Limited Liability Partnership

A Comparative Analysis

Table of Contents
1. Introduction

2. Basic Concepts 3. Limited Liability Partnership US & UK Legislations 4. Limited Liability Partnership in India 5. Analysis

6. Case Laws

Introduction
The importance of the Partnership Act 1890 in the historical development of partnership law in the United Kingdom is beyond question. Drafted in 1879 and finally enacted in 1890 after much debate and amendment, this seminal piece of Victorian legislation with its "rather limpid prose" and the "deceptive simplicity, born of clear and elegant expression" in which Sir Frederick Pollock clothed its provisions,1 was intended as partial codification of the considerable number of common law and equitable principles developed by the law courts. It has served as an example for most Commonwealth jurisdictions and has strongly influenced the American Uniform Partnership Act of 1914 (UPA). In fact, in irrespective of the UPA, the Partnership Act has served as a model for more than 30 other partnership Acts and ordinances with implementation dates ranging from 1891 to at least 1981. The Indian law of partnership in India is based on the provisions of the English law of partnership. Until the English Partnership Act of 1890 was passed, the law of partnership even in England was largely based on legal
1

J.J. Henning , Partnership Law Review : The Joint Consultation Papers and the Limited Liability Partnership Act in Brief Historical and Comparative Perspective, Comp. Law. 2004, 25(6), 163-170,

decisions and custom. There were very few acts of parliament relating directly to partnership. The Indian Partnership Act of 1932 (Partnership Act) was the result of a Report of a Special Committee consisting of Shri Brojender Lal Mitter, Sir Dinshaw Mulla, Sir Alladi Krishnaswami Iyer and Sir Arthur Eggar.2 Prior to the enactment of the Partnership Act, the law relating to partnership was contained in Chapter XI (sections 239 to 266) of the Indian Contract Act, 1872 (Contract Act). These provisions contained in the Contract Act were not found adequate. As a result, Chapter XI of the Contract Act was repealed and replaced by the Partnership Act of 1932. The limited liability partnership (LLP) concept originated in the US in the early 90s in unincorporated form. It was inspired by litigation against professional firms that had done work for failed savings and loan associations. Claims against all partners, including many who had nothing to do with the failed associations, were a strong incentive for the development of a mechanism to limit the vicarious liability of partners.3 Following this, it was also adopted in United Kingdom (2000) and now the Naresh Chandra Committee has proposed the same for India. Thus, it is important for us to begin our understanding of Limited Liability Partnership, by knowing some basic concepts.

Law Commission of India, 178th Report, 2001, Recommendations for amending various enactments, both Civil & Crimilan 3 Johan Henning, The Deadlocked Limited Liability Partnership Arbitration or Winding Up, Comp. Law. 2005, 26(10)

Basic Concepts
1. Partnership A Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.4 Under the Indian Partnership Act, 1932, every partner is jointly and severally liable for all the acts of the firm.5 2. General Partnership A general partnership is formed when two or more people intend to work together to carry on a business activity. The distinguishing feature of a partnership is the unlimited liability of the partners. Each partner is personally liable for all of the debts of the partnership. That includes any debts incurred by any of the other partners on behalf of the partnership. Any one partner is able to bind the partnership by entering into a contract on behalf of the partnership. 3. Limited Partnership A limited partnership consists of one or more general partners and one or more limited partners. The general partner is responsible for the management of the affairs of the partnership, and he has unlimited personal liability for all debts and obligations. Limited partners have
4 5

Sec. 4, The Indian Partnership Act, 1932

Ibid, Sec. 25

no personal liability. The limited partner stands to lose only the amount which he has contributed and any amounts which he has obligated himself to contribute under the terms of the partnership agreement.

4.

