does not relieve a general partner from liability for the
partnerships non-malpractice contractual and tort liabilities; the partners are insulated only from
the vicarious responsibility for the partnerships malpractice-type liability. The Texas LLP
statute has served as a model for many other LLP statutes in the USA. In some states of the
USA, the LLP regime is more liberal e.g. the State of Delaware, famous for its laissez-faire
approach to company law, has established a regime where any obligation of a LLP, whether
arising in contract, tort or otherwise, is solely the obligation of the LLP. A partner is not
personally liable, directly or indirectly, by way of indemnification, contribution, assessment or
otherwise for such an obligation solely by reason of being or acting as a partner. Interestingly,
the Delaware law also provides for, and permits, foreign limited liability partnerships. The
proposed Indian Bill takes the Delaware approach in preference to the Texas approach as
highlighted below.

Proposed LLP Structure in India

The second Naresh Chandra Committee Report floated the idea of the introduction of LLP
which, it described, in a legal perspective, as a hybrid between a company and a partnership, but
much closer to the private company form. Before highlighting the form proposed for the
6

introduction of the LLP vehicle it would be useful to reflect on the reasons mooted and the
assessed need for this positive change.

Reasons for Introduction

The two primary considerations advanced by the Naresh Chandra Committee for the introduction
of LLPs in India are the risk factor advantage associated with such an enterprise and the
enhanced global competitive advantage an LLP vehicle will offer to Indian professionals like
lawyers, accountants, doctors, architects, and company secretaries. Firstly, LLP is looked upon,
primarily, as a form of business entity which permits individual partners to be shielded from
joint liability created by another partners business decision or misconduct. In an increasingly
litigious market environment, the prospect of being a member of a partnership firm with
unlimited personal liability is risky and unattractive and this is the chief reason why partnership
firms of professionals, such as accountants, have not grown in size to successfully meet the
challenge posed today by the international competition.5 This makes an LLP a most suitable
vehicle for partnerships among professionals such as lawyers and accountants. A LLP enters into
contracts in its own name in the same way as a limited company, but its members have the
advantage of limited liability similar to the shareholders of a company. Hence, in the event of a
business failure or a tortuous complex of disputes and claims, the liability would be limited to
the partner responsible. There would be no recourse to attach the personal assets of the other
members, except the member who was personally responsible to negligent. Similarly, a partners

Walter W. Steele, How Lawyers Protect the Family JewelsThe Invention of Limited Liability Partnerships, 39 S.
Tex. L. Rev. 621 [Clearly law partnerships are no longer the chummy clubs they once were. All lawyers can
identify with the fear and confusion felt by a partner in one section of a large general partnership who learns that one
of his partners in a different section in the partnership's branch office in another city has subjected the partnership to
a catastrophic claim for damages.]

liability is not limited when the misconduct takes place under his supervision or control i.e. an
LLP only protects a partner from liability arising from the incorrect decision or misconduct of
other partners or any of its employees not under his control. This lowers the risk factor
associated with unlimited liability in a partnership and introduces the limited liability concept of
company law to make such bodies more adaptive to international competition.
Secondly, in India professional like lawyers, accountants, doctors, architects, and company
secretaries have been prohibited from practicing under any incorporated form. But as Indian
professionals are increasingly transacting with or representing multi-nationals in international
transactions, the extent of the liability they could potentially be exposed to is extremely high.
Hence, in order to encourage Indian professionals to participate in the international business
community without apprehension of being subject to excessive liability, the need for having a
legal structure like the LLP is self-evident. Provisions in the Partnership act, 1932 which restrict
the number of partners to twenty prevent the growth of professional firms to the large entities
operating on an international scale. Section 11 of the Companies Act, 1956 requires an
association of more than 20 persons, formed for profit motive, to be mandatorily registered as a
company under the Act. Such inhibiting conditions have to be removed to prevent the Indian
professionals from getting excluded from taking their rightful place in the international
community, that their skills otherwise entitle them to. The Irani Committee has recommended for
deletion of section 11 and bringing in a new Act to address the issue of LLP as in view of the
potential for growth of the service sector, requirement of providing flexibility to small
enterprises to participate in joint ventures and agreements that enable them to access technology
and bring together business synergies and to face the increasing global competition enabled

through WTO, etc., the formation of Limited Liability Partnerships (LLPs) should be
encouraged.

