2021 (4) TMI 749 - HC - Indian Laws

Rejection of registration of a partnership firm constituted by the petitioner - whether LLP can be treated as a person which can be permitted to form a partnership with an individual? - HELD THAT - In the present case an individual agreed with an LLP to share the profits of the business. LLP is a body corporate, independent legal entity having a common seal and perpetual succession, capable of suing and of being sued. Once a partnership is formed the LLP, which is a partner would have to abide by the partnership Act. The respondent's objection is based on the liability of the partners of LLP, stating that the same is confined to the terms in the agreement - The liability of partners of LLP and liability of the LLP as a partner under the Partnership Act would be different. The liability of partners in an LLP cannot have any relevance when the LLP itself becomes a partner, when it would be bound by the provisions in the Partnership Act. The liability of the LLP would be as in the case a company which joins a firm after entering into a partnership. Section 4 of the Partnership Act permits Constitution of a firm or partnership between one or more persons. In this case the partnership deed was executed between an individual and an LLP which is a body corporate having a legal entity and coming within the definition of person . The individual liability of the partners of LLP would not be relevant when the LLP itself would have liability independent of the liability of the partners. Therefore, the difference in the provisions under the Partnership Act relating to liability of the firm or the individual partners would not stand in the way of constitution of a partnership with an LLP - LLP cannot have a disqualification from entering into a partnership with an individual or other persons. There shall be a direction to the respondent to reconsider the request of petitioner for registration and to take appropriate action on the same within a period of one month from the date of receipt of a copy of the judgment - Petition allowed - decided in favor of petitioner.

Summary

Issues Involved:
1. Whether an LLP can be a partner in a partnership firm under the Indian Partnership Act, 1932.
2. The liability implications of an LLP being a partner in a partnership firm.
3. Interpretation of relevant provisions of the LLP Act, 2008 and the Indian Partnership Act, 1932.

Detailed Analysis:

Issue 1: Whether an LLP can be a partner in a partnership firm under the Indian Partnership Act, 1932.

The petitioner challenged the Registrar of Firms' decision (Ext.P2) which declined the registration of a partnership firm on the ground that an LLP cannot be a partner of a firm. The petitioner argued that the LLP is a legal entity under the LLP Act, 2008, capable of forming a partnership. The respondent maintained that certain provisions of the LLP Act are inconsistent with the Indian Partnership Act, 1932, particularly regarding liability. The Court examined the definitions and provisions of both acts, noting that the LLP Act defines an LLP as a body corporate and a legal entity separate from its partners. The Court concluded that an LLP can be considered a "person" under Section 3(42) of the General Clauses Act, 1897, and thus can form a partnership with an individual.

Issue 2: The liability implications of an LLP being a partner in a partnership firm.

The respondent's objection was based on the differing liability provisions between the LLP Act and the Partnership Act. The LLP Act restricts a partner's liability to the terms in the LLP agreement, whereas the Partnership Act holds partners jointly and severally liable. The Court noted that the liability of an LLP as a partner would be governed by the Partnership Act once it becomes a partner in a firm. The liability of the LLP itself would be similar to that of a company joining a partnership, independent of the individual liability of its partners.

Issue 3: Interpretation of relevant provisions of the LLP Act, 2008 and the Indian Partnership Act, 1932.

The Court analyzed the definitions and relevant sections of both acts. Section 4 of the Partnership Act defines “partnership” as a relation between persons who agree to share profits. The Court referred to Section 3(42) of the General Clauses Act, which includes any company or body of individuals as a "person." The LLP Act defines an LLP as a body corporate with perpetual succession and a legal entity separate from its partners. The Court held that the LLP, being a body corporate, fits the definition of "person" and thus can form a partnership under the Partnership Act. The Court also distinguished the present case from the Supreme Court judgment in Dulichand Laxminarayanan vs. Commissioner of Income Tax, where a firm was not considered a "person" capable of forming a partnership.

Conclusion:

The Court set aside the Ext.P2 order and directed the respondent to reconsider the petitioner's request for registration, acknowledging that an LLP can form a partnership with an individual under the Indian Partnership Act, 1932. The Writ Petition was allowed, and the respondent was instructed to take appropriate action within one month from the date of receipt of the judgment.