Limited Liability Company A limited liability company, commonly called an "LLC," is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. The main difference between a Limited Liability Partnership or LLP and a limited liability company is that a Limited Liability Partnership has the organisational flexibility of a partnership and is taxed as a partnership. In other respects it is very similar to a company.6

Larry E. Ribstein, Eighth Annual Corporate Law Symposium: Limited Liability Companies, 4 U. Cin. L. Rev. 319,

Limited Liability Partnership Act U.S. and U.K. Legislations

The limited liability partnership (LLP) concept originated in the US in the early 90s in unincorporated form. It was inspired by litigation against professional firms that had done work for failed savings and loan associations. It is difficult to believe that Limited Liability Partnership, such a major reformation of partnership law, had its beginnings not in a legislative advisory committee meeting or in a courtroom as a judge-made remedy, but instead began in a law firm of 21 employees in Lubbock, Texas.7 During the crisis, the government sued the law and accounting firms 8 that represented the failed banks for malpractice. Claims against all partners, including many who had nothing to do with the failed associations, were a strong incentive for the development of a mechanism to limit the vicarious liability of partners. 9

Susan Saab Fortney, Seeking Shelter in the Minefield of Unintentended Consequences--The Traps of Limited Liability Law Firms, 54 WASH. & LEE L. REV. 717, 720-21 (1997)
8

Over one-third of all bank failures at the time occurred in the state of Texas. Hamilton, supra note 8, at 1069.
9

Supra 3

In a short period of time, all US jurisdictions adopted legislation sharing the theme that a LLP limits, or eliminates, joint and several liability of partners for some, or all, liabilities and obligations of the partnership. The National Conference of Commissioners on Uniform State Laws approved the Uniform Limited Liability Partnership Amendments (ULLPA) to the Revised Uniform Partnership Act (RUPA) in 1996. Emergence of limited liability partnership in the United Kingdom In the UK, most professional firms are structured as partnerships. Prior to the Introduction of LLPs, England followed the traditional system of Partnership. But, the unlimited nature of liability on partners and the increasing globalization necessitated a change. Two large accountancy firms, assisted by a law firm, began steps to obtain a limited liability partnership (LLP) statute in Jersey10, which received Royal Assent in November 1996. "By mid-1996 it was plain that the option of offshore registration as a Jersey LLP was being very seriously considered by a number of very large professional partnerships. It was this prospect, combined with the perceived possibility that a successful mega-claim could in due course precipitate the failure of a major firm, that led to the November 1996 decision11to bring forward LLP legislation in the UK."12

10

Jersey is a parliamentary democracy and a dependency of the British Crown. It is not part of the United Kingdom, nor is it a colony. Her Majesty Queen Elizabeth II of the UK is the Head of State of Jersey. The Sovereign is represented in the Island by the Lieutenant Governor. While Jersey makes its own laws, it has pledged allegiance to the English Crown since 1066.
11

On 7 November 1996, Ian Lang, President of the Board of Trade, announced the UK government's intention to bring forward legislation at the earliest opportunity to make LLP available to regulated professions in the UK.
12

House of Commons Select Committee on Trade and Industry Report 1998. H.C. 59, para.82.

The concept of LLP was introduced in 1996 in the United Kingdom. The Limited Liability Partnership Bill, shorn of any limitation on its availability to the regulated professions, was introduced into the House of Lords late in 1999. The objective of both the LLP Act and the regulations is to modernise the legal framework for business in the UK, keeping it at the forefront of international practice by offering firms the ability to incorporate with limited liability while organising themselves on partnership lines, subject to provisions of the Companies Act 1985 and the Insolvency Act 1986 on financial disclosure, fraudulent trading and winding up similar to those which apply to companies and their directors, thus providing safeguards to those dealing with the LLP. The Limited Liability Partnership Act 2000 (the Act) received Royal Assent on July 20, 2000. Subsequently, the Limited Liability Partnerships Regulations and the Limited Liability Partnerships (Fees) (No.2) Regulations (the Regulations) were promulgated. Since April 6, 2001, LLPs may be registered in the United Kingdom under the Act. Notwithstanding the term "partnership" in its designation, the law of partnership will in general not be applicable to an LLP, although it will be taxed as a partnership to ensure that the choice between using an LLP or a partnership is a tax neutral one. The LLP will be required to disclose information, inter alia, on its finances and members, similar to that required of companies.13The Limited Liability Partnership Act 200014 received royal assent on July 20, 2000. Since April 6, 2001, limited liability partnerships may be registered in the United Kingdom under the Act.

13

DTI, Limited Liability Partnerships Bill. A Consultation Document. Regulations to Accompany the Limited Liability Partnerships Bill (URN 99/1025), Part IV, para. 2.
14

Act 12 of 2000.

