The Limited Liability Partnership Act, 2008 | Important Acts and Laws for Judiciary Exams PDF Download

Introduction

A partnership traditionally involves a business arrangement between two individuals aiming for profit, where partners have unlimited liability for the firm's actions. With the emergence of the concept of limited liability, partnerships were seen as risky. Hence, the introduction of limited liability partnerships became necessary.

Limited Liability Partnership

An LLP provides partners with limited liability while maintaining the flexibility associated with partnership models. This flexibility has made LLPs a popular business structure in modern times.

Advantages of a Limited Liability Partnership

• Flexibility: Internal management in an LLP is governed by the LLP Agreement, offering flexibility in organizational structure.
• Reduced Compliance: LLPs involve less statutory compliance compared to companies under the Companies Act, 2013.
• No Ownership-Management Divide: In an LLP, every partner acts as an agent of the firm and isn't liable for the actions of other partners.
• Distinct Legal Identity: An LLP has a separate legal identity from its members, making it a distinct legal entity.

Disadvantages of a Limited Liability Partnership

• Public Disclosure: Documents filed by an LLP are public, unlike those of a general partnership, which remain private unless disclosed.
• Compliance Complexities: LLP operations involve intricate compliance requirements, leading to potential growth impediments.
• Financing Limitations: Venture capitalists and angel investors typically avoid investing in LLPs, leaving them with limited funding options like borrowing from financial institutions or partners.

Venture capitalists are deterred from investing in LLPs due to the specific responsibilities attached to LLP partners under the LLP Act.

Historical Development

• The concept of LLP was initially proposed by the Naresh Chandra Committee to address the limitations of traditional partnerships. The committee highlighted the unattractiveness of unlimited liability in partnerships, especially for professional firms.
• Professional firms were restricted from engaging in business activities due to regulatory constraints, unlike trading and manufacturing companies. This led to a need for separate legislation governing LLPs to ensure their flexibility and effective regulation.
• The Committee on New Company Law, led by Dr. J.J. Irani, further advocated for LLPs to benefit small enterprises by enabling them to form agreements, joint ventures, and access new technologies for global competitiveness.

Objective of the Limited Liability Partnership Act, 2008

• The Limited Liability Partnership Act, 2008 aims to establish rules governing the creation and management of limited liability partnerships.
• It facilitates the formation of LLPs and addresses related matters to promote growth for small businesses and encourage professionals from diverse fields to collaborate.
• One key objective was to remove the restriction on the maximum number of partners in a partnership, which was previously limited to 20 partners under the Companies Act, 1956.
• The Companies Act, 2013 now allows a maximum of one hundred partners in a partnership firm.

Nature and Salient Features of a Limited Liability Partnership

• An LLP possesses a distinct legal identity separate from its partners, enabling it to own property, enter into contracts, and take legal action in its own name.
• LLPs enjoy perpetual succession, meaning changes in partners do not affect the entity's continuity in case of partner alterations.
• LLPs are exempt from certain provisions of the Partnership Act, 1932, providing them with a unique regulatory framework.
• Partners in an LLP act as agents of the partnership but not of each other, limiting individual liability to the partnership's obligations.
• An LLP is not liable for unauthorized actions of its partners if the claimant knew the partner was acting beyond their authority.
• Partner liability is restricted to their obligations within the LLP, safeguarding personal assets from business debts.
• The transfer of profit-sharing rights among partners is permitted, but it does not grant the transferee managerial authority.
• LLPs must maintain annual accounts, submit solvency statements, and comply with regulatory reporting requirements.
• The government can mandate an LLP to change its name if it resembles another entity closely, adding "LLP" at the end of its name as per the Act.
• Winding up an LLP can occur voluntarily by partners' decision or through a directive from the National Company Law Tribunal.

Partner of a Limited Liability Partnership

• Any individual or corporate entity can become a partner in an LLP, with specific conditions for disqualification outlined in Section 5.
• Personal liability for LLP obligations may arise if the number of partners falls to one and business operations continue under this condition for over 6 months.
• Partnership formation and relationships are governed by the LLP agreement and the partners who sign the incorporation document.
• Partners must notify the LLP of any name or address changes within 15 days, with subsequent communication to the Registrar.

Designated Partners in Limited Liability Partnerships (LLPs)

• As per Section 7 of the LLP Act, every Limited Liability Partnership (LLP) must have a minimum of two designated partners, with at least one being a resident of India. It is crucial that both designated partners are individuals, not corporate entities. If all LLP members are corporations, then the nominees of these corporations will act as the designated partners.
• A resident of India is defined as someone who has resided in the country for at least 182 days in the preceding year.
• The law specifies individuals who are not eligible to serve as designated partners, including minors, individuals declared bankrupt within the last five years, those imprisoned for more than six months, and anyone with a history of fraudulent activities in the past five years.
• Any vacancy for a designated partner must be filled within 30 days of its occurrence. If vacancies remain unfilled or if there is only one designated partner in the LLP, all partners will be considered designated partners as per Section 9.
• Section 10 outlines that failure to comply with the requirements of Section 7 can lead to penalties. Both the LLP and its partners may face fines of up to 5 lakh rupees.

