Jayamma Xavier v. Registrar of Firm, (2021) – LLP Can Form Partnership Firm

DATE: 8th April, 2021

JUDGES: P.V Asha

PARTIES

• Jayamma Xavier (PETITIONER)
• Registrar of Firm (RESPONDENT)

SUBJECT: In the present case, the High Court is dealing with sections 25, 26 and 49 of Indian Partnership Act and section 28 of Limited Liability Partnership Act which lays down provision for liability of partners of a firm. The question before the court is whether an LLP can be a partner of a firm.

AN OVERVIEW

1. The following judgment deals with a petition challenging an order passed by Registrar of firms through which it declined the registration of partnership firm to the petitioner on the ground that an LLP cannot be a partner of a firm.
2. The petitioner claimed to be a designated partner of Sleeplock LLP, which was registered under LLP Act, 2008. Sleeplock LLP formed partnership firm with Gourav Raj under the name M/s.Morning Owl Sleep Solutions. A partnership deed was executed for the same which was submitted for registration. However, the Registrar rejected the registration stating that LLP cannot be a partnership firm.
3. The petitioner claimed that an LLP shall be treated as a person as under section 14 of LLP Act it is capable of suing and being sued. It is a legal entity, separate from its partners and partnership with an LLP is not prohibited under Partnership Act. Therefore, there cannot be any objection in registering an LLP with a partnership as it is a person. The petitioner placed reliance on the judgment given in M.M.Pulimood vs. Registrar of Firm: 1984 KLT 420 in support of his contention that the said rejection is illegal and without understanding the provisions contained in the LLP Act.
4. Subsequently, the respondent filed a statement confirming his stand regarding the impugned order. According to the respondent, some of the provisions of LLP Act and Partnership Act are inconsistent concerning the liability. Referring to sections 25, 26 and 49 of the Indian Partnership Act, the respondent stated that the partners of a firm are jointly and severally liable and also severally liable for the acts of the firm. On the other hand, under section 28 of LLP Act, the liability is restricted to the extent provided in the agreement. These provisions are contrary to each other.
5. It was further contended that a firm cannot enter into partnership with LLP. The provisions in LLP Act are completely frustrating the purport of Section 25 and 49 of the Indian Partnership Act. The respondent relied upon the judgment given in Dulichand Laxminarayanan vs. Commissioner of Income Tax, Nagpur.

IMPORTANT PROVISIONS

INDIAN PARTNERSHIP ACT

• Section 25- Liability of a partner for acts of the firm- Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.
• Section 26- . Liability of the firm for wrongful acts of a partner- Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner.
• Section 49- Payment of firm debts and of separate debts- Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.

LIMITED LIABILITY PARTNERSHIP ACT

• Section 28- Extent of liability of partner-

(1) A partner is not personally liable, directly or indirectly for an obligation referred to in sub-section (3) of section 27 solely by reason of being a partner of the limited liability partnership.

(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall not affect the personal liability of a partner for his own wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership.

ISSUES: The issue before the court was whether or not an LLP can be treated as a person which can be permitted to form a partnership with an individual?

ANALYSIS OF THE JUDGMENT

• To answer the issue raised, the court looked into the judgment relied upon by both the parties. Referring to the cases relied upon by the petitioner, the court noted that in the said judgment the court analysed section 3 of the Partnership Act and the definition of the term person in section 3(42) of the General Clauses Act and found that there was no impediment in executing a partnership with a Private Limited Company incorporated under the Companies Act which comes under the definition of Person.
• Further, the court noted that in Dulichand’s case, section 26A of Income Tax Act and provisions of Partnership Act were analysed, and it held that a partnership cannot be formed between 3 firms, a Hindu Undivided Family and an individual. It was found that a firm is not a legal entity.
• However, the court further observed that when both these judgment arrived, the LLP Act was not in existence. Thus, the court referred to section 4 of Partnership Act which stated that a partnership is relation between persons.
• Therefore, a partnership can be entered between two persons. Moreover, person as per section 3(42) of General Clauses Act shall include “any company or association or body of individuals, whether incorporated or not”. Therefore, person can be an incorporated body of individuals and LLP is a body corporate. Also, as per section 3 of the Act, an LLP shall be a body corporate.
• Referring to section 25, 26 of Partnership act and section 28 if LLP Act, the court stated 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 have any relevance when the LLP itself becomes a partner, when it would be bound by the provisions in the Partnership Act. The liability of the LLP would be as in the case a company which joins a firm after entering into a partnership”.
• The court on the question of difference in liability under both statutes stated that “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 liability of the firm or the individual partners would not stand in the way of constitution of a partnership with an LLP”.
• Therefore, the court set aside the impugned order and directed the registrar of firms to reconsider the petitioner’s request of registration.

CONCLUSION

• The approach adopted by the court in the present judgement is highly analytical. The fact that an LLP is a person and a body corporate makes it eligible to form a partnership as it is clearly stated in the partnership act that a partnership is a relation between persons.
• However, the main issue was revolving around the liabilities of the partners under both the provisions being inconsistent with each other. The court as dealt with this matter very prudentially as the liability of partners of LLP and the liability of LLP as a partner is different. That means, when an LLP is partner in a firm, its liability will be in accordance with Partnership Act as o any other company joining the firm.
• The LLP act would be invoked in case of liability of partners within the LLP and not when LLP is a partner in a firm. Therefore, no inconsistency between the statutes stands as impediment in constituting a partnership with LLP.

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