LIMITED AND UNLIMITED LIABILITY PARTNERSHIP: A COMPARATIVE

ANALYSIS

Contracts- II

Submitted by

KRISHNA KANT JAIN

SM0115022
II Year, IV Semester

National Law University, Assam

 Content

Table of Cases....................................................................................................2.

Table of Statutes.....................................................................................................2

Table of Abbreviations (sort by A to Z)................................................................3

Introduction….......................................................................................................4

Aim(s)….................................................................................................................6

Objectives (s)..........................................................................................................6

Scope and Limitations….........................................................................................6

Review of Literature................................................................................................7

Research Questions/ Hypothesis/Hypotheses..........................................................9

Research Methods applied to test the hypothesis/hypotheses…..............................9

Liability of Partners in Partnership Firm (Unlimited Liability)......................10

Limited Liability Partnerships.............................................................................12

Partnership with Limited Liability in India........................................................15

Exception to the Limited Liability Rule...............................................................17

Conclusions..............................................................................................................18

Bibliography..............................................................................................................19

1
Table of Cases

1. SNP Punj v. CIT

2. Hurruck Chand v. Gobind Lal Khetry
3. Lee v. Brown
4. Raskov v. Stapke & Harris
5. J & J Sports Productions, Inc. v. Sunsets on Sand
6. Henry v. Masson
7. Edlinger v. United States
8. Vohra v. Cadigan Arbor Park
9. Total Holdings USA, Inc. v. Curran Composites, Inc

Table of Statutes

1872 -The Indian Contract Act

1932- The Indian Partnership Act

2000- The UK Limited Liability Partnerships Act

2008- The Limited Liability Partnership Act

1922- New York Partnership Law

Table of Abbreviations (sort by A to Z)

& AND
AIR All India Reporter
Anr Another.
Art Article
Assn Association
Aug August
Co Company
Doesn't… Does not
Ed. Edition
Govt. Government
Hon’ble Honorable
i.e That is
Ibid. IBIDEM
Inc. Incorporation
Ltd. Limited
Ors Others
LLP Limited Liability Partnership

Pg. Page
s/d Signed
SC Supreme Court
SCC Supreme Court Cases
SCR Supreme Court Record
Sec. Section
U.S United States
V Versus
Introduction

The issue of liability is generally the most important one in all types of business
organizations. Liability means and implies responsibility for an act or omission. It is
exposedness to the sanctions of law.1 According to Salmond, “Liability or responsibility is
the bond of necessity that exist in between the wrongdoer and the remedy of the wrong.” 2
The liability of a person consists in those things which he must do or suffer.3

As far as partnership is concerned, it has been a very popular and convenient mode of
business for a long time in the history and still continuing. Partnership is the relation between
persons who have agreed to share the profit of a business carried on by all or any of them
acting for all. Persons who have entered into partnership for one another are called
individually “Partners” and collectively “a firm” and the name under which their business is
carried on is called the “firm name”.

The legislature in India made a slight variation in the traditional meaning of partnership and
provided a new form of statutory partnership mode called as Limited Liability Partnership.
The basic difference between the abovementioned two is the extent of liability. As the name
suggests, the latter from imposes the liability upon the partner which is limited in nature. But
again the question arises as to what should be the extent of such limitation on liability. The
answer has been given by the statute itself through which the concept of limited liability
partnership was introduced in India.4

India was also not far behind other nations in this field. After opening up of the Indian
economy, the entrepreneurship, knowledge and risk capital had combined to provide a further
impetus to India’s economic growth. In this background, a need was felt for a new corporate
form that would provide an alternative to the traditional partnership with unlimited personal
liability on the one hand, and, the statute-based governance structure of the limited liability
company on the other, in order to enable professional expertise and entrepreneurial initiative

