Foreign Companies and the LLP Act, 2008

Weightage: Chapters 11 and 12 of ICAI's Paper 2 syllabus, together roughly 8 marks. The lightest block in Part I, and one where the marks come from precise distinctions rather than volume.

Foreign companies

What makes a company a foreign company

A foreign company means any 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.

Both limbs matter. Incorporation abroad alone does not make a company a foreign company for the purposes of the Act; there must be a presence in or activity directed at India. The inclusion of electronic mode is what brings within the definition a company that maintains no office here but transacts with Indian customers through a digital platform, and it is the modern extension of a definition originally written for branch offices.

Electronic mode covers business transactions carried out electronically, whether the main server is installed in India or outside, including business to business and business to consumer transactions, data interchange and other digital supply transactions, offering to accept deposits or subscriptions in India or from Indian citizens, financial settlements, web-based marketing, advisory and transactional services, database services, products, supply chain management, online services such as telemarketing, telecommuting, telemedicine, education and information research, and all related data communication services.

Documents to be delivered on establishing a place of business

Every foreign company must, within thirty days of establishing its place of business in India, deliver to the Registrar for registration:

• a certified copy of the charter, statutes, memorandum and articles or other instrument constituting or defining the constitution of the company, with a certified translation where it is not in English;
• the full address of the registered or principal office of the company;
• a list of the directors and secretary with 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 opening and closing of a place of business in India on any earlier occasion;
• a declaration that none of the directors or the authorised representative in India has ever been convicted or debarred from formation of companies and management in India or abroad;
• any other prescribed information.

Alteration. Where any alteration is made in any of these particulars, the foreign company must deliver a return containing the particulars of the alteration to the Registrar within thirty days of the alteration.

Accounts, audit and filing

Every foreign company must in every calendar year make out a balance sheet and profit and loss account in the prescribed form and containing the prescribed particulars, and deliver a copy to the Registrar, together with a list of all places of business established by the company in India as at the date of the balance sheet.

Where any of those documents is not in English, a certified translation must be annexed.

Every foreign company must get its accounts relating to its Indian business operations audited by a practising chartered accountant in India or a firm or limited liability partnership of practising chartered accountants.

Display of name

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 of incorporation, in letters easily legible in English characters and also in the characters of the local language;
• state the name of the company and the country of incorporation in legible English characters in all business letters, billheads and letter paper, and in all notices and other official publications of the company;
• where the liability of members is limited, state that fact in every prospectus and in all the documents mentioned above, and exhibit it on the outside of every office or place of business.

The requirement exists because a person dealing with the Indian office of an overseas company needs to know both that it is foreign and that its members' liability is limited, neither of which is apparent from the trading name.

Prospectus and issue of securities

Where a foreign company makes an offer of securities to the public in India, or invites subscription for its securities, the prospectus provisions apply with the necessary modifications, including the requirement that the prospectus state the particulars prescribed and be delivered for registration.

Indian Depository Receipts. A foreign company may issue Indian Depository Receipts subject to prescribed conditions.

Punishment for contravention

Where a foreign company contravenes these provisions, it is punishable with a fine, and every officer of the foreign company who is in default is punishable with fine. Importantly, contravention does not affect the validity of contracts: any failure by a foreign company to comply does not affect the validity of any contract, dealing or transaction entered into by the company, 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.

That sanction is the practical one. The foreign company remains bound by its contracts and can be sued on them; what it loses is the ability to enforce them until it regularises its position.

The Limited Liability Partnership Act, 2008

The problem the LLP solves

A traditional partnership offers flexibility: partners agree among themselves how to run the business, share profits as they choose, and are not burdened with the machinery of meetings, resolutions and filings. Its fatal defect is unlimited liability, and worse, liability for the acts of other partners, so that a professional's personal assets can be exhausted by a colleague's negligence in a matter they never touched.

A company offers limited liability and separate legal personality, but at the price of a rigid governance structure designed for a body of shareholders separate from management, which fits a firm of professionals badly.

The limited liability partnership takes the flexibility of the partnership and the limited liability and separate personality of the company. It is, in the Act's own phrase, a body corporate formed and incorporated under the Act, which is a legal entity separate from that of its partners.

The essential characteristics

Body corporate with perpetual succession. An LLP is a body corporate formed and incorporated under the Act, and is a legal entity separate from that of its partners. It has perpetual succession, and any change in the partners does not affect the existence, rights or liabilities of the LLP.