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Limited Liability Partnership in India

In an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to say the least, risky and unattractive. In India, some bodies of professionals have been prohibited from practicing under an incorporated form. E.g. Development of legal profession in India has been restricted in India on account of the number of impediments in the current regulatory system which hinders Indian law firms from competing effectively against foreign firms.15 This would hamper the growth of Indian Law Firms in comparison to the Foreign Law Firms once the Legal Sector is opened. The general partnership or partnership simpliciter has traditionally been the entity of choice to provide services by professionals such as lawyers, accountants, doctors, architects, and company secretaries.16 The unlimited
15

A Consultation Paper on Legal Services under GATS (Prepared by Trade and Policy Division, Department of Commerce, Government of India)
16

Naresh Chandra Committee Report

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liability of general partnerships under the Indian Partnership Act 1932 has become a cause for concern in the light of increase in the incidence of litigation for professional negligence, the size of the claims and the risk to a partner's personal assets when a claim exceeds the sum of the assets of the partnership.17 The idea that LLPs should be introduced in India was mooted in the Report of the Naresh Chandra Committee on Regulation of Private Companies and Partnership and the May 2005 Report of the Expert Committee on Company Law (J. J. Irani Committee). In response, on November 2, 2005, the Ministry of Company Affairs in the Government of India circulated a concept paper on LLPs with a view to stimulating public debate over ideas which will be incorporated in the proposed Limited Liability Partnership Bill (the "Bill"). The proposed Bill is drafted on the lines of the United Kingdom's Limited Liability Partnerships Act 2000.18 Advantage of Limited Liability Partnership 1. The main advantage of LLP is that limited partners do not take on personal liability for the obligations of the entire partnership, but only to the extent of the money contributed to the firm by such partners. Whereas, under Sec. 25 of the Indian Partnership Act, a partner is jointly and severally liable. 2. Further, a partners liability is not limited when the misconduct is attributable to him or to an employee under the supervision or control of that partner. An LLP only protects a partner, other than a general partner from the liability arising from the misconduct or personal acts of other partners.
17

Infra Note 20

18

Aparna Viswanathan, India considers introduction of Limited Liability Partnerships, I.C.C.L.R. 2006, 17(5), 141

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3. The members of an LLP would have the option to have a general partner or more with unlimited liability, but it would not shield the partners from legal liability arising out of their own personal acts which are not done for and on behalf of the LLP, that is, any act done beyond the acts and powers of the partners as laid down in the incorporation document. 4. The main benefit in an LLP is that it is taxed as a partnership,19 but has the benefits of being a corporate, or more significantly, a juristic entity with limited liability. 5. An LLP has the special characteristic of being a separate legal personality20 distinct from its partners. 6. Sec. 11 of the Companies Act bars the formation of a partnership consisting of more than 20 persons. But in a Limited Liability Partnership, a minimum of two partners is required.21 Disadvantages of Limited Liability Partnership 1. Though good in parts, the implementation of this concept may give rise

to certain tricky issues. How would one prove that a particular partner is responsible for an act of felony? This would give rise to disputes amongst the
19

For tax law, income-tax as well as sales tax, partnership firm is a legal entity - State of Punjab v. Jullender Vegetables Syndicate - 1966 (17) STC 326 (SC), CIT v. A W Figgies AIR 1953 SC 455, CIT v. G Parthasarthy Naidu (1999) 236 ITR 350
20

Though a partnership firm is not a juristic person, Civil Procedure Code enables the partners of a partnership firm to sue or to be sued in the name of the firm. - Ashok Transport Agency v. Awadhesh Kumar 1998(5) SCALE 730 (SC). [A partnership firm can sue only if it is registered].
21

V. Pattabhi Ram & Mithun D'Souza, Demystifying Limited Liability Partnership, The Business Line, (May 15, 2006)

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partners themselves. In a situation wherein there are two or more joint auditors who have signed a problem balance sheet, to whom would one pin the responsibility? Even if we say that a partner would only be liable for his acts, how can one distinguish which partner has done which act ? The main problem will arise is to where should one draw the line ? These are big issues which need to be resolved before implementing or allowing firms to form LLPs.22 2. Even if the allocation of work amongst the auditors is as clear as

crystal, disputes would be inevitable. Since the LLPs are proposed to disclose financial information a la a private limited company, a separate format of financial statements would need to be devised. Provisions relating to authorised capital, stocks, and so on, would be irrelevant in a professional firm. With the new-age insurance companies offering a slew of innovative insurance products, it may not take a long time before a comprehensive policy is devised that protects all risks for a partnership. A partner being held responsible to the extent of his contribution in the case of a felony is bad enough for him. 23 3. But the situation is not that bad after all. If the Partnership Act is

amended to permit unlimited partners, clauses in the partnership deed fit together limited liabilities of the partners, there is an insurance policy that covers all business risks associated with a partnership and corporate governance practices are introduced for partnerships above a pre-defined size, would then there be a requirement for a separate law relating to LLPs? Your guess is as good as mine.

