Extent of Liability of Limited Liability Partnership.

partner

Extent of Liability of Limited Liability Partnership.

A Limited Liability Partnership is not bound by anything  done by a partner in dealing with a person if;

a, the partner has no authority in fact for the limited liability partnership  in doing a particular act and

b, the person knows that has no authority or does not know or believe him to be the limited liability partnership partner.

2. The Limited Liability partnership is liable if limited liability partnership partner is liable as a result to any person of wrongful act or on his part omission in the course of business of the Limited Liability Partnership business or with its authority.

3. An Limited Liability Partnership obligation, whether in contract arising or otherwise, shall be solely the limited liability partnership obligation.

4. The Limited Liability Partnership liabilities shall be met out of the Limited Liability Partnership property.

SECTION 28: EXTENT OF LIABILITY OF PARTNER:
A partner is not liable personally, indirectly or directly for an obligation to in subsection (3) referred of Section 27 by reason solely of the limited liability partnership solely.

The sub-section (3) provisions and sub-section (1)  of this section shall not affect the partner of personal liability for his own wrongful omission or act, but a partnership shall not be personally liable for the act wrongfully or of any other partner omission of the Limited Liability Partnership omission.

SECTION 27 AND 28 ANALYSIS.

The section 27 and section 28 provisions should be together read to understand the extent of the LLP liability and its partners.

LLP not liable for ultra vires of the partners act.

Section 27(1)(a) of the LLP Act provides that an LLP is not bound by doing anything by a partner in dealing with a person if in fact the partner  has no authority to act for the LLP a particular act in doing. In such a case, the partner acts shall be regarded as ultravires. For such ultra vires acts, of the partner, the LLP shall not be liable. The concerned partner shall be liable personally therefore for his acts of the ultra vires acts. Further, in terms of Section 26 of the LLP Act, in such cases the liability shall not transverse of the LLP to other partners.

LLP not liable if the outsider has the knowledge of the partner ultra vires acts.

Section 27(1)(b) of the LLP Act provides is not bound anything done in a dealing with a person by the partner if the person knows that he has no authority or does not believe him or know to be a LLP partner.

In such a case, the constructive notice doctrine principle notice could be well applied (as in the companies case), which operates on the premise that the person dealing with an organisation premise would be presumed to be having a knowledge of the public documents of the company contents (i.e., the documents with the Registrar of the company filed with the Registrar of the Companies viz., Memorandum and Articles of the Association of the Company.

LLP liable for wrongful actor or omission of its partner on the part of its business course or with its authority done.

Section 27(2) of the LLP Act provides that the LLP is  Liable if a LLP partner is liable to any person as a result of omission or wrongful act on his part in the course of the LLP business or with its authority.

If a partner is dealing with the person in the business of LLP ordinary course or with the LLP special authority, and there has been a omission or wrongful act of such partner on the part, then, in such a case, the LLP would be liable for such wrongful act or by its partner omission. However, the partner personal liability for his wrongful act or shall continue to be there omission.  Further, in terms of Section 26 of the LLP Act, the liability shall not transverse of the LLP other partners.

In such a case, the doctrine of indoor management principle (commonly known as the Turquand’s principle) could be well applied, as in the companies case, on the premise which operates that there is no notice as how to handled the internal affairs with the organisation. For instance, while dealing a person with an organisation would be presumed to be having the contents knowledge of the Memorandum of Association (MoA) and Articles of Association (AoA) of the Company, such a person is entitled also to assume that the company officers have observed duly the provisions of such MoA and AoA. It is no part of an outsider duty to see properly the company carries its internal regulations of its own.

Obligation of the LLP shall be the obligation of the LLP alone.

Section 27(3) provides that the LLP obligation, whether arising in contract or otherwise shall solely the LLP obligation. In other words, for any acts done or undertaken contractual obligation undertaken on the LLP behalf in the ordinary course of its business, the LLP shall be liable alone. Further, an LLP liabilities shall be met out of the LLP property. Under the LLP Act this provision is a departure from the partnership traditional firms under the Indian Partnership Act, where the partnership firm obligation of its partners is also the obligation.

In an LLP, a partner shall not be liable personally, indirectly or directly, for an obligation under section 27(3)  incurred solely by the reason of the LLP being a partner. Nevertheless, Sections 27(3) and 28(1) of the LLP Act provisions of the LLP Act shall not affect the partner liability personal for his omission or wrongful act.

Section 29 – Holding Out

Any person by who spoke by words or by conduct or written, represents himself, or knowingly allows himself to be represented in a limited liability partnership to be a partner is liable to any person who has faith of such representation to the limited liability partnership given credit, whether the representing person himself or represented to be a partner does or need not know that has reached the person representation so giving credit.

