Partnership and Limited Liability Partnership

Basics: in force from 1 October 1932 (except s.69, effective 1 October 1933); ss.1–69 (original structure), replacing Chapter XI of the Contract Act (ss.239–266). Partnership is governed by the principles of contract (s.5: it arises from contract, not from status; members of a Hindu undivided family carrying on business are not partners merely by status).

Definition (s.4): 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 are individually partners and collectively a firm; the name is the firm name.

Essentials:

1. An agreement between two or more persons (contractual capacity required).

2. A business (a continuous activity for profit).

3. Sharing of profits (sharing of losses is not essential; sharing of gross receipts is not partnership).

4. Mutual agency: the business is carried on by all or any of them acting for all. This is the real test (Cox v Hickman, 1860: mere sharing of profits is not conclusive; Mollwo March & Co. v Court of Wards, 1872).

s.6 (Mode of determining existence): regard must be had to the real relation between the parties, as shown by all relevant facts taken together. Sharing of profits or gross returns, or receipt of a share of profits, does not by itself make a person a partner.

Maximum number of partners: 50 (Companies Act, 2013, s.464, read with Companies (Miscellaneous) Rules, 2014); 10 for banking business. An association exceeding the limit is an illegal association. Firm is not a legal person (it is not distinct from partners in civil law), although for income tax and certain other purposes it is treated as a unit.

Kinds of partners: active (working), sleeping/dormant, nominal, partner by estoppel/holding out (s.28), partner in profits only, sub-partner, and a minor admitted to the benefits (s.30).

Kinds of partnership: at will (s.7: no fixed duration; any partner may dissolve by notice, s.43) and particular (s.8: for a particular venture or adventure).

• s.9: partners must carry on the business to the greatest common advantage, be just and faithful to each other, and render true accounts and full information.

• s.10: duty to indemnify for loss caused by fraud.

• s.11: the mutual rights and duties may be determined by contract, and may be varied by consent.

• s.12: rights of partners: every partner has the right to take part in the conduct of the business; to be consulted and heard (a decision in the ordinary course of business is by majority, but a change in the nature of the business requires consent of all); to have access to books; and the duty to act diligently. s.13: unless otherwise agreed: no remuneration; profits shared equally and losses in the profit ratio; interest on capital: none; interest on advances beyond capital: 6% per annum; right to be indemnified for expenses incurred and liabilities in an emergency or in the ordinary conduct of business; liability for wilful neglect.

• s.14: property of the firm: all property originally brought in or acquired in the course of business, including goodwill. s.15: application of firm property exclusively for the firm’s business.

• s.16: personal profits earned by a partner from firm’s business or use of its property or name; competing business (the partner must account for and pay over the profit).

• s.17: rights and duties after change in the constitution of the firm (on a continuing basis); the partner’s rights after the firm’s dissolution.

• s.18: a partner is the agent of the firm for the purposes of its business.

• s.19: implied authority to bind the firm in acts done in the usual way of business. Exceptions (not allowed unless there is a contract to the contrary): submit a dispute to arbitration; open a bank account in his own name; compromise or relinquish a claim; withdraw a suit; admit liability in a suit; acquire immovable property on behalf of the firm; transfer immovable property belonging to the firm; enter into partnership on behalf of the firm.

• s.20: express restriction of implied authority is effective against third parties with notice. s.21: emergency authority. s.22: mode of binding the firm (an act done in the firm name or in any manner expressing intention to bind). s.23: admissions by a partner concerning the affairs of the firm are evidence against the firm. s.24: notice to the acting partner is notice to the firm.

• s.25: Liability of every partner for all acts of the firm done while he is a partner is joint and several.

• s.26–27: the firm is liable for wrongs and misapplication of money by a partner acting in the ordinary course of business (Hamlyn v Houston, an English authority).

• s.28/29: Holding out: a person who represents himself, or knowingly lets himself be represented, as a partner is liable to those who have given credit on that faith. A partner by estoppel.

