EXPLANATORY NOTES TO LLP - LLP - LLP

Concept Paper on Limited Liability Partnership EXPLANATORY NOTES Introduction 1. The main purpose of this Concept Paper (hereinafter referred to as The Paper ) is to create a basic framework, which will facilitate the creation of a new legal entity in India viz. the limited liability partnership ( LLP ). The essential feature of an LLP is that it combines the organisational flexibility and tax status of a partnership with limited liability for its partners. An LLP is a body corporate having perpetual succession and separate legal entity. 2. The paper is only an approach to the introduction of a Bill in the Parliament and has not been vetted by the Legislative Department, Ministry of Law. 3. The aim of this paper is only to provoke critical examination of the provisions contained in this paper by all chambers of commerce, business organizations, professional bodies, academicians and persons connected with corporate sector. 4. The Ministry will feel rewarded if it stimulates widest possible public debate so that the Bill as and when introduced in the Parliament will duly take into account the various points of view. 5. The Ministry invites suggestions for improvement of the paper. Once the concepts are frozen after public debate and completion of consultation process, necessary changes will be proposed and finalized. Thereafter, the Limited Liability Partnership Bill will be framed for introduction in the Parliament. 6. It will be appreciated if the suggestions are given, in a tabular form, against each section. All suggestions must, however, reach the Ministry (by post addressed to Shri B M Anand, Joint Director, Ministry of Company Affairs, Room No 539, A Wing, Shastri Bhawan, New Delhi or by e-mail at [email protected]) latest by 31-12-2005. 7. These explanatory notes have been made to assist the reader in understanding the paper and need to be read in conjunction with the paper. However, they are not meant to be a comprehensive description of the paper. Background 8. The idea that there should be the opportunity in India to organise as an LLP emerged out of the Report of the Naresh Chandra Committee on Regulation of Private Companies and Partnership and Report of the Expert Committee on Company Law (Dr. J. J. Irani Committee). 9. In India, businesses mainly operate as companies, sole proprietorships and partnerships. Each of these is subject to different regulatory and tax regimes reflecting their organisation and ownership. Introducing LLPs as a new business structure would fill the gap between business firms such as sole proprietorship and partnership which are generally unregulated and Limited Liability Companies which are governed by the Companies Act, 1956. In addition to an alternative business structure, LLPs would foster the growth of the services sector. The regime of limited liability partnership will provide a platform to small and medium enterprises and professional firms of Company Secretaries, Chartered Accountants, Advocates etc. to conduct their business/profession efficiently which would in turn increase their global competitiveness. 10. The Indian Partnership Act, 1932 sets out special rules relating to the liability of partners to persons dealing with them. A partner acts as the agent of the firm and of other partners for the purpose of the business of the firm. Further, every partner is liable, jointly and severally, with all the other partners, for all acts of the firm done while he is a partner. 11. The unlimited liability for partners in case of general partnerships has become an increasing cause for concern in the light of general increase in the incidence of litigation for professional negligence, the size of claims and the risk to a partner s personal assets when a claim exceeds the sum of the assets of the partnership. The unlimited liability of partners has been the chief reason why partnership firms of professionals, have not grown in size to successfully meet the challenges posed today by international competition, WTO, GATS etc. As an alternative corporate business vehicle, limited liability partnership goes some way towards addressing these concerns. A limited liability partnership has unlimited capacity and provides the internal flexibility of a partnership i.e. by allowing the partners to adopt whatever form of internal organisation they prefer while at the same time limiting their liability with respect to the LLP to their individual contributions. 12. The Concept paper comprises of and is divided into sixteen chapters and five schedules as under: Chapters 1. Chapter I - Preliminary 2. Chapter II - Applicability 3. Chapter III - Incorporation 4. Chapter IV - Partnership 5. Chapter V - Extent and Limitation of Liability 6. Chapter VI - Duties and Standards of Conduct 7. Chapter VII - Contributions 8. Chapter VIII - Financial Disclosures 9. Chapter IX - Taxation 10. Chapter X - Assignment and Transfer of Partnership Rights 11. Chapter XI - Investigation 12. Chapter XII - Conversion to Limited Liability Partnership 13. Chapter XIII - Foreign Limited Liability Partnership 14. Chapter XIV - Amalgamation, Merger and Demerger of Limited Liability Partnerships 15. Chapter XV - Winding Up and Dissolution 16. Chapter XVI - Miscellaneous Schedules 1. First Schedule - Default provisions for limited liability partnerships. 2. Second Schedule - Conversion from firm to limited liability partnership. 3. Third Schedule - Conversion from private company to limited liability partnership. 4. Fourth Schedule - Conversion from unlisted public company to limited liability partnership. 5. Fifth Schedule - Penalties. 