Kevin Moses Paul
12 February 2021
A business entity can take the shape of any of the accepted forms of business organization. With respect to India, there are a number of business organizational forms legally accepted.
These include, but are not limited to, sole proprietorship, Hindu undivided family (HUF), partnership, cooperatives, limited liability partnership, companies etc.
Out of these, the most commonly accepted and recognized business organizational forms are Partnerships, Limited Liability Partnerships, and Companies. LLPs are the most recent form of organization.
A Limited Liability Partnership (LLP) is a form of organization having the advantages of both a company as well as a partnership. Like a company, each partner in an LLP has limited liability to the extent of his/her contribution and is not liable to for another partner’s misconduct or negligence.
Furthermore, an LLP, just like a corporate entity, has perpetual succession and a separate legal entity.
Section 42 of the Act deals with the provisions related to the assignment and transfer of partnership rights in an LLP.
The relevant section further states :-
(1) The rights of a partner to a share of the profits and losses of the limited liability partnership and to receive distributions in accordance with the limited liability partnership agreement are transferable either wholly or in part.
(2) The transfer of any right by any partner pursuant to sub-section 1 does not by itself cause the disassociation of the partner or a dissolution and winding up of the limited liability partnership.
(3) The transfer of right pursuant to this section does not, by itself, entitle the transferee or assignee to participate in the management or conduct of the activities of the limited liability partnership, or access information concerning the transactions of the limited liability partnership.”
According to Section 42(1), there are specifically two economic rights of a partner that are transferable to a third party.
These rights are namely:
(a) The rights of a partner to a share of the profits and losses in accordance with the LLP Agreement and
(b) the rights of a partner to receive distributions in accordance with the LLP Agreement.
These two rights can be transferred from a partner to any person either wholly or in part. This right to transfer is unconditional in nature and thus, it cannot be curtailed even by an LLP agreement.
Such a transfer or assignment necessarily has to be a free transfer, which is not qualified by any express or implied conditions, to one or more transferees either in whole or partly.
The Section 42(2) lays down that a transfer of rights under sub-section 1 will not, by itself, lead to either -
(a) the disassociation of the partner from the LLP,
(b) dissolution of the LLP or
(c) winding up of the LLP.
Thus, merely the transfer of the economic interests of a partner to others does not lead to the change in the structure of the LLP.
If, however, a transfer or assignment of rights results in the change in the LLP agreement or in the partners or it leads to
Free transferability of share is one essential condition for Company form of business, subject to some restrictions under private companies.
New Act, deals with substantially. Statutory provisions related to transfer of share one should refer the following sources:
1. Section 56 of Companies Act, 2013
2. Rule 11 of Companies (Share Capital & Debentures) Rules 2014
3. Provisions given in model articles of association given in Table ‘F’ of Schedule-I
You may click on the link given below if you ever need to understand more about Transferring of shares in a LLP firm - https://www.legalwiz.in/blog/ease-of-transferring-ownership-llp-vs-pvt-ltd-co
