Analysis of applicable provisions of Companies Act 1956 to LLP

Limited Liability Partnership (LLP) is an alternative business vehicle that provides the benefits
of limited liability of a company, but allows its members the flexibility of organizing their
internal management on the basis of a mutually arrived agreement, as is the case in a
partnership firm.

There has been some literature of LLP on our site www.llphelpline.com, however now we are
trying to study the provisions of Companies Act, 1956, which would have impact on LLP.

The Companies Act, 1956, has used terms such as “Body Corporate, Company, Partner,
Partnership, Firm” in various sections. The point to be examined is whether LLP is to be
treated as partnership firm or company or body corporate and whether provisions of
Companies Act, 1956 are applicable to LLP?

Let us now understand these terms and their application to LLP:

BODY CORPORATE:

According to Section 2(7) of Companies Act, 1956 defines Body Corporate as "body
corporate" or "corporation" includes a company incorporated outside India but does not
include –
(a) a corporation sole;
(b) a co-operative society registered under any law relating to co-operative societies; and
(c) Any other body corporate (not being a company defined under this Act), which the
Central Government may, by notification in the Official Gazette, specify in this behalf.

According to Section 2(1)(d) of LLP Act, 2008,

“body corporate” means a company as defined in section 3 of the Companies Act, 1956 (1 of
1956) and includes—
(i) a LLP registered under this Act;
(ii) a LLP incorporated outside India; and
(iii) a company incorporated outside India,
but does not include—
(i) a corporation sole;
(ii) a co-operative society registered under any law for the time being in force; and
(iii) any other body corporate (not being a company as defined in section 3 of the Companies
Act, 1956 (1 of 1956) or a LLP as defined in this Act), which the Central Government may, by
notification in the Official Gazette, specify in this behalf;

The Companies Act has used the word Corporate as synonym to the word Body Corporate.
The ordinary meaning of Corporation as per Oxford Law & Business Electronic Dictionary:
Corporation, an entity that has legal personality, i.e. it is capable of enjoying and being subject
to legal rights and duties.

Under Halsbury’s law of England: A Corporation may be defined as a body of persons which is
recognized by the law as having a personality which is distinct from the separate personalities
of the members of the body.

The definition given under Companies Act, 1956 is an inclusive definition. It specifically excludes
a corporation sole; a co-operative society registered under any law relating to co-operative
societies and any other body corporate (not being a company defined under this Act), which the
Central Government may, by notification in the Official Gazette, specify in this behalf, even
though they are separate legal entities distinct from their members.

From the above definition we can say that body corporate or corporation is a legal entity
distinct from the members with perpetual succession. The LLP is also a legal person distinct
from its partnersi and it also has feature of perpetual successionii. Hence LLP falls under the
broader concept of Corporation/Body Corporate. It is not specifically excluded from the
definition of Body Corporate as mentioned in Companies Act, 1956 .Even Section 2(1)(d) of LLP
Act, 2008 states that Body Corporate includes LLP.

Hence all the provisions of Companies Act, 1956 which refers to term Body Corporate are
applicable to LLP.

COMPANY:

As per Section 3 of Companies Act, 1956: (i) "company" means a company formed and
registered under this Act or an existing company as defined in clause (ii)

The LLP is a partnership formed and registered under LLP Act, 2008 and not under any other Act
such as Companies Act, 1956. Hence LLP and Company are different business entities. Both are
included under Body Corporate yet different entities.

PARTNER, PARTNERSHIP AND FIRM:

Companies Act, 1956 does not define these terms.

According to Section 4 of the Partnership Act, 1932:

Definition of "Partnership", "Partner", "Firm" And "Firm-Name".
"Partnership" is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually, "partners"
and collectively "a firm", and the name under which their business is carried on is called the
"firm-name".

Section 2(1)(q) of Limited Liability Partnership Act, 2008 mentions that “Partners” means
any person who becomes a partner in the limited liability partnership in accordance with the limited
liability partnership agreement;

Section 2(1)(n) of Limited Liability Partnership Act, 2008 mentions that “LLP” means a
partnership formed and registered under this Act.

Terms Partners/ Partnership referred under Companies Act will apply to partners of LLP and
LLP.

As per legal dictionary (The Law Lexicon), a firm is not a legal entity and is a collective term for
partners who have entered into partnership with one another.

LLP is a legal entity separate from its partnersi. LLP and its Partners are distinct entity in the
eyes of law. LLP is incorporated under LLP Act, 2008. Provisions of Partnership Act, 1932 are not
applicable to LLPiii.

Hence firm word typically applies to partnership firm covered under Partnership Act, 1932 and
not under LLP Act, 2008. Whereas terms partner, partnership mentioned in Companies Act,
1956 would apply to partners of LLP as well as to the partners of firm.

We have now explained the applicability of various terms mentioned in Companies Act and also
its applicability to Limited Liability Partnership. Let us now examine, what is the impact of
provisions of sections of Companies Act, 1956 referring to the discussed terms on LLP.

