VIGIL JURIS ADVOCATES, SOLICITORS & NOTARY MUMBAI. AUGUST 28, Pradip N Kapadia, Vigil Juris

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1 HIGHLIGHTS OF THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 AND DRAFTING OF LIMITED LIABILITY PARTNERSHIP AGREEMENT BY MR. PRADIP KAPADIA ADVOCATE & SOLICITOR PARTNER VIGIL JURIS ADVOCATES, SOLICITORS & NOTARY MUMBAI. AUGUST 28,

2 OBJECTIVE The basic objective of the Limited Liability Partnership Act, 2008 is to provide for a corporate business vehicle/entity that gives the benefits of limited liability to its members but allows them the flexibility of organizing their internal structure as a partnership based on a mutual agreement. The LLP is a hybrid business entity which is intended to combine best aspects of a company and a partnership; and at the same time provide simple and uncomplicated format for small and medium business enterprises professionals and service Industry. 2

3 COMING INTO FORCE Most provisions of LLP Act came into force w.e.f. 31 st March, 2009 Sections 55 to 58 (and corresponding Schedules viz., 2 nd, 3 rd and 4 th Schedule) were brought into force w.e.f. 31 st May Sections 55 to 58 (and corresponding schedules viz. 2nd, 3rd and 4th schedule) : Conversion from firm into LLP (Sec. 55) Conversion from private company into LLP (Sec. 56) Conversion from unlisted public company into LLP (Sec 57) Registration and effect of conversion.( Sec. 58) 3

4 LLP ACT 2008 The LLP Act has 81 sections and 4 Schedules. The LLP Rules, 2009 prescribed under the Act. There will be separate Rules for Winding-up and Dissolution. Section 67 provides that the Central Government may apply to LLPs the provisions of the Companies Act, 1956 by issuing a Notification. 4

5 SALIENT FEATURES OF THE LLP ACT 1. LLP is a body corporate. 2. A legal entity separate from its partners. 3. Having perpetual succession. 4. Name of every LLP must end with the words Limited Liability Partnership or LLP. 5. LLP shall have at least 2 partners. No maximum limit. 6. At least 2 individuals who are partners or nominees of bodies corporate who are partners,shall act as designated partners. 7. LLP will be issued a certificate of incorporation by the Registrar of Companies (ROC) of the State in which the registered office of the LLP is to be situated. 8. The mutual rights and duties of partners inter se and those of the LLP and its partners shall be governed by an agreement. In absence of any such agreement, the mutual rights and duties shall be governed by the provisions in the First Schedule to the Act. 5

6 9. Every partner of LLP is for the purpose of the business of LLP, the agent of LLP but not of other partners. 10.The liability of the partners shall be limited to their agreed contribution in the LLP. 11. No partner would be liable on account of the un-authorised actions of other partners. 12. The liability of the LLP and the partners who are found to have 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 LLP. 13. The rights of a partner to a share of the profits and losses of the LLP and to receive distribution in accordance with the LLP agreement are transferable, either wholly or in part, without by itself causing disassociation of the partner or a dissolution and winding up of the LLP. 6

7 OTHER ASPECTS LLP shall maintain the prescribed books of accounts relating to its affairs and in the prescribed manner. The accounts of LLP shall be audited as per the Rules prescribed. Certain LLPs have been exempted under the Rules. LLP shall file with the ROC, Statement of Account and solvency and an Annual return every year. (Ss. 34 & 35) Central Government empowered to make rules for provisions in relation to establishment of place of business by foreign LLPs in India. Provisions have been made in the LLP Act for allowing a compromise and arrangement including mergers and amalgamations, as also for winding up and dissolution. Central Government has powers to investigate the affairs of LLP. Provisions for the conversion of a firm/private limited company/unlisted public company, to LLP 7

8 REQUIREMENTS TO INCORPORATE LLP Two or more persons associated for carrying on a lawful business with a view to profit can incorporate a LLP (Section 11 (1)(a)) - The term business includes every trade, profession, service and occupation (Section 2(e)). Minimum two partners : (section 6(1)). There is no maximum limit prescribed for number of partners. At least two persons who are individuals partners and/or nominee/s of partner/s who is/are body/bodies corporate, to be specified as Designated Partners One of the Designated Partners must be a person resident in India. He must be a person who has stayed in India for a period of note less than 182 days during the immediately preceding one year. Designated Partner must be an individual who is a partner, or a nominee of body corporate who is a partner. 8

9 Q1. If there are 4 partners of whom 2 are individuals and 2 are bodies corporate, can nominees of the two bodies corporate be designated as Designated Partners. A. It appears it is possible in this case to appoint nominees of body corporate as Designated Partners, unless department takes a contrary view and issues a clarification to that effect. Q2. Can the nominee of a body corporate be a person other than individual? A. Though this is not expressly mentioned in the proviso to Section 7(1), it appears from Section 7(2) that only individual can be a nominee of the body corporate. The intention of the legislation is to have an individual partner or individual nominee of a partner if it is body corporate, to act as designated partner. 9

10 Limited Liability Partnership Agreement ( LLP Agreement ). Section 2 (q) Partner partner, in relation to a limited liability partnership, means any person who becomes a partner in the limited liability partnership in accordance with the limited liability partnership agreement; Section 2 (o) limited liability partnership limited liability partnership means a partnership formed and registered under this Act; Section 23 of the LLP Act (Relationship of Partners) refers to LLP Agreement. 10