Role and Responsibilities of a Designated Partner in an LLP

Designated Partner's Duties as per LLP Agreement:

• A designated partner in a Limited Liability Partnership (LLP) is tasked with ensuring adherence to all regulations outlined in the LLP agreement.
• Each designated partner must obtain a Designated Partner's Identification Number (DPIN) as mandated.

Filing of Annual Returns:

• According to Section 35 of the LLP Act, a designated partner is entrusted with the responsibility of submitting the LLP's annual return within 60 days of the financial year's closure.
• Failure to meet this deadline can result in a penalty of up to Rs. 1 lakh for the designated partner.

Assistance to Inspectors:

• Under Section 47, a designated partner is obligated to cooperate with any inspector appointed under Chapter IX for investigating the LLP's affairs.

Resignation or Cessation of Partnership

• When a partner decides to resign from a limited liability partnership (LLP), they must provide a 30-day notice to the other partners indicating their intention to resign.
• If a partner passes away, is declared insolvent, or is deemed of unsound mind by a competent court, they cease to be a partner of the LLP.
• Upon ceasing to be a partner, the former partner or their entitled representative will receive their share of accumulated profits and capital contribution, but they lose the right to participate in the management of the LLP.

Incorporation of a Limited Liability Partnership

• To establish an LLP, registration under the Limited Liability Partnership Act, 2008, is mandatory.
• The process of incorporating an LLP involves submitting the incorporation document to the Registrar of the State where the LLP intends to set up its registered office.
• This document must be signed by at least two individuals associated with conducting a lawful business for profit.
• A statement confirming compliance with all legal provisions must accompany the incorporation document, prepared by a chartered accountant, cost accountant, company secretary, advocate, or any subscriber of the document.
• Submitting a false statement can lead to imprisonment of up to 2 years and a fine of up to Rupees 5 lakh.
• The incorporation document should detail the LLP's name, registered office, partners' names and addresses, including designated partners, and the intended business activities.
• Once all requirements of Section 11 are met within the specified timeframe, the Registrar will approve the incorporation document and issue the LLP's certificate of incorporation.

Conversion to a Limited Liability Partnership

• Chapter X of the Act outlines three methods of converting to an LLP, involving the transfer of assets, liabilities, privileges, interests, and obligations from a firm or company to the LLP.

Conversion of a partnership firm to a Limited Liability Partnership (LLP)

• Section 55 and Schedule 2 outline the process for transforming a partnership firm into an LLP.
• The conversion to an LLP does not alter any existing agreements made by the partnership firm. It is considered that the LLP was also a party to these contracts.

Conversion of a private company to a Limited Liability Partnership

• Schedule III under the Act outlines the process for transforming a private company into an LLP.
• A private company can transition to an LLP if its assets are not tied to any security interest, and if the partners of the new LLP consist solely of the shareholders of the private company.
• For conversion, the private company must furnish a statement to the registrar, signed by all shareholders. This statement should include the company's name, registration number, and the date of its incorporation.
• Additionally, the statement, along with the incorporation document as specified in Section 11, must be submitted to the Registrar.
• Subsequently, the Registrar has the authority to either grant the certificate of registration for the LLP or reject the application. In case of rejection, the decision can be contested before the Tribunal.

Procedure for Conversion of a Public Listed Company to an LLP

• Conversion process from an unlisted public company to an LLP is governed by Section 57 in conjunction with the 4th Schedule.
• For eligibility, there should be no existing security interest in the company's assets during the application phase.

Registration Requirements

• After registration, the LLP must promptly notify the Registrar of Firms for partnerships or the Registrar of Companies for private or unlisted public companies within 15 days.

Transition of Ownership

• Upon conversion, former private or public company shareholders become partners in the LLP and are subject to the Act's regulations.

Hurdles in Conversion

• Conversion to a Limited Liability Partnership (LLP) involves costs and risks, as well as complexities such as requiring consent from all partners or members, including minority shareholders.
• When a company transitions to an LLP, it is considered dissolved and removed from the registrar's records.
• An essential condition for conversion is that no asset of the company should have any existing security interest, which is uncommon in today's business environment.
• Once a company becomes an LLP, it cannot revert to being a partnership firm, public, or private company.

