Limited Liability Partnerships

Transcription

1 Limited Liability Partnerships Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta India Phone / / / / Fax: Emerging trends in Company law by Vinod Kothari 1

2 Concept paper on LLPs in India Based on the recommendations of the NC Gupta committee, and the Irani committee, the Govt had come out with a concept paper and a draft of the LLP bill in late LLP Bill has been placed before Lok Sabha on 7 th Dec 2006 Rajya Sabha on 15 th Dec The Constitution (entry 44, List 1 of Seventh Schedule) has put corporations law in the Union List: As LLPs are to be given an incorporated status, they will fall under this list. Recent Global trends in Company law by Vinod Kothari 2

3 Concept of LLPs The word partnership in LLPs is a misnomer, as the entity is not merely a collective coming together of two persons: Results into creation of a new entity with its own existence LLPs are a hybrid between a company and a partnership: Externally, they have all features of a company Internally, they are run and managed by the members, hence they are like partnerships The idea is to clothe a partnership with Limited liability Incorporeal existence and therefore personality of its own The concept of LLPs has inherent inconsistencies, as it has not had benefit of seasoning over centuries: US law also relates to 1990s Delaware model is the most commonly used one. Recent Global trends in Company law by Vinod Kothari 3

4 LLP legislation in other countries In UK, LLP law was passed in 2000 The campaign for LLPs was initiated by accounting firms (PwC and E&Y) to limit their liability: Though UK Companies Act did allow professions to register as companies, accounting firms were reluctant to publish accounts, be subject to inspections etc The argument was first rejected by the Law Commission The accounting firms used their power to have this law passed in Jersey in the midst of political uproar: In view of the agreements between Jersey and UK, the accounting firms could still do business in UK This forced the DTI to put the LLP bill on the agenda in 1996 After a series of consultations, the Bill was passed in 2000; with tax clarity, the structure got into offing in April 2001 The UK move set the ball rolling in other countries too: Canada (Ontario) introduced LLP law in 1998 Singapore issued consultation paper in 2002, enacted the law in 2005 In UK, the LLP model is available for all businesses; in New York, it is open only for selected professions. Recent Global trends in Company law by Vinod Kothari 4

5 What happened after the LLP law In UK, accounting firms were quick to capitalise on the new law: Major accounting firms (KPMG, PWC, E&Y) registered themselves as LLPs Of the top 50 law firms, 14 already registered as LLPs, and 24 more have plans to convert [Legal Week, 25 th Aug 2005] Advantages of LLPs: Very cheap to incorporate Lot of flexibility, very little accountability All benefits of a partnership business, though with a new entity Taxation as general partnerships Recent Global trends in Company law by Vinod Kothari 5

6 Overview of the UK LLP law Most obvious feature: the law is very short, very simple: Just 19 sections, no schedules The law could afford to be simple, as chunk of the corporate law provisions arise from separation of ownership and management Owners and managers are the same: one member designated as designated member May be a founding member or may change Unlimited business capacity Principle of agency/principalcy applicable: Every member is an agent of the LLP Limited liability must always come with protected capital: The law provides for capital of each partner, but does not restrict drawing Capital or liability not mentioned in incorporation documents Recent Global trends in Company law by Vinod Kothari 6

7 Overview of the Singapore model Singapore LLP Act of 2005 has 61 sections and 5 schedules, fifth schedule being elaborate with provisions on winding up Provides for transferable partners interest, eligibility to convert a partnership and private company into an LLP Requires manager Requires declaration of solvency Makes debt owed to partners to be subordinated to the claim of the outsiders Surprisingly, however, a loan made by a partner is not so subordinated Provides for disqualification of persons who have managed insolvency partnerships Recent Global trends in Company law by Vinod Kothari 7

8 Salient features of the LLP Bill - Constitution Indian law seems based on the Singapore law LLP is a body corporate, separate entity, perpetual succession: To ensure perpetuality, transferability of membership is a must Members constituting it are members: Individuals and corporates may be members: Since body corporate will include an LLP, an LLP may also be a member At least 2, maximum unlimited Existing firms and Companies may convert themselves in LLPs Schedule 2 and 3 provide for the same: Eligibility in case of a company no security interest on the assets of the company No such eligibility condition in case of firms Recent Global trends in Company law by Vinod Kothari 8