1
Agarwal Nomita, Jurisprudence (Legal Theory), 10th ed., Central Law Publication, Allahabad, 2015, at p. 254.
2
Fitzgerald P.J., Salmond on Jurisprudence, 12th ed., Universal Law Publishing Co. Pvt. Ltd., Delhi, 2006, at p.
349.
3
Mahajan V.D., Jurisprudence and Legal Theory, 5th ed., Eastern Book Company, Lucknow, 2012, at p. 365.
4
The concept of the Limited Liability Partnership was introduced in India via ‘The Limited Liability
Partnership Act, 2008’ passed by Indian Parliament and subsequently published in the official notification on
9th January 2009 with an objective (as stated in the preface of the Act) ‘…to make provisions for the formation
and regulation of limited liability partnerships and for the matters concerned therewith and incidental thereto…’
to combine, organise and operate in flexible, innovative and efficient manner. The concept
and necessity of Limited Liability Partnership was further highlighted and emerged out of the
Naresh Chandra Committee Report5 on ‘Regulation of Private Companies and Partnership”
and of the Dr. J. J. Irani Committee Report6 on ‘Company law’. In Dr. J. J. Irani Committee
Report the need of limited liability Partnerships (LLPs) and LLP Act was stated in following
words:

“In view of the potential for growth of the service sector, requirement of providing flexibility
to small enterprises to participate in joint ventures and agreements that enable them to access
technology and bring together business synergies and to face the increasing global
competition enabled through WTO, etc., the formation of Limited Liability Partnerships
(LLPs) should be encouraged. It would be a suitable vehicle for partnership among
professionals who are already regulated such as Company Secretaries, Chartered
Accountants, Cost Accountants, Lawyers, Architects, Engineers, Doctors, etc. However, it
may also be considered for small enterprises not seeking access to capital markets through
listing on the stock exchange. We recommend that a separate Act be brought about to
facilitate limited liability partnerships. The concept need not be addressed in Companies
Act.”

Keeping in mind the need of the day, the Lok Sabha passed the Limited Liability Partnership
Bill on 13 December 2008, thereafter it received the assent of the President on 7 January
2009 and got the legal status as The Limited Liability Partnership Act, 2008 (hereinafter ‘the
Act’).7

Every partner of an LLP would be, for the purpose of the business of the LLP, an agent of the
LLP but not of the other partners. Liability of partners shall be limited except in case of
unauthorized acts, fraud and negligence. But a partner shall not be personally liable for the
wrongful acts or omission of any other partner. An obligation of the limited liability
partnership whether arising in contract or otherwise, is solely the obligation of the limited
liability partnership. The liabilities of LLP shall be met out of the property of the LLP.8 LLP

5
Ministry of Finance & Company Affairs, Gov’t of India, Report of The Committee on Regulation of Private
Companies And Partnership: Naresh Chandra Committee-II (July 2003)
6
Ministry of Company Affairs, Gov’t of India, Report on Company Law: Dr. Jamshed J. Irani Committee (May,
2005), available at http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf, last accessed on
23/04/2017.
7
The Limited Liability Partnership Act, No. 6 of 2009, available at
http://www.mca.gov.in/Ministry/actsbills/pdf/LLP_Act_2008_15jan2009.pdf, last accessed on 23/04/2017.

5
8
http://www.mca.gov.in/LLP/faq_liability_partners.html, last accessed on 25/04/2017.

5
has a separate legal entity, liable to the full extent of its assets, the liability of the partners
would be limited to their agreed contribution in the LLP. Further, no partner would be liable
on account of the independent or un-authorized actions of other partners, thus allowing
individual partners to be shielded from joint liability created by another partner’s wrongful
business decisions or misconduct.9

A partner is said to have unlimited liability in a partnership firm governed under the Indian
Partnership Act, 1932 (the "Partnership Act") because he is personally liable for the losses of
the business being carried out by the partnership firm. If a partnership firm suffers losses and
an erosion in its net worth as its debts or liabilities exceed its assets, creditors can proceed
against the personal assets of the partners of the firm to recover their debts. This is unlike in
the case of a company or a limited liability partnership ("LLP").

Aim

To Study and compare the Limited and Unlimited Liability Partnership

Objectives

To understand the meaning Limited and Unlimited Liability Partnership.

To know the difference between Limited and Unlimited Liability
Partnership
To find out what are the Exceptions to Limited Liability Partnership rule.