Investigation of a Limited Liability Partnership

• Chapter IX of the Act focuses on investigations related to LLPs.
• The Central Government has the authority, under Section 43, to appoint inspectors to investigate LLP affairs, especially if there are violations of the Act.
• A body corporate or firm cannot serve as inspectors, as stated in Section 45 of the Act.
• If a court or tribunal deems it necessary, the central government can appoint inspectors to investigate LLP affairs.
• Partners requesting an investigation must provide evidence and a security deposit to the Central Government.
• Inspectors are required to submit investigation reports to the Central Government, which can be used as evidence in legal proceedings.
• If the Central Government finds evidence of wrongdoing, it can initiate prosecution with the cooperation of partners, designated partners, employees, and agents of the LLP.

Powers of the Inspectors

• Inspectors have the authority to investigate any current or past entity associated with the LLP.
• They can also probe former or current partners, with approval from the central government after giving the partner a chance to present their case.
• If an inspector suspects that LLP-related documents might be tampered with, they can request permission from a Magistrate to seize those documents.
• The Magistrate can grant permission for document seizure, allowing the inspector to retain them until the investigation concludes, not exceeding 6 months.
• After the investigation, the inspector must return the seized documents to the original custodian.

Limited Liability Partnership (Amendment) Act, 2021

• The Act introduces provisions empowering inspectors to investigate entities linked to LLPs.
• Inspectors can scrutinize current and past partners with government approval, ensuring transparency and accountability.
• In cases of suspected document tampering, inspectors can seek court permission to seize and retain documents for up to 6 months.
• Document seizure aims to preserve evidence integrity during investigations, promoting fair and thorough inquiries.

Introduction to Start-up LLP and Small LLP

• Small LLP Definition: The Limited Liability Partnership (Amendment) Act, 2021, introduced the concept of small limited liability partnerships. A small LLP is characterized by a contribution of less than 25 lakhs or a higher specified amount below 5 crores, along with a turnover of less than 40 lakh Rupees or a higher prescribed amount under 50 crores. Additional criteria and conditions must also be met.
• Start-up LLP Definition: The Amendment also brought in the notion of a start-up LLP, defined in the newly inserted Section 76(A). A start-up LLP is one that is incorporated under the 2008 Act and recognized as such by the Central Government.
• Purpose of Start-up and Small LLPs: The primary aim of introducing start-up and small LLPs is to provide them with advantages over other LLPs. In cases of default, these LLPs are liable for only half the penalty prescribed for a general LLP. This special benefit extends to the partners and designated partners of such LLPs as well. For start-up and small LLPs, a maximum penalty of Rupees 1 lakh can be imposed, and for the partners or other members, a maximum penalty of Rupees 5 lakh can be levied.

Resident of India

• Definition of Resident of India: The recent Amendment has altered the meaning of 'resident of India' as stated in Section 7 of the primary Act. According to the Amendment, an individual is considered a resident of India under this Act if they have resided in India for at least 120 days in the preceding financial year.
• Criteria for Residency: To be classified as a resident of India, an individual must have spent a minimum of 120 days within the borders of India during the previous financial year.
• Implications of the Amendment: This change in residency criteria affects how individuals are categorized for the purposes of the Act, particularly in terms of taxation and legal rights.
• Example: For instance, if a person has lived in India for 100 days in the current financial year and then meets the 120-day threshold in the subsequent year, they would be considered a resident of India under the amended definition.

Punishment

• Section 30 of the Limited Liability Partnership (LLP) Act of 2008 states that if an LLP or its partners engage in fraud, they will face unlimited liability. Those involved in the fraudulent activities may be imprisoned for up to 5 years and fined up to Rs. 5 lakh.
• The recent Amendment to the Act has increased the maximum imprisonment term from 2 years to 5 years for those found guilty of fraud within an LLP.
• According to Section 21 of the Act, an LLP failing to include its name, registration number, and office address in official communications and invoices can be fined up to Rs. 25,000. The Amendment has raised this fine limit to Rs. 10,000.

Key Points on Change in the Name of LLP

• The recent Amendment grants authority to the Central Government to instruct a Limited Liability Partnership (LLP) to alter its name if it matches an existing LLP or trademark. This directive must be adhered to within a period of 3 months.
• In situations where the LLP fails to comply with the stipulated timeframe for name alteration, the Central Government is empowered to assign a new name to the LLP.

Explanation

• Under the revised regulations, if an LLP discovers that its name is identical to another LLP or a registered trademark, the Central Government can intervene and mandate a name change. This measure is crucial to prevent confusion among businesses and consumers.
• For instance, if an LLP named "ABC Consultants LLP" finds out that there is already an existing "ABC Solutions LLP," the Central Government may require the former to modify its name to maintain uniqueness in the market.
• Moreover, the 3-month grace period provided for name alteration allows LLPs to make the necessary adjustments without disrupting their daily operations significantly.