22 23

Mohan R. Lavi, Little Utility of Limited Liability, The Business Line, (21st August, 2005)

Ibid

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A n a l y s i s o f L i mi t e d L i a b i l i t y P a rt n e r s h i p
A Limited Liability Partnership is a body corporate with limited liability in the sense that its members are not personally liable for its debts beyond their financial interests in the LLP itself, but with unlimited capacity.24 It is incorporated by registration with an incorporation document fulfilling the role of the memorandum of association25 and subject to many of the accounting and disclosure requirements and other controls applicable26 to companies. An LLP is different from a company in a number of ways:27 (a) it does not have shares or shareholders; (b) it has members/partners (members for LLPs in the UK and partners in the US and India) but not directors, and there is no separation of ownership and management;
24

Limited Liability Partnership Act, 2000 ss 1(3) and (4). Ibid S. 2

25

26

Geoffrey Morse, Partnership for the 21st Century, Limited Liability Partnerships and Partnership Law Reform in the United Kingdom, 2002 Sing. J. Legal Stud. 455
27

Kitty Lam, Limited Liability Partnership and Liability Capping Legislation for the Practice of Law in Selected Places, Research and Library Services Division Legislative Council Secretariat.

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(c) It does not have a memorandum28 and articles which are public documents governing the key facts of the company and the mutual relationship between the members/partners and the company; and (d) The agreement governing the mutual rights and duties between the members/partners, and between the members/partners and the LLP is a purely private document. Under the auspices of the Insolvency statutes, LLPs, like limited liability companies, are allowed to: propose a voluntary arrangement; apply to the court for an administration order; go into receivership; resolve to go into voluntary liquidation, to appoint a liquidator and to allow a liquidator to receive an interest in a transferee company or LLP on a voluntary liquidation; and resolve to be wound up by the court.29 Externally therefore the LLP is a company but internally it may be run as the members wish--there is no formal legal requirement in the legislation for any written agreement. It was originally assumed that the professional firms for whom the form was initially intended would draft their own; at a late stage it was realised that this might not be the case with smaller enterprises and so there are a number of, rather hastily thought through, default terms in the regulations based on some of those in the Partnership Act30 the only obvious direct application of partnership law to LLPs, apart from direct taxation where an LLP is also to be treated as a partnership (another relic of its origins--as is

28 29

Sec. 14, The Companies Act, 1956 ( Act No. 1 of 1956)

Fergus Payne , Insolvency of Limited Liability Partnerships, Insolv. Int. 2005, 18(7)
30

Limited Liability Partnership Regulations, 2001

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the fact that changing from a partnership to an LLP is tax neutral whereas changing from a company to an LLP is not). The LLP is therefore a hybrid creature but based substantially on the corporate model. English partnership law does not currently confer legal personality on a partnership Thus, once it was decided to create the LLP as a separate legal person the corporate model was the obvious solution. There is one limit to the application of the corporate model, however, in that, given the absurdity of a one person partnership of any form, it is not possible to have a single member LLP. Since it appears that otherwise there is no legal reason why a single member LLP should not exist, the resulting paradox in itself reprises the basic conflict in using company law to regulate what is called a partnership.

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Cases involving Limited Liability Partnerships

Because this concept has not been implemented or allowed in India, there are no Case Laws as such. So, we will refer to some U.S Case Laws where LLP is already a full fledged practice. 1. Megadyne Information Systems v. Rosner, Owens & Nunziato,31

The plaintiff sued a law firm LLP and its partners for malpractice and breach of fiduciary duty. The court granted the defendants summary judgment on the malpractice claim but determined there were fact issues regarding a breach of fiduciary duty claim. The breach of fiduciary duty claim was premised on alleged misrepresentations by the firm to the plaintiff that the plaintiff had a viable claim against the Orange County Transportation Authority (OCTA) when the firm knew that limitations had run on the claim and the firms continued representation and receipt of fees for worthless legal representation. The court also determined that there were fact issues relating to the personal liability of the partners. The court cited the California LLP provisions for the proposition that partners in an LLP do not have vicarious liability for the torts of another partner, and the court stated that the plaintiff could only hold a partner liable who was involved in the handling of the matter. All three
31

No. B213137, 2002 WL 31112563 (Cal. App. Sept. 21, 2002).

