Thursday, July 16, 2009

An Analysis of the LLP Act

A paper titled The Indian LLP Law: Some Concerns for Lawyers and CAs by Amit M. Sachdeva and Sachin Sachdeva has been posted on SSRN. Here is the extract:

With a view to giving the entrepreneurs the necessary regulatory support, India enacted its first law on limited liability partnerships in December 2008, after almost two years of debate. An LLP, as a hybrid business form, coalesces the separate legal existence and limited liability attributes of a company and the organizational suppleness of a general partnership. The Indian LLP Act is based on the LLP legislations in the UK and Singapore.

While this is a promising entity, there are some defects that seem to have crept in. This paper, besides tracing the conceptual and legislative history of this concept, does a general survey of the provisions of the Act. The paper also uses some of the decisions rendered by the English courts to further explain the concept of an LLP.

In the second part, the authors argue that the LLP Act, 2008 seems to have left some concerns unaddressed. Most significant amongst them appears to be the continued application of Section 11 of the Indian Companies Act, 1956, which requires that any entity which associates more than 20 persons must, of necessity, be registered as a company under the Companies Act, 1956. The assumed non-prescription of the limit on the number of partners was seen by lawyers, among others, a robust incentive to incorporate themselves into LLPs. The paper argues against the obviousness of this assumption. Similarly, it is doubted by the authors if the LLP Act would be able to bypass the requirements of the Advocates Act and the Bar Council Rules and permit an association between "advocates" and "non-advocates".

The article is helpful in that it analyses recent English court decisions on the concept of an LLP, particularly its feature of separate legal existence. The article also seeks to debunk the notion that the LLP Act does away with the limit of 20 partners in case of firms. As the authors rightly state, the 20-partner limit is imposed by Section 11 of the Companies Act and until that section is amended the limit would possibly apply to LLPs as well. As regards criticisms regarding the ambiguity in tax position relating to LLPs, the authors’ fears appear to have been allayed by the Budget 2009 that clarifies that LLPs would be taxed in a similar manner as general partnerships. Finally, the article (somewhat inconclusively, as the authors themselves state) deals with the issue of professional rules governing lawyers and the effect of the LLP law on them.


Subharekha said...

This is interesting however, if you were to see the language in section 11, it provides for a carve out for associations "formed in pursuance of some other Indian
law". Hence even if there is an unregistered partnership so long as the formation thereof is recognised under the partnership act the maximum membership limit of 20 may not be applicable to such partnerships. Similarly there is no reason why this will be applicable in respect of LLPs.

amit said...

Dear Subharekha,
That precisely is the basis for the controversy that we have sought to highlight in our paper.
The law, as it stands of today, admits of the limit of 20 persons as applicable to a general partnership (as under the Indian Partnership Act, 1932).
Interestingly, we make the same argument in our paper. The entire paper may be downloaded from Please see para 2 on page 14 beginning "The LLP Act ...", see particularly the position we take: "[t]he argument against the obviousness of the second of the possible interpretations is that the Partnership Act, 1932 would also meet the criterion of "other Indian law". Section 11 further does not qualify "other Indian law" with the requirement in the nature of the words, "promulgated or enacted after the coming into force of the Companies Act."

I would be glad to have your (as also from everyone else) further comments on this so that I may have another view since we are considering writing to the Ministry of Corporate Affairs raising this issue with them.

Anonymous said...

Dear Amit,

You made the point that the use of the term 'Indian law' in Section 11 (of the Companies Act)as a carve-out provision to defend the inapplicability of the 20 partner limit is uncertain in its effect since the term could easily encompass the Partnership Act and the LLP Act.

Also, there is Section 71 of the LLP Act which says:

"The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force."

This makes things more complicated because:

1. This could very well mean that in case of any conflict between the provisions of the Partnership Act and the LLP Act, the LLP Act will defer to the interpretation provided under the Partnership Act.

2. Also, it would be subservient to any interpretation provided under the Companies Act.

So either way, there is the possibility that Indian Courts might well read the legislations as being in harmony and hold the 20 partner limit as valid in caes of an LLP. Since the Courts do not usually deviate from the written word of the legislation(as that is the most lucid reflection of the legislature's intention)we might have a problem here.

Anonymous said...

Hi Amit,

Even if the term 'other Indian law' includes the Partnership Act (which it clearly does), how does it militate against the same term including the LLP Act? The LLP Act and the Partnership Act are two different Acts and the carve out provision is applicable to partnerships and LLPs formed under the respective Acts. The fact that a partnership formed under the Partnership Act cannot have more than 20 partners should not affect the applicability of the carve-out provision to the LLPs under the LLP Act. They are two completely different Acts.

Subharekha said...

Amit, thank you for the link. On perusing section 11 again in light of the same, I must admit that there may exist an element of ambguity in interpreting section 11, though Iam not too sure about the reasons put forth in the paper...

Seperately however, does anyone have any idea as to the basis of the interpretation hitherto applied by most persons in respect of section 11 viz. in restricting the membership of partnership firms to 20 despite the "other Indian law" exception in section 11?

enterpreneurship with ease said...

I have a small query about Partnerships.
Can a salaried employee with a pvt ltd. company start a business in partnership with another person.

Amit Sachdeva said...

Yes, a salaried employee of a private limied company can, subject to anything to the contrary in the employment contract, can start a business in partnership with another person. But, of course, if the business directly conflicts with the current employment of the salaried employee, the employee risks his employment for the more practical reasons of annoying his employers.

Hope this would be useful.