The Hindu Business Line : Of limited appeal

THE IDEA OF limited liability partnership (LLP) has moved forward with the Ministry of Company Affairs releasing a `concept paper' on the subject. The demand for combining the benefits of partnership with the limited liability of companies is not new. However, it is only recently that governments, long used to the unlimited liability clamp on partners, began warming to the thought. For instance, the UK passed the Limited Liability Partnership Act in 2000, after experimenting with limited liability companies, and in the US, Texas enacted the LLP statute in the early 1990s, serving as model for other states. Even in India, expert committees on legal reforms have gone into the question in recent times.

As a traditional form of organisation, partnership — with members agreeing to share the profits of a business carried on by all of them or any of them on behalf of the others — offers operational flexibility unlike companies that come with the baggage of regulatory compliance or sole proprietorship that is constrained by financial and technical resources. However, the downside of a partnership is the draconian legal stipulation that every partner is liable jointly, with all the other members, and also severally for all acts of the firm done while he is a partner. This may protect the interests of those dealing with the firm, but is unattractive for many, especially those offering professional services. In contrast, a limited liability partnership shields a partner's assets from limitless liabilities that may accrue from the omissions and commissions of other partners; in LLP, every partner will be an agent of the partnership and not of the other partners. LLP is also expected to provide a comfort cap in the context of the nascent professional negligence litigation, while at the same time wielding the stick of unlimited liability in case of fraud. Welcome as the initiative is, it remains to be seen how far professionals, be they in accounting or law, use the new option that promises `perpetual succession and a legal personality', were it to become law. The lower limit is two partners, and there is no cap on the number of partners an LLP can have, notes the concept paper. That is something readily appealing to multinational accounting firms that would need only to ensure that the firm has a manager who is an individual and resident in India to perform the administrative and filing functions.

It is noteworthy that the concept paper mentions `standards of conduct' to instil good governance in the LLPs; allows transfer of economic rights; mandates financial disclosures; and postulates conversion of existing firms, private limited companies and unlisted ones into the proposed form of business thrown open also as `a platform to small and medium enterprises'. There can be reservations on the soundness of vesting with the Registrar wide powers vis-a-vis the LLPs. Again, with the prospect of `prescribed' provisions of the Companies Act applying also to the LLPs, one may expect but guarded movement towards this business innovation from the `generally unregulated' general partnerships.

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