Provided that where received any credit by the limited liability partnership of such representation as a result, the limited liability partnership shall, without prejudice to the person liability so himself representing or represented to be a partner, without he liability of the partners prejudice so representing himself or represented to be a partner, be liable to the credit extent received by it or any financial benefit thereon derived.

Where after death of the partner’s the business is continued in the limited liability partnership name, the same, the continued use of that name or of the partner’s name deceased as apart thereof shall not of make itself his legal representative or his liable estate for any act of the limited liability partnership done after his death.

Analysis of Section 29.

Section 29 of the LLP Act seeks to cast liability on a person who, thought not being a partner, holds himself in an LLP as a partner, and any outsider acting on such representation to the LLP extends credit. In such a case, holding himself the person out as a partner shall be (personally) liable to the person who has extended credit on such representation basis to the LLP.

Any person (not being a partner), who by spoken words or written or by conduct himself represents or knowingly himself permits to be represented to be a partner in an LLP, shall be covered within of the provisions of Section 29 of the LLP Act.

It can be observed that holding out such (representation as partner, indirectly or directly) could be through any of the modes following:

i, by spoken words (e.g., he introduces as a partner himself or permits knowingly as a person his introduction, etc.);

ii, by written (e.g.,he mentions as a partner himself or permits knowingly as a partner to be mentioned in documents of the business, emails, correspondence, etc.,); or

iii, by conduct (e.g., he himself conduct in such a manner that causes other person to believe that he is a LLP partner ).

A person would be liable under provisions of Section 29 of the LLP Act whether such person represents himself or permits knowingly himself as a partner to be represented in an LLP. The liability shall trigger who has when any person, on the faith of any representation such, given to the LLP credit on such representation. It would be immaterial whether the person himself representing or represented to be a partner does or does not know that the representation has reached so giving credit to the person. Understandably, in case liability of holding out by a person (as a LLP partner) has been prevented to only where a situation, based on such representation, some credit to the LLP has been extended.

Section 29 of the LLP Act, however, explicitly does not mention the liability extent of any person who himself holds out as a LLP person to any third party.

Proviso to Section 29 stipulates that where received any credit by the LLP as such representation result, the LLP shall, without prejudice of the person to the liability liability so representing himself, the LLP shall, to the liability without prejudice of the person so himself representing or to be a partner represented, to the extent of credit received by it or derived thereon any financial benefit. Thereby meaning, notwithstanding the person liability so himself representing  or represented to be a partner, the LLP shall be liable also to the credit extent received by it or any derived financial benefit thereon. It may be observed that of person in case who himself holds out as a partner, the liability has not exceeded to the financial benefits.

In case of sham sunder V Haridev Bansal and Ors. (1999) 122 PLR 509, the High Court of Punjab and Haryana, after examining Section 22 and Section 28 of the Indian Partnership Act, decided that ” a firm is bound by a partner act or other person of the firm. While anyone, who by words written or spoken by conduct represents himself to be a partner of the firm, is liable in that firm as a partner.” Further in the same case it was decide that ” while dealing with a concern of the partnership, a third party is not expected to verify the partnership records or from other authorities concerned as to who are the partnership partners concern of events in the normal events.” Further, “Internal management of the partnership concern of events in normal course.” Further concern of partnership and outsider is not required to verify minutely such facts. If a person is transacting and actually carrying on the partnership of the business and is dealing for years together with other persons, the Court would be justified fully in holding that such person would be liable for the liability of the partnership on the principle of holding out as a partner.

It appears that the LLP liability has been confined to the principal amount plus any actually derived principal thereon. Practically, it would be very difficult to ascertain whether the LLP has derived any financial benefit. If yes, then exactly how much financial benefit has been derived by the LLP? Assuming that someone has extended of INR credit 1 the LLP uses for its business the said amount, how would be ascertained the financial benefit? It is not clear. A subjectivity lot would remain there.

Section 29(2) of the LLP Act provides that where after death of the partner’s the business is continued in the same name, the continued use of that name (of the LLP) or of the partner’s name deceased as thereof part shall not make itself make his legal representative or his liable estate for any act of the LLP after his death done.

In the table following, a parallel has been drawn of Section 28 of the Indian Partnership Act (relating to “holding out”) provisions.

Penal action on errant powers who are not India residents:

In case of LLPs foreign or other LLPs where all or most are the foreign partners or outside India residents, it would be an intriguing question as to how penal action will be taken against the errant powers who are not India residents.

In every LLP, there has to be designated partner at least one who is in India resident for the statutory compliance requirements purpose. The LLPs would have freedom to appoint resident more than one as designated partners. A LLP has separate legal entity would remain liable always for statutory compliance’s. civil liability on such a partner would be adjudicated under the Indian civil laws by the Courts, which recognize “foreign awards”. Criminal liability would require enforcement/adjudication by the courts including using the process of extradition. This position would somewhat be same to the companies director who are nationals of foreign.

 

 

 

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