Scope and Limitations

To study the Area of Limited and Unlimited Liability Partnership in India and Abroad.

9
http://www.llponline.in/what_is_llp.php, last accessed on 25/04/2017.

6
Review of existing literature

1. Madhusudan Saharay, TEXTBOOK ON INDIAN PARTNERSHIP ACT WITH

LIMITED LIABILITY PARTNERSHIP ACT (2010), Universal Law Publishing
Co. Ltd., C-FF-1A, Dilkush Industrial Estate.
The abovementioned book has been published at a time when the concept of ‘limited
liability partnership’ has become an integral part of the partnership law. The present
book is a welcome addition to the subject as it brings together both the kinds of
partnerships under one umbrella. The book is divided into two parts, part I deals with
Indian Partnership Act, 1932 while part II deals with the Limited Liability Partnership
Act, 2008. Since the present book is written in the form of text bookcum-commentary,
the chapterisation of the book is also according to the scheme of both these
legislations. The author devotes 35 pages on index as compared to 270 pages of the
entire book. This exhaustive index provides the sub-headings. The repetition of the
headings in an exhaustive manner in a three-tier way should have been avoided.
Under part I of the book, apart from the introduction, there are eight chapters
according to the scheme of the 1932 Act. The introductory chapter is definitely
praiseworthy and appears as a biography of the partnership law. This chapter gives
brief idea about the growth of law of partnership under different existing legal
systems. The chapter also provides a glimpse of the report of Law Commission of
India2 on partnership law and other related issues. The subsequent chapter runs
according the scheme of the 1932 Act with a brief discussion on almost each and
every section of the Act.
Chapter I deals with preliminary subjects such as “act of firm” and “business” while
business has been discussed comparatively with common law but on the point of “test
of business” merely one line discussion does not appear to be adequate. Again, in
chapter II, the discussion of definitions of “Partnership”, “Partners”, “Firm” and
“Firm name”, “Partnership at Will”, “Particular Partnership”, “Limited Partnership”
and some information on “Group Partnership”, etc. are qualitative and must for a
beginner.
 Chapter III is devoted to an analysis of various provisions dealing with the rights and
duties of partners and property of the firm.
The author in chapter IV has discussed right, duties and liabilities of the partners
elaborately and sectionwise. The discussion of the principle of holding out and the
position of minors in a partnership is not only elaborate but also excellent.
Chapter V deals with incoming and outgoing partners and their rights, duties and
liabilities. Under chapter VI, the provisions regarding dissolution of firms have been
discussed. The book presents a detailed account of various grounds and modes of
dissolution and its consequences.

2. P C Markanda, THE LAW OF PARTNERSHIP IN INDIA, Lexis Nexis

Butterworths Wadhwa, 2010, Lucknow

The book establishes Partnership as a concept has evolved over a period of centuries
now. In the nascent stages of the concept, faith and trust amongst the partners was the
corner-stone of the partnership and need for a written instrument was not felt
necessary. However, with the passing times and changing values, even the written
instruments were being flouted with impunity. This is borne out from the fact that
initially the law with regard to partnership was contained in Sections 239-266 of the
Indian Contract Act, 1872, but the same proved to be insufficient and defective to
meet the exigencies thrown by changing times, values and needs. The business
community was not satisfied with the provisions, which impelled the legislature to
enact a separate law relating to partnership. This led to the enactment of the Indian
Partnership Act, 1932. The English law, on which the provisions of the Indian
Contract Act were founded, also underwent changes, leading to the English
Partnership Act, 1890. The author has extensively and comprehensively covered the
various aspects dealing in the Partnership Law.
The books contains exhaustive notes, commentary on case-law, Indian & Foreign, and
State Amendments on the Indian Partnership Act, 1932 (Act 9 of 1932). The book
also incorporates full text of the Limited Liability Partnership Act, 2008 and Limited
Liability Partnership Rules, 2009. It provides Case law, both Indian and foreign, as
well as excerpts from commentaries of celebrated authors have been included in the
 book. Each Section has been divided into various heads along with a critical analysis
of various provisions of the Act for the facility of the readers.

3. S.A. Naik, LAW RELATING TO LIMITED LIABILITY PARTNERSHIP IN

INDIA, Lexis Nexis Butterworths Wadhwa, Lucknow, 2010
This book examines in detail the formation and operation of a Limited Liability
Partnership (LLP) as a form of business organization in India. In India the concept of
limiting the liability of partnerships was introduced through the LLP Act, 2008. Under
the Act a partnership has become an entity which is a combination of a company
under the Companies Act, and a partnership under the Partnership Act. The reasons
for forming LLPs were articulated, and the new type of partnership visualized, by the
Naresh Chandra Committee and presented in its Report, the text of which is given as
an Annexure in the book. This commentary on the LLP Act provides an integrated
analysis on the current state of the law by including a comparative analysis of the
relevant provisions of the Companies Act, 1956. Under each section apart from a
general discussion of the provisions, the author also points out the significant issues
relating to the law of partnership and contemporary LLPs under the law of the United
Kingdom and Singapore. Of utmost importance, the tax implications of the
introduction of the LLP Act are also deliberated upon at relevant places, in particular
with reference to the conversion of firms, private companies, and unlisted public
companies into LLPs.

Research Methods applied to test the hypothesis/hypotheses

This Research is based on Doctrinal method of Research, Secondary Sources like Books,
Statues, Cases, Article, Newspaper Articles have been used.
2. Liability of Partners in Partnership Firm (Unlimited Liability)

The rights and obligations of partners are generally laid down in the partnership deed. In case
the partnership deed does not specify them, then the partners will have rights and obligations
prescribed in the Partnership Act.

The partners are jointly and severally responsible to third parties for all acts which come
under the scope of their express or implied authority. This is because that all the acts done
within the scope of authority are the acts done towards the business of the firm. 10 The
question of liability of partners to third parties may be considered under different heads.

These are as follows:

2.1 Contractual liability

Every partner is liable jointly with other partners and also severally for the acts of the firm
done while he is a partner. The expression ‘act of firm’ connotes any act or omission by all
the partners or by any partner or agent of the firm, which gives rise toa right enforceable by
or against the firm. Again in order to bring a case under Section 25, it is necessary that the act
of the firm, in respect of which liability is bought to be enforced against a party, must have
been done while he was a partner. 11 Thus, where certain persons were found to have been
partners in a firm when the acts constituting an infringement of a trademark by the firm took
place, it was held that they were liable for damages arising out of the alleged infringement, it
being immaterial that the damages arose after the dissolution of the firm.

The Court in the case of SNP Punj v. CIT12 held that “A partner is always liable for
partnership debts unless there is an implied or express restriction. A creditor is at liberty to
recover the debt from any one or more of the partners.”

2.2 Liability for tort or wrongful act

The firm is liable to the same extent as the partner for any loss or injury caused to a third
party by the wrongful acts of a partner, if they are done by the partner while acting (a) in the
ordinary course of the business of the firm (b) with the authority of the partners. If the act in
question can be regarded as authorized and as falling within either of the categories
10
Section 25 of the LLP Act.
11
http://www.icaiknowledgegateway.org/littledms/folder1/chapter-3-the-indian-partnership-act-1932.pdf, last
accessed on 25/04/2017.
12
(2007) 137 DLT 608.

10
mentioned in Section 26, the fact that the method employed by the partner in doing it was
unauthorized or wrongful would not affect the question. Furthermore, all the partners in a
firm are liable to a third party for loss or injury caused to him by the negligent act of a partner
acting in the ordinary course of the business. 13 For example, one of the two partners in coal
mine acted as a manager was guilty of personal negligence in omitting to have the shaft of the
mine properly fenced. As a result thereof, an injury was caused to a workman. The other
partner was held responsible for the same.

The Calcutta High Court in the case of Hurruck Chand v. Gobind Lal Khetry14:

The plaintiff and the defendant were firms of merchants dealing in piece goods. One
Baji Nath was the active partner of the defendant firm. The plaintiff sent a cartload of
Dhoties and Shirtings to Howrah railway station to be consigned to their customers, but
they were stolen enroute to the station. The goods were subsequently recovered from
the possession of Baji nath who was dealing with them in the name of the firm. The
other partner knew nothing whatever about the theft.