11 LLP Agreement governs: a) the mutual rights and duties of the partners; b) the mutual rights and duties of the LLP and its partners. c) In the absence of any agreement as to any matter, such mutual rights and duties shall be governed by the provisions contained in the First Schedule. (Section 23(4)). Thus, LLP Agreement corresponds to AOA of a Company under the Companies Act, 1956 and First Schedule corresponds to Table A of the Companies Act. The LLP Act does not prescribe the contents of the LLP Agreement. There doesn t appear to be specific mention in the LLP Act about mentioning business or object of the LLP in the LLP Agreement. However, LLP Agreement should obviously mention as to what business the LLP will carry on. 11

12 Section 11(2)(c) requires to state in the incorporation document, the proposed business Under Form No. 2 (Form of Incorporation Document) clause 4 requires to state: Business to be carried on by the limited liability partnership. Form No. 2(Form of Incorporation Document) is like MOA of a limited company. The following are the main things to be stated in the Incorporation Document (Section 11(2) read with Rule 11 and Form 2):- (i) Name of the LLP (ii) State in which the registered office of the LLP is to be situated (iii) Address of registered office of the LLP. (iv) Business to be carried on by the LLP. (v) Names, address and other particulars of the Partners. (vi) Contribution to be made by each partner and if it is not by way of money then monetary value of such contribution. 12

13 WHO CAN BE A PARTNER IN LLP? (Section 5) 1. Individual But individual is disqualified if: (a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force; (b) he is an un discharged insolvent; or (c) he has applied to be adjudicated as an insolvent and his application is pending. 2. Body Corporate i.e. a. Company, as defined in Section 3 of the Companies Act, b. limited liability partnership registered under this Act; c. limited liability partnership incorporated outside India; and company incorporated outside India. The following cannot become partners in LLP as these are specifically excluded from the definition of body corporate under Section 2(d) : 13

14 (i) a corporation sole; (ii) a co-operative society registered under any law for the time being in force; and (iii) any other body corporate (not being a company as defined in section 3 of the Companies Act, 1956 (1 of 1956) or a limited liability partnership as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf; 14

15 DESIGNATED PARTNER Designated Partners- At least two (Section 7) [Requirement to have Designated Partners discussed earlier]. To be named in incorporation document. Every partner may be named as Designated Partner (Section 7(2)(i)) May become a designated partner in accordance with the LLP Agreement. May cease to be a designated partner in accordance with the LLP Agreement. (Section 7(2)(ii)) His prior consent to act as designated partner in prescribed form. [Form No. 9 is prescribed]. He must comply with such eligibility conditions as may be prescribed. (Section 7(5).Rule 9) He must obtain DPIN - Designated Partner Identification Number, from the Central Government. For this, the procedure laid down in Sections 266A to 266G of the Companies Act, 1956 shall mutatis mutandis apply. (Section 7(6) and R-10. ) 15

16 LLP is required to file with the Registrar, particulars of the Designated Partner in the prescribed manner within 30 days of his appointment. If there is vacancy in the post of Designated Partner, the LLP may appoint a new Designated Partner to fill up such vacancy (Section 9). The word may used must mean shall if the LLP does not have at least two Designated Partners. If you have at least two Designated Partners inspite of the vacancy caused, then obviously even after 30 days of such vacancy you can appoint additional Designated Partner, if your LLP Agreement permits. If there is a casual vacancy resulting into only one partner being left as a Designated Partner, then according to one view, even during the period of 30 days which is allowed to fill up the casual vacancy, all the partners shall be deemed to be Designated Partners. 16

17 If casual vacancy is filed up or additional Designated Partner is appointed, his particulars will have to be filed with the Registrar under Section 7(4) in such manner as may be prescribed. If no Designated Partner is appointed, or if at any time there is only one Designated Partner, each partner shall be deemed to be a Designated Partner. (Section 9 proviso) Section 34(2) and Rule 24(6) provide that LLP s Statement of Account and Solvency shall be signed by Designated Partners on behalf of the LLP. 17

18 Disqualification for Designated Partners: Section 7(5) : An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed. Disqualifications prescribed by Rule 9:- R.9. (1) A person shall not be capable of being appointed as a designated partner of a limited liability partnership, if he (a) has at any time within the preceding five years been adjudged insolvent; or (b) suspends, or has at any time within the preceding five years suspended payment to his creditors and has not at any time within the preceding five years made, a composition with them; or (c) Has been convicted by a Court for any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months; or (d) has been convicted by a Court for an offence involving section 30 of the Act. 18

19 The Central Government may, by notification in the Official Gazette, remove the disqualification incurred by any person by virtue of clauses (a) or (b) of subrule (1), either generally or in relation to any limited liability partnership or limited liability partnerships specified in the notification. Section 7(5) refers to eligibility to be a designated partner. Not clear whether incurring any of the disqualifications under Rule 9 after being so appointed will disqualify from continuing as a designated partner. Rule 9 (1) provides:. Shall not be capable of being appointed as a designated partner. That means eligibility to be seen only at the time of appointment. Implication of Section 7(5) read with Rule 9 is if there are going to be only two partners in LLP then person who is disqualified under Rule 9 will not be able to become a partner in LLP 19

