Foreign Companies and the LLP Act, 2008 — Practice

Question 1

A company incorporated in Singapore has no office or employee in India but sells software to Indian customers through its website, with servers located in Singapore. Is it a foreign company? Give reasons.

Accepted Answer

It is a foreign company. The definition requires a company or body corporate incorporated outside India which has a place of business in India, whether by itself or through an agent, physically or through electronic mode, and conducts any business activity in India in any other manner. The words physically or through electronic mode are decisive here and are the modern extension of a definition originally written for branch offices. Electronic mode is defined to cover business transactions carried out electronically, whether the main server is installed in India or outside India, and expressly includes business to business and business to consumer transactions, data interchange and other digital supply transactions, web-based marketing, advisory and transactional services, database services and products, online services, and all related data communication services. Selling software to Indian customers through a website falls squarely within that description, and the location of the servers in Singapore is expressly immaterial. The company therefore has obligations under the Act, including delivering its constitutional documents and prescribed particulars to the Registrar within thirty days of establishing its place of business in India, filing accounts of its Indian business operations audited by a practising chartered accountant in India, and complying with the name display requirements. The extension exists because the older definition would have left a substantial digital economy outside Indian company law entirely.

Question 2

State the documents a foreign company must deliver to the Registrar on establishing a place of business in India, and the time limit. What happens where particulars later change?

Accepted Answer

Every foreign company must, within thirty days of the establishment of its place of business in India, deliver to the Registrar for registration a certified copy of the charter, statutes or memorandum and articles of the company or other instrument constituting or defining its constitution, together with a certified translation where the instrument is not in English. It must also deliver the full address of the registered or principal office of the company; a list of the directors and secretary of the company with the prescribed particulars; the name and address of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company; the full address of the office of the company in India which is deemed to be its principal place of business in India; particulars of the opening and closing of a place of business in India on any earlier occasion or occasions; a declaration that none of the directors of the company or the authorised representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and any other information as may be prescribed. Where any alteration is made or occurs in any of these particulars, the foreign company must deliver to the Registrar for registration a return containing the particulars of the alteration within thirty days of such alteration.

Question 3

A foreign company has traded in India for two years without making any filings. It now wishes to sue an Indian customer for unpaid invoices. Advise on its position and on the validity of the underlying contracts.

Accepted Answer

The contracts remain valid and enforceable against the foreign company, but the company cannot enforce them until it regularises its position. The Act provides that any failure by a foreign company to comply with the provisions relating to foreign companies does not affect the validity of any contract, dealing or transaction entered into by the company or its liability to be sued in respect of it. But the company shall not be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction, until it has complied with the provisions applicable to it. So the customer may sue the foreign company on the contract, and the foreign company may not sue the customer, which is a deliberately asymmetric sanction. The advice is therefore practical: the company must first make the filings it has omitted, delivering the constitutional documents and prescribed particulars to the Registrar, filing its balance sheet and profit and loss account with the list of places of business, and having its Indian accounts audited by a practising chartered accountant in India, after which the suit may be brought. It is separately punishable with fine, and every officer of the foreign company who is in default is punishable with fine. The design of the sanction reflects that voiding contracts would harm the Indian counterparties the provisions exist to protect.

Question 4

State the name display obligations of a foreign company and explain the purpose behind them.

Accepted Answer

Every foreign company must conspicuously exhibit on the outside of every office or place where it carries on business in India the name of the company and the country in which it is incorporated, in letters easily legible in English characters, and also in the characters of the language or one of the languages in general use in the locality in which the office or place is situate. It must cause the name of the company and of the country in which it is incorporated to be stated in legible English characters in all business letters, billheads and letter paper, and in all notices and other official publications of the company. And where the liability of the members of the company is limited, it must cause notice of that fact to be stated in every prospectus issued and in all the business letters, billheads, letter paper, notices, advertisements and other official publications, and to be conspicuously exhibited on the outside of every office or place where it carries on business in India. The purpose is disclosure to anyone dealing with the Indian office. A trading name reveals neither that the entity is incorporated abroad, which affects where and how it may be pursued and under whose law it is constituted, nor that the liability of its members is limited, which affects what a creditor can expect to recover. Both are facts a counterparty would want before extending credit, and neither is discoverable from the premises.

Question 5

Explain the deficiencies in the traditional partnership and in the company form that the LLP was created to address, and identify the single provision that carries the design.