14. Commentary on Chapters Chapter I - Preliminary The preliminary chapter contains the provisions relating to short title, commencement and extent of the proposed Act and the definitions of key terms used in the paper. Chapter II - Applicability An LLP is a body corporate having perpetual succession and a legal personality of its own. It shall have at least two partners but there is no limit on the maximum number of partners that it can have. If at any time the number of partners of an LLP falls below two and the business is carried on for more than six months, a person who is a partner of the LLP during the time that it so carries on business after those six months and is cognizant of this fact shall be liable jointly and severally with the LLP for the obligations of the LLP incurred during that period. Any individual or body corporate may be a partner in an LLP. An LLP being a body corporate, the law relating to partnerships is generally not applicable to a limited liability partnership. Similarly, any change in the partners does not affect the existence, rights and liabilities of the LLP. Every LLP shall ensure that it has a manager who is an individual and is resident in India. The role of a manager is to perform the administrative and filing duties of the LLP and will be held personally liable for all penalties imposed on the LLP unless he satisfies the Tribunal that he should not be held liable. Further, in all cases where the manager is liable the LLP shall also be liable to the same extent for such defaults. The particulars of such person, his consent to act as a manager and any change of manager shall be lodged with the registrar in the prescribed manner and form. A manager need not be a partner of the LLP. However, if no manager is appointed, each partner who is resident in India shall be treated as a manager. The LLP shall appoint another person as the manager within sixty days from the date on which a person ceases to be a manager. Chapter III - Incorporation To form an LLP, there must at the outset be at least two persons who are associated for carrying on a lawful business with a view to profit and who subscribe their names to a document called an incorporation document . The incorporation document must be delivered to the Registrar in the prescribed form and manner. A statement must also be delivered to the Registrar that there has been compliance with all the requirements of this Act and Regulations with respect to incorporation and matters precedent and incidental thereto. The statement must be made by a subscriber to the incorporation document and by either an advocate, or a Company Secretary, or a Chartered Accountant in whole time practice in India, who is engaged in the formation of the LLP. The incorporation document must contain information such as the name of the LLP, its proposed business, address of its registered office, the name, address and photographs of the persons who are to be its partners and manager(s) on incorporation. If a person makes a statement under section 8(1)( c ) that he knows to be false or does not believe to be true he shall be punishable under the Act. When the registrar receives the incorporation document he will retain and register it. Once the documents have been registered, the registrar will issue a certificate that the LLP is incorporated by the name specified in the incorporation document. A statement that is delivered under section 8(1)( c ) may be accepted by the registrar as sufficient evidence that the requirement in section 8(1)( a ) has been complied with. The certificate issued by the registrar is an evidence that all the requirements have been complied with. Every LLP is required to have a registered office in India to which all communications will be made and received. Any change in the registered office shall be intimated to the Registrar. An LLP, shall by its name has the power to sue and being sued, hold and dispose property, have a common seal and to do and suffer such other acts as bodies corporate may lawfully do and suffer. Every LLP is required to have either the words limited liability partnership or the acronym LLP as the last words of its name. An LLP shall not be allowed to register with a name, which is undesirable or identical to a name of any other LLP or body corporate or to a registered trade mark, or a trade mark which is subject of an application for registration, of any other person under the Trade Marks Act, 1999. The name shall be printed on all its invoices and official correspondence along with a statement that it is registered with limited liability. Chapter IV - Partnership The first partners of an LLP are those who sign the incorporation document. After incorporation, any person may become a partner of an LLP by agreement with the existing partners. The rights and duties of the partners of an LLP to one another and to the LLP are governed by the provisions of any agreement between the partners. In case, a matter has not been specifically dealt with in the agreement, the provisions set out in the First Schedule shall apply. Certain particulars contained in the LLP agreement as may be prescribed and any changes made therein shall be filed with the Registrar. A person may cease to be a partner by death, dissolution of the LLP or in accordance with any agreement with the other partners of the LLP. Where there is no agreement a partner may cease to be a partner by giving 30 days notice to the other partners. However, a person shall be regarded as a partner, in relation to any person dealing with the LLP unless the third person has notice that the former partner has ceased to be a partner or a notice in this regard has been delivered to the Registrar. Moreover, a former partner shall continue to be liable for the acts done in his tenure. Where a person ceases to be a partner of an LLP, a person entitled to his share in consequence to death or insolvency may not interfere with the management or administration of the LLP, but may receive any amount to which he is entitled. Where a person becomes or ceases to be a partner, the manager of the LLP shall within thirty days from the date on which the partner becomes or ceases to be a partner notify the registrar in the prescribed form and manner. In case of admission of a partner, a statement by the incoming partner that he consents to be a partner should also be filed in the prescribed form and manner. Similarly where there is any change in the name or address of a partner, the same shall be notified. If a person ceases to be a partner and believes that the LLP shall not lodge the statement with the Registrar, he shall himself lodge it. Chapter V - Extent and Limitation of Liability Each partner of the LLP is an agent of the LLP but not of other partners. Therefore, a partner shall be held personally liable for his own wrongful act or omission, but will not be liable for the wrongful act or omission of any other partner of the LLP. An LLP is however, not bound by the actions of a partner where that partner has no authority to act for the LLP, and the person dealing with the partner is aware of this or does not know or believe that the partner was in fact a partner of the LLP. Further, where a partner of an LLP is liable to a person for a wrongful act or omission