9 Management of LLPs Singapore law requires a manager: Manager to be an individual Indian law requires at least two designated partners Who are individuals The position of designated partners seems to be the same as in case of directors The designated partner is the scapegoat: Answerable for all acts matter or things, done or to be done by the LLP, and shall be personally liable for all penalties on the LLP The LLP is liable for only the contravention of this section (appointment of a manager) This section is ridiculous: by not appointing a designated partner, the only implication is the penalty of this section, appointing one, the designated has all implications of all laws UK law talks of designated member; if no member is designated, then every member is a designated member Recent Global trends in Company law by Vinod Kothari 9

10 Preservation of capital One of the most important pillars of the limited liability is definite capital: Capital is the foundation on which the assets are built The LLP law, limiting liability, leaves the issue of preservation of capital very vague: Capital is not mentioned in the Incorporation document; hence not a public knowledge Capital of partners may be drawn Sec 26 leaves the issue of contribution on winding up completely open to be provided in the partnership agreement which is not a public document Sec 19 (4) provides the liability of the partnership to be met solely from the property of the partnership: Obviously, property means, net property, that is, net worth, which is the capital If there is no capital maintenance clause, the whole concept may be totally flawed The basis of contracting external liabilities is only a declaration of solvency: Which does not serve the purpose of credit enhancement, as solvency is only as on the date on which it is made In absence of capital maintenance, LLP might be NLP no liability partnership Recent Global trends in Company law by Vinod Kothari 10

11 Preservation of capital or capital insurance UK law requires partners to contribute to the extent of drawings made within 2 years prior to winding up Insolvency rules in India are applicable to only individuals LLPs may be subject to corporate bankruptcy rules: Undue preference rules may require returning of drawings made 1 year before winding up [sec 531A] Recent Global trends in Company law by Vinod Kothari 11

12 Partners and their relationship Initial partners are subscribers to organic document Any one can be partner in accordance with agreement: Individuals and bodies corporate may be partners Designated partners must at least be two individuals In case of bodies corporate as partners, at least two individuals to be designated Insistence comes from the need for individuals to be directors Partnership interest is not a transferable security but requires agreement with all partners Mutual rights of partners are allowed to be governed by the partnership deed Cessation: Death, etc Mutual agreement Resignaion by 30 days notice A retiring partner shall be entitled to receive the credit of his capital and share of accumulated profit determined to the date of his cessation: The law should provide subject to mutual agreement Changes in partners to be notified to the registrar Recent Global trends in Company law by Vinod Kothari 12

13 Partnership principle Every partner to be agent of the LLP, not of other partners Partnership interest interestingly split into: Economic interest Non economic interest Economic interest defined in sec. 2 (8) means right to share in profits Economic interest assignable, but assignee is not treated as a partner, nor gets any right of participation in management: Creates interesting situation: Partner may be X, assignee of economic interest may be Y X incurs liabilities, Y has all economic interest, but no obligation, as does not have any partner status Companies Act, on the contrary, recognises no trusts or equities on the shares Recent Global trends in Company law by Vinod Kothari 13

14 Transferability of partners interest Seems the share of the partner in the capital of the firm, and share in profits, are two separate interests Share in profits a transferable interest: sec 41 This has clearly followed the Singapore model Recent Global trends in Company law by Vinod Kothari 14

15 Accounting and reporting LLPs are required to maintain records, but not: Hold meetings and lay accounts File accounts Publish accounts They only make an annual declaration of solvency Liability for the declaration is on the manager Recent Global trends in Company law by Vinod Kothari 15

16 Taxation In line with UK law, Bill for provides for taxation of income as in case of general purpose partnerships Recent Global trends in Company law by Vinod Kothari 16

17 Inspection and investigation Provisions analogous to sec. 234 and 235/ 237 of Companies Act Prosecution powers of the Central Govt Recent Global trends in Company law by Vinod Kothari 17

18 Winding up Winding up may be either voluntary or mandatory: Regulations to be provided Notably, Singapore has a huge set of rules applicable to winding up of LLPs, almost on line of Companies Act Recent Global trends in Company law by Vinod Kothari 18

19 Applicability of Companies Act UK has extended a large chunk of Companies Act provisions to LLPs too: Power contained in sec. 57 to extend Companies Act provisions: Very likely that several of the administrative provisions may, over time, be extended Recent Global trends in Company law by Vinod Kothari 19

20 Penalties and prosecution The power to impose penalties has been granted to the Tribunal Recent Global trends in Company law by Vinod Kothari 20