The firm was held liable. It was within the authority of Baji Nath to sell the piece goods for
the firm. The goods that he sold belonged to the plaintiff. That was conversion of goods
(plaintiff’s property) for which the firm was held liable.

2.3 Liability for misappropriation by a partner

Section 27 provides that (a) when a partner, acting within his apparent authority, receives
money or other property from a third person and misapplies it or (b) where a firm, in the
course of its business, received money or property from a third person and the same is
misapplied by a partner, while it is in the custody of the firm, is liable to make good the loss.
It may be observed that the workings of the two clauses of Section 27 are designed to bring
out clearly an important point of distinction between the two categories of cases of
misapplication of money by partners. Clause (a) covers the misapplication of money or
property belonging to a third party made by the partner receiving the same. For this provision
to the attracted, it is not necessary that the money should have actually come into the custody
of the firm. On the other hand, the provision of clause (b) would be attracted when such
money or property has come into the custody of the firm and it is misapplied by any of the

13
Ibid, note 11.
14
(1906) 12 CWN 1053

11
partners. The firm would be liable in both the cases. If receipt of money by one partner is not
within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the
firm and the other partners will not be liable, unless the money received comes into their
possession or under their control.

2.4. Liability for Holding Out

Partner by holding out (Section 28): Partnership by holding out is also known as partnership
by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then
stopped from denying the character he has assumed and upon the faith of which creditors
may be presumed to have acted. When a person (1) represents himself, or (ii) knowingly
permits himself, to be represented as a partner in a firm (when in fact he is not) he is liable,
like a partner in the firm to anyone who on the faith of such representation has given credit to
the firm. A person may himself, by his words or conduct have induced others to believe that
he is a partner or he may have allowed others to represent him as a partner. The result in both
the cases is identical.

It is only the person to whom the representation has been made and who has acted thereon
that has right to enforce liability arising out of ‘holding out’. You must also note that for the
purpose of fixing liability on a person who has, by representation, led another to act, it is not
necessary to show that he was actuated by a fraudulent intention. The rule given in Section 28
is also applicable to a former partner who has retired from the firm without giving proper
public notice of his retirement. In such cases a person who, even subsequent to the retirement,
give credit to the firm on the belief that he was a partner, will be entitled to hold him liable.

Furthermore, the Act defines various other kinds of liabilities like Income Tax Liability of a
Partner 15, dishonor of cheques and liability towards the debts of the firm.

3. Limited Liability Partnerships

A. Diversity Jurisdiction

Lee v. Brown, No. 3:08-CV-01206 CSH, 2009 WL 3157542 (D. Conn. Sept. 25, 2009)
(stating thatrule that partnership has citizenship of each of its partners for purposes of
diversity jurisdiction applies toLLPs).

15
See Section 278-B of the Income Tax Act.
B. Standing or Capacity to Sue or Be Sued

Raskov v. Stapke & Harris, No. B215351, 2010 WL 522780 (Cal. App. 2 Dist. Feb. 16,
2010) (rejecting attempt to analogize State Bar’s termination of LLP’s certificate of
registration to suspended corporation for purposes of determining firm’s standing to defend
itself in declaratory judgment action because rule in corporate context is statutory rule limited
to corporations).

C. Pro Se Representation

J & J Sports Productions, Inc. v. Sunsets on Sand, LLP, No. 10-cv-12-wmc, 2010 WL
1740803

(W.D. Wis. April 29, 2010) (holding LLP could not appear pro se through partner who was
not licensed attorney, and noting that purpose of engaging in business as LLP is to limit
recovery to entity’s assets rather than assets of partners and requirement that LLP be
represented by counsel did not preclude partner from continuing to defend herself
individually).