Scope
The Committee has, however, proposed that the scope of LLP should, in the first instance be
made available to firms providing professional services, as opposed to trading firms and or
manufacturing firms, for the following reasons:
1. Indian professional firms are precluded from practicing under any other legal form in
view of the restrictions imposed by their respective regulatory laws while the trading
manufacturing firms have the option to carry on business as a private limited or public
company under the Companies Act, 1956.
2. As the professionals are also governed and regulated by their respective professional,
regulatory bodies, which also control and monitor professional conduct, extending the
LLP structure only to professionals will minimise the risk inherent in testing new waters
in India.
3. LLP vehicle offers no special advantage to the small private companies or SSI units in
light of the fact that the Committee itself had simultaneously recommended a
considerable easing of regulations on private companies, specially small private
companies.
The Committee felt that extending the LLP structure to professionals, in the first instance, would
help evaluate its advantages and risks; and based on such evaluation and experience,
the LLP form can be considered for extension to small scale manufacturing and/or trading firms
as well in the future. The apprehensions, however, do not seem to be well founded as in all other

J.J. Irani Expert Committee on Company Law , Para 18.1

jurisdictions the LLPs have been floated as general commercial entities open for adaptation by
all businesses. The restrictions will not be of any value keeping in mind the fact that the LLP is
being floated as a beneficial alternative to unlimited liability business entities and only those who
find it beneficial will resort to it. A resort or change to LLP will obviously be based on deeper
assessment and understanding of the pros and cons of such a makeover.

The Concept Paper

Keeping the above requirements in mind, on November 2, 2005, the Ministry of Company
Affairs has introduced the concept paper on Limited Liability Partnership 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. The paper has invited positive response from research
scholars.7 The concept paper has tried to bring in the advantages of both a partnership firm and a
company, while trying to mitigate their drawbacks. On the one hand, through LLP it seeks to
offer partners the security of a limited liability, the inception of a new corporate form of
governance, while on the other hand it has done so by minimising the onerous procedures that an
incorporated company is required to follow. In addition, the proposed LLP also does away with
the ownership-management divide that is a necessary consequence of an incorporated company.
Every partner of the LLP is an agent of the LLP but not of other partners. So no partner is liable
for the acts of any other partner. In consonance with the reasons mooted by the Committee the
Concept Paper notes that in addition to an alternative business structure, LLPs would foster the
growth of the services sector. The regime of limited liability partnership will provide a platform
7

Aparna Viswanathan , India Considers Introduction of Limited Liability Partnerships, I.C.C. L.R. 2006, 17(5) ,
141-142

10

to small and medium enterprises and professional firms of Company Secretaries, Chartered
Accountants, Advocates etc. to conduct their business/profession efficiently which would in turn
increase their global competitiveness. The model Act has different chapters highlighting
different aspects of an LLP which are the product of fusion of various elements picked and
mixed up from two different areas of law. The major features of the proposed Limited Liability
Partnerships Act, 2006 can be catalogued as features akin to companies and modified features of
partnerships along with their associated lacunae.

Features akin to Companies

(1) Fundamentals of an LLP
The chapter lays down the fundamental elements of the new legal entity which appears to be
more akin to a company in its dealings with the outside world. An LLP is a body corporate
having perpetual succession and a legal personality of its own. 8 It shall have at least two
partners but there is no limit on the maximum number of partners that it can have. 9 If at
any time the number of partners of an LLP falls below two and the business is carried on for
more than six months, a person who is a partner of the LLP during the time that it so carries
on business after those six months and is cognizant of this fact shall be liable jointly and
severally with the LLP for the obligations of the LLP incurred during that period. 10 Any
individual or body corporate may be a partner in an LLP. An LLP being a body corporate, the
law relating to partnerships is generally not applicable to a limited liability partnership.

Section 3
Section 6(1)
10
Section 6(2)
9

11

11

Similarly, any change in the partners does not affect the existence, rights and liabilities

of the LLP.