There are few sections in Companies Act, 1956 which attracts attention of LLP towards
Companies Act, 1956. They are Section 187, Sections 295, Section 297, Section 299, Section
301, Section 314, and Section 372A.

Before examining these provisions, it is important to understand whether LLP can become a
member of a Company.

MEMBER:

As per section 41 of Companies Act, 1956, (1) The subscribers of the memorandum of a
company shall be deemed to have agreed to become members of a company, and on its
registration, shall be entered as members in its register of members.

(2) Every other person who agrees in writing to become a member of a company and whose
name is entered in its register of members shall be a member of the company.

(3) Every person holding equity share capital of a company and whose name is entered as
beneficial owner in the records of the depository shall be deemed to be a member of the
concerned company.
The person capable to enter into contract on his own can subscribe to the memorandum.
Person as per Section 3 of General Clauses Act, 1987 means "Person" shall include any company
or association or body of individuals, whether incorporated or not.

All persons can not become members unless it has separate legal entity.eg. Partnership firm
can not become member. In Sheodayal Khemka’s case it has been observed that “A partnership
under section 239 of the Contract Act, is a relationship which subsists between persons; but a
firm is not a person; it is not an entity; it is merely a collective name of the individuals who are
member of the partnership. However, LLP is a separate entity and is capable to enter into
contract. Hence, LLP can become member.

As per NSDL/ CDSL guidelines, even LLP can open demat account under "Corporate" status in
the CDSL/NSDL system with the sub-status "LLP". From this we can say that even LLP can also
become beneficial owners if they buy shares through their demat account.

From above we can say that even LLP can become a member of the Company.

Section 187 of Companies Act, 1956: Representative of Body Corporate

As per this section any body corporate which is a member of the Company can authorize any
person as it thinks fit to act as its representative at any meeting of the company, or at any
meeting of any class of members of the company.

As mentioned above LLP is a Body Corporate and hence Section 187 will also be applicable to
LLPs. Thus a LLP can also appoint its representative at any meeting of the Company in which
such LLP is a member.

The person so authorized will have the same rights and powers (including the right to vote by
proxy) on behalf of the LLP which he represents as that body could exercise if it were an
individual member, creditor or holder of debentures of the company.

Section 295 of Companies Act, 1956: Loan to Directors:

As per Section 295(1) no Company without obtaining the previous approval of the Central
Government in that behalf shall, directly or indirectly, make any loan to, or give any guarantee
or provide any security in connection with a loan made by
(b) any other person to, or to any other person by any firm in which any such director or
relative is a partner.
(d) any body corporate at a general meeting of which not less than twenty-five per cent of the
total voting power may be exercised or controlled by any such director, or by two or more such
directors together; or
(e) any body corporate, the Board of directors, managing director, or manager whereof is
accustomed to act in accordance with the directions or instructions of the Board, or of any
director or directors, of the lending company.
But definition of firm does not include LLP and hence section 295(1)(b) will not be applicable to
LLP’s.

As per section 295(1)(d) Body Corporate includes LLP, hence the first criteria of any body
corporate would be applicable but the whole part cannot be held applicable as criteria of
general meeting is not mentioned anywhere in LLP Act.

But if a LLP has specifically mentioned to hold meetings at particular intervals in its agreement
and conducts meeting accordingly then this section may apply to LLP. Even if more than 25% of
voting rights is held by any of the partner of LLP who is Director of the Company then under
Section 295(1)(d) previous approval of Central Government would be required to make any
loan to, or give any guarantee or provide any security in connection with a loan made.

Concept of Director, Managing Director or Manager does not exist in LLP. Hence Section
295(1)(e) is not applicable to LLP.

Hence Loan given by public Company to LLP where 25% of voting in company by one or more
directors who are also partner or designated partner in LLP will require approval of Central
Government.

Section 297 of Companies Act, 1956 - Board's Sanction to be required for certain
Contracts in which particular Directors are interested:

Section 297(1) provides that consent of the board of directors of a company shall be necessary
for a contract for the sale, purchase or supply of any goods, materials of services entered into
by the company with a director of the company or his relative or a firm in which such a director
or relative is a partner. The persons specified in this section are
i) Director of the Company,
ii) his relative,
iii) a firm in which such a Director or relative is a partner or
iv) a private Company in which such director is a director or member.

Body Corporate is not included in section 297. It is neither a Company, nor a firm as mentioned
earlier. Hence section 297 will not be applicable to a Company when it enters into contracts
with LLP.

Section 299 of Companies Act, 1956 – Disclosure of Interest by Directors:

As per section 299(1): Every director of a company who is in any way, whether directly or
indirectly, concerned or interested in a contract or arrangement, or proposed contract or
arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose
the nature of his concern or interest at a meeting of the Board of directors.
(3)(a) For the purposes of sub-sections (1) and (2), a general notice given to the Board by a
Director, to the effect that he is a director or a member of a specified body corporate or is a
member of a specified firm and is to be regarded as concerned or interested in any contract or
arrangement which may, after the date of the notice, be entered into with that body corporate
or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any
contract or arrangement so made.
(6) Nothing in this section shall apply to any contract or arrangement entered into or to be
entered into between two companies where any of the directors of the one company or two or
more of them together holds or hold not more than two percent of the paid-up share capital in
the other company.

As per section 299(3)(a) the term member refers to partners of firm and members of Body
Corporate. Thus the term member used in Section 299(3)(a) does not necessarily means
“member” as defined in Companies Act, 1956. LLP is also a Body Corporate and hence Section
299(3)(a) will be applicable to LLP. Thus Director of Company acting as partner or designated
partner in LLP then have to make general disclosure as per section 299(3).

As per Sec.299 (6) exempting contracts on the basis of 2% shareholding has used the word
"company" and not "body corporate". LLP is included in the definition of Body Corporate as
mentioned earlier and hence, even if contribution made in LLP is NIL, Sec.299 and 301 will be
applicable. Even concept of paid up share capital is not applicable as LLP includes contribution
and not share capital.

Section 301 of Companies Act, 1956 - Register of Contracts, Companies and Firms in
which Directors are interested:

As per this section 301:

(1) Every company shall keep one or more registers in which shall be entered separately
particulars of all contracts or arrangements to which section 297 or section 299 applies

(2) Particulars of every such contract or arrangement to which section 297 or, as the case may
be, sub-section (2) of section 299 applies, shall be entered in the relevant register aforesaid

(3) The register aforesaid shall also specify, in relation to each director of the company, the
names of the firms and bodies corporate of which notice has been given by him under
subsection (3) of section 299.

As stated before Section 299 can be applicable in case the director is interested by way of LLP.
Thus particulars of contracts or arrangements to which section 299 applies shall be entered in
register of the Company maintained under section 301 of Companies Act, 1956.

As per section 301(3), the name of Limited Liability Partnership shall be mentioned in the
register of which notice is received by the director.

Section 314 of Companies Act, 1956 - Director etc., not to hold office or place of profit:

As per Section 314:

(1) Except with the consent of the company accorded by a special resolution, -
(a) no director of a company shall hold any office or place of profit, and
(b) no partner or relative of such director, no firm in which such director, or a relative of such
director, is a partner, no private company of which such director is a director or member, and
no director or manager of such a private company, shall hold any office or place of profit
carrying a total monthly remuneration of such sum as may be prescribed, except that of
managing director
or manager, banker or trustee for the holders of debentures of the company -
(i) under the company; or
(ii) under any subsidiary of the company, unless the remuneration received from such
subsidiary in respect of such office or place of profit is paid over to the company or its holding
company:
Provided that it shall be sufficient if the special resolution according the consent of the
company
is past at the general meeting of the company held for the first time after the holding of such
office
or place of profit

Section 314(b) states about partner of director. For the purpose of this section only partners
and designated partners individually are considered. The LLP itself cannot be considered for
purpose of this section. Thus this section will not apply to Limited Liability Partnership but will
apply to partners of LLP in which directors of a company is acting as partner in LLP.

Section 372A - Inter-corporate loans and investments.

Section 372A imposes some restrictions on giving loan, investments, giving guarantee,
providing security by a Company to bodies Corporate unless the requirements of this section
are complied with. In section 372A (1) and 372A (3) the word body corporate is mentioned. LLP
is a Body corporate as mentioned earlier. Therefore while calculating the limits under section
372A loan given to LLP or guarantee given for LLP or investments made in LLP or securities for
LLP should be considered. Thus while calculating applicability of Section 372A loan, investment,
guarantee, security given to LLP would be considered.

Also as per section 372A(3) : The loan made to LLP by a public Company shall not be made at a
rate of interest lower than the prevailing bank rate, being the standard rate made public under
section 49 of the Reserve Bank of India Act, 1934 (2 of 1934).

Certain sections of Companies Act, 1956 are made applicable to LLP. The notification issued is
as follows:
Through the Notification No. G.S.R.6(E) dated 6th January, 2010, the Central Government in
exercise of powers conferred by sub-section (1) of section 67 of LLP Act 2008 (6 of 2009), made
applicable the provisions of sections 441, 443, 445, 446, 448, 450, 451, 453, 454, 455, 456, 457,
458, 458A, 460, 463, 464, 465, 466, 467, 468, 471, 474, 476, 477, 478, 479, 481, 482, 483, 484,
486, 487, 488, 494, 497, 511, 511A, 512, 514, 515, 517, 518, 519, 528, 529, 529A, 530, 531,
531A, 532, 533, 534, 535, 536, 537, 538, 539, 540, 541, 542, 543, 544, 545, 546, 547, 548, 549,
550, 551, 552, 553, 554, 555, 556, 558, 559, 560 and 584 of the Companies Act, 1956 to a LLP,
except where the context otherwise requires, with certain modifications.

I
Section 3(1) of LLP Act, 2008
ii
Section 3(2) of LLP Act, 2008
iii
Section 4 of LLP Act, 2008