2. A company formed and registered under the Companies Act is
a separate legal entity distinct from its shareholders and directors. The extent
to which the liability of shareholders of a limited company, formed and
registered under the Companies Act, towards the debts of such a company is
limited, is contained in the Memorandum of Association thereof. Accordingly, if
a company is limited by shares, a shareholder is not required to make any
contributions for the satisfaction of the debts of the company of any amount
over and above the amounts remaining due and payable on the shares held by him.
Such amount may be called up by the board of directors of the company in the
course of the day-to-day operations of the company or in the event of winding up
thereof, as the case may be. Where a company is limited by guarantee, a
shareholder is, upon a winding-up thereof, required to contribute the amounts
specified in the Memorandum of Association thereof for satisfaction of the debts
of such a company limited by guarantee. S. 426 of the Companies Act clearly sets
out the aforesaid position.
3. We now examine the provisions of the LLP Act in relation
to limitation of liability of the partners of an LLP. The LLP Act does not
specifically provide the manner in which liabilities of the partner would be
limited. However, the same can be deduced from several provisions of the LLP Act
as set out hereinafter.
4. S. 3 of the LLP Act, inter alia, provides that an
LLP is a body corporate separate from its partners, unlike a partnership firm
constituted under the Partnership Act, which has no separate legal existence. S.
4 of the LLP Act, inter alia, provides that the provisions of the
Partnership Act would not apply to an LLP. Ss.(3) and (4) of S. 27 of the LLP
Act, inter alia, provide that an obligation of the LLP whether arising
out of contract or otherwise is solely the obligation of such LLP and the
liabilities of such LLP are to be met out of the property of the LLP. Ss.(1) of
S. 28 of the LLP Act provides that a partner is not personally liable for any
obligation of an LLP solely by reason of being a partner thereof. Ss.(2) of the
said S. 28, inter alia, provides that such partner would be personally
liable for wrongful acts or omissions committed by him, but not those committed
by any other partner of the LLP. Therefore, in terms of the aforesaid provisions
of the LLP Act, a partner of an LLP is not personally liable for the obligations
of such LLP, except those arising as a result of his own wrongful acts or
omissions.
5. However, unlike the Companies Act, the aforesaid
provisions do not specifically indicate the circumstances and extent to which
any partner would be required to make contributions to the LLP. The provisions
in relation to such contributions are contained in S. 32 and S. 33 of the LLP
Act.
6. Ss.(1) of S. 32 of the LLP Act, inter alia,
provides that a partner may make contributions to the LLP in the form of
tangible or intangible property, money, promissory notes and the like. Ss.(2) of
S. 32 of the LLP Act, inter alia, provides that the monetary value of the
contribution of each partner is required to be accounted for and disclosed in
the manner prescribed. Rule 23 (1) of the Limited Liability Partnership Rules,
2009 (‘the Rules’), inter alia, provides that the contribution of such
partner is required to be accounted for and disclosed in the accounts of the LLP
along with the nature of contribution and amounts.
7. Ss.(1) of S. 33 of the LLP Act, inter alia,
provides that the obligation of a partner to contribute money or other property
or to perform services for an LLP is governed by the provisions of the limited
liability partnership agreement (‘the LLP Agreement’) executed between the
partners. The said provisions are broad enough to enable contractual
restrictions to be placed on the obligation of a partner to make contributions,
whether on incorporation of the LLP or dissolution thereof or at any time during
the continuance thereof. Therefore, generally speaking the LLP Agreement may
provide that a particular partner is required to contribute certain amounts upon
execution of the LLP Agreement or in the usual course of its business or for
that matter perform services in the course of the business of the LLP, but is
not required to contribute any amounts upon the winding-up thereof. The LLP
Agreement may also provide that a partner is bound to contribute certain sum
only upon winding-up thereof and not otherwise. The aforesaid clauses could, in
ordinary circumstances, be regarded as sufficient to restrict the liability of a
partner.
8. However, the LLP Act does not itself provide for the
circumstances in which the obligations of the LLP can be enforced against the
partners thereof and we need to consider as to whether provisions such as the
aforesaid are sufficient to protect the interests of a partner of the LLP
against any personal liabilities. We therefore examine the provisions of the LLP
Act which define the circumstances in which an obligation of a partner under the
LLP Agreement can be enforced.
9. It is obvious that an obligation in the LLP Agreement can be enforced against a partner by other partners being parties thereto. In addition thereto, Ss.(2) of S. 33 of the LLP Act, inter alia, provides that a creditor of the LLP which extends credit to or acts on an obligation described in the LLP Agreement may enforce the original obligation against such partner. The said Ss.(2) of S. 33 does not restrict the aforesaid right of the creditor to a circumstance in which the LLP is ordered to be wound-up, but appears to extend such right to the creditor in all circumstances. Therefore, an obligation of a partner to contribute any sum to the LLP can be enforced by a third party against such partner at any point of time and is not limited to the event of winding-up as in case of a company formed and registered under the Companies Act. Similarly, in case a partner has agreed to contribute any service to the customer or clients of the LLP, such an obligation may be enforced by the customer or client of the LLP against the particular partner of the LLP. Ss.(4) of S. 24 of the LLP Act in fact provides that the liability of a partner of the LLP to such LLP or its other partners or to third parties would not cease merely by virtue of his ceasing to be a partner of the LLP. Also, questions may arise as regards the contribution made by a partner at the time of setting-up of the LLP, which contributions are eventually refunded to the partner on account of profits made by the LLP. In such a case, it is necessary to consider as to whether the partner would be obliged to once again bring in such contributions in future, which have been refunded upon the LLP having made profits. All these aspects would have to be taken into account while drafting the LLP Agreement which may differ on a case-to-case basis.
10. To summarise the issue, the LLP Act is a very complicated piece of legislation. The LLP Agreement may need to take care of a large number of issues for protection of its members. Moreover, unlike companies formed and registered under the Companies Act, the LLP Act and the Rules do not prescribe the manner in which the liability of a partner of an LLP is limited. It is’ advisable and essential therefore that the LLP Agreement is carefully drafted by an experienced person so that the same contains all necessary provisions as per the LLP Act, so as to ensure that the liability of a partner thereof to make contributions to an LLP does not extend be-yond what is envisaged and the LLP remains as such in law and in spirit.