(2) Managers
Each LLP is required to appoint a manager (not necessarily a partner of the LLP) who is
responsible for ensuring statutory compliance for the LLP. The position seems to be akin to a
director of a company and has no analog in the domain of partnership law. In UK he has been
christened as a designated member. Akin to a director of a company12, the manager is required
to file a written consent for taking the position in an LLP.13The Concept Paper seems to be
extremely liberal as to who can be appointed as a manager as the only condition provided is that
the manager should be an individual and that he should be resident of India. Neither are any
qualifications prescribed for them nor are there any stringent disqualification as applicable to
directors in companies under Section 276 of the Companies Act, 1956, like required share
qualification , insolvency or absence of conviction for offences of moral turpitude are applicable
to such managers. Therefore, it is very much possible that the partners may appoint somebody
who is not qualified enough and that person in due course becomes a scapegoat for the activities
of the partners. Section 7(6) makes the Manager personally liable to all penalties imposed on
the limited liability partnership for any contravention of those sections unless he satisfies the
Tribunal that he should not be so liable. Considering a hypothetical scenario where the partners
appoint an insolvent person as a manager, it would be difficult to fix financial sanctions on him
for contravention of the provisions of the Act. The problem is realistic as the Registrar has not

11

Section 4
Section 266 of the Companies Act, 1956
13
Section 7(3)
12

12

been given any powers to refuse to accept the letter of consent filed by any person to be manager
of an LLP.

(3) Incorporation
The mandatory requirement of incorporation for all LLPs, as a necessary consequence of a
separate legal status conferred on them, takes them one step closer to the concept of a registered
company. To form an LLP, under section 8, there must, at the outset, be at least two persons
who are associated for carrying on a lawful business with a view to profit and who subscribe
their names to a document called an "incorporation document". The document is akin to a
memorandum of association required to be filed under Section 12 of the Companies Act. The
incorporation document must be delivered to the Registrar in the prescribed form and
manner. A statement must also be delivered to the Registrar that there has been compliance
with all the requirements of this Act and Regulations with respect to incorporation and matters
precedent and incidental thereto. The statement must be made by a subscriber to the
incorporation document and by either an advocate, or a Company Secretary, or a Chartered
Accountant in whole time practice in India, who is engaged in the formation of the LLP and
a false statement with positive knowledge or absence of belief in its truth, shall be
punishable under the Act. Section 8(2) draws heavily upon section 13 of the Companies Act,
1956 whereby it requires that the incorporation document must contain information such as
the name of the LLP, its proposed business, address of its registered office, the name,
address and photographs of the persons who are to be its partners and manager on
incorporation. The retention by the ROC of the document and subsequent grant, after
satisfaction about the procedural compliance with section 8, of a certificate signed by him
and authenticated under his official seal shall complete the registration process of an LLP
13

under Section 9. The consequences of registration have been enlisted in section 13 whereby
the LLP shall, by its name have the power of1. suing and being sued;
2. acquiring, owning, holding and developing or disposing of property, both movable and
immovable;
3. having a common seal; and
4. doing and suffering such other acts and things as bodies corporate may lawfully do and
suffer.
Every LLP is required to have either the words "limited liability partnership" or the acronym
"LLP" as the last words of its name. An LLP shall not be allowed to register with a name,
which is undesirable or identical to a name of any other LLP or body corporate or to a
registered trade mark, or a trade mark which is subject of an application for registration, of
any other person under the Trade Marks Act, 1999. The name shall be printed on all its
invoices and official correspondence along with a statement that it is registered with limited
liability. 14
Going by the gamut of the provisions the creation of an LLP has been made similar to that of a
company. The process is fairly well known and thus its continuance in respect of a new legal
entity shall ensure certainty as well as save costs and difficulties which might be faced while
providing a new procedure for conferring separate legal status on an LLP.

(4) Limited Liability

The liability of a partner under the Indian Partnership Act 1932 is both joint and several. This
means that the liability of a firm is unlimited and even a partner's personal estate will be liable
14

Section 12

14

for all the debts contracted by the firm. In contrast, in an LLP, the liability of the partners is
limited to the extent of their individual contributions only. Each partner of the LLP is an agent of
the LLP but not of other partners as per section 18. Therefore, a partner shall be held personally
liable for his own wrongful act or omission, but will not be liable for the wrongful act or
omission of any other partner of the LLP. An LLP is, however, under section 19, not
bound by the actions of a partner where that partner has no authority to act for the LLP,
and the person dealing with the partner is aware of this or does not know or believe that the
partner was in fact a partner of the LLP. Further, where a partner of an LLP is liable to a
person for a wrongful act or omission in the course of business of the LLP or with its
authority, the LLP will be liable to the same extent as the partner. An LLP being a separate
legal entity is liable for an obligation arising in contract or otherwise and the liabilities of
the LLP shall be met out of its property. 15 A partner will not be held personally liable,
directly or indirectly for an obligation of the LLP, solely by reason of being a partner of
the limited liability partnership. In short, members have a corporate veil behind which they
can shelter from creditors, third parties and personal liability. However, this liability shield will
be withdrawn under section 21 in case of an act carried out by a LLP with the intent to
defraud creditors or for any other fraudulent purposes. Lastly, a former partner shall continue
to be liability for the acts done in his tenure.

