Presentation On LLPs - Modified

Limited Liability Partnerships
Vinod Kothari
1012 Krishna
224 AJC Bose Road
Kolkata 700 017. India
Phone 91-33-22811276/22817715/22813742
E-mail:vinod@vinodkothari.com
Site: www.vinodkothari.com
Emerging trends in Company law by
Vinod Kothari 1
LLPs legislation in India
Based on the recommendations of the NC Gupta committee,
and the Irani committee, the Govt had come out with a concept
paper and a draft of the LLP bill in late 2005.
The earlier version of LLP Bill was placed before:
 The Lok Sabha on 7th Dec 2006
 The Rajya Sabha on 15th Dec 2006 and was referred to the
Parliamentary Standing Committee on Finance.
The Parliamentary Standing Committee on Finance had
recommended a pass through status for tax purposes – Nov
2007
The Constitution (entry 44, List 1 of Seventh Schedule) has put
“corporations law” in the Union List: As LLPs are to be given an
incorporated status, they will fall under this list.
The revised Bill, LLP Bill, 2008 was introduced in the Rajya
Sabha on 21st Oct 2008. Simultaneously, the Limited Liability
Partnership Bill, 2006 has been withdrawn.
Recent Global trends in Company law by Vinod Kothari 2

LLPs legislation in India…cont.
The Rajya Sabha passed the revised bill on 24th Oct
2008. The Lok Sabha also gave its assent on 12th
Dec 2008 and after publication in official gazette in
January, 2009, the Bill has now become The Limited
Liability Partnership Act, 2008
Based on the provisions of LLP Act, Ministry of
Company affairs has prepared the Concept LLP
Rules and E-forms.
First LLP got registered on 02.04.2009
Total 2792 llps as on 31.10.2010
LLP Rules, 2009 notified on 01.04.2009
LLP (Amendment) Rules, 2010 notified in January,
2010
Concept of LLPs
The word “partnership” in LLPs is a misnomer, as the entity is
not merely a collective coming together of two persons:
 Results into creation of a new entity with its own existence
LLPs are a hybrid between a company and a partnership:
 Externally, they have all features of a company
 Internally, they are run and managed by the members, hence they
are like partnerships
 The idea is to clothe a partnership with
 Limited liability
 Incorporeal existence and therefore personality of its own
The concept of LLPs has inherent inconsistencies, as it has not
had benefit of seasoning over centuries:
 US law also relates to 1990s – Delaware model is the most
commonly used one.

LLP legislation in other countries
In UK, LLP law was passed in 2000
The campaign for LLPs was initiated by accounting firms (PwC and E&Y) to limit their
liability:
 Though UK Companies Act did allow professions to register as companies,
accounting firms were reluctant to publish accounts, be subject to inspections
etc
The argument was first rejected by the Law Commission
The accounting firms used their power to have this law passed in Jersey in the midst
of political uproar:
 In view of the agreements between Jersey and UK, the accounting firms could
still do business in UK
 This forced the DTI to put the LLP bill on the agenda in 1996
 After a series of consultations, the Bill was passed in 2000; with tax clarity, the
structure got into offing in April 2001
The UK move set the ball rolling in other countries too:
 Canada (Ontario) introduced LLP law in 1998
 Singapore issued consultation paper in 2002, enacted the law in 2005
 Japan also enacted LLP law in 2005
 France and Germany have their own models
In UK, the LLP model is available for all businesses; in New York, Nevada and
California, it is open only selected professions.
In US, all the states including DC have now adopted LLP laws.

LLP Legislation in other countries (contd.)
It is called Special General Partnership in China. Restricted to
knowledge based professions and technical service industries.
(Partnership Enterprise Law, 2007)
Act on Agreement for Limited Liability Partnership of Japan was
enacted on May 6, 2005. May be formed for any purpose.
Japanese LLPs may not be used by lawyers or accountants.