• s.30: Minors: a minor cannot be a partner but may be admitted to the benefits with the consent of all. He has a share of profits and property, may inspect accounts, and cannot sue the firm for his share except for dissolution. He is not personally liable. On attaining majority (or on knowing he was admitted), within six months he must give public notice electing whether to become or not become a partner. If he elects to become a partner, he becomes personally liable to third parties for acts of the firm since he was admitted to the benefits; if he elects not to, his share is not liable for acts after the date of the notice.

• s.31: a new partner can be introduced only with the consent of all the partners, unless otherwise agreed. An incoming partner is not liable for acts before joining (s.31(2)).

• s.32: Retirement: with the consent of all, by agreement, or by notice in the case of a partnership at will. A retiring partner remains liable for acts before retirement, and also for subsequent acts until public notice is given (s.32(3)). His liability can be discharged by an agreement with the third party and the continuing partners.

• s.33: Expulsion: only in good faith, by a power conferred by contract and exercised by a majority.

• s.34: insolvency of a partner. s.35: death of a partner (the estate is not liable for subsequent acts). s.36: rights of an outgoing partner to carry on a competing business (permitted, unless restrained by contract, but he cannot use the firm name or represent himself as carrying on the firm’s business). s.37: an outgoing partner (where the business continues without final settlement) has the right to a share in subsequent profits or to 6% interest on his share at his option.

Dissolution of the firm differs from dissolution of partnership: the former ends the whole firm, while the latter means the relationship between some partners changes (for example, by retirement) and the firm continues.

Modes:

• s.40: by agreement.

• s.41: Compulsory dissolution: on insolvency of all partners, or all but one, or on any event that makes the business or partnership unlawful.

• s.42: By contingencies (subject to contract): expiry of term; completion of the adventure; death of a partner; insolvency of a partner.

• s.43: by notice in partnerships at will.

• s.44: By the court on grounds: unsound mind; permanent incapacity of a partner; misconduct likely to prejudicially affect the business; persistent breach of agreement; transfer of the whole interest of a partner to a third party; the business can only be carried on at a loss; and any other just and equitable ground.

Consequences: s.45: continued liability for acts after dissolution until public notice (not for the estate of a deceased, insolvent or retired partner’s apparent liability). s.46: right of partners to have the business wound up and property applied in payment of debts. s.47: authority to continue for winding up. s.48: Mode of settlement of accounts in the absence of agreement: (a) losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits (Garner v Murray: a solvent partner need not make up the deficiency of an insolvent partner’s capital); (b) assets are applied in the following order: debts to third parties, then advances (loans) by partners (rateably), then capital of each partner, and the residue (if any) is shared in the profit ratio. s.49: the right to personal profits earned after dissolution. s.51: return of premium on premature dissolution. s.52: where a partnership is rescinded for fraud, the party defrauded has a lien and rights. s.53: restraining use of the firm name or property after dissolution. s.54–55: agreements in restraint of trade and goodwill (the goodwill is sold with the business, and the selling partner may be restrained from carrying on a competing business).

Registration is optional, not compulsory. Procedure: an application to the Registrar of Firms, with the prescribed fee, signed by all partners, with the details of firm name, place of business, date of joining, names and addresses, and duration (s.58). Effects of non-registration (s.69):

• (1) No suit by a partner (or his representative) against the firm or other partners to enforce a right arising from the contract or conferred by the Act.

• (2) No suit by or on behalf of an unregistered firm against any third party to enforce a right arising from a contract.

• (3) No set-off or other proceeding claimed by or on behalf of the firm.

• Exceptions (s.69(3)–(4)): suits for the dissolution of a firm or for accounts, and the realisation of the property of a dissolved firm or an insolvent partner; the right to sue for claims under Rs. 100; suits that do not arise out of a contract (torts, statutory rights); firms with no place of business in the territories where the Act applies; third parties can sue an unregistered firm.