20 LIABILITIES OF DESIGNATED PARTNER( SECTION 8) Unless expressly provided otherwise in the Act, a designated partner shall be responsible for the doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the LLP Act including filing of any document, return, statement and the like report pursuant to the provisions of the Act and as may be specified in the LLP Agreement. Liable to all penalties imposed on the LLP for any contravention of those provisions. Section 76 deals with offences by LLPs. Section 76 provides that it offence is committed by a LLP, then every partner or designated partner with whose consent or connivance such offence is committed or to whose neglect it can be attributed, shall also be guilty of such offence apart from the LLP, and shall be liable to be prosecuted and punished. Section 76 does not differentiate between designated partner and other partners. 20

21 Section 34 (2) and Rule 24(6): Statement of Account and Solvency to be prepared in Form No.8 for each financial year is required to be signed by each Designated Partner. Rule 24(11) provides that Designated Partners may appoint auditors. Rule 24(12) provides that partners may appoint Auditors if Designated Partners have failed to do so. Thus primary power/responsibilities to appoint Auditors is entrusted to the Designated Partners by the Rules. 21

22 Limited Liability Partnership Agreement Section 23 (1): Except as otherwise provided by the LLP Act, the mutual rights and duties of the Partners of LLP AND The mutual rights and duties of LLP and its partners, shall be governed by the LLP Agreement between the partners or between the LLP and its partners Section 23 (2) requires that LLP Agreement and changes, if any, made therein shall be filed with the Registrar in prescribed form. By Rule 21, Form 3 has been prescribed. The provision of Section 23 (2) provides that Limited Liability Agreement shall be filed in prescribed form. It is not clear as to what is intended by these wordings. From Form 3 it appears that only extracts of Limited Liability Partnership Agreement are to be filed, but Form 3 is a very lengthy form and requires detailed analysis of the contents of the LLP Agreement. 22

23 Section 23 (3) reads: (3) An agreement in writing made before the incorporation of a limited liability partnership between the persons who subscribe their names to the incorporation document may impose obligations on the limited liability partnership, provided such agreement is ratified by all the partners after the incorporation of the limited liability partnership. The reference to an agreement in Sub-section (3) is obviously to LLP Agreement as it is an agreement made between the persons who subscribed the names to the Incorporation Document. Therefore, if LLP Agreement is signed before incorporation of LLP, it must be ratified by all the partners after incorporation of LLP to make it binding on the LLP. The provisions of the Act and contents of the prescribed forms indicate that LLP Agreement may be entered into before incorporation of LLP or immediately after incorporation of LLP. 23

24 Section 23 (4) provides that in the absence of agreement as to any matter, the mutual rights and duties of the partners ( i.e. partners inter se ) and the mutual rights and duties of the LLP on the one hand and the partners on the other hand shall be determined by the provisions relating to that mater as are set out in the First Schedule. The First Schedule of the LLP Act corresponds to Table Schedule A of the Companies Act,

25 THE FIRST SCHEDULE [See section 23(4)] PROVISIONS REGARDING MATTERS RELATING TO MUTUAL RIGHTS AND DUTIES OF PARTNERS AND LIMITED LIABILITY PARTNERSHIP AND ITS PARTNERS APPLICABLE IN THE ABSENCE OF ANY AGREEMENT ON SUCH MATTERS. 1. The mutual rights and duties of the partners and the mutual rights and duties of the limited liability partnership and its partners shall be determined, subject to the terms of any limited liability partnership agreement or in the absence of any such agreement on any matter, by the provisions in this Schedule. 2. All the partners of a limited liability partnership are entitled to share equally in the capital, profits and losses of the limited liability partnership. 25

26 3.The limited liability partnership shall indemnify each partner in respect of payments made and personal liabilities incurred by him (a) in the ordinary and proper conduct of the business of the limited liability partnership; or (b) in or about anything necessarily done for the preservation of the business or property of the limited liability partnership. 4. Every partner shall indemnify the limited liability partnership for any loss caused to it by his fraud in the conduct of the business of the limited liability partnership. 5. Every partner may take part in the management of the limited liability partnership. 6. No partner shall be entitled to remuneration for acting in the business or management of the limited liability partnership. 7. No person may be introduced as a partner without the consent of all the existing partners. 26

27 8. Any matter or issue relating to the limited liability partnership shall be decided by a resolution passed by a majority in number of the partners, and for this purpose, each partner shall have one vote. However, no change may be made in the nature of business of the limited liability partnership without the consent of all the partners. 9. Every limited liability partnership shall ensure that decisions taken by it are recorded in the minutes within thirty days of taking such decisions and are kept and maintained at the registered office of the limited liability partnership. 10. Each partner shall render true accounts and full information of all things affecting the limited liability partnership to any partner or his legal representatives. 11. If a partner, without the consent of the limited liability partnership, carries on any business of the same nature as and competing with the limited liability partnership, he must account for and pay over to the limited liability partnership all profits made by him in that business. 27

