LIMITED LIABILITY PARTNERSHIP-PART-XIV - PARTNER'S CONTRIBUTION

[Dr. Sanjiv Agarwal]

Sections 32 and 33 of the LLP Act, 2008 provide that a partner may contribute in an LLP in the form of property or an agreement or a contract for services as per the LLP agreement and if a creditor extends credit to an LLP without a notice of compromise amongst the partners for obligation of a partner, he may enforce the original obligation against the partner. This is similar to the concept of holding out.

Form of Contribution( Section 32 )  

Section 32 of LLP Act, 2008 seeks to provide various kinds in which contributions may be made by partners of an LLP and the manner in which such contributions shall be valued and disclosed in the accounts of the LLP.

Contribution by a partner is like equity contribution by a shareholder in a company, it determines the extent of liability of the partner for the acts of the LLP. The quantum of contribution by a partner in LLP is significant for the external world as well as for the partner himself. For external world, quantum of contribution reflects the creditworthiness of the firm, and as for the partners and the firm, it involves tax implications on change in the partnership and also the extent of liability of the partner in case of default by LLP.

Section 32 deals with the contribution to be made by a partner in the firm. Sub-section

(1) thereof provides for the form in which such contribution can be made and sub-section

(2) provides the disclosure requirements in relation to the contribution.

Section 32(1)

While describing the form in which a partner may make a contribution in an LLP, the sub-section provides that a contribution of a partner may consist of -

* tangible, movable or immovable or intangible property or

* other benefit to the limited liability partnership, including

* money, promissory notes,

* other agreements to contribute cash or property, and

* contracts for services performed or to be performed.

LLP Act allows partners to contribute in any form -tangible or intangible property, contracts of services and also paper promises and agreement to contribute cash or property. While tangible or intangible property constitutes immediate payment of contribution, contract of services may constitute payment of contribution over the period of service, paper promises and agreement to contribute cash or property constitutes a commitment to pay contribution in future (at the time of need like winding up/dissolution of LLP) like the unpaid share capital in a company.

Correct valuation of tangible or intangible property and also of the contract of services in terms of money is significant to reflect the true value of contribution. In this regard, Rule 23 of the Rules provides that such valuation can be made by a practicing chartered accountant, or by a practicing Cost Accountant or by approved valuer from the panel maintained by the Central Government.

Section 32(2)

The purpose of determining monetary value of contribution is to reflect the financial strength and creditworthiness of the limited liability partnership and also to reflect the financial commitment of the partners. Thus it is important that the external parties dealing with the limited liability partnership are informed about the amount contributed by the partners. Sub-section (2) of Section 32 stipulates the requirement to disclose the monetary value of contribution in the prescribed manner. In this regard Rule 23(2) prescribes that the contribution of each partner shall be accounted for and disclosed in the Accounts of the LLP along with nature of contribution and amount. Accordingly, an LLP is required to disclose the monetary value of contribution in Form 8 - Form for filing statement of Account and Solvency - under the account head titled 'contribution' mentioned under the main heading 'liabilities'.

Obligation to Contribute( Section 33)

Section 33 of LLP Act, 2008 seek to provide that obligation of a partner to make contribution shall be as per the LLP Agreement. The clause further seeks to provide that a creditor of an LLP may enforce the original obligation against any partner of the LLP without notice of any subsequent compromise between partners.

Sub-section (1) of this Section discusses the obligation of a partner to make contribution in the corpus of LLP and Sub-section (2) talks about the rights of third party to enforce the liability of partner to the extent of his disclosed contribution.

Section 33(1)

A partner is required to make contribution in a Limited Liability Partnership as per the partnership agreement. Thus it appears that contribution by a partner in LLP corpus is not a mandatory requirement, a partnership agreement may not require a partner to make such contribution. But where the agreement defines the contribution of a partner, he has an obligation to make such contribution. By implication, the agreement may also define the form of contribution to be made.

The contribution made by a partner is like his own asset forming corpus of LLP. As per Section 24 of the Act, where a partner ceases to be a partner of LLP, along with the other benefits as per the provision, he is entitled to receive back his contribution as originally made by him.

Section 33(2)

The contribution constitutes capital of an LLP and is a kind of security to the external world dealing with LLP. As the liability of an LLP is limited to the extent of contribution of partners therein, the disclosure of this amount and correct valuation and status thereof becomes all the more significant.

Section 33(2) provides that in case, there is any change in the obligation of a partner to contribute capital in LLP from that mentioned in the partnership agreement, and the third parties (say creditors) dealing with the LLP without notice of such change may enforce the original obligation against such partner. This provision reflects that the partner's contribution described in the partnership agreement is a basis of information to the external world (particularly creditors in context of this provision) about the contribution. But the notable point is that such agreement is not open for public inspection under the provisions of the Act. Though Section 23(2) of the Act read with Rule 21 provides that the LLP agreement and any changes therein should be filed with the Registrar within 30 days of such agreement or the changes made therein, as the case may be, such agreement is not included in the list of documents open for public inspection as prescribed under Section 36 of the Act. The moot point is that how a creditor, who has no access to the partnership agreement can rely on the amount of contribution, mentioned in such agreement for making any deal with the LLP so as to later enforce his right under this provision.

Section 33(2) particularly refers to a situation of compromise amongst the partners whereby the partners agree to reduce or waive the amount of contribution to be made by a given partner and a creditor deals with the LLP without knowledge of such change. This situation again envisages absence of public information. In this context it is relevant to note that Section 60 of the Act provides that an order passed by the Tribunal sanctioning a compromise or arrangement between the partners, is to be filed by the LLP with the Registrar within 30 days after making such an order and have effect only after it is so filed. A creditor may deal with the LLP without notice of such compromise and in such a situation; the creditor has a right to enforce the original obligation of contribution by such partner. It is similar to the principle of holding out.

A notable point is that the right under a creditor has right under sub-section (2) of Section 33 is available to creditor only in case of a compromise between partners. In case of a compromise between partners and creditors of LLP under Section 60, this right would not be available to creditors.

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