What happened after the LLP law
In UK, accounting firms were quick to capitalise on
the new law:
 Major accounting firms (KPMG, PWC, E&Y) registered
themselves as LLPs
 Of the top 50 law firms, 14 already registered as LLPs, and
24 more have plans to convert [Legal Week, 25th Aug 2005]
 A report in March 2006 states 11379 LLPs were already
registered in a short time
Advantages of LLPs:
 Very cheap to incorporate
 Costs only GBP 20 in UK
 Lot of flexibility, very little accountability
 All benefits of a partnership business, though with a new
entity
 Taxation as general partnerships

Overview of the UK LLP law
Most obvious feature: the law is very short, very simple:
 Just 19 sections, one schedule
The law could afford to be simple, as chunk of the corporate law
provisions arise from separation of ownership and management
Owners and managers are the same: one member designated
as “designated member”
 May be a founding member or may change
Unlimited business capacity
Principle of agency/principalcy applicable:
 Every member is an agent of the LLP
Limited liability must always come with protected capital:
 The law provides for capital of each partner, but does not restrict
drawing
Capital or liability not mentioned in incorporation documents

Overview of the Singapore model
Singapore LLP Act of 2005 has 61 sections and 6 schedules,
fifth schedule being elaborate with provisions on winding up
Provides for transferable partners’ interest, eligibility to convert a
partnership and private company into an LLP
Requires manager
Requires declaration of solvency
 Makes debt owed to partners to be subordinated to the claim of the
outsiders
 Surprisingly, however, a loan made by a partner is not so
subordinated
Provides for disqualification of persons who have managed
insolvency partnerships
Taxed as general partnership.

Salient features of the LLP Act - Constitution
Indian law seems based on the UK and Singapore law
 Unlike the UK or Singapore law, it is complete code by itself
 Provisions right upto winding up, compromise, arrangement are all incorporated
 14 chapters , 81 sections, 4 schedules
Bill does not restrict the benefit of LLP structure to certain classes
of professionals only and would be available for use by any
enterprise which fulfills the requirements of the Act.
LLP is a body corporate, separate entity, perpetual succession:
 To ensure perpetuality, transferability of membership is a must
Members constituting it are members:
 Individuals and corporates may be members:
 Since body corporate will include an LLP, an LLP may also be a member
 At least 2, maximum unlimited
Existing firms and Companies may convert themselves in LLPs –
Schedule 2 and 3 provide for the same:
 Eligibility in case of a company – no security interest on the assets of the
company
 No such eligibility condition in case of firms

Management of LLPs
Singapore law requires a manager:
 Manager to be an individual
Indian law requires at least two designated partners
 Who are individuals
 At least one of them to be Indian resident
 The position of designated partners seems to be the same as in case of
directors
The designated partner is the scapegoat – sec 8:
 Answerable for all acts matter or things, done or to be done by the LLP, and
 shall be personally liable for all penalties on the LLP for contravention of
provisions of this Act including filing of any document, return, statement and
like report;
 The LLP is liable for only the contravention of this section (appointment of a
manager)
 This section is ridiculous:
 by not appointing a designated partner, the only implication is the penalty of this
section,
 appointing one, the designated has all implications of all laws
 UK law talks of designated member; if no member is designated, then every
member is a designated member

More on designated partners
Since the concept of designated partners is essential
to accountability of the LLP, the provisions are largely
similar to those of company directors- sec 7
 DPIN required (application in eform 7)
 Consent required
 Particulars of designation to be filed with the Registrar
 If there is no designated partner, or only one, or in case of
vacancy, then all to be so deemed – sec 9
Other qualifications, similar to those of directors, laid
down in the Act-Sec 5
 Undischarged insolvent
 Suspension of payment to creditors
 Offences involving moral turpitude
However, no provisions relating to disqualifications

Incorporation procedure
Incorporation done by filing incorporation
document in eforms 1,2,3 & 4– sec 11
Contents similar to those of sec 13 of
Companies Act
 Hence, doctrine of ultra vires applicable
Effect of incorporation – the corporeal status
– sec 14
 Capable of
 Suing and being sued
 Acquiring holding and disposing property of any kind
 Having a Common seal
 All trappings of a body corporate