28 12.Every partner shall account to the limited liability partnership for any benefit derived by him without the consent of the limited liability partnership from any transaction concerning the limited liability partnership, or from any use by him of the property, name or any business connection of the limited liability partnership. 13. No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners 14. All disputes between the partners arising out of the limited liability partnership agreement which cannot be resolved in terms of such agreement shall be referred for arbitration as per the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996). 28

29 RELATIONSHIP OF PARTNERS AND LLP 1.Save as otherwise provided by the LLP Act mutual rights and duties as between the LLP and its partners are governed by the LLP Agreement and the First Schedule to the Act (to the extent not excluded). (Section 23(1) and (4)). 2. Every partner is, for the business of the LLP, the agent of the LLP (Section 26). 3. A partner of LLP is not an agent of other partner of LLP. 4.(i)A partner may transfer either wholly or in part : (a) his right to a share of profits and losses; and (b) his right to receive distributions (Section 42(1) (ii) Such transfer does not cause disassociation of the partner or dissolution and winding-up of the LLP (Section 42(2)). (iii) Such transfer does not entitle the transferee/assignee to participate in the management or activities of the LLP. (Section 42(3).) 29

30 5. Section 42 categorically says that rights of a partner to share profits and losses and to receive distribution are transferable either wholly or in part. It does not refer to LLP Agreement at all and from the wordings it appears that restriction cannot be imposed under the LLP Agreement. However in the Notes to Clauses given with the Bill, in relation to this provision it is mentioned :- Clause 42 - This clause seeks to provide that the rights of a partner to a share of the profits and losses of the LLP and to receive distribution shall be transferable in accordance with the LLP agreement and such transfer shall not by itself cause the disassociation of the partner or a dissolution and winding up of the LLP. The clause further seeks to provide that such transfer would not entitle the transferee to participate in the management of the LLP. 30

31 LIABILITY OF LLP AND PARTNERS (Sections 27 to 30) Obligation of LLP whether arising in contract or otherwise, shall be solely the obligation of the LLP. (Section 27(3)) Liabilities of the LLP shall be met out of the property of the LLP (Section 27(4)) A partner is not personally liable directly or indirectly for an obligation of the LLP( Section 28(1). A partner shall not be personally liable for the wrong act or omission of any other partner of the LLP (Section 28(2). Each partner is personally liable for his own wrongful act or omission (Section 28(2). The LLP shall be liable if a partner of the LLP 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 LLP or with its authority. (Section 27(2)) 31

32 LLP is not bound by anything done by a partner in dealing with a person, if : (a) (b) the partner in fact has no authority to act for the limited liability partnership 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. (Section 27(1)) 32

33 HOLDING OUT (Section 29) Any person who holds out himself 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, irrespective whether the person so holding out does or does not know that such representation has reached the persons so giving credit. For the purpose of this section holding out means, representing by words spoken or written, or by conduct, or knowingly permitting himself to be represented to be a partner in a LLP. Even in such case, the LLP is also liable to the extent of credit received by it or financial benefit derived there from. Section 29(2) clarifies that the continued use of the name of the deceased partner as a part of LLP shall not by itself make his legal representatives or his estate liable for any act of the LLP done, after his death. 33

34 Cessation of Partnership inertest ( Section 24) (i) Voluntary Cessation (ii) Compulsory Cessation A person ceased to be a person of LLP: (a) in accordance with the provisions of the LLP Agreement ; or (b) by giving 30 days notice in writing to the other partners of intension to resign as partner. A person shall cease to be a partner of LLP: (a) on his death (b) on dissolution of LLP (c ) if he is declared to be of unsound mind by a competent court (d) if he is applied to be adjudged as an insolvent or declared as an insolvent 34

35 Consequences of ceasing to be a partner: Even after ceasing to be a partner from the LLP that person is not discharged from any obligation to the LLP or to the other partners or to any other person which he incurred while being a partner. (Section 24 (4). In relation to any person dealing with LLP a former partner is regarded as still being a partner of the LLP unless: (a) that person has notice that the former partner has ceased to be a partner of LLP or : (b) a notice has been delivered to the Registrar that the former partner has ceased to be a partner of the LLP (Section 24 (3) ) 35

36 Entitlement of former partner ( Section 24 (5) ) Unless otherwise provided in the LLP Agreement, the former partner or his successor ( in the event of death or insolvency ) shall be entitled to receive from the LLP : (a) amount equal to capital contribution of the former partners actually made to the LLP; and (b) his right to share in the accumulated profits of the LLP. After the deduction of accumulated losses of the LLP, determine as at the date the former partner ceased to be a partner. A former partner or a person entitled to his share in consequence of death or insolvency does not have any right to insolvency in the management of the LLP. (Section 24 (6) ) 36

37 Contents of LLP Agreement Following are the Heads of Agreement which may be covered in an Agreement for Limited Liability Partnership: 1. Parties (i) (ii) Names and description of parties If LLP is already formed then join LLP also as a party and give its description, registered office and registration No. 2. Objective Intent of forming Limited Liability Partnership. 2A. Name of LLP If LLP is not formed then give particulars of its proposed name. Section 16 provides for reservation of name for a proposed LLP. In deciding the name of the LLP, the provisions of Rule 18 should be taken into account. R.18 provides guidelines as to which names shall not be allowed. 37

