Bhat Committee (1972): The Bhat Committee (1972) had recommended limited liability for Small Scale Industrial entrepreneurs so that more persons could be persuaded to invest in new small enterprises. This would also ensure a greater flow of risk capital bring in the concept of partnership with limited liability.
Expert Committee on Development of Small Sector Enterprises headed by Sh. Abid Hussain in 1997: The 1991 policy for small scale industries had proposed an enactment of a Limited Partnership Act so that it would be easier for SSE entrepreneurs to source additional funding from other partners who could invest in partnership as sleeping partners. Based on this recommendation, the Expert Group recommended that the Limited Partnership Act should be enacted as soon as possible.
It recommended that the proposed Limited Partnership Act should also incorporate the law governing limited management partnerships. These rules should lay down the rights and obligations of the managers and the investors. Since expertise would have to be sought from management companies overseas, the rules for the repatriation of their profits should also be spelt out.
Study Group on Development of Small Sector Enterprises (SSEs) headed by Dr. S P Gupta (2001): The Committee felt that with Indian professionals increasingly transacting with or representing multi-nationals in international transactions, the extent of the liability they could potentially be exposed to is extremely high. Hence, in order to encourage Indian professionals to participate in the international business community without apprehension of being subject to excessive liability, the need for having a legal structure like the LLP is self-evident. Provisions which restrict the number of partners to twenty prevent the growth of professional firms to the large entities operating on an international scale. Such inhibiting conditions have to be removed. Otherwise, Indian professionals may well get excluded from taking their rightful place in the international community, that their skills otherwise entitle them to.
Naik Committee (1992): Naik committee has also made recommendations for legislation on LLPs in India.
Following Committees set up by M/o Company Affairs have also recommended for legislation on LLPs:
Committee on Regulation of Private Companies and Partnerships headed by Sh. Naresh Chandra (2003): The Naresh Chandra Committee-II that developed the concept of LLP in India observed 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 and accountants.”
Two or more professionals, who wish to associate for the purpose of providing an identified professional service, may subscribe their names in an “incorporation” document in the prescribed form.
The relations inter se the partners and between the partners and the LLP may be governed by individual agreements between the parties concerned. Such agreement must be filed with the RoC; changes made in the agreement will also have to be filed with the RoC.
The LLP agreement should contain information as may be prescribed by the Department of Company Affairs.
No limit is placed on the number of partners in an LLP. Any person may become a partner by entering into an agreement with the existing partners in the LLP. Further, when a person ceases to be a partner of an LLP he/ she should continue to be treated as a partner unless: (a) the partnership has notice that the former partner has ceased to be a partner of the LLP; or (b) a notice that the former partner has ceased to be a partner of the LLP has been delivered to the RoC. A partner having resigned from an LLP would continue to be liable for acts done by him during his tenure as member of the LLP.
LLPs should be regulated and administered by the Central Government to ensure uniform standards, and since many of the State Governments might not have adequate infrastructure and expertise for ensuring effective regulation.
Every partner of the LLP would be an agent of the LLP. However, an LLP would not be bound by anything done by a partner in dealing with a person if (a) the member in fact had no authority to act for the LLP by doing that act; and (b) the person knows that he has no authority or does not know or believe him to be a partner of the LLP.
Where a partner of the LLP is liable to any person or entity as a result of his wrongful act or omission in the course of the business of the LLP, the LLP would be liable in such circumstances. However, the partner would be liable only to the extent of his/her contribution to the LLP.
In the event of an act carried out by a LLP, or any of its partners, fraudulently, the liability would not be limited; it would, in fact, become unlimited as provided for in sec 542 of the Companies Act, 1956.
A partner shall not be liable for the personal acts or misconduct of any other partner.
The provisions relating to insolvency, winding up and dissolution of companies as contained in the Companies Act, 1956 may be examined and suitably modified to conform to the philosophy of LLPs. The partners may have to contribute to the assets of the LLP in the manner provided for in this regard.
There should be insurance cover and/or or funds in specially designated, segregated accounts for the satisfaction of judgments and decrees against the LLP in respect of issues for which liability may be limited under law. The extent of insurance should be known to, and filed with the RoC, and be available for inspection to interested parties upon request.
The standards of financial disclosures would be the same as, or similar to, that being prescribed for private companies subject to privilege already available between a professional and his or her client in maintaining confidentiality.
The LLPs should be governed by a taxation regime that taxes the partners as individuals, rather than taxing the LLP itself, i.e., the LLPs should be treated in the same manner as the firm under the tax laws.
The Committee on New Company Law (Dr. J.J. Irani Committee) (2005): The Dr. J.J. Irani Committee, while recommending the formation of LLPs, pleaded very strongly for the enactment of a separate legislation in this regard. The Naresh Chandra Committee recommended its application to the service industry while the Irani Committee extended its application to the small enterprises also. The Committee opined that “the service sector is gaining importance by the day, especially professional services such as lawyers, chartered accountants, cost accountants, taxation experts, doctors, etc. In such a situation, to make these professionals globally competitive, the LLP form of business has become a need of the day. This is specially going to help the lawyers and accountants because it will help them to organize their business better and enlarge the number of partners. The original number of partners allowed under the Companies Act is and now it can be increased, so this means expansion of one’s operations in one’s respective profession. Also, no partner would be liable on account of the independent or unauthorized actions of other partners, allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.”
The Dr. J .J. Irani Committee on Company law was appointed by the Department of Company Affairs and this Committee too examined the issue of LLP (along with Small Companies) and made the following recommendation: “In view of the potential for growth of the service sector, requirement of providing flexibility to small enterprises to participate in joint ventures and agreements that enable them to access technology and bring together business synergies and to face the increasing global competition through WTO, etc, the formation of LLPs should be encouraged. It would be a suitable vehicle for partnership among professionals, who are already regulated such as Company Secretaries, Chartered Accountants, Cost Accountants, Lawyers, Architects, Engineers, Doctors, etc. However it may also be considered for small enterprises not seeking access to capital markets through listing on the stock exchange”. It seems that the LLP Bill gives precedence to the viewpoint of the Irani Committee’s observations of extending its applicability beyond the professional services.
According to the Naresh Chandra Committee, the scope of LLP should, in the first instance be made available to firms providing professional services, as opposed to trading firms and or manufacturing firms, for several reasons. Firstly, because Indian professional firms are precluded from practicing under any other legal form in view of the restrictions imposed by their respective regulatory laws; trading firms or manufacturing firms, however, have the option to carry on business as a private limited or public company under the Companies Act, 1956. Secondly, as the professionals are also governed and regulated by their respective professional, regulatory bodies, which also control and monitor professional conduct, extending the LLP structure only to professionals minimizes the risk inherent in testing new waters. Thirdly, there is no special advantage that small private companies or Small Scale Industrial (SSI) units would derive from being an LLP, especially in light of the fact that this Committee itself had also simultaneously recommended a considerable easing of regulations on private companies, especially small private companies. It was felt that extending the LLP structure to professionals, in the first instance, would help evaluate its advantages and risks; and based on such evaluation and experience, the LLP form can be considered for extension to small-scale manufacturing and/or trading firms as well in the future. However it must be noted that, unlike the Naresh Chandra Committee report (which had advocated the limitation of the LLP concept initially to only the professional services), the Irani Committee had dealt with the issue of LLP in a passing manner, and thus rejecting the detailed recommendations of the Naresh Chandra Committee on this issue does not augur well for the Indian market.