(5) Financial Disclosures

The Indian Partnership Act, 1932 does not lay down any specific provision regarding any policy
related to financial disclosures or regarding any statutory maintenance of Books of Accounts.
Therefore, a Partnership firm is required to follow the provisions of the Income Tax Act, 1961.
15

Sections 19(3) & 19(4)

15

Sections 44AA and 44AB of the Income Tax Act provide only for maintenance of Books of
Accounts and for Audit of Accounts beyond a certain limit of gross receipts. As a consequence
thereof there is no stern rule regarding financial disclosure. Whereas, as stated in the Concept
Paper, an LLP has a more austere system of financial disclosures to follow in as much as it is not
only required to maintain the proper Books of Accounts for assessment16 but also to annually file
a declaration of solvency with the Registrar17, declaring whether or not the firm is able to pay its
debts as they occur in the normal course of business. Thus, an attempt has been made to update
and rectify the missing provisions of the aged Partnership Act. At the same time, the Act avoids
the detailed financial disclosures required in case of companies under Sections 209 to 223 of the
Companies Act, 1956. The Registrar, however, is empowered to call for further information and
explanation necessary for the purposes of carrying out the provisions of the Act.18
The author wishes to highlight a few lacunae that persist in the present form of the provisions. As
per the Concept Paper, the liability for maintaining the books of accounts falls on the manager,
but there is no basis provided for determining this liability. Unlike Section 209 of the Companies
Act, 1956 which prescribes the maintenance of proper books of accounts with respect to all the
sums received and expended by the company and the matters in respect of which the receipt and
expenditure has taken place, all sales and purchases of goods by the company, the assets and
liabilities of the company etc., section 27 of the LLP Act, 2006 is absolutely silent on the kinds
of books of accounts to be maintained by the LLP. It only uses an ambiguous expression books
of accounts relating to its affair for each year of its existence and hence it would be unfair to
hold the manager liable for any discrepancy in the maintenance of the Books of Accounts if the
law does not bring to his knowledge the nature of the books that are to be maintained. Lastly,
16

Section 27
Section 28
18
Similar powers have been granted to the ROC under Section 234 of the Companies Act, 1956
17

16

there is an the omission of any express provision or duty upon the partners to furnish information
to the manager wherein he can build an opinion on the LLPs solvency, as the ultimate
responsibility of the fairness of the document of Declaration of Solvency is on the manager and
in default of which he is liable. As a result, the managers position has been rendered extremely
vulnerable and there is a need to incorporate in the law such a duty upon the partners of the LLP.

(6) Assignment and Transfer of Partnership Rights

The proposed law provides for a novel feature of Assignment and Transfer of Partnership Rights.
Under section 36, the economic rights of a partner are freely transferable, and the non-economic
rights can be transferred if permitted by the LLP Agreement. Section 2(8) defines "economic
rights" as the rights of the partner to a share of the profits and losses of the partnership and to
receive distributions in accordance with the limited liability partnership agreement. However,
unlike section 108 of the Companies Act, 1956 whereby the mode of transfer on a duly stamped
transfer instrument is prescribed, the section is silent on any special mode of assignment of
partnership rights. Moreover, no power has been given to the other partners to refuse to
acknowledge the transfer in contrast with section 111 of the Companies Act. However, section
37 while permitting the transfer of partnership rights provides that the transfer does not ipso
facto entitle the assignee to participate in the management or conduct of the limited liability
partnership's activities or to access information concerning the limited liability partnership's
transactions. Thus, a partnership agreement is required between the assignee and the existing
partners as per section 14(2) for entitlement to such rights. While this is accordance with the law
of partnership, a deviation has been made under section 37 whereby the partnership is not
dissolved by transfer of rights by one of partners. Such a transfer is not possible under the Indian
Partnership Act, 1932.
17

