Off with the shackles


Limited liability partnerships should be introduced swiftly to enable Indian law firms to expand and compete effectively, argues Vikrant Pachnanda of Perot Systems

Proprietorships and partnerships have long characterized the Indian business landscape, offering simple procedures for establishment without the requirement for extensive legal formalities. Lawyers, entrepreneurs, other professionals and corporations have, nevertheless, stressed the need for new corporate forms to reduce the strains of liability associated with standard partnership structures.

Vikrant Pachnanda
Vikrant Pachnanda

The Indian Partnership Act, 1932, defines a partnership as “the relation between persons who have agreed to share the profits of a business carried on by all, or any of them acting for all”. Under this agreement, every partner is equally liable for the actions executed by one or more partners, collectively known as a “firm”. Depending on the arrangement agreed upon, a partner may be liable to the extent that they are required to pay the firm’s debts using their personal properties.

A limited liability partnership (LLP) in many ways shares the features of a standard partnership, however, partner liability in this structure is strictly limited to the extent of their investment in the LLP.

The Indian LLP Bill is largely based on the UK LLP Act 2000, and the Singapore LLP Act 2005. The Naresh Chandra Committee-II developed the concept of LLPs in India, observing that “in an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to say the least, risky and unattractive. Indeed, this is the chief reason why partnership firms of professionals, such as accountants, have not grown in size to successfully meet the challenge posed today by international competition. This makes an LLP a most suitable vehicle for partnerships among professionals such as lawyers.”

The LLP bill contains provisions under which a partnership firm and a company in any form may be converted into an LLP. The key advantage of an LLP is clearly the reduction of responsibility. Once established, the LLP would be a body corporate and a legal entity, gaining perpetual succession.

While there is no limit to the maximum number of partners required for the formation of an LLP, in contrast to a standard partnership, a minimum of two partners is mandatory. Two “designated partners” will be appointed to maintain accountability for regulatory and legal compliances.

The mutual rights and duties of the LLP and its partners would be governed by the agreement between them, or by the bill, in the absence of an agreement, and any debts incurred would be the sole responsibility of the LLP, reducing the liability of its partners. While individual partners cannot be held accountable for the wrongful acts or omissions of another partner; as agents of the LLP, partners would be answerable if they have been personally involved in deliberate acts of fraud or negligence.

LLPs thus offer an alternative form of business that provides the benefits of a limited liability company and the flexibility of a partnership.

The introduction of LLPs in India will foster the growth of micro, small and medium enterprises, venture capital funds and enterprises in new knowledge and technology-based fields where existing corporate forms are unsuitable. In addition, multidisciplinary partnerships within professional services firms, combined with entrepreneurial initiative, would be greatly enhanced.

LLP structures will have a positive impact on the legal profession in India, which has thus far been impeded due to restrictions in the current regulatory system. Lifting the 20-partner ceiling of partnership structures will enable Indian law firms to compete effectively with international legal establishments in jurisdictions where LLPs for professional services have already been offered.

Despite the merits involved in creating LLPs, there are lacunas which have yet to be addressed. The absence of provisions relating to the collective responsibility for an LLP firm’s actions is a core weakness. The tax position for LLPs also remains unclear. Moreover, the lack of a ceiling dictating the maximum number of partner appointments allowed may result in LLPs becoming unmanageable.

Section 72(2) of the bill creates another encumbrance, awarding the central government substantive rulemaking power for 34 specified matters, which could result in tedious legislation. Furthermore, companies may think twice about adopting this new partnership structure in light of the need for financial disclosures and the prohibition on the conversion or reconversion of LLPs into firms or companies.

While certain clarifications, and perhaps modifications, to the LLP bill are required, companies – and especially law firms – are keen for these alternative partnership structures to be introduced. Introducing LLPs as a new business structure would bridge the gap between partnership firms and companies, whether joint-stocked or limited liability. With foreign law firms eagerly knocking on India’s door for a share in the country’s flourishing legal services sector, it is imperative that LLPs be introduced swiftly. A vast majority of the world’s top law firms, including Clifford Chance, Herbert Smith, Allen & Overy, and Linklaters, have implemented LLP structures and would be keen to replicate this form of incorporation in India once the Bar Council permits their entry.

Vikrant Pachnanda is a lawyer with Perot Systems in India.