D. Limited Liability of Partners

Henry v. Masson, S.W.3d , 2010 WL 5395640 (Tex. App. 2010). Henry and Masson
were partners in an orthopedic surgery practice. They formed their practice as an LLP in
2001, and personal disputes led to litigation in 2003. During a hearing in the case, they
agreed in principle to wind up the LLP and sever all ties between them. Additional disputes
and issues arose, and another suit was filed. In an attempt to resolve all their differences, they
executed a settlement agreement. Litigation ensued over alleged breaches of the settlement
agreement. Among the issues addressed in this appeal was a claimby Masson that the trial
court erred in ordering Henry and Masson to make capital contributions to the partnership to
allow the partnership to pay out funds it had taken in that actually belonged to two new
entities formed by the parties. Masson based his argument on the fact that the partnership was
an LLP and the provision of the

Texas Revised Partnership Act providing that partners in an LLP are protected from
individual liability for the debts and obligations of the partnership incurred while the
partnership is an LLP. The court stated that neither the partnership agreement nor the statute
prevented the trial court from ordering contributions to the partnership during winding up.
According to the court, the payments the trial court ordered Henry and Masson to make were
capital contributions to discharge debts of the partnership during winding up, not an
adjudication of individual liability for the debts or obligations as contemplated by the statute.
The court relied upon the partnership agreement, which provided that if no partner agreed to
lend funds needed to discharge the partnership’s debts, obligations, and liabilities as they
came due, each partner was required to timely contribute the partner’s proportionate share of
funds needed. Masson argued that this provision was not intended to apply in the winding up
process and that reference elsewhere in the partnership agreement to payment of the
partnership’s debts upon dissolution “to the extent funds are available” evidenced the
partners’ intent that they would not be required to make additional capital contributions
during the winding up. The court stated that the phrase relied upon by Masson appeared in a
section referring to steps to be taken after the sale of partnership property, and the funds
mentioned are funds received from the sale of partnership property. The court did not
interpret the agreement to mean that sale of partnership property was the only source of funds
to pay debts. The court also rejected Masson’s argument that the reference in the capital
contribution provision to payment of debts as they become “due and payable” was evidence
that the parties did not intend to require capital contributions during winding up. The court
stated that “due and payable” simply modified the type of debt to be paid and did not limit the
provision to “operational” status of the partnership.

J & J Sports Productions, Inc. v. Sunsets on Sand, LLP, No. 10-cv-12-wmc, 2010 WL
1740803 (W.D. Wis. April 29, 2010) (noting that purpose of engaging in business as LLP is
to limit recovery to entity’s assets rather than assets of partners and requirement that LLP be
represented by counsel did not preclude partner from continuing to defend herself
individually). Edlinger v. United States, No. 3:10-cv-148, 2010 WL 1485951 (N.D.N.Y.
April 14, 2010) (granting summary judgment in favor of partner in LLP because no allegation
or evidence showed that partner engaged in misconduct or directly supervised errant partner
or that partnership agreement limited statutory protection provided by LLP, and partners in
New York LLP are not liable for partnership debt, obligation, or liability absent wrongful
conduct committed by partner himself, partner’s direct supervision of someone who engaged
in wrongful conduct, or limitation of scope of liability protection by partnership agreement).

Vohra v. Cadigan Arbor Park, No. G040387, 2010 WL 1102428 (Cal. App. 4 Dist. March 25,
2010) (relying on California statutory provisions that provide partner in LLP is not liable for
debts, obligations, or liabilities of partnership absent personal tort liability and that partner is
not proper party in action against LLP, and holding trial court did not err in non-suiting
partner in LLP where there was no evidence partner had any personal involvement in
partnership’s dealings with plaintiff).

E. Foreign LLPs

Total Holdings USA, Inc. v. Curran Composites, Inc., C.A. No. 4494-VCS, 2009 WL
3238186 (Del. Ch. Oct. 9, 2009) (interpreting governing law provisions of Section 15-106 of
Delaware Revised Uniform Partnership Act and commenting regarding application of Section
15-106(b) to LLPs).

