LIMITED LIABILITY PARTNERSHIP-PART-XIX - Assignment and Transfer of Partnership Rights

[Dr. Sanjiv Agarwal]

Section 42 of LLP Act, 2008 provides that a partner of an LLP can transfer his beneficial interest in an LLP to a third party but such transfer will not give right to third party to participate in the management of LLP or any access to LLP information neither it will result in disassociation of the transferring partner from the LLP nor the transferee of such interest would become a partner.

This section seeks to provide that the rights of a partner to a share to the profits and losses of the LLP and to receive distributions shall be transferable in accordance with the LLP agreement and such transfer shall not by itself cause the disassociation of the partner or a dissolution and winding up of the LLP. The section further seeks to provide that such transfer would not entitle the transferee to participate in the management of the LLP.

Assign

The word 'assign' means to grant , to convey , to make an assignment, to transfer or to make over to another the right one has in any object, as in a estate. According to Halsbury, 4th Edition Vol 9, Page 212-213, assignment by act of the parties may be an assignment either of rights or of liabilities under a contract: or as it is sometimes expressed, an assignment of the benefit or the burden of the contract. The rights and liabilities of either party to a contract may in certain circumstances be assigned by operation of law, as for example, when a party dies or becomes bankrupt. Covenants relating to land, such as covenants entered into between the parties to a lease or between vendor and purchaser may in certain circumstances be enforceable by, or bind, their successors in title.

According to P. Ramanatha Aiyar 's Advanced Law Lexicon, the term "assignment", as ordinarily used, signifies the transfer, between living parties of all kinds of property, real, personal and mixed by delivery, endorsement, transfer in writing , or by parol, and includes as well the instruments by which the transfer is made as the transfer itself.

An assignment is a transfer or setting over of property, or of some right or interest therein, from one person to another, the term denoting not only the act of transfer, but also the instrument by which it as effected. In these senses the word is variously applied in law. Alexander M Burrill A treatise on the Law and Practice of Voluntary Assignment for the Benefit of Creditors at 1 (James Avery Webb Edition. 6th Edition, 1994.

Assignment generally takes place when a contract is involved. It is an act in writing of the concerned parties. One who assigns is called assigner ,i e, one who holds the right to make an assignment. Assignee is one to whom an assignment is made, one to whom rights are assigned.

Transfer

"Transfer", on the other hand implies movement from one person or place to other person or place, i e, physical movement. For example, rights could be assigned while shares may be transferred. Similarly, property may be transferred but right in property may be assigned. Transfer of share or rights implies transfer of such shares or rights from transferor to transferee so that transferee becomes the legal and beneficial owner thereof. In Companies Act, registration of transfer of shares is mandatory. Shares or other interest of any member in a company is a movable property transferable in a manner provided in law or in articles of association. Thus, a shareholder has an interest in a company an interest, which is represented by his shareholding. Share is movable property, with all the attributes of such property. As share is transferable but while a transfer may be effective between transferor and transferee from the date of transfer, the transfer is duly complete and the transferee becomes a shareholder in the true and full sense of the term, with all the rights of a shareholder, only when the transfer is registered in the register of members of the company.

The provisions of section 42 deal with assignment and transfer of partnership rights in a LLP and provide that rights of a partner to share the profits and losses of LLP and right to receive distribution as per the partnership agreement are transferable both, either wholly or in part. The consequence of such transfer or assignment would not ispo facto mean dissolution or winding up of a LLP or disassociation of a partner with LLP. This would be a simple transfer without any right to the transferee to take part in the management or conduct of activities of LLP or to access any information about LLP or any transaction thereof.

The analysis of section 42 reveals as under -

(a) Partners have right to assign or transfer the rights of

* profits and losses of LLP

* receiving distribution as per LLP agreement

(b) Such right to transfer can be exercised , either fully or in part.

(c) Transfer of rights as per (a) above by LLP partners would not result in any of the following-

* disassociation of the transferor partner with LLP

* dissolution of LLP

* winding up of LLP

(d) Transfer of certain rights as per (a) above by LLP partner will not automatically entitle the transferee or assignee to-

* participate in management of LLP, or

* conduct the activities of LLP, or

* access information about transactions of LLP

While sub section (1) talks about transfer of rights, the rights have been specified as to share of profit or losses of LLP and to receive distribution in accordance with LLP agreement. This right is unconditional and can not be curtailed, even by a LLP agreement. Also, such transfer or assignment shall be a free one and it is implied that no conditions or qualifications could be attached thereto. Such assignment or transfer of rights will have to be absolute, unconditional and free to one or more transferees either in whole or partly.

It the transfer or assignment results in change in LLP agreement or changes in partners or there is a cessation of partnership interest, provisions of section 22 to 25 of LLP Act must also be complied with.Section 24 prescribes the ways in which the cessation of interest in partnership can take place and its consequences. Read with section 32 on partner's contribution in LLP, it provides a comprehensive view of contribution, encumbrance, redemption and liability as a contributory to third party claims. It may be noted that section 24(4) specifically provides that the cessation of a partner of LLP by itself shall not discharge the outgoing partner from any of his obligation towards LLP or other partners or to other persons pertaining to the period when he was a partner.

Transfer of Economic Rights

Section 42 implies that while economic rights as to profit or loss and distribution are subject to assignment or transfer in a free manner, non economic rights (say right to attend a meeting or appoint a proxy or inspection of books etc) could be transferred if permitted by the LLP agreement. As a consequence, LLP provides for transfer of economic rights without change in management. Thus, even if rights are transferred or assigned, transferee does not become a partner or can not force himself upon LLP to participate in management unless consented by other partners by way of an agreement.

A transfer in whole or in part of the transferable interest does not imply the partner's disassociation or dissolution and winding up of the LLPs activities. Further, such transfer or assignment does not entitle the assignee to participate in the management or conduct of the LLP activities or access information concerning the LLPs transactions. Moreover, the non-economic rights will not be automatically transferable unless specified in the LLP agreement.

In Rose v Lynx Express Ltd and Another [2003] EWHC 2937 (Ch), (2004) 1 BCLC 397 Chancery Division (UK), the dispute related to pre emption provisions governing transfer of shares were held by nominee on behalf of LLP and member wanting to transfer legal or beneficial ownership in shares was required to give prior notice to the company as per articles. The articles required a member who wishes to transfer any shares to give notice in writing of such transfer to the me company and transfer of shares was defined in articles to include the transfer of the legal or beneficial ownership in such shares and any sale or other disposition of any legal or equitable interest in a share whether or not for consideration or otherwise. The claimant, who was already a shareholder of company brought proceedings against second defendant who was a registered shareholder of subject company as a nominee on behalf of two LLPs for which it was a manger. Since investors who wanted to invest in company did so by taking over interests of existing partners in LLPs, the ownership of shares so far as company is concerned remained unaltered with LLPs. On charges of breach of pre emption provision by transfer of beneficial or equitable interest in shares without giving notice to company, it was held that the articles only required a transfer notice to be given by any member who wished to transfer shares, albeit a legal or beneficial interest in such shares and it did not required any member to give notice of intended transfer of a beneficial interest in shares by a non member if the legal interest remained vested in the member. Thus it was held that second defendant (nominee of LLPs) is not required to give notice of change in the composition of LLPs on whose behalf it held shares in the subject company. The court ruled that no pre action disclosure was desirable.