Accepted Answer

A traditional partnership offers flexibility. The partners agree among themselves how to run the business, share profits as they choose, and are free of the machinery of meetings, resolutions, registers and returns. Its fatal defect is unlimited liability, and specifically liability for the acts of other partners, since every partner is the agent of the firm and of the other partners and each is jointly and severally liable for all acts of the firm. A professional's personal assets can therefore be exhausted by a colleague's negligence in a matter they never touched, which is intolerable in a firm of any size. A company offers limited liability and separate legal personality, but imposes a governance structure designed for a body of shareholders distinct from management, with mandatory meetings, resolutions, filings and audit that cannot be contracted out of, and which fits a firm of professionals who are simultaneously owners and managers very badly. The LLP takes limited liability and separate personality from the company and internal flexibility from the partnership: it is a body corporate formed and incorporated under the Act, a legal entity separate from that of its partners, with perpetual succession, whose mutual rights and duties are governed by the LLP agreement. The single provision carrying the design is that every partner of an LLP is, for the purpose of its business, the agent of the LLP but not of other partners. That clause is what removes cross-liability while leaving each partner fully answerable for his own conduct.

Question 6

State the requirements as to partners and designated partners of an LLP. What happens if the number of partners falls below two, and what is the position where all partners are bodies corporate?

Accepted Answer

Every LLP must have at least two partners. Any individual or body corporate may be a partner, but an individual is not capable of becoming a partner if he has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force, is an undischarged insolvent, or has applied to be adjudicated as an insolvent and his application is pending. Every LLP must have at least two designated partners who are individuals, and at least one of them must be a resident in India; every designated partner must obtain a Designated Partner Identification Number. Designated partners are responsible for doing all acts, matters and things as are required to be done by the LLP in respect of compliance with the Act, and are liable to all penalties imposed on the LLP for any contravention of those provisions. Where the number of partners is reduced below two and the LLP carries on business for more than six months while the number is so reduced, the person who is the only partner of the LLP during the time that it so carries on business after those six months, and who knows that fact, is liable personally for the obligations of the LLP incurred during that period. The protection of limited liability is therefore forfeited by continuing alone. Where all the partners are bodies corporate, or where one or more partners are individuals and bodies corporate, at least two individuals who are partners of the LLP or nominees of such bodies corporate must act as designated partners.

Question 7

Partner A of an LLP negligently advises a client, causing a ₹2 crore loss. Partner B had no involvement. Separately, Partner C knowingly participates with Partner A in a scheme to defraud a creditor. Advise on the liability of the LLP, A, B and C.

Accepted Answer

Take the negligence first. An LLP is liable if a partner of the LLP is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the LLP or with its authority, so the LLP is liable for the 2 crore, and the obligations of the LLP are solely its obligations, met out of the property of the LLP. Partner A remains personally liable, because the protection given to partners does not affect the personal liability of a partner for his own wrongful act or omission. Partner B is not liable at all: a partner is not personally liable, directly or indirectly, for an obligation of the LLP solely by reason of being a partner, and the exception for liability for the wrongful act of another partner applies only where he participated in it, which B did not. That is precisely the difference from a general partnership, where B would be jointly and severally liable. On the fraud, a different provision applies. In the event of an act carried out by an LLP or any of its partners with intent to defraud creditors of the LLP or any other person, or for any fraudulent purpose, the liability of the LLP and of the partners who acted with intent to defraud creditors is unlimited for all or any of the debts or other liabilities of the LLP. So A and C, having acted with that intent, face unlimited liability, while the LLP itself is not liable if it establishes that the act was without its knowledge or authority.

Question 8

Explain the significance of a partner being the agent of the LLP but not of other partners. When is an LLP not bound by what a partner does?

Accepted Answer

Every partner of an LLP is, for the purpose of the business of the LLP, the agent of the LLP but not of other partners, and the trailing clause is the whole difference from a general partnership. Under the Indian Partnership Act, 1932 each partner is the agent of the firm and of the other partners, which is the mechanism by which one partner's act creates personal liability in all the others; removing the second half of that agency removes cross-liability at its source, so that a partner's act binds the LLP but creates no personal obligation in his colleagues. This is why the LLP is attractive to professional firms, where the risk being avoided is precisely liability for a colleague's error. The LLP is not bound in one situation, defined narrowly. An LLP is not bound by anything done by a partner in dealing with a person if the partner in fact has no authority to act for the LLP in doing that particular act, and the person knows that he has no authority or does not know or believe him to be a partner of the LLP. Both limbs must be read together: it is not enough that the partner lacked authority, since a third party dealing in good faith with someone he reasonably believes to be a partner is protected; the LLP escapes only where the third party knew of the want of authority, or did not know or believe the person to be a partner at all.

