LLP can form a partnership firm with an individual or other persons

Case Details: Raj Shipping Agencies v. Barge Madhwa
Citation: [2020] 116 taxmann.com 707 (Bombay)

In a significant ruling, the Kerala High Court held that a Limited Liability Partnership could form a partnership with an individual or other persons.

BRIEF FACTS

1. A partnership deed was executed between an individual and an LLP.
2. When the said deed was submitted for registration, the Registrar of Firms refused registration of the partnership firm on the reasoning that an LLP cannot be a partner in the firm.
3. The Petitioner claimed that a partnership and an LLP are not prohibited under the Partnership Act and that LLP is a legal entity, as defined under the LLP Act, and it is separate from its partners. It has perpetual succession and has a common seal. The Petitioner argued that on its registration, it is capable of suing and being sued under Section 14. It can also acquire, develop, or dispose of movable or immovable properties. Therefore, the petitioner claims that the LLP is liable to be treated as a person, and there cannot be any objection to registering a partnership with an LLP.
4. The respondent filed a statement reiterating his stand in the impugned order.
5. According to the respondent, Section 25, 26, and 49 of the Indian Partnership Act, 1932 makes the partners jointly and severally liable with all other partners.
6. At the same time, under Section 28 of the LLP Act, 2008, the provisions regarding the liability of the partnership firm are restricted only to the extent provided in the agreement. Such a provision runs contrary to Section 25 and 49 of the Indian Partnership Act.
7. It is also pointed out that foreign investment is permissible in LLP, whereas it is not permissible under the Partnership Act.

THE QUESTION THAT AROSE WAS

Whether LLP can be treated as a person, who can be permitted to form a partnership with an individual?

THE HIGH COURT’S RULING

The High Court of Kerala held that -“a partnership can be entered into between two persons. Such persons can be an incorporated body of individuals. LLP is a body corporate. It can be said to be a person, as defined in Section 3(42) of the General Clauses Act, 1897 if there is no repugnancy in the subject or context. To examine the same, it is necessary to look at some more provisions in both the Acts viz. Partnership Act and LLP Act”

The High Court of Kerala further held that the liability of partners of LLP and liability of the LLP as a partner under the Partnership Act would be different. The liability of partners in an LLP cannot be relevant when the LLP becomes a partner, as the provisions in the Partnership Act would bind it. The liability of the LLP would be as in the case of a company that joins a firm after entering into a partnership.

The Court also observed that Section 4 of the Partnership Act permits the constitution of a firm or partnership between one or more persons. In this case, the partnership deed was executed between an individual and an LLP, a body corporate having a legal entity and coming within the definition of “person”. The individual liability of the partners of LLP would not be relevant when the LLP itself would have liability independent of the liability of the partners. Therefore, the difference in the provisions under the Partnership Act relating to the firm’s liability or the individual partners would not stand in the way of the constitution of a partnership with an LLP.

The Court held that LLP could not be disqualified from entering into a partnership with an individual or other persons.

CONCLUSION

The decision of Hon’ble high court has set aside various disputes and arguments on a LLP being partner of a Partnership Firm. The court has rightly pointed that a LLP entering into partnership firm as an incorporating entity separate from its partners. The liability of partners of a LLP and liability of LLP as a partner in a partnership firm is totally different. The liability of partners of a LLP cannot be relevant as on becoming LLP as a partner of a partnership firm it is controlled by the Indian Partnership Act and not Limited Liability Partnership Act, 2008 and hence a LLP can become partner in a partnership firm.

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Footnotes

Section 25 in The Indian Partnership Act, 1932 Liability of a partner for acts of the firm—Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.

Section 26 in The Indian Partnership Act, 1932- Liability of the firm for wrongful acts of a partner—Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner.

Section 49 in The Indian Partnership Act, 1932- Payment of firm debts and of separate debts—Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.

Section 27 in The Limited Liability Partnership Act, 2008

Extent of liability of limited liability partnership .-

(1) A limited liability partnership is not bound by anything done by a partner in dealing with a person if-

• the partner in fact has no authority to act for the limited liability partnership in doing a particular act; and
• the person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership.

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

(3) An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership.

(4) The liabilities of the limited liability partnership shall be met out of the property of the limited liability partnership.

Section 28 in The Limited Liability Partnership Act, 2008

Extent of liability of partner .-

1. A partner is not personally liable, directly or indirectly for an obligation referred to in sub-section (3) of section 27 solely by reason of being a partner of the limited liability partnership.
2. The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall not affect the personal liability of a partner for his own wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership.