THE LIMITED LIABILITY PARTNERSHIP ACT, 2009 – AN OVERVIEW

BACKGROUND

The Limited Liability Partnership (LLP) Act, 2008 introduced the well renowned form of business organization – The LLPs into India. The Act considered the suggestions of the various Parliamentary Standing Committees such as the Naresh Chandra Committee, J.J.Irani Committee and the Abid Hussain Committee. The Act was notified on 31st March 2009, and is effective from 1st April 2009.

 KEY FEATURES OF THE LIMITED LIABILITY PARTNERSHIP ACT, 2008

a)       LLP is a separate legal entity separate from its partners, can own assets in its name, sue and be sued.

b)       LLP has a perpetual succession, and remains unaffected by any change in the constitution of its partners.

c)       The management of the LLP is done through its designated partners.

d)       One partner is not responsible or liable for another partner’s misconduct or negligence.

e)       Minimum of 2 partners are required to incorporate an LLP. At least one partner should be a resident of India. There is no restriction on the maximum number of partners.

f)        Should be ‘for profit’ business.

g)       The rights and duties of partners in LLP will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. Liability of the partners is limited to the amount contributed or agreed to be contributed to the LLP.

h)       LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40 lakhs.

ADVANTAGES OF AN LLP

i.      Restricts the liability of its partners to the amount contributed or agreed to be contributed to the LLP.

ii.     Allows flexibility of its internal structure as in a general partnership. These are governed by the LLP Agreement.

iii.    The requirements as to board meetings, resolutions, annual meetings etc are not mandatory except when required by the Agreement. Hence there is lesser paperwork in case of LLPs.

iv.     There are no restrictions as to managerial remuneration, distribution of profits etc

v.       There is no limit as to the maximum members of a Limited Liability Partnership.

vi.     LLP is a separate legal entity which is not affected by the change in constitution of its partners.

KEY ISSUES IN THE LIMITED LIABILITY PARTNERSHIP ACT, 2008

Minor as a partner

The Act does not expressly prohibit a minor from being a partner of the LLP. But whether he can give consent to act as a Designated Partner?

Form of Contribution

Section 32 provides the option to have the contribution of the Partners in the Intangible Form and further the rules provide that the intangible contribution should be certified by Practicing Chartered Accountant. In case of intangibles like know-how, is it practical to have a Chartered Accountant certify the value of the intangible asset?

Act or Agreement?

The LLP Law is silent on the overriding effect of LLP Act on the LLP agreement as compared to Section 9 of the Companies Act, 1956 wherein it is specifically provided that Companies Act would override to contrary provisions provided in the Memorandum and Articles of Association of any Company. No such provision is provided under LLP Act 2008 clarifying the position of the Act and the agreement in case of contradiction.

According to the Naresh Chandra Committee, there should be compulsory insurance cover and/or or funds in specially designated, segregated accounts for the satisfaction of judgments and decrees against the LLP. This provision seems to have disappeared in the LLP Act.

(1)     Books of Accounts: The LLP Act specifies that proper books of accounts be maintained. Both the Act and Rules are silent as to whether electronic books of accounts are valid.

(2)     Security Interest: One key condition for the conversion of a company (Private or unlisted Public) to an LLP is that the company may convert into an LLP provided there is no security interest subsisting on its assets or in force at the time of application. A key issue is that many companies would have secured bank borrowing by way of pledge of its assets. Is this clause really practical?

(3)     No option to convert LLPs to Companies: The Act does not have any option for LLPs to convert into Companies.

(4)     FDI norms: The Act permits foreign LLP's to be incorporated. What will be the FDI norms? Whether these will be eligible for automatic route under FEMA regulations?

Conclusion

While still relatively a new term in India, limited liability partnerships promise to become a significant feature of our legal landscape. Even though there are certain issues that need to be addressed in the near future, the LLP will act as an engine of growth for economic development of the country and would lead to the growth of professional services in the country.