Question 9

A retired professional allows an LLP to continue naming him on its letterhead. A supplier extends credit on the strength of his reputation and is not paid. Advise, and state the position where a partner has died and the business continues in the same name.

Accepted Answer

The retired professional is liable to the supplier. Any person who by words spoken or written or by conduct represents himself, or knowingly permits himself to be represented, to be a partner in an LLP is liable to any person who has on the faith of any such representation given credit to the LLP, whether or not the person so representing himself is actually receiving any benefit of the credit so received. Permitting his name to remain on the letterhead is knowingly permitting himself to be represented as a partner, and the supplier extended credit on the faith of it, so both limbs are satisfied; that he draws no profit from the LLP is expressly irrelevant. Where any credit is received by the LLP as a result of such a representation, the LLP is liable to the same extent as the person representing himself. The provision protects those who deal on the strength of an apparent partner's standing, and its practical lesson is that a retiring partner must ensure his name is removed from all the firm's materials. The position on death is different and is expressly provided for: where after a partner's death the business is continued in the same LLP name, the continued use of that name or of the deceased partner's name as a part of it shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death.

Question 10

State how the mutual rights and duties of LLP partners are determined, what happens in the absence of agreement, and why the Indian Partnership Act, 1932 does not apply.

Accepted Answer

The mutual rights and duties of the partners of an LLP, and the mutual rights and duties of the LLP and its partners, are governed by the LLP agreement between the partners, or between the LLP and its partners. The agreement is the primary source, and this is the respect in which the LLP retains partnership flexibility: the partners may settle profit sharing, management, admission, retirement and expulsion as they choose, without the mandatory machinery a company must follow. In the absence of any agreement as to any matter, the mutual rights and duties of the partners and of the LLP and its partners are determined by the provisions relating to that matter as set out in the First Schedule to the Act, which supplies defaults on such matters as equal sharing of profits, indemnity, participation in management and the requirement of consent for the introduction of a new partner. The Indian Partnership Act, 1932 does not apply to an LLP, and this is stated expressly rather than left to inference. The reason is that the two forms differ at the foundation: a firm has no separate legal personality and its partners are agents of each other, whereas an LLP is a body corporate whose partners are agents only of the LLP, so importing partnership law would contradict the very provisions the LLP Act was enacted to create.

Question 11

State the books, statements, returns and audit obligations of an LLP, including the audit exemption thresholds. Are they cumulative?

Accepted Answer

Every LLP must maintain such proper books of account as may be prescribed relating to its affairs for each year of its existence, on cash basis or accrual basis and according to the double entry system of accounting, and must maintain them at its registered office. Every LLP must prepare, within a period of six months from the end of each financial year, a Statement of Account and Solvency for the said financial year as at the last day of that financial year, signed on behalf of the LLP by its designated partners, and must file it with the Registrar within the prescribed time in the prescribed form and manner and accompanied by prescribed fees. Every LLP must file an annual return duly authenticated with the Registrar within sixty days of closure of its financial year in the prescribed form and manner and accompanied by prescribed fees. On audit, the accounts of an LLP must be audited in accordance with the prescribed rules, but an LLP whose turnover does not exceed forty lakh rupees in any financial year, or whose contribution does not exceed twenty-five lakh rupees, is not required to get its accounts audited, subject to the partners deciding not to have an audit. The two thresholds are alternatives and not cumulative, so satisfying either one brings the exemption, which is the point most often misstated; an LLP with turnover of 30 lakh and contribution of 40 lakh is exempt on turnover alone.

Question 12

Compare a partnership firm, an LLP and a company on separate legal personality, liability for another's acts, and rigidity of governance. Which form suits a firm of six professionals, and why?

