LLP concept is welcome, however embryonic

WITHOUT CONTEMPT

The ministry of company affairs has published a concept paper on limited liability partnerships (LLPs). Finally, Indian professionals have some indication of how the government will like to help them compete with the world.

Unlike companies""in which the liability of shareholders can be limited to the extent of the share capital""partnerships in India have unlimited liability. Indian partnership laws are over 60 years old, out of touch with modern-day realities, and out of sync with international practices on partnerships.

Add to that the restrictions on professions such as auditing and law that do not allow enterprises to be organised as corporates. Add the 20-partner limit on a partnership firm, and you have a completely backward business environment for Indian professionals.

There are so many professions that do not need to be organised as companies and have to deal with a fairly unproductive range of compliance requirements.

These are individual-driven businesses, primarily in the services sector, which do not need to be organised as companies. Introduction of the concept of LLPs will fill this void and plug the lacunae faced by the system.

Unlimited liability that is attendant with proprietorships and partnership firms""there being no legal distinction between the assets of the proprietor or the partners and the assets of the business, thereby, leading to situations where individuals could be sued to bankruptcy""is the bane of such professions.

The human mind will naturally be constricted in the size of the risk that it is willing to take, particularly, when it is clear that every venture and every step forward amounts to putting at stake everything that the proprietor or the partners have.

Moreover, the joint and several liability attendant with partnerships results in any partner being able to risk the personal assets of every other partner.

International professional firms are mostly organised as LLPs and are able to leverage their risk-taking capacity and compete effectively with Indian professional firms. The concept paper is welcome.

However, the approach taken in the concept paper indicates that the ministry would make life of LLPs very similar to that of companies.

By excluding the applicability of all forms of partnership law currently applicable to partnerships, the concept paper""if adopted in the current form""would make life for LLPs as difficult as it is for companies.

The concept paper provides for a "manager" of every LLP who will ensure compliance and will be personally liable for all penalties imposed on the LLP. This has taken the concept of "officer in default", outlined by company laws, to an extreme.

If such a manager is not registered with the authorities, every partner will be a manager, and, therefore, every partner will become personally liable for penalties. This will negate the fundamental concept behind LLPs.

The concept paper provides for cessation of partnership of any partner with a 30-day notice. Every partner will be an agent of only the LLP and not of the other partners.

A partner has to be expressly authorised to bind the partnership, without which the LLP cannot be bound to third parties in respect of obligations incurred without authorisation. The obligations of the LLP and the liabilities arising from them will be limited to the value of the property of the LLP.

Surprisingly, the concept paper suspends the limited liability when it comes to any intentional act of fraud on creditors by an LLP. This will lead to every creditor always alleging fraud on the part of the LLP, thereby, suspending the very foundation of limited liability.

For taxation purposes, the paper proposes to retain the avoidance of double taxation of partners, which is a welcome measure. It will be crucial to ensure that the income-tax laws are not made to be in conflict with this position.

The concept paper provides for free transferability of a partner's economic interests in an LLP. This is uncalled for and needs to be left to the partnership deed among the partners. LLPs, unlike public listed companies, do not need to have free transferability of partners' shares. The concept paper also provides for conversion of existing partnerships and companies into LLPs.

Currently in a skeletal form, the ministry has called for public comments on the concept paper. In a number of places, it has merely been stated that regulations would be made to govern specific concepts such as mergers and amalgamations of LLPs, registration of foreign LLPs, etc. However, this is an excellent beginning.

The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own

somasekhar@jsalaw.com