Partnership
A Comparative
Analysis
2
Table of Contents
1. Introduction
2. Basic Concepts
3 . L i m i t e d L i a b i l i t y Pa r t n e r s h i p
– US & UK Legislations
4 . L i m i t e d L i a b i l i t y Pa r t n e r s h i p
in India
5. Analysis
6. Case Laws
3
Introduction
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,
4
2
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)
5
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
no personal liability. The limited partner stands to lose only the amount
4
Sec. 4, The Indian Partnership Act, 1932
5
Ibid, Sec. 25
6
6
Larry E. Ribstein, Eighth Annual Corporate Law Symposium: Limited Liability Companies,
4 U. Cin. L. Rev. 319,
7
L i m i t e d L i a b i l i t y Pa r t n e r s h i p A c t –
U. S. a n d U. K . L e g i s l a t i o n s
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
7
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
8
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.
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
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.
9
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.
10
Limited Liability
Partnership in India
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
11
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 LLP’s 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
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.
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
17
Infra Note 20
18
Aparna Viswanathan, India considers introduction of Limited Liability Partnerships,
I.C.C.L.R. 2006, 17(5), 141
12
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.
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
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,
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)
13
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
LLP’s.22
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
Mohan R. Lavi, Little Utility of Limited Liability, The Business Line, (21st August, 2005)
23
Ibid
14
24
Limited Liability Partnership Act, 2000 ss 1(3) and (4).
25
Ibid S. 2
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.
28
Sec. 14, The Companies Act, 1956 ( Act No. 1 of 1956)
15
(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
Fergus Payne , Insolvency of Limited Liability Partnerships, Insolv. Int. 2005, 18(7)
30
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 plaintiff’s 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.
32
745 N.Y.S.2d 291
33
[1998] 1 WLR 830; [1998] 2 All ER 57.
19
Bibliography
Acts :-
1. The Indian Partnership Act, 1932
2. 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
2. Fergus Payne, Insolvency of Limited Partnerships, Insolv. Int. 2005,
18(7),
3. Geoffrey Morse, Kitty Lam, Limited Liability Partnership and
Liability Capping 2002 Sing. J. Legal Stud. 455
4. 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,
5. Mohan R. Lavi, Little Utility of Limited Liability, The Business Line,
(21st August, 2005)
6. V. Pattabhi Ram & Mithun D'Souza, Demystifying Limited Liability
Partnership, The Business Line, (May 15, 2006)
Cases
1. Ashok Transport Agency v. Awadhesh Kumar 1998(5) SCALE 730
(SC).
2. Barr & Company, Williams v. Natural Life Health Foods Ltd
3. CIT v. A W Figgies - AIR 1953 SC 455,
4. CIT v. G Parthasarthy Naidu (1999) 236 ITR 350
5. Megadyne Information Systems v. Rosner,
6. Owens & Nunziato Schaufler v. Mengel, Metzger,
7. State of Punjab v. Jullender Vegetables Syndicate - 1966 (17) STC 326
(SC),