21 Comparing LLPs and private companiessimilarities LLPs Small companies Incorporated personality Perpetual existence, winding up by law Yes Yes Yes Yes Plurality of owners yes Yes Limitation of contributory liability Limits on trading powers Yes None Yes None professional companies are normally not allowed Recent Global trends in Company law by Vinod Kothari 21

22 LLPs and small companies -differences LLPs Small companies Segregation of management and ownership Indian law requires designated partners; UK law does not. Designated partners generally liable for all compliances Law does not lay down powers of designated partners Directors are different from shareholders; different powers are vested Agency principle Partners represent the LLP Shareholders are distinct Transferability Fixity of capital Partnership is transferable only by agreement LLPs need not have fixed capital Shares are transferable securities Limited liability companies need to have fixed capital Reporting, audit, meetings No requirements Elaborate requirements Recent Global trends in Company law by Vinod Kothari 22

23 Separation of management and ownership One of the key features of LLPs is that there is no separation of ownership and management: Hence, the foundations of corporate law, with the owners reposing trust in the management do not apply Much of the reporting and accountability structure of corporate law arises out of this separation UK LLP law does not provide for separation of management: In fact, there is a designated member who will be answerable to the regulators The concept paper in India goes the Singapore way in separating management and ownership Recent Global trends in Company law by Vinod Kothari 23

24 Administrative authorities Incorporation, striking of defunct LLPs: Registrar of Companies Registry record keeping, inspections, etc Registrar of companies Compromise, arrangement, etc Central Government Rule making powers; powers to notify Companies Act to be applicable Winding up Tribunal Prosecution for offences: Lower courts Recent Global trends in Company law by Vinod Kothari 24

25 Compliances required by LLPs PIN nos for designated partners Particulars of designated partners are filed Incorporation by filing incorporation document with the RoC Reservation of name, change of name, etc provisions similar to companies Partnership agreement and changes therein to be filed with the RoC: Surprisingly, the partnership deed is not one of the documents available for inspection u/s 35 While the basic rights of the partners are defined in the document Registration of changes in partnership (names of partners) Filing of annual accounts and declaration of solvency Audit of accounts Filing of annual return Powers of the registrar to call for information, inspection and investigation largely the same as in case of companies Compromise, arrangements etc as per rules to be made by Central govt Recent Global trends in Company law by Vinod Kothari 25

26 What may the LLP hold LLPs may hold any property, tangible or intangible Interestingly, partners may transfer, either as contribution or otherwise, properties in kind also Unlike in case of companies, no fetters on transfer of property in kind or a separate disclosure: Valuation of the property not given the seriousness it deserves Recent Global trends in Company law by Vinod Kothari 26

27 Accounting: Liberties that the LLP enjoys May write books on either cash or accrual basis Might mean a considerable tax advantage Clearly conflicts with the audit requirements cash basis cannot reflect true and fair value of the state of affairs Accounting standards not applicable Limitation of liability: Best of both the worlds limited liability and flexible capital No minimum capital requirements Audit: While auditing is mandatory, there is no substantive detailing in the law Perhaps the rules may be much more liberal than for companies Borrowings: No restriction on borrowing from partners, or to partners Sec 62 puts amounts owned to partners at par with amounts onwed to others Surprising provision Singapore law subordinates claims of partners No need to create charges Apparently, not something that lenders will like Recent Global trends in Company law by Vinod Kothari 27

28 Ultra vires, agency rule and LLPs The doctrine of ultra vires apparently is not applicable to LLPs Since the objects are not required to be specified in the incorporation document At the same time, the partners are supposed to be agent of the LLP Partner exceeding his authority does not bind the LLP In other words, the LLP escapes liability for anything done in excess of the assigned authority Authority of LLPs contained in partnership document Those dealing with the LLP cannot get partnership document as it is not one of the docs that may be inspected This leaves those dealing with the LLP at a great risk Recent Global trends in Company law by Vinod Kothari 28

29 Conversion into LLPs Firms, private companies and unlisted public companies may convert Firms: All partners to continue Amount to dissolution of the firm Transfer of property by way of vestation may be stamp duty may be escaped Private companies: There is no security interest on the property All members of the private company continued as partners There is no need to seek sanction of the lenders, etc Public unlisted companies: Same as in case of private companies Recent Global trends in Company law by Vinod Kothari 29