38 3. Definition and interpretation Clause 4. Formation: Statement that parties have agreed to form a LLP. OR Statement that parties ( i.e. partners) have incorporated. LLP. Give Regd. Office address and Registration No. 38

39 Business 5A. Commencement of business of LLP 5B. Duration of LLP (i) Business to be carried on by the LLP (ii) Place of business of LLP 6. Designated Partners (i) Names of the Designated Partners. (ii) Acts, matters or things required to be done by a designated partner in respect of the compliance of the provisions of the Act. (iii) Powers in relation to acts, matters, or things which the designated partner can exercise only with the consent of all the partners/requite number or of partners or partners holding particular percentage of share. 39

40 7. Contribution of Partners (i) Contribution by each Partner by way of money or property or other benefit or to perform services. 8. Partners powers, duties and authorities. Power, duty and authority of each partner Mutual rights and duties of partners, Mutual rights and duties of Limited Liability Partnership and partners. Restrictions on partners authority 40

41 Management of LLP: (i) Acts, matters or things, if any, which can be done only with the consent of all the partners. (ii) Acts, matters or things, if any which can be done only with the consent of requisite number or percentage of the partners. (iii) Manner if any, in which the consent of the partners is to be obtained. (iv) Procedure for calling, holding and conducting meetings, ( where the decisions are to be made at meetings of partners) including requirement of Notice, agenda, quorum etc. (v) Writing of the Minutes of the meeting of the partners (vi) How will various decisions concerning LLP will be made whether by majority, special majority or unanimity. (vii) Working hours, leave etc of the partners. (viii) Address for service of documents on the LLP, if any, other than Regd. Office. (Section 13 (2) read with Rule 16(2)) 41

42 (ix) How decision, if any, for shifting of Registered Office will be made? (Rule 17 (1)). Rule 17(1) provides that LLP may change its registered office from one place to another (a) by following procedure laid down in LLP Agreement, or (b) with consent of all partners, if LLP Agreement does not lay down the procedure for this. (x) How decision, if any, to change the name of the LLP will be taken? (Rule 20 (1)) (xi) What will be the voting right of each Partner? 10. Provisions relating to change in constitution of LLP by : (i) Admission of a new partner (ii) Retirement of a Partner (iii) Cessation of a Partner by death insolvency etc. (iv) Expulsion of a partner (v) Resignation of the partner. 42

43 11. Rights obligations and entitlements of a partner on admission /retirement/cessation/expulsion/resignation 12. Financial Year of the LLP. 12. Financial Year of the LLP 13. Accounts How accounts will be made and accounting policy 14. Auditors (i) Who will be the Auditors or how appointment of the Auditors will be made (ii) How Auditors will be removed/changed. 15.Banking arrangement. Who will be Bankers and how banking operations will be carried out 16. Members contribution. Each partner s contribution to the capital Provision, if any, for future increase in capital 43

44 17. Members shares (i) Members shares in the Profit of the LLP (ii) Members shares in the Loss of the LLP (iii) Members shares in the assets on dissolution of the LLP 18. Members Account. (i) Provisions regarding Profit or Loss will be credited or debited to Members Account. (ii) Drawings to be debited to that Member (iii) Drawing to be allowed to each Member 19. Distribution of Profits 20. Perquisites and salary of the Partners 21. Right of a partner to transfer his rights to a share of the profit and loss and to receive distribution ( Section 42 of the LLP Act) 22. Representation and Warranties by the Partners. 44

45 Indemnities Indemnities from the partners to the LLP and vice-a-versa. 24. Provision for Winding up 25. Dispute resolution and Arbitration. 26. Non-compete Clause, if any ( validity subject to sec. 27 of the Indian Contract Act, 1872). 27. Notice Clause 28. Usual boiler plate clauses such as: (i) Severability (ii) Execution in counter parts (iii) Variation (iv) No waiver (v) Entire Agreement (vi) Confidentiality 29. Sharing of stamp duty if it is not debited to LLP 30. Common Seal Whether the LLP will have Common Seal and how it will be used. 31. Exclusion/inclusion of various provisions contained in the First Schedule to the LLP Act. 45

46 IS LLP AGREEMENT REQUIRED TO BE FILED WITH THE REGISTRAR? Form 2 (Incorporation Document and Statement) prescribed under Rule 11 read with Section 11, does not provide for attaching a copy of the LLP Agreement. Para 10 in that Form No. 2 is a subscription clause which reads : We, the several partners.. and have entered or agreed to enter into a limited liability partnership agreement in writing.. -Section 23(2) read with Rule 21 requires that LLP Agreement and any change made therein should be filed with the Registrar in Form No. 3 with prescribed fees. -Form No. 3 is a detailed form requiring so many disclosures concerning contents of LLP Agreement in analytical form. With effect from 15 th January 2010, Rule 21 has been amended and yet does not provide for filing of LLP Agreement, but in the amended Form No. 3, the list of Attachment includes Initial LLP Agreement. 46