(7) Investigation and Winding Up

The provisions relating to investigation of companies under the Companies Act, 1956 viz.
sections 235 to 246 have been exactly casted into sections 38 to 49 of the LLP Act, 2006 without
any essential difference in the powers of the Central Government or the Tribunal to order
investigation and the powers of the investigating officer. Under section 46 the LLP may be
wound up by a petition before the Tribunal by the Central Government if it is satisfied that that
the business of the limited liability partnership is being conducted with an intent to defraud its
creditors, partners or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a
manner oppressive or unfairly prejudicial to some or any of its partners, or that the limited
liability partnership was formed for any fraudulent or unlawful purpose and that the partners of
LLP have been guilty of fraud, misfeasance or other misconduct towards the limited liability
partnership or towards any of its partners. Section 55 is akin to section 425 of the Companies
Act, 1956 whereby winding up of an LLP may either be voluntary or by the Tribunal. The
circumstances under which winding up can be done by the Tribunal have not been specified and
nor is the procedure thereof given in the Act. The vaccum is to be filled by the regulations to be
made by the Central Government and proper course would be to extend the provisions of
Companies Act with requisite modifications by virtue of power granted to the Central
Government under section 57 of the model LLP Act, 2006.

(8) Conversion to Limited Liability Partnership

The Act provides for specific provisions to affect a conversion from partnership and specified
types of companies to LLPs. A firm can convert under section 50 read with Second Schedule; a
private company can convert under section 51 read with Third Schedule and an unlisted public

18

company can do so under section 53 and Fourth Schedule. The Schedules prescribe eligibility
criteria for different entities to file for conversion with the ROC and gives power to the latter to
register them as LLPs. Rules have been prescribed for existing contracts and employments of
such entities whereby the LLP is deemed to be the contracting party in all such instruments in
place of the previous entity or persons. However, listed public companies have not been given an
option to switch over to LLP because of their greater public accountability which will be
eliminated if the option is available to them as an LLP is much more akin to a private company.

(9) Appointment of Auditors

Auditing of Accounts is an important requirement that has clearly been overlooked by the
Concept Paper and the model Act is silent on any auditing requirement. In the view of the author,
there must be in law an obligation upon every LLP to get its accounts audited by an auditor. As
to who can be an auditor, the conditions should be similar to those specified in the Companies
Act under section 226. The auditor should be made responsible in law for the accounts of the
LLP and should be bestowed with all the requisite powers akin to those under section 227 of the
Companies Act in order to ensure that the accounts show a true and fair view of the state of
affairs of the LLP, and secures the interests of creditors and all other persons dealing with it.

(10) Compulsory Insurance

It must be pointed out that a very important aspect of LLP laws across the world is the provision
for compulsory insurance. Compulsory Insurance is required to protect the interests of persons
claiming against the LLP and to ensure that they receive what is due. The Delaware and Texas
statutes require that an LLP set aside a minimum amount of funds or their equivalent, or obtain
liability insurance for the protection of persons with negligence or malpractice claims against the
19

firm.

In Texas, the minimum financial responsibility is $100,000 while in Delaware, it is

$1,000,000.19 Liability insurance is generally designed to cover different kinds of omissions,

negligence, wrongful acts, malpractices and misconduct for which liability is otherwise limited.
Insurance companies in UK provide professional indemnity insurance to cover all reasonable
costs incurred in the defence or settlement of claims arising from the above, as long as they are
accidental or unintentional acts. It is certainly rational that, to receive the benefit of limited
liability, firms must be asked to compulsorily insure themselves. The Concept Paper contains
serious lacunae in this respect which ought to be removed to ensure the commercial viability of
this entity.

Modified Features of Partnership

Partnership flexibility has been made an integral component of the LLP structure and the LLP
members have been left free to determine the internal organization and mutual rights and
obligations through an agreement. Section 15 provides that partners may bind themselves by a
pre-incorporation agreement provided such agreement is ratified by all the partners after the
incorporation of the limited liability partnership. In the absence of agreement as to any matter,
Section 15(4) specifies that the mutual rights and duties of the partners and the mutual rights and
duties of the limited liability partnership and the partners shall be determined by any provision
relating to that matter as is set out in the First Schedule of the Act.

