The Hindu Business Line : May this not be limited only to discussion

THE Government has announced its intention to introduce a Limited Liability Partnership Bill in the Budget session of Parliament to take risk out of floating partnerships. For this, a draft Bill, on which the ICAI has been consulted, is being readied. The concept of the limited liability partnership (LLP) may be new in India but not in many other countries. In the UK, for instance, partnerships are governed by the Partnership Act of 1890.

Unlike an incorporated company, a partnership does not have a legal personality of its own and, therefore, partners are liable for the debts of the firm. In general partnerships, the partners are fully liable for these debts. To obviate the difficulty in this regard, the UK brought the Limited Partnership Act into the statute book in 1907. Limited partners are liable only to the extent of their investment.

Committee recommendations

The LLP concept is now being debated on the basis of the recommendations of the Naresh Chandra and the Irani Committees. These committees have opined that LLP would be a suitable vehicle for partnership among professionals who are already regulated by professional bodies.

The committees recognise that there are many forms of associations that would facilitate business operation. The corporate form of organisation provides greater transparency to both stakeholders and entities interacting with the business firm.

The committees feel that the Companies Act need not enforce limitations on other forms of organisation. This should be left to be specified or regulated through the respective legislation relating to such forms. This will necessitate a review of the Partnership Act. The Companies Act need not make any prescriptions in this regard.

Section 11 of the Act bars the formation of any partnership consisting of more than 20 persons for carrying on any other business that has for its object the acquisition of gain by the partnership.

If the number exceeds 20, the association will have to be registered as a company. The section is intended to prevent mischief that can arise out of large trading undertakings being carried on by such bodies where persons dealing with them do not know with whom they are contracting and, hence, may be put them to much hardship. Section 11 talks of 20 or more persons. The General Clauses Act 1899 defines a person as including a company, other association or body of individuals. Courts have recognised that companies can enter into partnerships. They are juristic persons.

The Irani Committee recommended that Section 11 should be amended so as to delete the provisions limiting the number of partners. It also recommended amendment to the Partnership Act. While the Naresh Chandra Committee looked at LLP mainly for professionals to prepare them for global competition, the Irani Committee suggested that the concept may also be considered for small enterprises not seeking access to capital markets through listing on the stock exchange. The idea is to enable them access technology and face increasing global competition, and bring in business synergies.

In general partnerships, each partner is jointly and severally liable for any liability arising out of or in respect of the partnership. Each partner's personal asset is at risk irrespective of culpability. Indian partnerships are, therefore, restricted to persons who know each other closely. By introducing the concept of LLP, such liability of partners will no longer be unlimited.

The LLP will be like a company. While framing the law, care will have to be taken to see that the concept does not give rise to shell partnerships, which have no assets. The Naresh Chandra Committee has recommended a mandatory insurance policy for this purpose.

Income-tax law recognises firms, association of persons, Hindu undivided families, body of individuals, and so on, as `persons' under Section 2 (31) of the Act. Though companies have only limited liabilities, Section 179 holds the directors of private companies in liquidation to be jointly and severally liable for the payment of tax, unless it is proved that the non-recovery cannot be attributed to any gross neglect or misfeasance on the part of the director.

The firm as such is taxed on its profits. The basic rate of tax is the same for the company and the firm. I-T law is growing more impervious to the form of business organisation. While framing the Liability Partnership Act, care should be taken to safeguard the interests of the Revenue.

The UK introduced LLP law in 2003 and Singapore in 2004. In these countries, LLP applies to a group of professionals. The proposed law in India will cover all forms of enterprises and will have a wide scope. The necessity for the law in the present context is open to debate.

(The author is a former Chief Commissioner of Income-Tax.)

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