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partners claimed that one of them was the sole attorney who handled the matter and that the other two had no involvement. However, the court found there were fact issues as to the involvement of the other two. The fact issues were raised by the admittedly-involved attorneys testimony that there might have been discussions with the other two partners that the plaintiff had a viable malpractice claim against the lawyers that had previously represented the plaintiff on their claim against OCTA. The court said these discussions could support an inference that the partners knew the plaintiffs claim against OCTA was time-barred and that they participated in the decision not to tell the plaintiff while the firm continued its representation. In addition, the name of one of the partners who claimed he was not involved appeared on the caption page of the claim filed with OCTA, suggesting his involvement in the case. 2. Schaufler v. Mengel, Metzger, Barr & Company, LLP,32

Apparently confusing LLP with limited partnership in stating that defendants had submitted insufficient evidence to establish that managing partner of accounting firm had no liability as a matter of law on buy-out agreement negotiated with plaintiff partner because the limited partnership act imposes joint and several personal liability on a general partner and on a limited partner who participates in the control of the business). 3. Williams v. Natural Life Health Foods Ltd 33

The extent to which an individual member or employee of the LLP will be liable in tort for his or her own misstatements is in some doubt. The case is related to a limited company and the House of Lords held that the director of the company would only be liable in negligence if: (a) he or she assumed personal responsibility for the advice; and (b) the claimant relied on this assumption of responsibility, and
32

745 N.Y.S.2d 291 [1998] 1 WLR 830; [1998] 2 All ER 57.

33

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(c) the claimants reliance on this assumption of responsibility was reasonable. Thus, individuals in an LLP will not incur liability in tort except in exceptional cases.

Bibliography
Acts :1. 2.

The Indian Partnership Act, 1932 The Limited Liability Partnership Act, 2000

3. The Companies Act, 1965 (Act 1 of 1965)

Articles
1.

Aparna Viswanathan, India considers introduction of Limited Liability Partnerships, I.C.C.L.R. 2006, 17(5), 141 Fergus Payne, Insolvency of Limited Partnerships, Insolv. Int. 2005, 18(7), Geoffrey Morse, Kitty Lam, Limited Liability Partnership and Liability Capping 2002 Sing. J. Legal Stud. 455 Larry E. Ribstein 4 U. Cin. L. Rev. 319, Larry E. Ribstein, Eighth Annual Corporate Law Symposium: Limited Liability Companies, 4 U. Cin. L. Rev. 319,

2.

3.

4.

5.

Mohan R. Lavi, Little Utility of Limited Liability, The Business Line, (21st August, 2005) V. Pattabhi Ram & Mithun D'Souza, Demystifying Limited Liability Partnership, The Business Line, (May 15, 2006)

6.

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Reports and Papers

1. A Consultation Paper on Legal Services under GATS (Prepared by Trade and Policy Division, Department of Commerce, Government of India)
2.

House of Commons Select Committee on Trade and Industry Report 1998 DTI, Limited Liability Partnerships Bill. A Consultation Document. Regulations to Accompany the Limited Liability Partnerships Bill (URN 99/1025),

3. 4.

J. J. Irani Committee Legislation for the Practice of Law in Selected Places, Research and Library Services Division Legislative Council Secretariat. Naresh Chandra Committee on Regulation of Private Companies and Partnership

5.

Cases
1.

Ashok Transport Agency v. Awadhesh Kumar 1998(5) SCALE 730 (SC). Barr & Company, Williams v. Natural Life Health Foods Ltd CIT v. A W Figgies - AIR 1953 SC 455, CIT v. G Parthasarthy Naidu (1999) 236 ITR 350 Megadyne Information Systems v. Rosner, Owens & Nunziato Schaufler v. Mengel, Metzger, State of Punjab v. Jullender Vegetables Syndicate - 1966 (17) STC 326 (SC),

2. 3. 4. 5. 6. 7.