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Nature & extent of liability of a partner of an LLP?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Sarath S asked almost 2 years ago

Hi, I want to know about the nature & extent of liability of a partner of an LLP. Sarath

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Open uri20170510 32134 1c996lj?1494421732 Anil answered almost 2 years ago

The partners in an LLP have a limited liability. Unlike in Partnership, where a partner is also liable for the acts of other partners, in an LLP, a partner is not liable for another partner’s act. No partner would be liable for independent or unauthorised acts of the other partners or for their misconduct. Every partner of an LLP, for the purpose of business of the LLP is the agent of the LLP, but not of the other partners.[xxiii] The LLP is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority.[xxiv] An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership.[xxv] A partner cannot be made liable for the obligations of the limited liability partnership. A partner is not personally liable, directly or indirectly for an obligation of LLP solely by reason of being a partner of the LLP.[xxvi] The liabilities of the LLP shall be met out of the property of the limited liability partnership.[xxvii] The partnership firm would be liable to the full extent of its assets, while the partner would be liable only to the extent of their agreed contribution. But these protections do not affect the personal liability of a partner for his own wrongful act or omission.[xxviii] An LLP is not bound by anything done by a partner in dealing with a person if the partner in fact has no authority to act for the LLP in doing a particular act and the person knows that he has no authority or does not know or believe him to be a partner of the LLP.[xxix] The mutual rights and duties of the partners and the mutual rights and duties of the LLP and its partners shall be determined on the basis of LLP agreement between the partners, or between the limited liability partnership and its partners.[xxx] If there is no agreement as to any matter, the mutual rights and duties of the partners and the mutual rights and duties of the LLP and its partners shall be determined by the provisions relating to that matter as set out in the First Schedule.[xxxi] So, according to section 23(4) of the Act, if there is no LLP agreement between partners then the terms of mutual rights and duties will be decided according to First Schedule. It is the First Schedule which ensures the cordial and fiduciary relation and reliable environment among partners inter se and between LLP and partners. The different aspects of mutual rights and duties covered under First Schedule are similar to mutual rights and duties under Indian Partnership Act, 1932. According to First Schedule, all the partners of an LLP are entitled to share equally in the capital, profits and losses of the LLP. This provision is similar to Section 13(b) of the Indian Partnership Act. In M. Govinda & Co. v. Commissioner of I.T., Andhra Pradesh[xxxii], the Hon’ble Supreme Court has held that where partners have agreed to share the profits in certain proportions, the presumption is that the losses are also to be shared in like proportions. Where in a partnership the profits are shared in a certain proportion, the fair inference is that losses are to be shared in the same proportion in the absence of a contract to the contrary; the onus of proving that they are not liable for the loss lies on persons who so assert.[xxxiii] If any partner has incurred personal liabilities or made payment in the ordinary and proper conduct of the business of the LLP or in or about anything necessarily done for the preservation of the business or property of the LLP, the LLP shall indemnify such partner. This provision corresponds to section 13(e) of the Partnership Act. While drafting the Bill leading to the enactment of the present Indian Partnership Act, the Judicial Committee had the following objects and reasons in mind: “…..the English Act in section 24(2) provides for the indemnity of a partner by his co-partners for anything necessarily done for the preservation of the business or property of the firm. The exact grounds of the indemnity are not clear, though Pollock and Lindley seem to rest it on the doctrine of salvage. In accordance with this doctrine Lindley would confine the indemnity to cases where the property of the business is in fact preserved by the act of the partner. We are of the opinion that there is no reason why a partner should not have the emergency powers which are conceded to an agent under section 212 of the Indian Contract Act, or why the right of indemnity should not be co-extensive with the authority of the partner. We have accordingly introduced a special clause, in the terms of section 212 of the Contract Act, and have made appropriate changes in regard to the right of indemnity in clause (e) (ii) of the clause 14(now section 13).” First Schedule also provides that every partner may take part in the management of the LLP, which is parallel to section 12(a) of the Partnership Act. First Schedule further provides that no partner shall be entitled to remuneration for acting in the business or management of the LLP. This provision is similar to section 13(a) of the Partnership Act. In the absence of an agreement, one partner cannot charge his co-partners with any sum for compensation in the form of salary or otherwise even where the services rendered by the partners are exceedingly unequal.[xxxiv] It is well known principle that under ordinary circumstances the contract of partnership excludes any implied contract for payment of services.[xxxv] The legal position on this position has been summarised by Lindley[xxxvi] in following passage: “Under the ordinary circumstances, the contract of partnership excludes any implied contract for payment of services rendered for the firm by any of its members. Consequently, in the absence of an agreement to that effect, one partner can’t charge his co-partners with any sum for compensation, whether in the shape of salary commission or otherwise, on account of his own trouble in conducting the partnership business…..And even where the amount of services rendered by the partner is exceedingly unequal, still, if there is no agreement that their services shall be remunerated, no charge in respect of them can be allowed in taking the partnership accounts.” So, a partner must perform the obligations assumed by him to the extent of his ability to the benefit of the whole without regard to the services of his co-partners and without regard to his co-partners and without any remuneration for his services other than the share of the profits to which he is entitled under the terms of the contract.[xxxvii] First Schedule also keeps an eye on unethical and anti-competitive conducts of partners. It mandates that each partner shall render true accounts and full information of all things affecting the limited liability partnership to any partner or his legal representatives. This provision intends that partners remain truthful and honest in their dealings. It is similar to section 9 of the Partnership Act, which provides for general duties of partners. In Corpus Juris Secundum[xxxviii], the nature of obligations between partners is so described: “Except to the extent that they are regulated by the express contract between them, the status, duties and obligations of partners as to each other are implied and enforced by the law. Generally speaking, the relationship of partnership is fiduciary in character, and imposes on the members of the firm the duty of dealing with one another in the utmost good faith and with respect to partnership affairs.” Every partner shall account to the limited liability partnership for any benefit derived by him without the consent of the LLP from any transaction concerning the LLP, or from any use by him of the property, name or any business connection of the LLP. This provision is parallel to section 16(a) of the Partnership Act. If a partner, without the consent of the limited liability partnership, carries on any business of the same nature as and competing with the LLP, he must account for and pay over to the LLP all profits made by him in that business. This provision is parallel to section 16(b) of the Partnership Act. In Pulin Bihari Roy v. Mahendra Chandra Ghosal[xxxix], where the partners were involved in salt business, it was held that the separate transactions were of precisely the same nature as the business carried on by the partnership and that there was thus a breach of duty on the part of the partner concerned by carrying a business in the same field of the competition. So, this Schedule also ensures transparency and loyalty in partners’ dealings. When the formation or nature of LLP is in question, then mutual rights and duties get more seriousness. In the eyes of LLP, all partners are equal and no change in LLP can be made without the consent of all the partners. According to First Schedule, any matter or issue relating to the LLP shall be decided by a resolution passed by a majority in number of the partners, and for this purpose, each partner shall have one vote. No change can be made in the nature of business of the LLP without the consent of all the existing partners. Further, no person may be introduced as a partner without the consent of all the existing partners. No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. Every LLP should ensure that the decisions taken by it are recorded in the minutes within thirty days of taking such decisions and are kept and maintained at the registered office of the LLP.

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