LLP can form a partnership firm with an individual or other persons, rules Kerala High Court

LLP can form a partnership firm with an individual or other persons, rules Kerala High Court

ase Details: Raj Shipping Agencies v. Barge Madhwa
Citation: [2020] 116 taxmann.com 707 (Bombay)

In a significant ruling, the Kerala High Court held that a Limited Liability Partnership could form a partnership with an individual or other persons. 

Facts

A partnership deed was executed between an individual and an LLP. When the said deed was submitted for registration, the Registrar of Firms refused registration of the partnership firm on the reasoning that an LLP cannot be a partner in the firm.

The Petitioner claimed that a partnership and an LLP are not prohibited under the Partnership Act and that LLP is a legal entity, as defined under the LLP Act, and it is separate from its partners. It has perpetual succession and has a common seal. The Petitioner argued that on its registration, it is capable of suing and being sued under Section 14. It can also acquire, develop, or dispose of movable or immovable properties. Therefore, the petitioner claims that the LLP is liable to be treated as a person, and there cannot be any objection to registering a partnership with an LLP.

The respondent filed a statement reiterating his stand in the impugned order. According to the respondent, Section 25, 26, and 49 of the Indian Partnership Act, 1932 makes the partners jointly and severally liable with all other partners. At the same time, under Section 28 of the LLP Act, 2008, the provisions regarding the liability of the partnership firm are restricted only to the extent provided in the agreement. Such a provision runs contrary to Section 25 and 49 of the Indian Partnership Act. It is also pointed out that foreign investment is permissible in LLP, whereas it is not permissible under the Partnership Act.

The question that arose was:

Whether LLP can be treated as a person, who can be permitted to form a partnership with an individual?

The High Court’s Ruling

The High Court of Kerala held that

“a partnership can be entered into between two persons. Such persons can be an incorporated body of individuals. LLP is a body corporate. It can be said to be a person, as defined in Section 3(42) of the General Clauses Act, 1897 if there is no repugnancy in the subject or context. To examine the same, it is necessary to look at some more provisions in both the Acts viz. Partnership Act and LLP Act”

The High Court of Kerala further held that the liability of partners of LLP and liability of the LLP as a partner under the Partnership Act would be different. The liability of partners in an LLP cannot be relevant when the LLP becomes a partner, as the provisions in the Partnership Act would bind it. The liability of the LLP would be as in the case of a company that joins a firm after entering into a partnership.

The Court also observed that Section 4 of the Partnership Act permits the constitution of a firm or partnership between one or more persons. In this case, the partnership deed was executed between an individual and an LLP, a body corporate having a legal entity and coming within the definition of “person”. The individual liability of the partners of LLP would not be relevant when the LLP itself would have liability independent of the liability of the partners. Therefore, the difference in the provisions under the Partnership Act relating to the firm’s liability or the individual partners would not stand in the way of the constitution of a partnership with an LLP. The Court held that LLP could not be disqualified from entering into a partnership with an individual or other persons.

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