in the course of business of the LLP or with its authority, the LLP will be liable to the same extent as the partner. An LLP being a separate legal entity is liable for an obligation arising in contract or otherwise and the liabilities of the LLP shall be met out of its property. A partner will not be held personally liable, directly or indirectly for an obligation of the LLP, solely by reason of being a partner of the limited liability partnership. However, this liability shield will be withdrawn in case of an act carried out by an LLP with the intent to defraud creditors or for any other fraudulent purposes. Chapter VI - Duties and Standards of Conduct This chapter deals with the duties and standards of conduct of partners. The more important of these provisions include obligations of loyalty, due care and good faith. Chapter VII - Contributions This chapter deals with the form and liability of partner s contribution. Chapter VIII - Financial Disclosures A limited liability partnership is required to maintain proper books of account at its registered office relating to its affairs for each year of its existence on accrual basis and according to the double entry system of accounting. An LLP shall take reasonable precautions to maintain the records so as to prevent loss or destruction, falsification of entries and facilitate detection and correction of inaccuracies. If default is made in complying with these provisions, the manager shall be punishable under the Act. The manager of an LLP shall lodge with the Registrar a declaration as to whether in his opinion the LLP appears to be able to pay its debts in the normal course of business or not. The declaration is to be lodged within 15 months of registration and subsequently every financial year at intervals of not more that 15 months. If the manager fails to lodge the declaration or makes a declaration without having reasonable grounds for his opinion, he shall be punishable under the Act. Further, if any person makes a statement or furnishes information to a manager that is false or misleading in a material particular, then that person shall also be punishable under the Act. The Registrar shall have the power to call for further information as he may require and any person, who fails to comply with any summons or requisition of the Registrar or provides false information, shall be punishable under the Act. He shall also have the powers to enforce the lodging or filing of any return, account or other document. Further, the Registrar may destroy any document lodged, filed or registered with it, if it is no longer necessary or desirable to retain the same. Regulations to the Act shall prescribe the offences which may be compounded by the Central Government under this Act. A limited liability partnership shall take all reasonable precautions to maintain the records it is required to maintain under sub-section (1) of section 27 in a manner so as to prevent loss or destruction thereof prevent falsification of entries and facilitate detection and correction of inaccuracies. Chapter IX - Taxation This chapter ensures that the partners of an LLP which is carrying on a business with a view to profit are treated for the purposes of income tax and capital gains tax as if they were partners carrying on a business in partnership, despite the fact that an LLP is a body corporate. It also provides that the property of the LLP shall be treated for those purposes as property of its partners. This ensures that partners will be individually liable to tax on their share of the profits of the trade, profession or business carried on by the LLP. Further, the assets of the LLP shall be treated as assets held by the partners for the purpose of taxing capital gains. This ensures that the partners of the LLP, rather than the LLP itself, will be liable to tax for capital gains on the disposal of LLP assets. The chapter brings LLPs in line with the approach adopted for partnerships, which similarly treats assets as held by the partners rather than by the partnership. Chapter X - Assignment and Transfer of Partnership Rights This chapter deals with the partner s transferable interest. A partner s economic rights, which include the rights of the partner to a share of the profits and losses of the partnership and to receive distributions in accordance with the limited liability partnership agreement, are freely transferable. However, 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 LLP s activities. Further, they do not entitle the assignee to participate in the management or conduct of the LLP s activities or access information concerning the LLP s transactions. Moreover, the non-economic rights of a partner shall not be transferable unless specified by the LLP Agreement. Chapter XI - Investigation This chapter deals with the investigation of the affairs of a limited liability partnership. Chapter XII - Conversion to Limited Liability Partnership This chapter contains provisions which provide for the conversion from firm, private company and unlisted public company to a limited liability partnership. The Second Schedule contains provisions for conversion from firm to LLP; the Third Schedule contains provisions for conversion from private company to LLP and the Fourth Schedule provides for conversion from unlisted public company to LLP. Chapter XIII - Foreign Limited Liability Partnership This chapter deals with the foreign limited liability partnership. The Regulations shall make provisions about the features of foreign limited liability partnership. Chapter XIV - Amalgamation, Merger and Demerger of Limited Liability Partnerships This chapter deals with the amalgamation, merger and demerger of limited liability partnerships. The Regulations shall make provisions for the same. Chapter XV - Winding Up and Dissolution This chapter deals with the winding up and dissolution of limited liability partnerships. The winding up of a limited liability partnership may be either voluntary or by the Tribunal. The Regulations shall make provisions for the winding up and dissolution of limited liability partnerships. Chapter XVI - Miscellaneous This chapter deals with business transaction of partner with partnership, application of company law etc., electronic filing service, penalties, application of other laws, enabling provision for Regulations, powers of Registrar, offences by limited liability partnerships, jurisdiction of the Tribunal and general penalties.