47 LLP AGREEMENT THIS AGREEMENT made at this. day of 2010 between MR. ABC of Mumbai Indian Inhabitant residing at.. ( hereinafter referred to as ABC ) of One Part ; MR. DEF of Mumbai Indian Inhabitant residing at (hereinafter referred to as DEF ) of Second Part, and PQR Pvt. Ltd. a company incorporated under the Companies Act, 1956 and having its Registered Office at. (hereinafter referred to as PQR Pvt. Ltd. ) of the Third Part. WHEREAS: (i) (ii) The parties hereto desire to carry on business in partnership, inter alia, of manufacturing garments and trading in garments, by incorporating a limited liability partnership. The parties hereto are desirous of recording the terms and conditions and the mutual rights and duties of the partners and the partners rights and duties in relation to such limited liability partnership. 47

48 NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS UNDER:- 1. DEFINITIONS AND INTERPRETATION: 1.1 In this Agreement unless the context otherwise requires, the following expressions shall have the following meaning: (i) Act means the Limited Liability Partnership Act, 2008 as in force including any statutory modification or reenactment thereof. (ii) Accounting Standards means all standards from time to time accepted by the accountancy profession as relevant to the preparation of the accounts of a limited liability partnership including (but without limitation), the Generally Accepted Accounting Principles. (iii) Auditors means the Auditors of the LLP appointed in accordance with this Agreement. 48

49 (iv) (v) (vi) (vii) (viii) Business means the business of the LP of manufacturing and trading in garments, and such other business as the Partners may decide from time to time. Designated Partners means one or more partner/s and/or Nominee of PQR Ltd. who is /are designated as Designated Partner from time to time as mentioned in clause [*] Financial Year means the period of 12 months commencing from 1st April and ending on 31st March. However the first financial year of the LLP shall be the period commencing from the date of its incorporation till the next 31st March. LLP means a limited liability partnership to be incorporated by the Parties in the name of XYZ LLP (or in such other name as may be available), under the provisions of the Act. Nominee of PQR Pvt. Ltd. means a person authorized by the PQR Pvt. Ltd., to act on its behalf in respect of the affairs of the LLP. 49

50 (ix) (x) (xi) (xii) Partners means Mr. ABC, Mr. DEF and PQR PVT. LTD. and partner means any one of them. This term shall also include any persons/s as may from time to time be inducted as partner/s of the LLP. Registered Office means the registered office of the LLP at [*] or such other address as shall from time to time be registered by the LLP with the Registrar. Registrar means the Registrar as defined in the Act and having jurisdiction over the LLP. Rules means the limited liability Partnership Rules, 2009 as amended from time tot time and in force pursuant to the Act. 50

51 1.2 In this Agreement: (i) Reference to the death of any Partner shall in the case of any Partner being a body corporate include reference to the winding up, dissolution or striking off the register of that Partner unless the context otherwise requires; (ii) Reference to any profits or losses of the LLP shall also include a reference to profits and losses of a capital nature; (iii) Words denoting any gender include all genders and words denoting persons include firms and corporations and vice versa; (iv) Words denoting the singular number only, include the plural and vice versa; (v) Unless the context otherwise requires reference to any clause paragraph or schedule is to a clause, paragraph or schedule ( as the case may be) of or to this Agreement; 51

52 (vi) (vii) (viii) Reference to any statute or statuary provision includes a reference to that statute or provision as from time to time amended, extended, reenacted or consolidated and to all statutory rules, regulations, instruments or orders made under it Any covenant or stipulation entered into by more than one party shall be deemed to be entered into jointly and severally; and The headings in this document are inserted for convenience only and shall not affect the construction or interpretation of this Agreement. 52

53 2. INCORPORATION 2.1 The Parties hereto i.e. Partners shall cause a limited liability partnership to be incorporated under the Act as early as possible, in the name of XYZ LLP or such other name as may be mutually agreed by the Partners. 2.2 Upon incorporation of the LLP, the Partners shall be the partners of the LLP 2.3 The Certificate of incorporation of the LLP shall be kept at the Registered Office of the LLP. 2.4 On incorporation of the LLP each of the Partners shall ratify and shall cause the LLP to ratify this LLP Agreement. 53

54 3.REGISTERED OFFICE The Registered office of the LLP shall be at. till otherwise decided by the Partners 4.ADDRES OF SERVICE The address for service of documents on the LLP and its Partners shall be at the Registered Office of the LLP given below [GIVE ADDRESS WITH POSTAL CODE AND ADDRESS]] [ Note: Under Section 13 (2) read with R. 16 (2) may specify any other address of service in addition to the registered office address. It is not clear as to what is the consequence if the document is not served at such additional address ] 54

55 BUSINESS OF LLP 5.1 The LLP shall carry on the business of manufacturing of and trading in garments. 5.2 The LLP may carry on such other business either in addition to or in substitution of its then existing business as may be decided with written consent of all the Partners from time to time. 6. DURATION OF LLP The Partnership hereby contemplated shall commence on the incorporation of the LLP and shall subsist until the LLP is wound up in accordance with the provisions of the Act. 55

56 7. ALL ASSETS AND PROPERTIES OF LLP 7.1 All the assets and properties of the LLP shall be held in the name of the LLP. 7.2 Without prejudice to the aforesaid, if any, asset or property of the LLP is held in the name of any Partner (or any nominees for them) the those Partners (or nominees) shall be deemed to have held the same in trust for the LLP and the LLP shall keep them and their respective estates and effects indemnified against all liability in respect of such assets and properties. Such Partners (or nominees) shall at the request in writing by the remaining Partners, transfer such assets/properties to the name of the LLP at the cost of the LLP. [ Note: Al assets of the L LP should be held in the name of the LLP ] 8. DESIGNATED PARTNERS Mr. ABC, and Mr. DEF shall be the Designated Partners as contemplated by Section 7 of the Act. [ Note: Nominee of PQR Pvt. Ltd. may also be designated as Designated partner ] 56

57 9.Accounts 9.1 It shall be the responsibility of the Partners to ensure that proper books of account as to the affairs of the LLP (which shall include any computerized accounting system(s) used by the LLP) shall be kept properly posted. 9.2 Such books of accounts (including the data held on any such computerized system as is referred to above ) shall be kept at the Registered Office or at such other place as the Partners may from time to time decide, ;and open to inspection by the Partners who may take copies of all entries. 9.3 The Accounts shall be prepared for each Financial Year and shall be signed by each Partner. The Accounts shall be got audited by the Auditors of the LLP. 9.4 The accounts of the LLP shall be maintained on cash basis or on accrual basis and according to double entry system 9.5 The designated partners shall ensure filing of the Statement of Accounts and Solvency for each Financial Year with the Registrar as required by the Rules and within the time prescribed by the Rules. 57

58 10. AUDITORS The Auditors of the LLP shall be appointed for each Financial Year with the unanimous consent of all the Partners. 11. CAPITAL OF LLP The capital of the LLP shall be Rs..(Rupees.) and shall be contributed by the Partners as under:- Name of the Partner 1. Mr. ABC 2. Mr. DEF 3. PQR Ltd. Total: Amount ( Rs.) 11.2 The capital of the LLP may be increased from time to time with the consent of all the Partners. The Partners shall contribute to such increased capital in the same proportion in which they contributed capital as mentioned in Clause 11.1 above. 58

59 11.3 The Partners shall be entitled to get interest from the LLP on the capital contributed by them at the rate of..% per annum. OR 11.3 The Partners shall not be entitled to claim any interest from the LLP on the capital contributed by them 12. Profit and Loss of the LLP The profits and losses of the LLP shall be shared amongst the Partners as under: Name of the Partners Percentage ABC DEF PQR Ltd. Total: 100% 13. SALARY OF PARTNERS Mr. ABC and Mr. DEF shall be entitled to receive from the LLP a monthly salary of Rs. [ Note: Salary in excess of the prescribed limit under the Income Tax Act, will be disallowed as expenses of the LLP ] 59

60 Management of LLP Every partner shall be entitled to participate in the management of the LLP. However, the Designated Partners shall be liable for day to day management of the business of the LLP and for doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the Act including filing of any document, return, statement and the like report pursuant to the provisions of the Act The LLP shall have bank accounts in such Banks and the LLP s bank account shall be operated in such manner as may be decided by the partners from time to time All decisions pertaining to the affairs and the business of the LLP, other than those mentioned in Clause 14.4 shall be taken by the majority of the Partners ( irrespective of their share of profit) [ Note: Alternatively the LLP Agreement may provide that all the decisions pertaining to LLP shall be decided unanimously by the partners.] 60

61 14.4 The decisions in respect of the following matters shall be taken only with the unanimous written consent of all the Partners:- (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) shifting the registered office of the LLP changing the address of service of documents on the LLP appointment or removal of the Auditors of the LLP change of name of the LLP change of business of the LLP increase in the capital of the LLP induction of any new partner in the LLP change in ratio of sharing of profit or loss by the Partners. 61

62 RIGHTS AND OBLIGAIONS OF THE PARTNERS 15.1 Each Partner shall: a) participate and attend to the business of the LLP to the greatest common advantage of the LLP. b) be just and faithful to each other. c) render true accounts and full information of all moneys affecting the LLP to the other. d) indemnify the LLP for any loss caused to it by his willful negligence or fraud in the conduct of the business of the LLP. e) attend to the business of the LLP diligently and actively. However, PQR Ltd. is entitled but not bound to attend to day to day business of the LLP. f) not withdraw any amount for own profit, benefit or use without the consent of the others. g) be entitled to be indemnified by the LLP in respect of payment made and liabilities incurred by him (i) in the usual and proper course of business of the LLP and (ii) in doing any act for protecting the LLP from loss in emergency. [ Note: Even though LLP is a body corporate and even though under the LLP Act ( Sec.26) each partner is agent of the LLP and not the agent of the LLP partners, the principle of being faithful to each other are relevant as ultimately Partners are the only beneficiaries of the LLP] 62

63 15.2 All the tangible and intangible assets of the LLP including the goodwill, benefits of contracts entered etc. in relation to the said business will belong to the LLP and the property of the LLP shall be used by the Partners exclusively for the business of the LLP Every Partner shall account for the profits earned from any transaction of the LLP or from the use of the property of LLP in any business transaction Any obligation of the LLP, whether arising in contract or otherwise, shall be solely the obligation of the LLP All liabilities of the LLP shall be met out of the assets and properties of the LLP No Partner shall be personally liable, directly or indirectly, for any obligation of the LLP. However, each Partner shall be liable for his own wrongful act or omission, but not of any other Partner of the LLP. 63

