The whole concept behind enacting the Limited Liability Partnership Act was that the limited liability partnership shall not be held liable for the independent or unauthorized act done by any other partner in the limited liability partnership. It allows individual partners to be shielded from joint liability created by another partners’ wrongful business decisions or misconduct. Following provisions has been enacted in the LLP Act for the extension of Liability in LLP:
- An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP’s employees or other agents. A partner is the agent of the LLP and not of the partners’ (Sec.26)
- 27(1) of the Act provides: “A limited liability partnership is not bound by anything done by a partner in dealing with a person if- (a) The partner in fact has no authority to act for the limited liability partnership in doing a particular act; (b) The person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership.
- 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 [Sec. 27(2)].
- 27(3) reads: “An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership.”
- The liabilities of the limited liability partnership shall be met out of the property of the limited liability partnership [Sec. 27(4)].
- A partner is not personally liable, directly or indirectly for an obligation referred to in Sec. 27(3) solely by reason of being a partner of the limited liability partnership [Sec. 28(1)].
- The provisions of Sec. 27(3) and Sec. 28(1) 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 [Sec. 28(2)].
In some countries, an LLP must also have at least one “general partner” with unlimited liability. Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries the LLP is more suited for businesses where all investors wish to take an active role in management.
- Holding out (Sec. 29) – Any person, who by words spoken or written or by conduct, represents himself, or knowingly permits himself to be represented to be a partner in a LLP is liable to any person who has on the faith of any such representation given credit to the LLP, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit:
Provided that where any credit is received by the LLP as a result of such representation, the LLP shall, without prejudice to the liability of the person so representing himself or represented to be a partner, be liable to the extent of credit received by it or any financial benefit derived thereon.
Where after a partner’s death the business is continued in the same limited liability partnership name, the continued use of that name or of the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death.
- Unlimited Liability in case of Fraud (Sec. 30):
There is no exposure to personal assets of the partners except in case of ‘fraud.’ In case of fraud, the liability of the LLP and the partner indulged in the same shall be unlimited.
In the event of an act carried out by a LLP, or any of its partners, with intent to defraud creditors of the LLP or any other person, or for any fraudulent purpose, the liability of the LLP and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the limited liability partnership:
Provided that in case any such act is carried out by a partner, the LLP is liable to the same extent as the partner unless it is established by LLP that such act was without the knowledge or the authority of the limited liability partnership.
Where any business is carried on with such intent or for such purpose as mentioned above, every person who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees. Where a LLP or any partner or designated partner or employee of such LLP has conducted the affairs of the LLP in a fraudulent manner, then without prejudice to any criminal proceedings which may arise under any law for the time being in force, the limited liability partnership and any such partner or designated partner or employee shall be liable to pay compensation to any person who has suffered any loss or damage by reason of such conduct: Provided that such LLP shall not be liable if any such partner or designated partner or employee has acted fraudulently without knowledge of the limited liability partnership.
- Whistle blowing (Sec. 31):
The Act provides protection to the partner or employee of a LLP from any penalty, in case he has provided useful information during investigation of such LLP. Sec. 31(1) lays down that: The Court or Tribunal may reduce or waive any penalty leviable against any partner/employee of a LLP, if it is satisfied that- (a) such partner/employee of a LLP has provided useful information during investigation of such LLP; or (b) when any information given by any partner/employee (whether or not during investigation) leads to LLP or any partner/employee of such LLP being convicted under this Act or any other Act.
No partner or employee of any LLP may be discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against the terms and conditions of his limited liability partnership or employment merely because of his providing information or causing information to be provided pursuant to sub-section (1).