4. Partnership with Limited Liability in India

India introduced its Limited Liability Partnership Act in 2008. A Limited Liability
Partnership also called as an LLP combines features of both the Partnership and the Company
into one single organisation. In other words, LLP is a way of doing business that provides the
advantages of limited liability of a company and at the same time gives flexibility to its
members as in the case of partnership firm.16
Thus, a Limited Liability Partnership (LLP) is a type of partnership in which the liability of
the partners is limited unlike the partnership governed by the Indian Partnership Act, 1932. In
an LLP, a partner cannot be held liable for the wrongful conduct or negligence of his co-
partner. This is an important point which distinguishes it from the unlimited partnership. In
an LLP, the partner’s liability is therefore limited like that of shareholders in a company.
Thus, an LLP is a combination of both partnership and company and because of this very
feature, it is appropriate for small and medium-sized enterprises.
The Act at the outset, besides conferring the separate legal personality, clarifies that ―every
partner is the agent of the LLP, but not of the other partners. 17 This marks a clear shift from
the present ―general‖ partnership law where the agency relationship, which is the rule,

16
http://blog.ipleaders.in/overview-limited-liability-partnership-india/, last accessed on 24/04/2017.
17
Section 26, The LLP Act
extends much farther.18 This also has clear implications for the liability of the partners for the
acts of other partners.19

Every partner of an LLP is an agent of the LLP. An LLP is not bound by anything done by a
partner in dealing with a person, if the partner has no authority to act and the person dealing
with such a partner knows that he has no authority to act as a partner of the LLP. The LLP is
also liable, if a partner is liable to any person on account of wrongful act or omission on his
part in the normal course of business or with its authority. A liability created whether arising
in contract or otherwise shall be the sole obligation of the LLP and such liability shall be met
out of the property of the LLP. The business dealing of a partner will have the effect of
holding himself out as a partner of the LLP and as such he becomes liable to any person who
has given credit to an LLP.20

Broadly, there are two models of limiting the partners’ liability adopted by the legislatures
worldwide. The first is the Texas Model. This model seeks to limit the liability of the partners
only in respect of ―wrongful acts‖ but not ―ordinary business acts.‖60 The other model,
commonly referred to as the Minnesota Model, imposes no ―personal liability for anything
chargeable to the partnership … or other debts or obligations‖ on partners of an LLP
―merely on account of this status. The second model is followed more explicitly in New
York state.21 There is also a third approach, which is a rather mid-way solution, which is
followed in the UK. The UK law imposes upon the members the ―liability to contribute to
its assets in the event of its being wound up as is provided for by virtue of this Act.22

The Indian LLP Act seems to follow the second model in that Section 28(1) seeks to exclude
the personal liability of a partner ―directly or indirectly for an obligation referred to in
[Section 27(3)] solely by reason of being a partner of the limited liability partnership.‖
Section 27(3) in turn provides that ― an obligation of the limited liability partnership
whether arising out of contract or otherwise, is solely the obligation of the [LLP]. Nothing in
the Act qualifies Section 27(3) as a reference solely to ―non-business‖ liabilities. This gives
an Indian LLP, the same status as a ―company within the meaning of Section 3 of the
Companies Act so far the extent of personal liability of its partners is concerned. Whatever

18
See, Sections 18 r/w 25 and 26, The Partnership Act, 1932
19
http://www.vaishlaw.com/Files/articles_tax/_LLP%20Law%20-%20Taxmann-Amit%20Sachdeva.pdf,
20
Parikshit Singh Shekhawat, Limited Liability Partnership-An Alternate Business Vehicle: An Analysis,
available at: http://indialawjournal.com/volume2/issue_3/article_by_parikshit.html, last accessed on 25/04/2017.
21
See, New York Partnership Law S. 26(b).
22
Section 1(4), The UK Limited Liability Partnerships Act, 2000.
the nature of acts giving rise to the obligation in question, a partner (other than the partner
who committed a wrongful act) of an LLP cannot be made personally liable.

5. Exception to the Limited Liability Rule

According to section 30, if LLP or any of its partners carry out an act, with intent to defraud
creditors of the LLP or any other person or for any fraudulent purpose, the liability of the
LLP and the partners who 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. So, in case of
fraud the protective cap of limited liability becomes ineffective. In case of a fraud carried out
by a partner, the LLP is also liable to the same extent as the partner. The only way for LLP to
avoid its liability is to establish that LLP was not aware of the fraud carried out by the
partner. So, the burden of proof to prove that the fraudulent act of partner was not within the
knowledge of the LLP is on LLP.