64 15.7 Any Partner shall not, without the consent of the others and in respect of or relating to the business of the LLP:- a) submit any dispute with any other person to arbitration or compromise or relinquish any claim; b) withdraw any suit or legal proceedings filed by the LLP; c) surrender any leasehold or tenancy rights of any immovable property; d) acquire or dispose of any immovable property e) assign or transfer his/its share or any interest in the LLP except as permitted by sub-section (1) of Section 42 of the Act and subject to the provision of Sub-section (2) and (3) of the said Section 42. f) admit any person as a partner in the LLP g) borrow any moneys for or in the name of the LLP, or create any security or charge on the assets of the LLP [Note: In the case of larger business some of the sub-clauses of this clause should be modified to make them more practical. For example, consent of any two partners for settling a dispute ] 64

65 16. EXPULSION OF A PARTNER The Partner shall not have any authority to expel any partner from the LLP. OR The partners not being less than 2/3rd in number of the total number of Partners be entitled to expel any partner without assigning any reason. OR The Partners not being less than 2/3rd in number of the total Partners shall be entitled to expel any partner provided the Partner proposed to be expelled has : (a) committed any material breach or persistent breach of this LLP Agreement ; or (b) has s a bankruptcy order made against him; or (c ) has failed to pay monies not being less than Rs. [.], due to the LLP, within 60 days of being requested in writing by the LLP through any of its partners; or (d) is guilty of any conduct accordingly to have serious /adverse effects upon the business and affairs of the LLP; or (e) has ceased to hold any professional qualification or certification required for the normal performance of his duties as a partner of the LLP.[NOTE: this sub-clause is relevant in the case of LLP formed by professionals] 65

66 17.CESSATION OF PATNERS INTEREST 17.1 A partner may retire as a partner of the LLP by giving a notice in writing of not less than [. ] the other partners of the LLP of his intention to resign as a Partner A partner of the LLP shall cease to be a partner of the LLP:- (a) on his death; or (b) if the partner concerned is a body corporate and has resolved to be voluntarily wound-up or has been directed by any Court/Tribunal or under any law to be wound-up; or (c ) If he is declared to be of sound mind by a competent court; or (d) If he has applied to be adjudged as a insolvent or declared as insolvent; or (e) on the dissolution of the LLP. 66

67 17.3 Where any Partner ceases to be a Partner of the LLP (for short Former Partner ) as provided above, the Former Partner or a person entitled to his share in consequences of the death or insolvency or dissolution or winding up of the Former Partner, shall be entitled to receive an amount equivalent to actual capital contribution by such partner in the LLP as also to his share in the accumulated profits of the LLP but after the deduction of accumulated losses of the LLP determined as at the date such Partner has ceased to be a Partner The representative of a former Partner entitled to his share shall not have any direct and/or indirect right to interfere in the management of the LLP The cessation of a Partner from the LLP shall not by itself discharge the Partner who has ceased to be such Partner from any obligation to the LLP or to the other Partners or to any other person to whom he has incurred any obligation while being a Partner of the LLP. 67

68 18. ENTITLEMENT ON CESSATION OF A PARTNER In the event of the death, retirement, deemed retirement [or expulsion ] of any Partner there shall be due to him from the LLP the amount of his partner s share of capital and the balance standing to the credit of his partner s account as shown in the accounts of the LLP at the date of such death or the coming into effect of such retirement or expulsion. There shall be no goodwill payable to him and there shall be no revaluation of the LLP s work in progress other than in the normal course of the preparation of the accounts according to such principles as would have been applied by the accountants in any event. [ Note: any other alternate provision can be made for deciding the entitlement of such person ceasing to be a partner].. 68

69 19.INDEMNITY 19.1 The LLP shall indemnify each and every Partner including Designated Partners in respect of payments made and personal liabilities incurred by such a Partner in the ordinary and proper conduct of the business of the LLP and/or in or about anything necessarily done for the preservation of the business or property of the LLP Every Partner including the Designated Partners shall indemnify the LLP for any loss caused to it by such Partner by the willful default, gross negligence or fraud of such a Partner in the conduct of the business of the LLP. 20. COMMON SEAL LLPs shall have a common seal with such design as may be unanimously agreed by the Partners. The Designated Partners shall provide for the safe custody of the Common Seal. The Common Seal shall be used under the authority of the resolution of the Partners. It shall not be necessary to use the Common Seal on all the documents executed by or in the name of LLP. However, Power of Attorney, if any, executed by the LLP shall always be under its Common Seal. [NOTE: Since Common seal is optional for LLP it is better not to provide for a common seal]. 69

70 21. WINDING UP AND DISSOLUTION FO LLP The LLP may be wound up and dissolved as per the provisions of the Act and the rules prescribed under the Act for this purpose, if all the Partners unanimously agree in writing to wind up and dissolve the LLP Upon winding up of the LLP the assets of the LLP remaining after providing for all liabilities, shall be distributed in specie amongst the Partners in proportion to their share of profit sharing or shall be liquidated and the net sale proceeds shall be distributed amongst the Partners in proportion to their share of profit sharing. 22. FIRST SCHEDULE NOT TO APPLY The mutual rights and duties of the partners and the mutual rights and duties of the LLP and the partners shall be governed by this LLP Agreement and application of each of the provision contained in the First Schedule to the Act is hereby expressly excluded. 70