LLPs may not get total immunity for lapses

NEW DELHI: Professionals and investors planning to do riskier business without fear of losing their personal assets under the proposed limited liability partnership (LLP) vehicle may not get total immunity for their lapses.

The government has introduced a provision in the new LLP Bill under which creditors and clients are liable to get compensation from a partner, an employee or the LLP itself for their omissions and fraudulent dealings. This is in addition to the unlimited criminal liability these persons will bear for their oversight or intention to dupe their customers or lenders.

The Bill provides for compensating any person who has suffered a loss or damage because of the action of the LLP, its partner or an employee. The Bill, to be re-introduced during the Parliament���s Budget session, is likely to be passed as it has addressed all issues raised by a parliamentary panel earlier.

The LLP, as a legal entity, however, shall not be liable to pay compensation if a partner or an employee has acted fraudulently or negligently without the LLP���s knowledge. The ministry of corporate affairs has placed the onus of proving this on the LLP to make it more responsible and accountable. If the LLP fails to prove this, both the entity and the partner will be equally liable.
The penalty for taking the customers for a ride include imprisonment of up to two years and a fine of up to Rs 5 lakh, it is understood. A court trying an accused could soften this punishment if he cooperates during the investigation. A whistle blower who helps in the conviction of the guilty will also be protected. These are the measures taken as a safeguard to ensure that the advantages of an LLP are not abused.

The main advantage of forming an LLP is that unlike in the case of a traditional partnership, a partner in this new business model will not be personally liable directly or indirectly for a contractual or other obligation simply because he is a partner. An LLP���s liabilities shall be met out of his own property.

Besides, a partner is personally liable only for his own wrongful action and not of another partner. Another flexibility of this hybrid business model is that its internal governance is not decided by law as in the case of a company, but by an agreement among its partners which could be modified as and when they want.