(1) Non-applicability of Partnership Law

Section 4 provides that except as otherwise provided by this Act or any other enactment, the law
relating to partnerships shall not apply to a limited liability partnership. Hence the operation of
19

Robert W. Hamilton, Registered Limited Liability Partnerships: Present At The Birth (Nearly), 66 U. Colo. L.
Rev. 1065 (1995)

20

general provision of the Indian Partnership Act, 1932 has been excluded but the Act of 2006
itself embodies certain elements of a partnership in partially modified form as the existence of
the entity is still based on an underlying partnership agreement.
(2) Underlying Partnership Agreement
The first partners of an LLP are those who sign the incorporation document. After
incorporation, any person may become a partner of an LLP by agreement with the existing
partners.20 A person may cease to be a partner by death, dissolution of the LLP or in accordance
with any agreement with the other partners of the LLP. Where there is no agreement a
partner may cease to be a partner by giving 30 days notice to the other partners. However, a
person shall be regarded as a partner, in relation to any person dealing with the LLP unless
the third person has notice that the former partner has ceased to be a partner or a notice in this
regard has been delivered to the Registrar. Moreover, a former partner shall continue to be
liable for the acts done in his tenure. Where a person ceases to be a partner of an LLP, a person
entitled to his share in consequence to death or insolvency may not interfere with the
management or administration of the LLP, but may receive any amount to which he is
entitled. In case of admission of a partner, a statement by the incoming partner that he
consents to be a partner should also be filed in the prescribed form and manner.
(3) Duties and Standards of Conduct
Section 23 and 24 casts the general duties of good faith and fiduciary duties of loyalty and due
care on all partners. The Act prescribes that the duty of loyalty shall consist of the following
elements:

20

Section 14

21

1. a duty to account to the limited liability partnership and hold as trustee for it any
property, profit, or benefit derived by the partner in the conduct and winding up of the
limited liability partnership's activities or derived from a use by the partner of limited
liability partnership property, including the appropriation of a limited liability partnership
opportunity;
2. a duty to refrain from competing with the limited liability partnership in the conduct or
winding up of the limited liability partnership's activities; and
3. a duty to refrain from dealing with the limited liability partnership in the conduct or
winding up of the limited liability partnership's activities as or on behalf of a party having
an interest adverse to the limited liability partnership.
The duty of due care has been defined as duty to refrain from engaging in grossly negligent or
reckless conduct and from contravening any of the provisions of this Act and any other law for
the time being in force. The duties are an exemplification and extension of the general duties of
partners specified in section 9 of the Indian Partnership Act, 193221 but the jurisprudence of the
same will be reflected in the judicial interpretation put onto the present sections 23 and 24.
(4) Taxation
The Naresh Chandra Committee Report has recommended a pass-through status for the LLP
in consonance with the law prevalent in U.K. whereby section 10 of the UK LLP Act lays down
that a trade, profession or business carried on by an LLP, with the view to profit, shall be treated
as carried on in partnership by its members and not by the LLP itself and thus, an LLP enjoys a
pass-through status and is not taxable as such; the taxation liability falls on the partners in their
individual capacity. In furtherance thereof, the draft bill on LLP, under Section 35, has adopted
21

Section 9 - Partners are bound to carry on the business of the firm to the greatest common advantage, to be just
and faithful to each other, and to render true accounts and full information of all things affecting the firm to any
partner or his legal representative

22

an approach similar to that of partnership firms for the purpose of taxation. For income tax
purposes, the status of an LLP as a body corporate has to be ignored and the partners are to be
individually made liable for any tax liability on their share of profits. Also in respect to a transfer
or disposal of any of the assets of the LLP, it is to be treated as though the assets are held by the
partners and the resulting capital gains tax would be chargeable on account of the partners, thus
the LLP enjoys a pass-through status for the purpose of taxation. Such a provision is essential to
ensure that the commercial choice between using an LLP or a partnership is not distorted and
beneficial elements of partnerships are not totally discarded.
In addition to these there are provisions concerning amalgamation and merger of LLPs which
have to be governed by regulations to be made by the Central Government. Specific offences
have been created for contravention of various requirements under different provisions of the
proposed model Act. Section 53 also provides for the introduction of Foreign LLPs in India
which have to be governed by regulations to be made. Thus, the proposed Bill as a whole is a
progressive legislation which though has some grey areas but yet it emerges successful in
creation of LLP as a separate legal entity within the existing framework of law in India. The
question whether an LLP is a company or a partnership is one of academic interest but the nature
of LLP has to be understood to determine which law should apply to those issues which the Act,
the Regulations and the parties themselves fail to determine. The predominant law to be applied
in such cases will depend upon the issues involved in any particular case viz. in external dealings
an LLP has to be considered akin to a private company while for internal regulation principles of
partnership laws shall apply