Preservation of capital
One of the most important pillars of the limited liability is definite capital:
 Capital is the foundation on which the assets are built
The LLP law, limiting liability, leaves the issue of preservation of capital
very vague:
 Capital is not mentioned in the Incorporation document; hence not a public
knowledge
 Capital of partners may be drawn
 Sec 31 leaves the issue of contribution on winding up completely open
 to be provided in the partnership agreement – which is not a public document
 Sec 27 (4) provides the liability of the partnership to be met solely from the
property of the partnership:
 Obviously, property means, net property, that is, net worth, which is the capital
 If there is no capital maintenance clause, the whole concept may be totally flawed
The basis of contracting external liabilities is only a declaration of
solvency:
 Which does not serve the purpose of credit enhancement, as solvency is
only as on the date on which it is made
In absence of capital maintenance, LLP might be NLP – no liability
partnership

Preservation of capital or capital insurance
UK law requires partners to contribute

to the extent of drawings made within 2
years prior to winding up
Insolvency rules in India are applicable
to only individuals
LLPs may be subject to corporate
bankruptcy rules:
 Undue preference rules may require
returning of drawings made 1 year before
winding up [sec 531A]
Partners and their relationship
(Chapter IV)
Initial partners are subscribers to organic document
Any one can be partner in accordance with agreement:
 Individuals and bodies corporate may be partners
 Designated partners must at least be two individuals
 In case of bodies corporate as partners, at least two individuals to be designated
 Insistence comes from the need for individuals to be directors
 Partnership interest is not a transferable security but requires agreement
with all partners.
Mutual rights of partners are allowed to be governed by the partnership
deed
Cessation:
 Death, etc
 Mutual agreement
 Resignaion by 30 days’ notice
 A retiring partner shall be entitled to receive the credit of his capital and
share of accumulated profit determined to the date of his cessation:
 The law provides that this is subject to provisions in the partnership agreement
Changes in partners to be notified to the registrar within 30 days- sec
25

Partnership principle
Every partner to be agent of the LLP, not of other
partners
Partnership interest interestingly split into:
 Economic interest
 Non economic interest
Provisions of 2006 Bill regarding economic interest
have been removed
But sec 42 contains a possibility of
 Right of a partner to a share in profits and losses and
distributions are transferable, wholly or in part
 Transfer by itself does not entitle right in management
 Clearly, therefore, a share in profits is not the same as being
a partner
 So, X may be partner
 Y may be entitled to share in profits

Limitation of liability – sec 27
The partnership is liable for liabilities of a parnter
 Unless partner had no authority, and did any act aware of
lack of authority
The obligation is limited to that of the partnership
 Does not extend to other partners
A partner is not liable solely by reason of being a
partner
 Key principle
 The offending partner is personally liable
 The firm is liable
 Other partners are not
However in case of a fraud on creditors, the liability is
unlimited – sec 30

Transferability of partners’ interest
Seems the share of the partner in the

capital of the firm, and share in profits,
are two separate interests
Share in profits a transferable interest:
sec 42
 This has clearly followed the Singapore
model

Partner by holding out- new concept- sec 29
Any person who holds himself out to be

a partner in a LLP, shall be liable to any
person who has on the faith of such
representation given credit to the LLP.
However continuance of business in the
name of deceased partner will not make
the legal heirs of deceased partner
liable.

Accounting and reporting
LLPs are required to maintain records as per LLP
Rules, 2009, but not:
 Hold meetings and lay accounts
 Publish accounts
They make an annual declaration of solvency and
statement of account in eform 8
 Liability for the declaration is on the designated partners.
Accounts are to be audited in the manner provided in
the Rules
 Except in case of small LLPs
Annual Return also needs to be filed in eform 11.
Monitory value of contribution of each partner to be
accounted for and disclosed in the accounts
Minuting requirements applicable as per schedule 1
Taxation
In line with UK law, Act provides for

taxation of income as in case of general
purpose partnerships.

Inspection and investigation
Provisions analogous to sec. 234 and

235/ 237 of Companies Act
Applicable sections of LLP Act are 44-
50
Prosecution powers are with the Central
Govt

Winding up
Winding up may be either voluntary or

mandatory.
Notably, Singapore has a huge set of
rules applicable to winding up of LLPs,
almost on line of Companies Act

Provisions made for Compromise &
Arrangement
Provisions similar to those applicable to
companies under the Companies Act,
1956
 Application to be made to Tribunal
 Meeting to be called, held and conducted
in the manner as Tribunal directs
 Sanction by majority of creditors or
partners representing three-fourth in value
 Arrangement to take effect from the date of
filing of order of Tribunal with the Registrar