Each person who was knowingly a party to the fraud business shall be punished with
imprisonment for a term which may extend to two years and with fine which shall not be less
than fifty thousand rupees but which may extend to five lakh rupees. 23 It is not enough that
law forgives the wrong doer with criminal liability only. Where an LLP or any partner or
designated partner or employee of such LLP has conducted the affairs of the LLP in a
fraudulent manner, then without prejudice to the criminal liability which may arise under any
law applicable at that time, the LLP and any such partner or designated partner or employee
shall be liable to pay compensation to any person who has suffered any loss or damage by
reason of such conduct.24 Here also in order to avoid liability the LLP has to prove that
fraudulent act of its partner, designated partner or employee was not within its knowledge.

It is not like that the guilty partner would make LLP liable and absolve himself for the loss
caused to the LLP. Every partner shall indemnify the limited liability partnership for any loss
caused to it by his fraud in the conduct of the business of the limited liability partnership. 25
This provision of indemnification corresponds to section 10 of the Partnership Act.

23
Section 30 (2)
24
Section 30(3)
25
First Schedule to the Act.
 Conclusion

A partner is said to have unlimited liability in a partnership firm governed under the Indian
Partnership Act, 1932 (the "Partnership Act") because he is personally liable for the losses of
the business being carried out by the partnership firm. If a partnership firm suffers losses and
an erosion in its net worth as its debts or liabilities exceed its assets, creditors can proceed
against the personal assets of the partners of the firm to recover their debts.

This is unlike in the case of a company or a limited liability partnership ("LLP"). In case of a
company or LLP becoming insolvent, the creditors can only proceed against the assets owned
by the company or the LLP and not sue to have their debts recovered from the shareholders
or the partners, as the case may be. However, in companies it is possible to elect to have
either some or all shareholders or directors with unlimited liability.

In a technical sense, there is no separate legal entity such as a partnership firm (although it is
treated as such for tax purposes). In case of a company, there is a separate juridical person in
its own right. You can sue a company in its own name. If you want to bring a suit against a
partnership, you have to sue each of the partners. The LLP is almost a hybrid between a
partnership and a company which confers legal status on the limited liability partnership and
protects the partners from personal liability for debts of the LLP.

A person would choose an LLP over a partnership for the above reasons. The only advantage
I see of retaining a partnership structure is that a partnership has more autonomy and lesser
reporting requirements.

Also, please note that foreign investment is permissible in LLPs (subject to certain
conditions) but not in partnership firms.
Bibliography

1. Madhusudan Saharay, TEXTBOOK ON INDIAN PARTNERSHIP ACT WITH

LIMITED LIABILITY PARTNERSHIP ACT (2010), Universal Law Publishing Co.
Ltd., C-FF-1A, Dilkush Industrial Estate.

P C Markanda, THE LAW OF PARTNERSHIP IN INDIA, Lexis Nexis Butterworths

Wadhwa, 2010, Lucknow

S.A. Naik, LAW RELATING TO LIMITED LIABILITY PARTNERSHIP IN INDIA,

Lexis Nexis Butterworths Wadhwa, Lucknow, 2010

Articles

1. S.J., Prashant “Limited Liability Partnership in India – A critical analysis of the Naresh
Chandra Committee Report on Regulation of Small Companies and Partnership”

2. Sharma, J.P. (2006), “Limited Liability Partnership Bill, 2006—some observations”, 78

CLA (Mag.) [3] Batra, S. (2007), “LLP may be growth vehicle for entrepreneurs &
professionals”, Economic Times, p. 16.

3. Viswanathan, A. (2006), “India Considers Introduction of Limited Liability

Partnerships”, I.C.C. L.R., 17(5), p. 141-142.

4. Srinivasan, K. (2007), “Warts noticeable on a closer look”, 76 CLA (Mag.) 19. [6] Bhasker,
S. (2007), “LLPs- A SWOT Analysis”, Business Line, p. 110.

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