A few extra provisions would make the Limited Liability Partnership Bill very attractive.
The Limited Liability Partnership Bill (LLP), 2008, which received President Pratibha Patil’s assent on January 7, is a modern piece of legislation. It gives full freedom to internal management within certain parameters; and balances this with extensive powers to the Regulator for enquiry, search and investigation; and punitive punishment to wrongdoers. The negative feature is that the Bill gives powers to the government in 39 areas to make rules in due course. One sincerely hopes that, unlike the Sebi rules, no substantive law is made through these rules, and only procedural issues are addressed.
The Bill, provides for the LLP to be viewed as a body corporate with a legal entity distinct from its members, having a right to hold and own property and with perpetual succession. Hence, a change of members will not affect its existence. Partners can transfer only their economic interest in the LLP; any rights to management will be as per the partnership deed. Thus, it provides an unfettered exit for a financial investor. A partner with unlimited liability is not required. These features will stimulate business growth, encourage technocrats to combine with financial investors, provide a growth vehicle to professionals without the limit of 20 partners; and will especially be useful in build-operate-transfer (BOT) projects.
For example, in executing a five-year road BOT project, an LLP would be an ideal vehicle. But the Bill only allows for individuals or companies to become Partners in an LLP. Why not allow co-operative societies to convert to LLPs as well? This facility of becoming a partner should be extended to any legal entity.
Corporate Governance: This is ensured by mandatory provisions. Two individuals must be “designated partners”; the responsibility for accounts and compliance with the LLP law rests with them. Penalty for default in compliance is imposed on them in their individual capacity. Secondly, the relevant partner has to face individual liability for any wrongful act, or omission, or for any act with fraudulent intent. Thirdly, the LLP Agreement must have provisions in 14 critical specified areas; otherwise the provisions of Schedule-I will mandatorily apply.
A minimum of two partners, with no upper limit, is being prescribed. Unlike the earlier Bill, the LLP Bill does not provide that there should be at least one partner with unlimited liability. On the contrary, it provides that the LLP shall itself be liable for its business contractual obligations; but the respective partner is personally liable only in specified situations of wrong doing. This is a shortcoming. If one partner wishes to have unlimited liability, this should be allowed.
Conversion to LLP: Specific provisions have been made to facilitate conversion of firms, unlisted companies and Indian branches of foreign LLP to an Indian LLP. Upon conversion, the entire undertaking together with all assets (including licences and permits) or liabilities (including contingent) and all contracts and legal cases vest in the LLP without any further act or deed. These provisions are pari materia with Part IX of the Companies Act which provides for conversion of firms into companies whereby stamp duty and conveyance cost are not leviable. A serious lacunae is the precondition that there should be no security interest in the converting entity assets. Written consent of the security interest holders should have sufficed. Most business entities do have secured loans with lenders having security-interest. Another condition is that only the partners or shareholders of the converting entity should be partners of the LLP. Two points arise out of this. The words: “at the time of application” should be inserted in this rule [in clause 2 (b) as in clause 2 (a)], so as to clarify matters beyond doubt that partners can be added subsequently. Secondly, this will not allow two or three convertible entities to convert into one LLP at par with the Income Tax Law where only 51 per cent of the equity is to be held by the partners of the converting firm and not 100 per cent.
Administration: The Registrar of Companies will act as the Regulator inter alia for filing of the LLP Agreement, filing of the Annual Statement of Accounts (on cash or mercantile basis) and Statement of Solvency, and has (directly or through Inspectors) powers of calling for information, search, enquiry, seizure of records, imposition of penalty for legal non-compliance, and for winding up etc. The introduction of Statement of Solvency is a new concept and should be welcomed by all. In the UK, if a company is not solvent in terms of liquidity, (even though net worth may be positive), it is required to inform the Registrar in advance of any default; and administrators are appointed by the Registrar. Should the law not provide that accounts should be circulated every six months while exempting the smaller LLP?
Flexibility is allowed regarding mutual rights and duties of the partners inter se or with the LLP and will be in accordance with the registered LLP Agreement. The law does not, ipso facto, provide any rights of management to the Designated Partners (DPs). The Bill’s First Schedule provides rules in 14 critical areas which will prevail unless the LLP Agreement makes specific alternative provisions. These cover inter alia management rights, voting rights, non-compete clauses, partners indemnification for genuine acts, partners liability for fraudulent acts, admission and expulsion of a partner etc. Some classes of LLP can be exempted from audit. The key would be a well drafted LLP Agreement which balances the interests of all stakeholders.
Schemes of Arrangement and Amalgamation: Wide-ranging provisions have been introduced for merger, de-merger, reconstruction etc. of an LLP with other LLPs; or with creditors or its partners; these will be widely welcomed. These do not exist in the Indian Partnership Act, 1892. The scope should be widened further. It should allow for merger of the whole or de-merger of part of the business with any legal entities and not with LLPs only. A dynamic LLP will need to convert to a company and go to the capital market; the present Bill does not envisage this. This will help in the natural growth of business. Otherwise such mergers face insurmountable legal hurdles (e.g. transfer of contracts) and huge stamp duty and transaction costs.
Migration of LLP: Internationally, the trend is for the law to facilitate migration of legal entities from one jurisdiction or country to another with the consent of both country’s Regulators. The LLP Bill should incorporate similar provisions. Many foreign LLPs would like to migrate to India as we tighten the Double Tax Agreement with countries like Mauritius. It will boost the formal economy and revenue generation. Indeed, a provision has been made in the Companies Bill 2008 for merger of an Indian company with a foreign company registered abroad, subject to necessary approvals. Provisions for migration and merger should be made.
Investigation: The Central government can investigate the affairs of an LLP through an inspector either suo moto, or on application of one fifth of the LLP’s partners; or on the orders of the Tribunal or Court. The inspector has powers to examine on oath; and with the approval of the relevant magistrate, to enter premises, search and seize papers.
The LLP Bill should stimulate business and entrepreneurship. It needs to incorporate certain additional provisions in order to be widely-accepted. Hopefully, it will be welcomed by the business and professional community.
The author is Partner of S S Kothari Mehta & Co Chartered Accountants