23

Conclusion
In certain academic circles concerns have been voiced that the limited liability concept in case of
legal professionals is contrary to their ethical duties towards the clients as it restricts their
liability towards clients in advance and works upon the fear of malpractice.22 Such vague ethical
considerations, however, have to be kept at bay with changing times and need for global
competitiveness at times when the Central Government is planning to open up the legal sector
for foreign firms and lawyers under the GATTs framework. Coming squarely to the need for
LLPs, the same has been highlighted by two well known committees. In addition, it has been
mooted that LLP will be a good and optimal vehicle for Small Scale Industries which are
constrained by inadequate finances, especially availability of working capital, from banks. The
theme of inadequate financing of SSIs has been flogged to such an extent that sickness in the SSI
sector and underfunding have become synonymous in the perception of several people and
recommendations have been made by many committees for improving the flow of credit to the
sector. The LLP system combines the advantage of the traditional corporate structure and the
entrepreneur-centric proprietary/partnership structure and will help more "marriages between
brains and bank balances" take place within the small enterprise/business sector, just as is
supposed to happen every time a company in the organised corporate sector issues capital to the
public in the form of equity shares or debentures.23 The LLP will tap funds not from the public
but from a section of inactive co-partners of an enterprise whose liability to repay debts of the
business will be limited to their investment and who will be entitled to a share in the profits of
the business. While the limited partnership business will give a greater level of comfort to banks

22

Supra note 5; Thomas D. Morgan, Conflicts of Interest and the New Forms of Professional Associations, 39 S.
TEX. L. REV. 215, 218 (1998).
23
R. Gopalakrishnan, SSIs: Why not ask for limited liability partnership?, available at <http://www. hindu
onnet.com /thehindu/features/ssi/stories/2004082800280123.htm>

24

and other lenders to small businesses, it at the same time will avoid the enormous amount of
documentation and strict procedure that corporate entities have to observe. There has been a
campaign of sorts to persuade SSIs to convert themselves into companies (under the Companies
Act), so that their projects/business plans could become more "bankable" and their balancesheets could gain acceptance and credibility with banks and financial institutions. This campaign
has obviously not succeeded and perhaps, the limited partnership system is a more realistic and
attractive option that would encourage entrepreneurs, in need of funds for modernisation and
expansion, to adopt from their present position of either proprietary undertakings or
partnerships.24 The K.B. Chandrasekhar Committee on Venture Capital has urged in its
report for introduction of LLPs for promotion of venture capital industry in India as they provide
the necessary flexibility in risk-sharing, compensation arrangements amongst investors and tax
pass through. Venture capital activity through such structures is required with a view to promote
innovation, enterprise and conversion of scientific technology and knowledge based ideas. The
Committee has opined that the flourishing venture capital industry in India will fill the gap
between the capital requirements of technology and knowledge based startup enterprises and
funding available from traditional institutional lenders such as banks. Flexible structures like
LLPs are indeed indispensable for such growth of venture capital industry.
With the circulation of the concept paper, the Ministry of Company Affairs has made efforts to
do away with the lacunae in the legal system of our country concerning LLPs, but it is yet in an
embryonic stage. While a great deal of thought yet needs to be put into certain aspects of the law,
some features can be adopted from the laws of other countries. Nevertheless, even a law that is
tried and tested in any other country has to be moulded to suit Indian conditions and