Applicability of Companies Act
UK has extended a large chunk of

Companies Act provisions to LLPs too:
 Power contained in sec. 59 to extend
Companies Act provisions:
 Very likely that several of the administrative
provisions may, over time, be extended

Penalties and prosecution
The power to impose penalties has

been granted to the Tribunal

Some major benefits of LLPs
If one realises, LLPs are presently a goldmine of exemptions
 Our view is that this status may not remain for long
 Soon, the government may have to extend several restrictions
applicable to companies to LLPs as well
LLPs engaged in financial business do not need NBFC
registration
 It is understood that currently the LLP registrar is not registering
LLPs with a financial object
 However, this requirement is not difficult to override
LLPs apparently may accept deposits as well
 Even restriction under sec 45S of the RBI Act is not applicable to
LLPs
Restriction on number of bondholders under sec 67 of the
Companies Act not applicable to LLPs
Biggest advantage is single point tax
 No dividend distribution tax
 No tax on book profits

Comparing LLPs and private companies-
similarities
LLPs Small companies
Incorporated Yes Yes

personality
Perpetual existence, Yes Yes
winding up by law
Plurality of owners yes Yes
Limitation of Yes Yes
contributory
liability
Limits on trading None None – professional
powers companies are
normally not
allowed
LLPs and small companies -differences
LLPs Small companies
Segregation of management Indian law requires Directors are different from

and ownership designated partners; UK shareholders; different
law does not. powers are vested
Designated partners
generally liable for all
compliances
Law does not lay down
powers of designated
partners
Agency principle Partners represent the LLP Shareholders are distinct
Transferability Partnership is transferable Shares are transferable
only by agreement securities
Fixity of capital LLPs need not have fixed Limited liability companies
capital need to have fixed
capital
Reporting, audit, meetings Minimum requirements Elaborate requirements
Separation of management and ownership
One of the key features of LLPs is that there is no
separation of ownership and management:
 Hence, the foundations of corporate law, with the owners
reposing trust in the management do not apply
 Much of the reporting and accountability structure of corporate
law arises out of this separation
UK LLP law does not provide for separation of
management:
 In fact, there is a “designated member” who will be
answerable to the regulators
The concept paper in India goes the Singapore way
in separating management and ownership

Administrative authorities
Incorporation, striking of defunct LLPs: Registrar of
Companies
Registry record keeping, inspections, etc
 Registrar of companies
Compromise, arrangement, etc
 NCLT
Rule making powers; powers to notify Companies Act
to be applicable
Winding up
 Tribunal
Prosecution for offences:
 Lower courts – sec 77

Compliances required by LLPs
Separate DPIN nos for designated partners even if the partner had DIN
Particulars of designated partners are filed
Incorporation – by filing incorporation document with the RoC
Reservation of name, change of name, etc – provisions similar to
companies
Partnership agreement and changes therein to be filed with the RoC:
 Surprisingly, the partnership deed is not one of the documents available for
inspection u/s 35
 While the basic rights of the partners are defined in the document
Registration of changes in partnership (names of partners)
Filing of annual accounts and declaration of solvency
Audit of accounts
Filing of annual return
Powers of the registrar to call for information, inspection and
investigation largely the same as in case of companies
Compromise, arrangements etc as per rules to be made by Central
govt

What may the LLP hold
LLPs may hold any property, tangible or
intangible
Interestingly, partners may transfer,
either as contribution or otherwise,
properties in kind also
Unlike in case of companies, no fetters
on transfer of property in kind or a
separate disclosure:
 Valuation of the property not given the
seriousness it deserves
Liberties that the LLP enjoys
Accounting:
 May write books on either cash or accrual basis
 Might mean a considerable tax advantage
 Clearly conflicts with the audit requirements – cash basis cannot reflect true and
fair value of the state of affairs
 Accounting standards not applicable
Limitation of liability:
 Best of both the worlds – limited liability and flexible capital
No minimum capital requirements
Audit:
 While auditing is mandatory, there is no substantive detailing in the law
 Draft rules exempt audit unless the turnover > 40 lacs, contributoin >25 lacs
Annual return is mandatory
Borrowings:
 No restriction on borrowing from partners, or to partners
 Sec 62 puts amounts owned to partners at par with amounts onwed to others
 Surprising provision – Singapore law subordinates claims of partners
 No need to create charges
 Apparently, not something that lenders will like