Accepted Answer

On separate legal personality, a partnership firm has none: the firm is the partners collectively, it cannot own property in its own name in the strict sense and it does not survive independently of them. An LLP is a body corporate and a legal entity separate from its partners, with perpetual succession, so any change in the partners does not affect its existence, rights or liabilities. A company is likewise a separate legal person with perpetual succession. On liability for another's acts, a partnership imposes the fullest exposure: every partner is the agent of the firm and of the other partners, and each is jointly and severally liable for all acts of the firm, so one partner's negligence can exhaust another's personal assets. In an LLP a partner is the agent of the LLP but not of other partners, and is personally liable only for his own wrongful acts or omissions, or where he participated in another's. In a company members are not liable at all beyond any amount unpaid on their shares. On governance, a partnership is governed entirely by the deed with the Partnership Act supplying defaults; an LLP by the LLP agreement with the First Schedule supplying defaults, plus a modest layer of filings; a company by mandatory statutory machinery of meetings, resolutions, registers, returns and audit that cannot be contracted out of. A firm of six professionals is best served by the LLP, because it needs protection from cross-liability, which the partnership cannot give, and internal flexibility with light compliance, which the company cannot give.

Question 13

Describe the incorporation of an LLP, the statement that must accompany the incorporation document, and the effect of registration.

Accepted Answer

For an LLP to be incorporated, two or more persons associated for carrying on a lawful business with a view to profit must subscribe their names to an incorporation document, which is filed with the Registrar of the State in which the registered office of the LLP is to be situated, in the prescribed manner and with the prescribed fees. There must be filed along with it a statement in the prescribed form, made by either an advocate, a company secretary, a chartered accountant or a cost accountant who is engaged in the formation of the LLP, and by anyone who subscribed his name to the incorporation document, that all the requirements of the Act and the rules made thereunder in respect of incorporation and matters precedent and incidental thereto have been complied with. The incorporation document must state the name of the LLP, the proposed business, the address of the registered office, the name and address of each person who is to be a partner and of the designated partners, and such other information as may be prescribed. On compliance the Registrar registers the incorporation document and issues a certificate of incorporation, which is conclusive evidence that the LLP is incorporated by the name specified. On registration the LLP is, by its name, capable of suing and being sued, of acquiring, owning, holding and developing or disposing of property whether movable or immovable, tangible or intangible, of having a common seal if it decides to have one, and of doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

Question 14

From what may an LLP be formed by conversion, and on what grounds may the Tribunal wind up an LLP?

Accepted Answer

An LLP may be formed by conversion from three sources, each governed by its own Schedule to the Act: from a firm, in accordance with the Second Schedule; from a private company, in accordance with the Third Schedule; and from an unlisted public company, in accordance with the Fourth Schedule. A listed public company cannot convert. On winding up, an LLP may be wound up either voluntarily or by the Tribunal. The Tribunal may wind up an LLP on six grounds. Where the LLP decides that it be wound up by the Tribunal. Where, for a period of more than six months, the number of partners of the LLP is reduced below two. Where the LLP is unable to pay its debts. Where the LLP has acted against the interests of the sovereignty and integrity of India, the security of the State or public order. Where the LLP has made a default in filing with the Registrar the Statement of Account and Solvency or the annual return for any five consecutive financial years. And where the Tribunal is of the opinion that it is just and equitable that the LLP be wound up. Note the connection between the second ground and the personal liability provision: continuing with a single partner for more than six months both exposes that partner personally for obligations incurred and gives the Tribunal jurisdiction to wind the LLP up.

Question 15

Explain what perpetual succession means for an LLP and contrast it with the position of a partnership firm on the death or retirement of a partner.

Accepted Answer

An LLP has perpetual succession, and the Act states expressly that any change in the partners of an LLP shall not affect the existence, rights or liabilities of the LLP. The LLP is a body corporate and a legal entity separate from that of its partners, so its identity is not constituted by the particular people who happen to be partners at any moment; partners may come and go, and every contract, every asset and every liability of the LLP continues unaffected. A counterparty contracting with an LLP therefore need not concern itself with the composition of the partnership at the date of performance. A partnership firm has no such continuity, because it has no separate legal personality and is in law the partners collectively. On the death or retirement of a partner the firm is, subject to contract between the partners, dissolved, and although in practice partnership deeds routinely provide for continuation between the remaining partners, that continuation operates by agreement rather than by the firm's own persistence. The practical consequences are considerable: an LLP's leases, licences, contracts and bank accounts survive a change of partners without novation or reassignment, whereas a firm's may need to be re-executed, and an LLP can hold property in its own name while a firm's property is held by the partners.

Practice — Foreign Companies and the LLP Act, 2008

Sign in to save attempts to your dashboard and track your accuracy over time

Find a verified tutor

Join a live course

Browse coaching centres

About

Categories

Support

Documentation

Get Study Tips & Updates

Download Our App

Download for iOS

Download for Android

Popular Cities