24

R. Gopalakrishnan , Wanted: limited partnership and SPC laws , available at <http://www.hinduonnet.com

/thehindu/features/ssi/stories/2004082800280135.htm>

25

circumstances. LLP is, after all, a new concept and will require a lot of deliberation. The Centre
must try to involve more and more people in the law-making process. The content of the law and
its manner of implementation must ensure maximum advantage to everyone involved, and efforts
must be made to make the LLP form of corporate governance widely accepted and popular. The
LLP vehicle has been successful in U.S.A and there is no evidence of its failure in U.K. where
several hundred registrations for this status have taken place.25 Some amount of cynicism still
remains about the working of the LLP system and certain scholars have vehemently criticized
their economic viability and the introduced structure based on the low take up rates for LLPs in
UK.26 Going by the fact that even scholarly opinion to the contrary has been expressed, 27 there is
a need to make a careful beginning instead of rushing through the introduction of the Act. All the
aspects have to be well thought out and regulations have to be made for different aspects
beforehand in order to assess their relevance in making LLP an effective commercial entity. In
place of producing a confusing admixture of company and partnership law principles, a proper
approach would be modify and if necessary radically alter those provisions. After the Irani
Committee Report it has become evident that the prolix procedures prescribed for the
governance of companies under the Companies Act, 1956 and the fragmented rules made by the
Central Government and SEBI have created confusion and raised the compliance costs in the
corporate sector. Thus a caution has to be taken that such rules and provisions should not be
blindly adapted for LLPs without making them simplified enough to bring the compliance costs

25

Supra note 3

26

David Milman, Limited Liability Partnerships: The Waiting Goes On, I.C.C. L.R. 2000, 11(10) , 329-332; V.
Finch and J. Freedman, The Limited Liability Partnership: Pick and Mix or Mix-Up?, J.B.L. 2002, SEP, 475-512, p.
479; Stephen Copp, Corporate Governance: Change, Consistency And Evolution: Part I , I.C.C.L.R. 2003, 14(2),
65-74
27

Saleem Sheikh, Limited Liability Partnerships: A New Trading Vehicle, I.C.C.L.R. 1997, 8(8), 270-277

26

to a reasonable level. Higher compliance costs will make such entities highly unattractive and
SSIs will shirk from entering the arena altogether. As for now, as the saying goes, a project well
begun is half done. The Ministry has made a great beginning, and there is hope that in future it
culminates in the beginning of a new law in the country.

27

Bibliography
-Articles1. Aparna Viswanathan , India Considers Introduction of Limited Liability Partnerships,
I.C.C. L.R. 2006, 17(5) , 141-142
2. David Milman, Limited Liability Partnerships: The Waiting Goes On, I.C.C. L.R. 2000,
11(10) , 329-332
3. J.J. Henning, Partnership Law Review: The Joint Consultation Papers and the Limited
Liability Partnership Act in Brief Historical and Comparative Perspective, Comp. Law.
2004, 25(6), 163-170
4. R. Gopalakrishnan , Wanted: limited partnership and SPC laws , available at
http://www.hinduonnet.com /thehindu/features/ssi/stories/2004082800280135.htm
5. R. Gopalakrishnan, SSIs: why not ask for limited liability partnership?, available at
http://www.hinduonnet.com/thehindu/features/ssi/stories/2004082800280123.htm
6. Robert W. Hamilton, Registered Limited Liability Partnerships: Present At The Birth
(Nearly), 66 U. Colo. L. Rev. 1065 (1995)
7. Saleem Sheikh, Limited Liability Partnerships: A New Trading Vehicle, I.C.C.L.R. 1997,
8(8), 270-277
8. Stephen Copp, Corporate Governance: Change, Consistency And Evolution: Part I ,
I.C.C.L.R. 2003, 14(2), 65-74

28

9. Stuart R. Cross, Limited Liability Partnerships Act , 2000 : Problems Ahead, J.B.L.,
2003, MAY , 268-283
10. Thomas D. Morgan, Conflicts of Interest and the New Forms of Professional
Associations, 39 S. TEX. L. REV. 215 (1998)
11. V. Finch and J. Freedman, The Limited Liability Partnership: Pick and Mix or Mix-Up?,
J.B.L. 2002, SEP, 475-512
12. Walter W. Steele, How Lawyers Protect the Family JewelsThe Invention of Limited
Liability Partnerships, 39 S. Tex. L. Rev. 621

-Committee Reports-

1. Naresh Chandra Committee on Regulation of Private Companies and Partnership Report

2. J.J. Irani Committee Report on Company Law
3. K.B. Chandrasekhar Committee Report on Venture Capital

-Miscellaneous-

1. LLP Act, 2000 [United Kingdom]

2. Concept Paper , 2005, circulated by Ministry of Company Affairs, India

29