Background: Enacted to provide a hybrid form combining limited liability and flexible organisation. It was in force from 31 March 2009. The LLP Rules, 2009 and the LLP (Amendment) Act, 2021 (and the LLP Rules 2022 after) added reforms.

Key features:

• Body corporate and a separate legal entity distinct from its partners (s.3), with perpetual succession (continuity despite changes in partners) and a common seal (optional).

• Minimum two partners; no upper limit (s.6). If the number falls below two for more than six months, the surviving partner who carries on business with knowledge is personally liable for obligations incurred after that period.

• Partners: any individual or body corporate (s.5). An individual is not capable of being a partner if he is of unsound mind (declared by a competent court), an undischarged insolvent, or has applied to be adjudicated insolvent.

• Designated partners (s.7): at least two (individuals) and at least one resident in India (resident means present in India for not less than 120 days in the preceding one year). Each must obtain a Director Identification Number (DIN). They are responsible for compliance.

• LLP Agreement (s.23): governs mutual rights and duties; in the absence of agreement, the First Schedule governs (for example, equal profit sharing, no remuneration; each partner has equal rights in management).

• Partners are agents of the LLP only, not of other partners (s.26). The LLP is not bound by acts of a partner done without authority where the other party knows this (s.27). The LLP is liable for wrongful acts of its partners in the course of business (s.27).

• Limited liability: the liability of a partner is limited to his agreed contribution. A partner is not personally liable for the wrongful acts of other partners (s.28), but remains liable for his own wrongful act (s.28(2)).

• s.30: Fraud: where an act is carried out with intent to defraud creditors or for any fraudulent purpose, the LLP and any partner knowingly party to it have unlimited liability for the LLP’s liabilities, and are liable to penal consequences (imprisonment 6 months to 5 years, and a fine).

• Contributions: may be tangible or intangible property, movable or immovable, or any other benefit (including cash, promissory notes, services).

Incorporation (ss.11–15): an incorporation document (and a statement of compliance) is filed online with the Registrar of Companies (through form FiLLiP); the Registrar issues a certificate of incorporation (s.11, 12, 13) which is conclusive evidence. The LLP’s name must end with ‘LLP’ or ‘Limited Liability Partnership’ (s.15).

Accounts and compliance: statement of accounts and solvency (Form 8) and annual return (Form 11) are filed every year (ss.34–35). Audit is required if turnover exceeds Rs. 40 lakh or contribution exceeds Rs. 25 lakh (LLP Rules, 2009, Rule 24). Maintenance of proper books for each year.

LLP (Amendment) Act, 2021 (notified in 2022): key reforms:

• Introduced the concept of a ‘small LLP’ (contribution up to Rs. 25 lakh, turnover up to Rs. 40 lakh, as prescribed) with lower penalties for default.

• Decriminalised and rationalised several offences; introduced compounding and adjudication of penalties.

• Allowed Indian LLPs to raise funds by way of ECB and allowed conversion and foreign LLP reforms.

• Provisions on ‘Foreign LLPs’, appeals to the NCLT and NCLAT, LLP Rules for conversion of firms, private companies and unlisted public companies (Schedules II–IV) into LLPs, and Authority for Adjudicating Officers.

• Now Central Government-appointed Adjudicating Officers and Special Courts deal with penalties.

Conversion: from a partnership firm (Second Schedule), a private company (Third Schedule), or an unlisted public company (Fourth Schedule). LLPs can also convert to a company under the Companies Act, 2013 (Chapter XXI).

Winding up (ss.63–64): voluntary or by the Tribunal (NCLT). The grounds for winding up by the Tribunal include: the LLP decides it should be wound up by the Tribunal; the LLP is unable to pay its debts; the LLP has acted against the sovereignty and integrity of India or the security of the State; the LLP has defaulted in filing the statement of accounts and annual returns for five consecutive financial years; and the Tribunal considers it just and equitable. The Companies Act provisions apply in so far as they relate to winding up.

Comparison table: