WITHOUT CONTEMPT
SomasekharSundaresan / New DelhiNovember 21, 2005
The ministry of company affairs has published a concept paper on limited liability partnerships (LLPs). Finally, Indian professionals have some indication of how the government will like to help them compete with the world.
Unlike companies—in which the liability of shareholders can be limited to the extent of the share capital—partnerships in India have unlimited liability. Indian partnership laws are over 60 years old, out of touch with modern-day realities, and out of sync with international practices on partnerships.
Add to that the restrictions on professions such as auditing and law that do not allow enterprises to be organised as corporates. Add the 20-partner limit on a partnership firm, and you have a completely backward business environment for Indian professionals.
There are so many professions that do not need to be organised as companies and have to deal with a fairly unproductive range of compliance requirements.
These are individual-driven businesses, primarily in the services sector, which do not need to be organised as companies. Introduction of the concept of LLPs will fill this void and plug the lacunae faced by the system.
Unlimited liability that is attendant with proprietorships and partnership firms—there being no legal distinction between the assets of the proprietor or the partners and the assets of the business, thereby, leading to situations where individuals could be sued to bankruptcy—is the bane of such professions.
The human mind will naturally be constricted in the size of the risk that it is willing to take, particularly, when it is clear that every venture and every step forward amounts to putting at stake everything that the proprietor or the partners have.
Moreover, the joint and several liability attendant with partnerships results in any partner being able to risk the personal assets of every other partner.
International professional firms are mostly organised as LLPs and are able to leverage their risk-taking capacity and compete effectively with Indian professional firms. The concept paper is welcome.
However, the approach taken in the concept paper indicates that the ministry would make life of LLPs very similar to that of companies.
By excluding the applicability of all forms of partnership law currently applicable to partnerships, the concept paper—if adopted in the current form—would make life for LLPs as difficult as it is for companies.
The concept paper provides for a “manager” of every LLP who will ensure compliance and will be personally liable for all penalties imposed on the LLP. This has taken the concept of “officer in default”, outlined by company laws, to an extreme.
If such a manager is not registered with the authorities, every partner will be a manager, and, therefore, every partner will become personally liable for penalties. This will negate the fundamental concept behind LLPs.
The concept paper provides for cessation of partnership of any partner with a 30-day notice. Every partner will be an agent of only the LLP and not of the other partners.
A partner has to be expressly authorised to bind the partnership, without which the LLP cannot be bound to third parties in respect of obligations incurred without authorisation. The obligations of the LLP and the liabilities arising from them will be limited to the value of the property of the LLP.
Surprisingly, the concept paper suspends the limited liability when it comes to any intentional act of fraud on creditors by an LLP. This will lead to every creditor always alleging fraud on the part of the LLP, thereby, suspending the very foundation of limited liability.
For taxation purposes, the paper proposes to retain the avoidance of double taxation of partners, which is a welcome measure. It will be crucial to ensure that the income-tax laws are not made to be in conflict with this position.
The concept paper provides for free transferability of a partner’s economic interests in an LLP. This is uncalled for and needs to be left to the partnership deed among the partners. LLPs, unlike public listed companies, do not need to have free transferability of partners’ shares. The concept paper also provides for conversion of existing partnerships and companies into LLPs.
Currently in a skeletal form, the ministry has called for public comments on the concept paper. In a number of places, it has merely been stated that regulations would be made to govern specific concepts such as mergers and amalgamations of LLPs, registration of foreign LLPs, etc. However, this is an excellent beginning.
The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own
Limited liability Bill on the anvil
Our Economy Bureau / New DelhiJuly 03, 2006
Two parliamentary Bills meant to significantly alter the corporate legal framework in India are to be tabled in this year's monsoon and winter sessions of Parliament, respectively.
A Bill to introduce Limited Liability Partnerships (LLPs) would be tabled in the monsoon session beginning August, and the Bill to alter the Companies Act in the winter session, Prem Chand Gupta, Minister of Company Affairs said.
The highlight of LLP is that it would provide partnerships with limited liability for partners, while simultaneously retaining tax provisions that govern partnerships.
LLP was the outcome of a committee set up earlier by the government under the chairmanship of Naresh Chandra to study the Companies Act and Indian Partnership Act.
The committee was asked to make suggestions that would bring about a regulatory environment, that would be marked by quality rather than quantity of regulation.
The MCA has been working on a new Companies Bill for a while. Gupta termed it as a massive exercise where a lot of issues had to be sorted out.
The current round of proposals to amend Companies Act included the constitution of an expert committee under the chairmanship of J JIrani, director of Tata Sons, to make recommendations.
The Irani committee included representatives from industry bodies and regulatory bodies such as the Securities and Exchange Board of India.
The government's proposals were guided by the need to have a comprehensive legislation that cover the entire spectrum of needs from registration to liquidation.
The Bill broadly aims to remove superfluous restrictions that the government currently imposes on companies, but simultaneously empowers it to check abuse by managements or governing boards, MCA officials had earlier said.
The complexity in the exercise to introduce LLP may not be of the same magnitude as the Companies Act, but the introduction of LLP would necessarily involve conditionalities.
The Federation of Indian Chambers of Commerce and Industry had earlier suggested that compulsory insurance be introduced along with LLP, especially of professional firms such as those chartered accountants and lawyers, because the services provided by them expose them to disproportionately high liabilities for negligence
Limited liability partnership law flawed, say experts
BS Reporter / KolkataApril 30, 2007
The Limited Liability Partnership (LLP) concept is saddled with pitfalls.
This was pointed out by Aditya Sharma, Associate Director, PricewaterhouseCoopers during a seminar on LLP, organised by the Eastern India Regional Council of The Institute of Company Secretaries of India.
Sharma said that among the many pitfalls which stalk the laws governing the Limited Liability Partnership concept are problems regarding cross border presence, sharing of common gains, legal jurisdiction and taxation issue.
"The profit sharing structure is largely discretionary and not too rigid and this leaves open a possibility of bias", he added.
Sharma said the LLP laws framed in the UK and 40 different states of the USA had led to growth of this sector.
"There are more than 4500 LLPs and about 6 million registered companies in UK",he said.
He admitted he was not very upbeat on the success of this new business vehicle in India.
He said that managing a trans-national partnership could be tricky and only few law firms had pulled it off effectively.
Speaking on the occasion, Sanjay Bhattacharya, a chartered accountant, said, "This proposed LLP model will only benefit the large organisations and not the small partnership firms."
He pointed out that the Limited Liability Partnership Bill was tabled to do away with the unlimited partnership in case of general partnership firms which have of late faced a rise in litigation.
The LLP Bill was introduced in the RajyaSabha on December 15 last year by Prem Chand Gupta, the Union Minister of Company Affairs.
It also got the Cabinet nod.
The proposed legislation, hailed as path-breaking by CII, is expected to be a hybrid between a limited liability company and a partnership firm.
It will particularly benefit entrepreneurs, professionals and enterprises providing services. The LLP structure is prevalent in countries such as the UK, the US, Australia, and Singapore.
The LLP Bill of 2006 is broadly based on the UK and Singapore LLP Acts.
According to the Bill, an LLP is a body corporate with an identity distinct from its partners and will have perpetual existence.
A minimum of two partners will be required for the formation of an LLP with no limit on the maximum number of partners. It further stipulates that the Indian Partnership Act, 1932, shall not be applicable to LLPs.
Vicarious liability of directors
LEGAL EYE
KumkumSen / New DelhiNovember 26, 2007
After the bulls and bears of the capital markets, the interiors of a Board room exude a sense of comfort. Quite misleading, because the persons who meet there at least four times a year, carry the burden of the limited liability company on their collective shoulders, some more than others. Directors are the trustees of the company’s money and properties, transact business and take on responsibilities as its representatives. They are also the fall guys, who, under the concept of vicarious liability, are liable for the corporation’s offences.
Usually a penal provision in a statute makes every person(s) in charge and responsible for the conduct of the Company’s business and affairs liable for prosecution. There are over hundred such Acts and only a few, such as the Factories Act make a director specifically liable. To satisfy the test of vicarious liability, the complainant has to allege and prove that the accused director was indeed responsible for the conduct of the particular business.
In recent years, directors’ liability in respect of negotiable instruments has been a hotly contested subject. The Companies Act, under Section 47, provides that a bill of exchange hundi or pronote if is manifestly made, accepted, drawn or endorsed by the company, the signatory would not be liable. This language being very wide, the credibility of cheques became low because of poor remedial measures in cases of dishonour.
The Negotiable Instruments Act 1881, an antiquated piece of legislation, had not envisaged this probability, and the civil remedy by way of recovery in a civil suit was self-defeating. The pursuit of criminal proceedings under IPC were equally fallible because of the rigid requirements of proof. The Courts treated dishonour as an act of cheating, which required establishment of mensrea or awareness on the director’s part.
In 1988, the Act was amended to insert Sections 138 to 142, specific to cheque-bouncing with the intent that drawers of cheque treat the instrument with due sanctity and to end the farce of “stop payment’ incidents. Simultaneously the definition of “officer in default” in the Companies Act was substantially amended following certain high court decisions where ,again, prosecution failed for absence of mensrea, particularly in relation to managing and whole time directors.
The general description was replaced by specifics including managing director, whole time directors, and in the absence of identifiable officers or directors, the entire Board. However, nominee directors of Government and public sector banks are excluded from prosecution.
Initially, the Courts were quite uncertain as to the relevant reasons and persons culpable. But clarity was provided by the Supreme Court in the Anil Hada case in 2000, that three categories of persons fall within the purview of the legal fiction of the section: the company, the person(s) responsible for its business, and any director or manager with whose connivance or neglect the offence has been committed.
However, on facts, the courts have consistently held that in order to prosecute directors, there has to be specific allegations as to how the directors were involved in and responsible for the offence, departing from the rule of vicarious liability.
The Supreme Court has held that the legal fiction created by Section 141 is subject to the strict compliance of statutory requirements, based on averments in the complaint, and is not easy for a complainant to build up a non-rebuttable case proving the director’s involvement in the company’s affairs.
KumkumSen is a Partner at RajinderNarain & Co.
India Inc hails introduction of LLP Bill
BhadraSinha / New DelhiDecember 27, 2006
The government’s move to introduce the Limited Liability Partnership (LLP) Bill in the recently concluded Parliament session has been welcomed by various corporates of the country who feel that the Bill, if converted into an Act, would organise the entrepreneurial initiative and allow for the evolution of new multi-disciplinary practice to offer a consolidated product or service.
Also, it would prepare the Indian professionals to compete with the highly growing sophisticated professional industry of the West which is already eyeing the sub-continent.
The Company Affairs Ministry has said that the need to have the new law has long been recognised for businesses which may require a framework to provide flexibility, suited to the requirements of the services.
PallaviShroff, senior partner of Amarchand and Mangaldas firm, upholds this viewpoint. “The new law shall, without imposing a detailed legal and procedural requirements intended for large widely held companies, will be an alternative corporate business vehicle offering benefits of limited liability besides giving its members a free hand to organise their internal structure as partnership based on agreement.’’
Shroff added that it was a very welcome legislation for professional services. In the present scenario, people enter into partnerships under the Indian Partnership At, 1932. However, there are restrictions as more than 20 partnerships would mean incorporating the firm into a company.
To avoid this, people adapt different means and ways to evade the limitation in the present law. AmitKapoor, head of the infrastructure practice of J Sagar and Associates also feels that people seldom enter into a partnership as there is always a risk of being held responsible for the acts of the other partner.
“LLP would mean protection from any litigation. If a person has certain financial interest in a particular partnership, the same remains intact in case the other partner gets sued,’’ said Kapoor.
According to him the law will change the paradigm. Professionals will be encouraged to come together and LLP will start the practice of convergence.
“Today one does want to rely on somebody’s competence but is deterred with regard to the liability. This stalls different professionals to enter into partnership,’’ he added.
LLP is also aimed at building the small scale industry. As per the survey of Ministry of Small Scale industry more than 90 per cent of small scale industry are individual proprietorships while only 2 per cent constitute partnership.
Advocate SumanBatra of KesarDass states LLP shall promote the service sector to become more organised and have a legal form. This, he claims, would entitle the small scale industry to have access to financial loans from financial institutions.
“In absence of a structured form of business, banks and financial institutions hesitate in sanctioning loans to a small scale industry as it is difficult to recover loan from an individual. Since LLP will promote more legalised firms in the country, there will be no hesitation in giving loans to an LLP.
In case of a default, the LLP can be would up just like a company under the Companies Act. Even in that case, the interests of partners remains protected,’’ adds Batra.
He further states that for professionals it will be a huge leap forward if LLP is made an Act. ``Even a law firm or an chartered accountant firm will be, under the LLP, able to raise capital by taking loans,’’ says Batra.
He cites an example from the West of how law firms internationally are more organised. ``Before taking up a case, law firms abroad sign an engagement document with the client informing the latter about the liability of each partners in the company. This enables a more professional approach towards work,’’ he adds.
Cabinet approves limited liability Bill
BS Reporter / New DelhiMay 02, 2008
In a move that will catalyse the growth of small companies, especially in the service sector, the Union Cabinet today approved the introduction of the Limited Liability Partnership Bill, 2008, in Parliament.
The law will allow entrepreneurs to set up shop without the need for onerous compliance procedures required for larger companies.
The Cabinet Committee on Economic Affairs (CCEA), which also met here today, approved a proposal by Agam SPV Six Ltd, a Cayman Islands-registered entity, to set up a wholly owned subsidiary with foreign direct investment of up to $300 million (Rs 1,170 crore) to set up new airports and upgrade existing airports, either directly or through its subsidiary.
The approval is subject to compliance with sectoral regulations, full disclosure of source of funds and adherence to know-your-customer norms.
The CCEA also approved a nutrient-based fertiliser subsidy scheme. Fertiliser manufacturers will now be allowed 5 per cent extra on notified retail prices of price-regulated fertilisers to encourage coating and fortification of fertilisers with secondary and micro nutrients.
In case of zinc-coated urea and boronated single super phosphate (SSP), the companies will be allowed to charge 10 per cent over the retail price of the subsidised fertiliser. The manufacturers will be free to convert up to 20 per cent of their total production into such value-added fertilisers.
CII to benchmark SMEs globally
Bs Reporters / KolkataAugust 19, 2008, 4:45 IST
Confederation of Indian Industry (CII), in association with IIM Kolkata, IIT Chennai and Japanese consultant ShobiShiba would be launching a visionary Small and Medium Enterprise (SME) programme this year with the goal of creating a model visionary SME in the country.