Joginder Singh Toor

“DOORS are opened to enter business in India” claims a journal published by an association of professionals in North America. The reason India has passed the Limited Liability Partnership Act, section 7 of which provides that every LLP limited liability partnership shall have at least two designed partners who are individuals and at least one of them shall be a resident of India.

The Act virtually opens the doors of business for foreigners to enter the market in India by having only one resident of India as a designated partner. The rest may be all foreigners. There is no maximum limit of partners. A body corporate, a company may be a multi-national can become partner by having one Indian resident as a designated partner. The Act has been acclaimed by big business and professional firms without taking note of its impact on Indian economy.

The Romesh Chandra Committee constituted by the Government of India, Ministry of Finance and Company Affairs recommended that the growth of Indian economy, the role played by entrepreneurs and their experience, skill and knowledge requires a new corporate form to replace the Traditional Partnership Act of 1932 with unlimited liability of the partners. It virtually allows the new entrepreneurs to play in India while sitting abroad and be free after committing any loss or injury of any magnitude, the Bhopal gas leak holocaust should be fresh in our minds indicating that you can neither be arrested nor punished. India is open for you.

Similar experience in Dubai where too, a foreigner can enter business with a native as a partner, left unpleasant experience when a foreign firm was found guilty of fraud. The enforcement agency tried to locate the native partner who was only a lorry driver, had left job long ago and was not traceable.

Indian Partnership Act of 1932, which has been termed as traditional one, provides for a partnership agreement, between persons who have agreed to share the profits of business carried on by all or any of them acting for all. It arises out of a contract or agreement, and not because of status like being a member of a Hindu undivided family (HUF). The partnership firm constituted under 1932 Act is not a legal entity. Its essential characteristic is that each partner is a representative of other partners. Each of the partners is an agent and a principal of other partner. Liability of the firm can be enforced against each partner. The personal assets of the partners are also open for meeting the liability of the firm.

The liability is unlimited. The partnership firm, where no duration is defined, is termed as partnership at will and is liable to be dissolved by notice or it ceases to be exist on the death of one of the partners in absence of a contract to the contrary.

A loss caused to the third party during the course of business, is to be indemnify by the firm and a loss caused by the partner by his misconduct or fraud to the firm is liable to be indemnified by the partner concerned.

The changed form of the corporate section, conceived by the LLP, is that it is a separate legal entity. Partners have the right to manage the business directly unlike corporate share holders. One partner is not responsible for another partner’s act. Minimum two partners are required to form a LLP. There is no maximum limit or cap. The duties of designated partners are provided under the law and one of the designated partners has to be permanent resident of India. Liability is limited to the amount of contribution. There is no exposure of the personal assets of the partner. Only the assets of the LLP are to meet the liability. Registration, like a company is essential. The name of the partnership business is to end with LLP like a company limited “private company or a public company”. Capital contribution or its minimum is not specified.

A care is however taken that in case of fraud, 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 shall be unlimited. Otherwise a LLP is not bound by any thing done by a partner in dealing with a person if the partner has no authority. The liabilities of the LLP are to be met out of the property of the LLP and not of the partners. It is specifically provided that a partner is not personally liable directly or indirectly for an obligation solely by reason of being a partner of the LLP.

The Act does not meet the requirement of common man, nor it protects the small business man nor does it ensure the liability of foreign partners in case of loss or injury of criminal nature. It surely opens the doors of India for foreign entrepreneurs and professionals.

[Joginder Singh Toor is a senior advocate based in Chandigarh 91-9815133530. jogindersingh_toor@yahoo.com]

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