Appeal Process from NCLT Order

• Initiating an Appeal: According to the Amendment Act, if a person is dissatisfied with the decision of the National Company Law Tribunal (NCLT), they have the right to appeal to the National Company Law Appellate Tribunal (NCLAT) within 60 days of the NCLT's order.
• Exception to Appeal: In cases where the NCLT's order was made with the consent of all involved parties, an appeal cannot be lodged against such a decision.
• NCLAT's Role: The NCLAT conducts a hearing where all parties are given the opportunity to present their arguments. Subsequently, the NCLAT may either modify, uphold, or overturn the NCLT's initial order.

For instance, if a company feels that the NCLT's decision regarding a merger was unjust, they can appeal to the NCLAT within the specified timeframe. However, if both merging companies agreed to the NCLT's ruling, no appeal can be made against it. During the appeal process, the NCLAT carefully considers the arguments of all parties before making a final decision.

Special Courts

• After the Amendment Act, modifications were made to Section 77 of the principal Act regarding the trial jurisdiction for LLP Act 2008 offenses.
• Special courts were introduced by the Amendment Act to exclusively handle offenses under the LLP Act.
• Section 77A now grants special courts sole jurisdiction over such offenses, except in cases where a higher-ranking individual than the Registrar files a written complaint.

LLP as a Partner in a Partnership Firm

• There has been a divergence of opinions among various High Courts regarding the permissibility of an LLP entering into a partnership with an individual.
• The issue revolves around whether an LLP, as a distinct legal entity, can engage in a partnership agreement with an individual or not.
• Some High Courts have upheld the validity of such partnerships, emphasizing the flexibility and autonomy provided by LLP structures.
• Conversely, other courts have expressed concerns about the potential conflicts arising from combining the distinct features of LLPs and traditional partnerships.

M/S Diamond Nation v. Deputy State Tax Commissioner (2019)

• Facts: In the case of M/S Diamond Nation v. Deputy State Tax Commissioner (2019), the issue arose when the Registrar of Firms rejected the application of Go Green Diamonds LLP to become a partner in a firm. The Registrar's reasoning was that an LLP cannot be a partner in a partnership firm.
• Arguments by the petitioners: The petitioners argued that as per Section 4 of the Indian Partnership Act, a legal entity such as an LLP can indeed be a partner in a partnership firm. They pointed out that according to Section 2(d) of the LLP Act, an LLP is a separate legal entity with a distinct identity from its members, thereby eligible to be a partner in a partnership.
• Arguments by the respondents: The respondents countered by highlighting that under a combined reading of Sections 25 and 49 of the Indian Partnership Act, all partners in a partnership share joint and several liabilities. In contrast, partners in an LLP, under the LLP Act, have limited liability. Moreover, while a partnership firm lacks separate legal identity from its members, an LLP enjoys a distinct legal personality, which could lead to complications if an LLP were allowed as a partner in a partnership firm. 
• The issue before the Court: The central question for the Court to decide was whether an LLP could legally function as a partner in a partnership firm.
• Judgment: The Court's decision was influenced by the case of Dulichand Laxminaraya v. Commissioner of Income Tax (1956), where it was established that since a firm is not a legal entity, it cannot enter into a partnership. The Court concluded that allowing an LLP to be a partner in a partnership would conflict with the principles of the Partnership Act. The concept of limited liability in an LLP contradicts the fundamental aspects of partnership law. Therefore, the Court upheld the Registrar's decision to deny the LLP's registration as a partner in the firm.

Jayamma Xavier v. Registrar of Firms (2021)

Facts

• An LLP partnered with an individual, but the registrar of firms refused to register the partnership, citing that an LLP cannot be a partner.

Key Points

• Petitioner's argument: The Partnership Act does not explicitly prohibit partnerships with LLPs. An LLP is a body corporate with legal standing, capable of entering into contracts.
• Respondent's argument: Certain sections of the Indian Partnership Act conflict with the LLP Act, making partnership with an LLP impermissible.

Key Issue

• Can an LLP be considered a legal entity capable of entering into a partnership?

Judgment

• The Court ruled that an LLP, being a body corporate under the LLP Act, can participate in partnerships. When an LLP partners with an individual, the LLP is bound by the Partnership Act, independent of its partners' liabilities under the LLP Act.
• The court overturned the registrar's decision, stating there is no explicit ban on LLPs forming partnerships.

Conclusion

• The LLP Act's scope extends beyond professional ventures. The 2021 Amendment aligns the Act with current economic trends, introducing concepts like start-up LLPs and small LLPs to support small businesses.
• Special courts will expedite legal processes, enhancing India's business environment.
• There's a need for the Supreme Court to clarify its stance on LLP partnerships.