Ultra vires, agency rule and LLPs
The doctrine of ultra vires apparently is not applicable
to LLPs
 Since the objects are not required to be specified in the
incorporation document
At the same time, the partners are supposed to be
agent of the LLP
 Partner exceeding his authority does not bind the LLP
 In other words, the LLP escapes liability for anything done in
excess of the assigned authority
 Authority of LLPs contained in partnership document
 Those dealing with the LLP cannot get partnership
document as it is not one of the docs that may be inspected
 This leaves those dealing with the LLP at a great risk

Conversion into LLPs
Firms, private companies and unlisted public
companies may convert
Firms as per schedule 2:
 All partners to continue
 Amount to dissolution of the firm
 Transfer of property by way of vestation – may be stamp
duty may be escaped
Private companies as per schedule 3:
 There is no security interest on the property
 All members of the private company continued as partners
 There is no need to seek sanction of the lenders, etc
Public unlisted companies as per schedule 4:
 Same as in case of private companies

Foreign LLPs
Law allows foreign LLPs to establish
place of business in India
 Of course, this will be subject to FDI rules
 And in case of professional firms, rules of
the respective professional bodies
 Seemingly paves the way for entry of foreign
firms in India
Discussion paper on foreign investment
in LLPs is already on the site of the
MCA
Downsides
Extracts from Canadian Lawyer
A limited liability partnership shifts risk, away from the law firm,
to clients and insurers. Even worse, it takes away a powerful
incentive to adopt systems that prevent negligence and
malfeasance. Many scholars have argued that the corporate
debacle beginning with the collapse of Enron was in part made
possible by the limited liability structure of professional firms,
such as Arthur Andersen, that gave poor (and sometimes
unlawful) advice to corporations that later imploded.
In the limited liability partnership, the rogue partner problem
virtually disappears: the straight-dealing partner doesn’t have to
be overly concerned about those who stray. One reason why
Arthur Andersen collapsed so dramatically, suggest some
commentators, is that there was no reason for partners to stay
around and sort out the mess: after all, it was an LLP, and they
weren’t on the hook.

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Limited Liability Partnerships

Recent Global trends in Company law by Vinod Kothari 2

Recent Global trends in Company law by Vinod Kothari 4

Recent Global trends in Company law by Vinod Kothari 5

Recent Global trends in Company law by Vinod Kothari 6

Recent Global trends in Company law by Vinod Kothari 7

Recent Global trends in Company law by Vinod Kothari 8

Recent Global trends in Company law by Vinod Kothari 9

Recent Global trends in Company law by Vinod Kothari 10

Recent Global trends in Company law by Vinod Kothari 11

Recent Global trends in Company law by Vinod Kothari 12

Recent Global trends in Company law by Vinod Kothari 13

Recent Global trends in Company law by Vinod Kothari 14

UK law requires partners to contribute

Recent Global trends in Company law by Vinod Kothari 16

Recent Global trends in Company law by Vinod Kothari 17

Recent Global trends in Company law by Vinod Kothari 18

Seems the share of the partner in the

Recent Global trends in Company law by Vinod Kothari 19

Any person who holds himself out to be

Recent Global trends in Company law by Vinod Kothari 20

In line with UK law, Act provides for

Recent Global trends in Company law by Vinod Kothari 22

Provisions analogous to sec. 234 and

Recent Global trends in Company law by Vinod Kothari 23

Winding up may be either voluntary or

Recent Global trends in Company law by Vinod Kothari 24

Recent Global trends in Company law by Vinod Kothari 25

UK has extended a large chunk of

Recent Global trends in Company law by Vinod Kothari 26

The power to impose penalties has

Recent Global trends in Company law by Vinod Kothari 27

Recent Global trends in Company law by Vinod Kothari 28

Incorporated Yes Yes

Segregation of management Indian law requires Directors are different from

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Recent Global trends in Company law by Vinod Kothari 32

Recent Global trends in Company law by Vinod Kothari 33

Recent Global trends in Company law by Vinod Kothari 35

Recent Global trends in Company law by Vinod Kothari 36

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Recent Global trends in Company law by Vinod Kothari 39

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