Unanswered questions in the Limited Liability Partnership Bill
- November 17, 2008
The concept of limited liability partnerships (LLP) had its genesis in India in the report of the J.J. Irani Committee on Corporate Law, which strongly advocated a separate law on limited liability partnerships. This was followed by the report of the Naresh Chandra Committee, which analysed several aspects of the separate law on limited liability partnerships. Both reports understood that the provisions governing the traditional partnership model were outdated and in need of revision. At the same time, both reports contained acknowledgement of the incompatibility of professional organisations with the corporate model. Reference was also made to similar regimes that had crept up across the globe, the UK Act of 2001 in particular.
The corporate form of ownership was often preferred to partnerships in order to limit owners’ liability. Lawyers have always viewed the prospect of being a member of a partnership firm with unlimited personal liability as a risky one. It became even more unattractive after malpractice litigation in the wake of the $980 billion Loan and Savings scandal in the early nineties left several US law firms bankrupt. Despite the nature of the risks involved, lawyers in India organised around the partnership model. This owed more to the lack of a viable alternative. Not only did the corporate form have a statute-based governance structure, it also lacked the flexibility of internal management of the partnership. The prospect of being subject to inspections was abhorrent. Further, The Bar Council of India Rules did not permit lawyers to operate as Executive Directors of companies, or even draw salaries.
The grudging acceptance of the partnership model also meant that legal practices could not gallop alongside the other constituents of a booming economy - the Companies Act limiting the expansion of a partnership to twenty partners. This was just as well. Several amongst the larger law firms have frequently felt exposed to significant liabilities. With increased specialisation and geographical expansion, such exposure came from diverse jurisdictions and practice areas, and they have had to spend enormous amounts on insurance.
Yet another problem with the partnership form is the difficulty of retaining management talent. Managing partners have to earn the respect of other partners through the weight of their equity as much as their leadership. This rudderless state of affairs at partnership law firms is maintained by the unity of ownership and management. The legal community’s search for a form of business organisation that accommodates size, diverse specialisation, management talent, and limited liability, along with the flexibility of internal management, is still some steps away from bearing fruit.
Limited liability
The key advantage of an LLP, as compared to a traditional partnership, is that the members (not partners) of an LLP are able to limit their personal liability if something goes wrong with the business – much like shareholders of a limited company. The risk of joint and several liability (the bedrock of a partnership) does not apply.
