[FAQs] on Limited Liability Partnership (LLP)

Generally, the assets sold upon dissolution of partnership are realized only in small instalments over a period of time. In such circumstances the choice is either to distribute whatever is collected or to wait till whole amount is collected. Usually, the first course is adopted. In order to ensure that the distributed cash amongst the partners is in proportion to their interest in the partnership concern either of the two methods described below may be followed for determining the order in which the payment should be made.

(i) Maximum Loss Method: Each instalment realized is considered to be the final payment i.e. outstanding assets and claims are considered worthless and partners’ accounts are adjusted on that basis each time when a deposit is made following either Garner Vs. Murray rule or the profit-sharing ratio rule.

(ii) Highest Relative Capital Method: According to this method, the partner who has the higher relative capital, that is, whose capital is greater in proportion to his profit-sharing ratio is first paid off. This method is also called as proportionate capital method.

Garner vs. Murray rule – Applicability

When a partner is unable to pay his debt due to the firm, he is said to be insolvent and the share of loss is to be borne by other solvent partners in accordance with the decision held in the English case of Garner vs. Murray. According to this decision, normal loss on realisation of assets is to be brought in cash by all partners (including insolvent partner) in the profit-sharing ratio but a loss due to insolvency of a partner has to be borne by the solvent partners in their capital ratio. In order to calculate the capital ratio, no adjustment will be made in case of fixed capitals. However, in case of fluctuating capitals, ratio should be calculated on the basis of adjusted capital before considering profit or loss on realization at the time of dissolution.

Non-Applicability of Garner vs Murray rule:

1. When the solvent partner has a debit balance in the capital account. Only solvent partners will bear the loss of capital deficiency of insolvent partner in their capital ratio. If incidentally a solvent partner has a debit balance in his capital account, he will escape the liability to bear the loss due to insolvency of another partner.
2. When the firm has only two partners.
3. When there is an agreement between the partners to share the deficiency in capital account of insolvent partner.
4. When all the partners of the firm are insolvent.

Under section 27(3) of the LLP Act, 2008 an obligation of an LLP arising out of a contract or otherwise, shall be solely the obligation of the LLP;

• The Liabilities of an LLP shall be met out of the properties of the LLP;
• Under section 28(1) a partner is not personally liable, directly or indirectly, for an obligation referred to in Section 27(3) above, solely by reason of being a partner in the LLP;
• Section 27(1) states that an LLP is not bound by anything done by a partner in dealing with a person, if:

1. 1. The partner does not have the authority to act on behalf of the LLP in doing a particular act; and
   2. The other person knows that the partner has no authority or does not know or believe him to be a partner in the LLP

• • Under section 30(1) the liability of the LLP and the partners perpetrating fraudulent dealings shall be unlimited for all or any of the debts or other liabilities of the LLP.

Under following circumstances, an LLP can be wound up by the Tribunal:

1. If the LLP decides that it should be wound up by the Tribunal;
2. If for a period of more than six months, the number of partners of the LLP is reduced below two;
3. If the LLP is unable to pay its debts;
4. If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the state or public order;
5. If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar for five consecutive financial years;
6. If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

Distinction between Partnership (LLP) an ordinary partnership firm and a Limited Liability

“Designated partner” means any partner designated as such pursuant to section 7 of the Limited Liability Partnerships (LLPs) Act, 2008.

As per section 7 of the LLP Act, every limited Liability Partnership shall have at least 2 designated Partners who are individuals and at least one of them shall be a resident in India:

Provided that in case of Limited Liability Partnership in which all the partners are bodies corporate or in which one or more partners are Individuals and bodies corporate, at least 2 individuals who are partners of such limited liability Partnership or Nominees of such Bodies corporate shall act as designated partners.

“Liabilities of designated partners”

As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a designated partner shall be-

(a) responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provisions of this Act and as may be specified in the limited liability partnership agreement; and

(b) liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.

Under section 64 of the LLP Act, 2008, an LLP may be wound up by the Tribunal:

• If the LLP decides that it should be wound up by the Tribunal;
• If for a period of more than six months, the number of partners of the LLP is reduced below two;
• If the LLP is unable to pay its debts;
• If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the state or public order;
• If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar for five consecutive financial years;
• If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

Nature of Limited Liability Partnership: A limited liability partnership is a body corporate formed and incorporated under the LLP Act, 2008 and is a legal entity separate from that of its partners. A limited liability partnership shall have perpetual succession and any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.

Designated partners: Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India.

In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

Distinction between an ordinary partnership firm and an LLP

Every partner of an LLP for the purpose of its business is an agent of the LLP but is not an agent of other partners. Obligations of LLP are solely its obligations and liabilities of LLP are to be met out of properties of LLP.

The partners of an LLP in the normal course of business are not liable for the debts of the LLP. The LLP is liable if a partner of LLP is liable to any person as a result of wrongful or omission on his part in the course of business of the LLP or with his authority. However, a partner will be liable for his own wrongful acts or commissions, but will not be liable for the wrongful acts or commissions of other partners of the LLP. Thus, a partner may be called to pay the liability of an LLP under exceptional circumstances.

If an LLP or any of its partners act with the intent to defraud creditors of the LLP or any other person or for any fraudulent purpose, then the liability of the LLP and the concerned partners is unlimited. However, where the fraudulent act is carried out by a partner, the LLP is not liable if it is established by the LLP that the act was without the knowledge or authority of the LLP. Where the business is carried out with fraudulent intent or for fraudulent purpose, every person who was knowingly a party is punishable with imprisonment and fine.

Under section 27(3) of the LLP Act, 2008, any obligation of the LLP arising out of a contract or otherwise will be the sole obligation of the LLP.

The partners of an LLP in the normal course of business are not liable for the debts of the LLP. However, under section 28(2) of the LLP Act, 2008, a partner will be liable for his own wrongful acts or commissions, but will not be liable for the wrongful acts or commissions of other partners of the LLP.

Thus, a partner may be called to pay the liability of an LLP under exceptional circumstances.