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The Limited Liability Partnership Act 2008

Introduction: With the growth of Indian economy, the role played by

its entrepreneurs as well as its technical and professional manpower has

been acknowledged internationally. In this background, a need was felt for a

new corporate form that would provide an alternative to the traditional

partnership which exposes its partners to unlimited personal liability and a

statute based governance structure of limited liability companies.

Limited Liability Partnership [LLP] is viewed as an alternative corporatebusiness vehicle that provides the benefits of the limited liability but allows

its members the flexibility of organizing their internal structure as a

partnership based on a mutually arrived agreement. LLP form is expected to

enable entrepreneurs, professionals and enterprises providing services of

any kind or engaged in scientific and technical disciplines, to form

commercially efficient vehicles suited to their requirements.

With this background, Limited Liability Partnership Act, 2008 [LLP Act] was

enacted on January 7, 2009.

Subsequently, Government of India [GOI] notified various provisions of LLP

Act on 31st March 2009. GOI has, on April 1, 2009, also notified the Limited

Liability Partnership Rules, 2009 [LLP Rules] in respect of registration and

operational aspects under the LLP Act.

NATURE OF LLP

LLP is a

"body corporate" formed and incorporated under LLP Act;

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legal entity separate from its partners and has perpetual

succession.

[Section 3(1)]

Two or more partners are required to form an LLP. Any individual or

a body corporate can be a partner in a LLP.

In case if individual is a partner, he should not be

found to be of unsound mind; or

an undercharged insolvent; or

a person who has applied to be adjudicated as insolvent and

the application is pending

[Sections 5 and 6]

DESIGNATED PARTNERS [SECTION 7]

LLP shall have at least two "designated partners" who are individuals

and at least one of them shall be "resident in India". In case one or

more of the partners of a LLP are bodies corporate at least two

individuals who are partners of such LLP or nominees of such bodies

corporate shall act as "designated partners"

"Resident in India" means a person who has stayed in India for

minimum 182 days during the immediately preceding 1 year.

Designated partner is responsible for compliance with the provisions of

LLP Act.

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Designated Partner is required to obtain Designated Partner

Identification Number [DPIN] from the Central Government.

Application for allotment of DPIN needs to be submitted online on the

LLP website along with the necessary proof duly attested and certified

as prescribed.

INCORPORATION OF LLP [SECTIONS 11 TO 21]

Procedure for incorporation of LLP is similar to the procedure for

incorporation of a company under the Companies Act, 1956. Applicants are

first required to file the application for reservation of name with the

Registrar of Companies [ROC]. Once the name applied is approved by the

ROC, the documents for incorporation of LLP need to be filed.

Name of every LLP shall end with the words "Limited Liability

Partnership" or "LLP".

Name which is undesirable or nearly resembles to that of any other

partnership firm or LLP or any body corporate or trade mark, is notallowed.

Any entity (body corporate/registered partnership firm) which has a

name similar to the name of LLP which has been incorporated

subsequently may seek change of name of such LLP through ROC

within 24 months from date of registration of such LLP.

No person shall carry on business under any name/title which containsthe words "Limited Liability Partnership" or "LLP" without duly

incorporating it as LLP under the LLP Act.

LLP is required to file with the ROC, the LLP agreement ratified by all

the partners within 30 days of incorporation of LLP.

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PARTNERS AND THEIR RELATIONS AND EXTENT OF LIABILITY

[SECTIONS 22 TO 31]

Mutual rights and duties of partners of an LLP inter se and those of the

LLP and its partners shall be governed by an agreement between the

partners, or agreement between the LLP and its partners. In absence

of any such agreements, the mutual rights and duties shall be

governed by the LLP Act.

Every partner of a LLP is, for the purpose of the business of LLP, the

agent of LLP, but not of other partners.

LLP, being a separate legal entity, shall be liable to the full extent of its

assets whereas the liability of the partners of LLP shall be limited to

their agreed contribution in the LLP.

LLP is not bound by anything done by a partner in dealing with a

person if

the partner in fact has no authority to act for the LLP in doing a particular

act; and

the person knows that he has no authority or does not know or believe

him to be a partner of the LLP

LLP is liable if the partner of a LLP is liable to any person for wrongful

act/omission on his part in the course of business of LLP/with its

authority

Obligation of LLP whether arising in contract or otherwise, shall solely

be the obligation of LLP. Liabilities of LLP shall be met out of properties

of LLP.

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Partner is not personally liable for the obligations of LLP solely by

reason of being a partner of LLP.

No partner is liable for the wrongful act or omission of any other

partner of LLP, but the partner will be personally liable for his own

wrongful act or omission.

The liability of the LLP and partners who are found to have acted with

intent to defraud creditors or for any fraudulent purpose shall be

unlimited for all or any of the debts or other liabilities of the LLP.

Cessation of a partner on grounds like resignation, death, dissolution

of LLP, declaration that a person is of unsound mind, declared/applied

to be adjudged as insolvent etc. will not be effective unless

the person has notice that the partner has ceased to be so; or

notice of cessation has been delivered to ROC.

The notice of cessation may be filed by the outgoing partner if he has

reasonable cause to believe that LLP has not file the said notice.

CONTRIBUTION BY PARTNER [SECTIONS 32 AND 33]

A contribution of a partner to the capital of LLP may consist of any of

the

tangible, movable or immovable property

intangible property

other benefit to the LLP including money, promissory notes,

contracts for services performed or to be performed.

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The obligation of a partner for the contribution shall be as per the LLP

agreement.

Creditor, which extends credit or acts in reliance on an obligation

described in the LLP agreement, without the notice of any compromise

made between the partners, may enforce the original obligation

against such partner.

AUDIT/FINANCIAL DISCLOSURES [SECTIONS 34 AND 35]

LLP shall maintain the prescribed books of accounts relating to its

affairs on cash or accrual basis and according to the double entry

system of accounting.

The accounts of every LLP are required to be audited, except in

following situations:

Turnover does not exceed Rs. 40,00,000 in any financial year; or

Contribution does not exceed Rs. 25,00,000

Central Government has powers to exempt certain class of LLP from

requirement of compulsory audit.

LLP are required to file following documents with the ROC

Statement of Account and Solvency, within 30 days from the end of

6 months of the financial year;

Annual return within 60 days from the end of the financial year.

ASSIGNMENT & TRANSFER OF PARTNERSHIP RIGHTS [SECTION 42]

The rights of a partner to a share of the profits and losses of the LLP

and to receive distribution in accordance with the LLP agreement are

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transferable, either wholly or in part. However, such transfer of rights

does not cause either disassociation of the partner or a dissolution and

winding up of the LLP.

Such transfer of right, shall not, by itself entitle, the assignee or the

transferee to participate in the management or conduct of the

activities of the LLP or access information concerning the transactions

of the LLP.

FOREIGN LLP [SECTION 59 AND RULE 34]

On establishment of a place of business in India, foreign LLP are

required to file prescribed documents for registration with ROC within

30 days of the establishment in India.

Any alteration in the constitution documents, overseas principle office

address and partner of foreign LLP are required to be filed with the

ROC in the prescribed form within 60 days of the close of the financial

year.

Any alteration in the certificate of registration of foreign LLP,

authorized representative in India and principle place of business in

India are required to be filed with the ROC in the prescribed form

within 30 days of alteration.

Foreign LLP ceasing to have a place of business in India, are required

to give notice to ROC in the prescribed form within 30 days of its

intention to close the place of business and from the date of such

notice, the obligation of Foreign LLP to file any document with the ROC

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shall cease, provided it has no other place of business in India and it

has filed all the documents due for filing as on the date of the notice.

CONVERSION OF PARTNERSHIP FIRM/PRIVATE

COMPANY/UNLISTED PUBLIC COMPANY INTO LLP [SECTIONS 55 TO

58, SECOND, THIRD AND FOURTH SCHEDULES]

GOI has, on May 22, 2009, notified provisions relating to conversion of

a partnership firm as defined under the Indian Partnership Act,1932

into LLP;

a private limited company into LLP;

an unlisted public company into LLP.

Second, Third and Fourth Schedules to the LLP Act contain provisions

relating to conversion of a partnership firm into LLP, a private limited

company into LLP and unlisted public company into LLP, respectively.

Eligibility for conversion:

Firm into LLP: Firm can be converted into LLP if all the

partners of firm become the partners of LLP and no one else.

Company into LLP: Private limited company/unlisted public

company can be converted if and only if -

(a) there is no security interest in its assets subsisting or

in force at the time of application for conversion; and

(b) all the shareholders of the company become partners

of LLP and no one else.

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registration may be continued, completed and enforced by or against

the LLP:

all proceedings, conviction, ruling, order or judgment of any

Court, Tribunal or other authority pending in any Court or

Tribunal or before any authority on the date of registration

every agreement irrespective of whether or not the rights and

liabilities there under could be assigned,

deeds, contracts, schemes, bonds, agreements, applications,

instruments and arrangements

every contract of employment

appointment in any role or capacity

any approval, permit or licence issued under any other Act,

etc.

In case of a firm, every partner of a firm which is converted into a

LLP shall continue to be personally liable (jointly and severally with

LLP) for the liabilities and obligations of the firm incurred prior to the

conversion or which arose from any contract entered into prior to the

conversion. In case any such partner discharges any such liability or

obligation he shall be entitled (subject to any agreement with the LLP

to the contrary) to be fully indemnified by LLP in respect of such

liability or obligation.

For a period of 12 months commencing on or before 14 days from

the date of registration, LLP shall ensure that every official

correspondence of LLP bears the following:

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a statement that it was, as from the date of registration,

converted from a firm/private limited company/unlisted public

company into a LLP; and

the name and registration number, if applicable, of the firm/a

private limited company/an unlisted public company from which

it was converted.

WINDING-UP OF LLP [SECTIONS 63 AND 64]

LLPs may be wound-up either voluntarily or by NCLT. LLP may be wound up

by NCLT if

LLP decides to wound up by NCLT;

Number of partners is reduced below 2 for a period of more than 6

months;

LLP is unable to pay its debts;

LLP has acted against the interests of the sovereignty and integrity

of India, the security of the State or public order;

LLP has defaulted in filing Statement of Account and Solvency or

annual return with the ROC for 5 consecutive financial years; or

NCLT is of the opinion that it is just and equitable that the LLP be

wound up

In January 2010, MCA had notified that certain provisions relating to

winding-up of a company under the Companies Act, 1956 will also be

applicable to a LLP. The notification also provides details of modification in

the provisions of the Companies Act relating to winding up for its

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applicability to winding up of LLP under the LLP Act. Subsequently, on 30

March 2010, issued Limited Liability Partnership (Winding up and

Dissolution) Rules, 2010.

MISCELLANEOUS PROVISIONS

The Central government has been empowered to apply any of the

provisions of the Companies Act, 1956 to LLPs with suitable changes or

modification. [Section 67]

ROC may strike off the name of LLP from the register of LLP if LLP is

not carrying on business or its operation, in accordance with the

provisions of LLP Act in the manner prescribed. [Section 75]

Forms/documents required to be filed under the LLP shall be filed in

electronic form online on the LLP portal duly authenticated by the

partner/designated partner with a digital signature and further

attested by the practicing chartered accountant/company

secretary/cost accountant whenever required. [Section 68]

Presently all the provisions of the LLP Act, other than those relating to

winding-up and dissolution of LLP and appellate provisions to be

exercised by NCLT and National Company Law Appellate Tribunal

[NCLAT], have been brought into force.

Till the constitution of NCLT and NCLAT under the Companies Act,

1956, the powers of NCLT and NCLAT will be exercised by the

Company Law Board or High Court as is specified in the LLP Act.

[Section 81]

Unless specifically provided, the provisions of the Indian Partnership

Act, 1932 are not applicable to LLPs. [Section 4]

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7. No Person may be introduced as a new partner without the consent of all the

existing partners. Such incoming partner shall give his prior consent to act as

Partner of the X LLP.

8. The Contribution of the partner may be tangible, intangible, Moveable or

immoveable property and the incoming partner shall bring minimum contribution of

Rs. ..

9. The Profit sharing ratio of the incoming partner will be in proportion to his

contribution towards X LLP.

Rights of Partner

10.All the partners hereto shall have the rights, title and interest in all the assets and

properties in the said X LLP in the proportion of their Contribution.

11.Every partner has a right to have access to and to inspect and copy any books of the

X LLP.

12. Each of the parties hereto shall be entitled to carry on their own, separate andindependent business as hitherto they might be doing or they may hereafter do as

they deem fit and proper and other partners and the X LLP shall have no objection

thereto provided that the said partner has intimated the said fact to the X LLP before

the start of the independent business and moreover he shall not uses the name of

the X LLP to carry on the said business.

13. X LLP shall have perpetual succession, death, retirement or insolvency of any

partner shall not dissolve the X LLP.

14.On retirement of a partner, the retiring partner shall be entitled to full payment in

respect of all his rights, title and interest in the partner as herein provided. However,

upon insolvency of a partner his or her rights, title and interest in the X LLP shall

come to an end. Upon the death of any of the partners herein any one of his or her

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heirs will be admitted as a partner of the X LLP in place of such deceased partner.

The heirs, executors and administrators of such deceased partners shall be entitled

to and shall be paid the full payment in respect of the right, title and interest of such

deceased partner.

15.On the death of any partner, if his or her heir opts not to become the partner, the

surviving partners shall have the option to purchase the contribution of the deceased

partner in the X LLP.

Duties of Partners

16.Every partner shall account to the limited liability partnership for any benefit derived

by him without the consent of the limited liability partnership from any transaction

concerning the limited liability partnership, or from any use by him of the property,

name or any business connection of the limited liability partnership.

17.Every partner shall indemnify the limited liability partnership and the other existing

partner for any loss caused to it by his fraud in the conduct of the business of the

limited liability partnership.

18.Each partner shall render true accounts and full information of all things affecting the

limited liability partnership to any partner or his legal representatives.

19.In case any of the Partners of the X LLP desires to transfer or assign his interest or

shares in the X LLP he has to offer the same to the remaining partners by giving 15

days notice. In the absence of any communication by the remaining partners the

concerned partner can transfer or assign his share in the market.

20.No partner shall without the written consent of the X LLP,--

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I. Employ any money, goods or effects of the X LLP or pledge the credit thereof

except in the ordinary course of business and upon the account or for the

benefit of the X LLP.

II. Lend money or give credit on behalf of the X LLP or to have any dealings with

any persons, company or firm whom the other partner previously in writing

have forbidden it to trust or deal with. Any loss incurred through any breach of

provisions shall be made good with the X LLP by the partner incurring the

same.

III. Enter into any bond or becomes surety or security with or for any person or

do knowingly cause or suffer to be done anything whereby the X LLP property

or any part thereof may be seized.

IV. Assign, mortgage or charge his or her share" in the X LLP or any asset or

property thereof or make any other person a partner therein.

V. Compromise or compound or (except upon payment in full) release or

discharge any debt due to the X LLP except upon the written consent given

by the other partner.

Meeting

21.All the matters related to the X LLP as mentioned in schedule II to this agreement

shall be decided by a resolution passed by a majority in number of the partners, and

for this purpose, each partner shall have one vote.

22.The meeting of the Partners may be called by sending 15 days prior notice to all the

partners at their residential address or by mail at the Email ids provided by the

individual Partners in written to the X LLP. In case any partner is a foreign residentthe meeting may be conducted by serving 15 days prior notice through email.

Provided the meeting be called at shorter notice, if majority of the partners agrees in

writing to the same either before or after the meeting.

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30.The X LLP shall pay such remuneration to the Designated Partner as may be

decided by the majority of the Partners, for rendering his services as such.

31.The X LLP shall indemnify and defend its partners and other officers from and

against any and all liability in connection with claims, actions and proceedings(regardless of the outcome), judgment, loss or settlement thereof, whether civil or

criminal, arising out of or resulting from their respective performances as partners

and officers of the X LLP, except for the gross negligence or willful misconduct of the

partner or officer seeking indemnification.

Cessation of existing Partners

32.Partner may cease to be partner of the X LLP by giving a notice in writing of not less

than thirty days to the other partners of his intention to resign as partner.

33.No majority of Partners can expel any partner except in the situation where any

partner has been found guilty of carrying of activity/business of X LLP with fraudulent

purpose.

34.The X LLP can be wounded up with the consent of all the partners subject to the

provisions of Limited Liability Partnership Act 2008.

Extent of Liability of X LLP

35. X LLP is not bound by anything done by a partner in dealing with a person if

I. the partner in fact has no authority to act for the X LLP in doing a particular

act; and

II. the person knows that he has no authority or does not know or believe him to

be a partner of the X LLP.

Miscellaneous Provisions

36.The limited liability partnership shall indemnify each partner in respect of payments

made and personal liabilities incurred by him

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a) Name:______________________________________

Address:_____________________________________

Signature:____________________________________

b) Name:_______________________________________

Address:_____________________________________

Signature:____________________________________

Minority Protection in Joint Ventures and Investments

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If you are involved in a joint venture company, or with capital investors, you may well

have to take into account the interests of substantial minority shareholders, who are not

willing to allow the unrestricted power of the controlling majority.

Reserving Control

A minority shareholder in such a situation may wish to obtain certain protection in a

shareholders' agreement. This protection may include:

The right to appoint one or more directors

A veto on matters affecting the value of his shares

A minimum dividend

Restrictions on share transfers

And pre-emption rights on new share issues.

Minority shareholders may seek to impose an obligation on the directors that they

provide regular reports on the business. Shareholders rights to such information are

otherwise rather limited.

It makes sense to establish in advance those matters requiring minority shareholder

approval and the procedure that must be followed if approval is not forthcoming.

Buy-Out Mechanisms

The minority shareholder may also seek to impose a requirement that any person

buying a controlling interest in the company should offer to buy his minority

shareholding at the same price and/or he may demand a mechanism to resolve

deadlock by requiring the majority shareholders to buy out the minority shareholders (or

vice versa).

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They cannot be implemented unless the partners agree, even if the majority partner has

sufficient shareholding to approve them. These matters generally protect the rights of

the minority shareholders.

Due to the importance of reserved matters, minority shareholders are seen fiercely

negotiating for them when a joint-venture agreement is discussed.

Some instances: amendments to the charter documents, declaration of dividend,

creation and issue of new shares, appointment and removal of auditors, change of

company's name or registered office, disposal of company's assets, investment in other

entities beyond a certain value, company's dissolution, corporate restructuring, etc.

Since these are critical matters, it is important that they are legally enforceable.

Otherwise, their purpose will be defeated.

The Companies Act, 1956, provides that matters before the shareholders may be

approved by a simple majority vote - more than 50% vote - or a special majority vote - at

least 75% vote. For example, declaration of dividend requires only a simple majority

vote, while a change of company's name requires a special majority vote.

In a 50:50 joint venture, reserved matters are 'generally' not provided. This is because a

partner cannot pass a resolution with his 50% vote - he will need the vote of the other

partner. To that extent, both partners are sufficiently protected.

However, the situation in a 51:49 venture is different. A 51% partner is in a position to

pass all matters that require a simple majority. The consent of the 49% partner is

required only for matter requiring special majority. In a 76:24 venture, the situation is

such that the majority partner is in a position to get all matters passed without the

consent of the minor partner, irrespective of whether they require simple or special

majority.

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Therefore, in all partnerships that are not equal, it is critical for the minority shareholder

to be protected through reserved matters.

As for legal enforceability of these matters, the issue has never been tested and there

are no direct judicial precedents on this point.

One view is that these matters are enforceable - both against joint-venture partners and

against the joint-venture company if the matters are incorporated in the bylaws or the

articles of association (AoA) of the company. This view arises as there is nothing in the

Companies Act that prohibits contractual agreement on such matters.

There is, however, another view: under the Act, shareholders have the right to vote in

direct proportion to their shareholding. Being a legal right, it cannot be denied to them

by the company. Therefore, if a shareholder has requisite shareholding to pass a matter

by a simple or a special majority, the company cannot deny that right, even if the

shareholders have contractually agreed otherwise.

So, as a company cannot deny this right, it cannot be legally bound to honour reserved

matters and the shareholder has freedom to vote on his shares in the manner he wantsand have resolutions passed, provided he has the requisite shareholding to pass them.

Therefore, a provision contrary to this in the bylaws will be against the Act and, hence,

void.

In a less-known matter of Jindal Vijayanagar Steel, such a question - though not directly

on reserved matters - came before the Company Law Board (CLB). There was a

provision in the shareholders agreement requiring shareholders' mutual consent to shift

the company's registered office. However, this provision was not incorporated in the

AoA of the company.

The CLB held that this clause requiring mutual consent cannot be forced on the

company as the provision was not incorporated in the company's AoA.

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It also held that such a clause when incorporated in the AoA would run contrary to the

spirit of the Act and, so, would become void. The CLB reasoned that the Act permits

shifting the registered office by a special majority vote and a denial of that right to a

shareholder with the requisite majority will be against the spirit of the Act.

Although there are no direct judicial precedents on the issue and, therefore, reserved

matters hold good, it is worth considering the above decision while agreeing on

reserved matters.

Who is the minority shareholder?

In legislation, established case law and doctrine, you can look in vain for a

general definition of a minority shareholder. Law assesses whether a specific

right or action should be given to a minority shareholder on a situation-to-

situation basis and also decides from case to case whether one qualifies as a

minority shareholder. This decision whether one has a right or an action isusually described in law in terms of percentage of the issued share capital, but

sometimes also in terms of the absolute book value of the shares required, or

as a combination of both. The fairness of this adherence to percentages in

deciding whether a shareholder is a minority shareholder can be questioned.

Dutch law, for instance, permits the issue of priority shares. These shares

have special controlling rights attached to them, making it possible to control

the company without holding a large percentage of the shares and without

providing a large share of the companys capital. A consequence of this is that

a shareholder providing the majority of the capital may sometimes not control

the company. In such a case the majority shareholder is effectively in a

minority position with regard to the exercising of controlling rights. Under

Indian company law, capital and control are not necessarily in line, so it is, in

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our opinion, impossible to define the concept of minority shareholder without

bearing in mind the control situation in the company. When a company makes

use of a specific control structure, whether that be priority shares, a pyramid

structure, or preference shares, percentages lose much of their relevance.

Under these circumstances we would define minority shareholders as those

shareholders who, irrespective of the amount of capital they provide, are

unable to exercise any significant form of control within the company.

What are minority rights?

In Indian company law several rights are given to all shareholders, irrespective

of the number of shares they hold. Not all of these rights can be qualified as

minority rights. The right to vote in the general meeting of shareholders, for

example, will usually not be a minority right for two reasons. First, because

this right is not specific to minority shareholders and second, because this

right usually has no significant meaning for minority shareholders. In the

event of a disagreement, they will be the ones to lose the vote at the general

meeting of shareholders. In our opinion, for a right to be a true minority right,

it needs to possess the characteristic that it creates the possibility that an

outcome can be reached that is different from the outcome that the majority

of the shareholders wish. This means that the minority shareholder can

interfere through a minority right in the affairs of the company, thereby

correcting the policies of the majority shareholder. Within the minority rights

we draw a distinction between positive and negative rights. By positive rights

we mean the ability to initiate policies by the company that would not have

been pursued without the initiative . By contrast, negative rights refer to the

possibility for a minority shareholder or a group of minority shareholders to

block a resolution that is desired by the majority. In addition to these two

categories we can mention a third: that of the so-called normalising minority

rights. These are rights that the minority shareholder can exercise to force the

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