The Indian Partnership Act, 1932 does not apply to an LLP. This is express, and it is examined: the general partnership law that governs a firm has no application here, and the LLP's internal relations are governed by the LLP agreement and, in the absence of agreement on any matter, by the First Schedule to the LLP Act.

Minimum partners. Every LLP must have at least two partners. If at any time the number 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 during that time and knows that fact is liable personally for the obligations of the LLP incurred during that period.

Designated partners. Every LLP must have at least two designated partners who are individuals, and at least one of them must be a resident in India. Where all the partners are bodies corporate, or one or more partners are individuals and bodies corporate, at least two individuals who are partners or nominees of such bodies corporate must act as designated partners. 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.

Who may be a partner. Any individual or body corporate may be a partner. An individual is not capable of becoming a partner if he has been found to be of unsound mind by a competent court and the finding is in force, is an undischarged insolvent, or has applied to be adjudicated as an insolvent and his application is pending.

Liability

The LLP is liable if a partner 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.

The obligations of the LLP are solely its obligations, and the liabilities of the LLP are met out of the property of the LLP.

A partner is not personally liable, directly or indirectly, for an obligation of the LLP solely by reason of being a partner.

But this does not affect the personal liability of a partner for his own wrongful act or omission; and it does not extend to protect a partner who is liable for the wrongful act or omission of any other partner of the LLP where he participated in it.

This is the core bargain, and it distinguishes the LLP from a partnership precisely: a partner remains fully liable for what he does, and is not liable for what another partner does.

Unlimited liability in case of fraud. Where an LLP or any of its partners carries out an act 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 is unlimited for all or any of the debts or other liabilities of the LLP. But if the act is carried out by a partner, the LLP is not liable if it is established by the LLP that the act was without the knowledge or the authority of the LLP.

Partner as agent

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.

The clause "but not of other partners" is the whole difference from a partnership, where each partner is the agent of the firm and of the other partners, and it is why one partner's act does not create personal liability in another.

Where a partner is not bound. 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.

Holding out

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 representing himself is actually receiving any benefit of the credit.

Where credit is given on the faith of such a representation, the LLP is liable to the same extent as the person representing himself.

Where a partner has died and the business is continued in the same name, the continued use of that name or of the deceased partner's name as part of it does not by itself make the legal representative or the estate liable for any act of the LLP done after his death.

Incorporation and the LLP agreement

Incorporation document. Two or more persons associated for carrying on a lawful business with a view to profit subscribe their names to an incorporation document, which is filed with the Registrar along with a statement in the prescribed form made by an advocate, company secretary, chartered accountant or cost accountant 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 have been complied with.

Certificate of incorporation is issued by the Registrar, and is conclusive evidence that the LLP is incorporated by the name specified.

Effect of registration. On registration the LLP is, by its name, capable of suing and being sued, acquiring, owning, holding and developing or disposing of property, having a common seal if it decides to have one, and doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

LLP agreement. 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. In the absence of agreement on any matter, the mutual rights and duties are determined by the provisions of the First Schedule.

Accounts, audit and filing

Every LLP must maintain proper books of account relating to its affairs for each year of its existence, on cash basis or accrual basis and according to double entry system of accounting, at its registered office.

Every LLP must prepare a Statement of Account and Solvency within six months from the end of each financial year and file it with the Registrar within the prescribed time.

Every LLP must file an annual return with the Registrar within sixty days of closure of its financial year.

Audit is required, except that 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' decision.

Conversion and winding up

An LLP may be formed by conversion from a firm, from a private company or from an unlisted public company, in accordance with the Second, Third and Fourth Schedules respectively.

An LLP may be wound up voluntarily or by the Tribunal, and the Tribunal may wind up an LLP where the LLP decides so by resolution, where for a period of more than six months the number of partners is reduced below two, where it is unable to pay its debts, where it has acted against the interests of the sovereignty and integrity of India, the security of the State or public order, where it has made default in filing the Statement of Account and Solvency or the annual return for five consecutive financial years, or where the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

The three-way distinction

Questions frequently ask for a comparison, and the clearest way to hold it is by asking three questions of each form.

Is there separate legal personality? A partnership firm has none — it is the partners collectively. An LLP has it. A company has it.

Are the partners or members liable for each other's acts? In a partnership, yes: 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. In an LLP, no: a partner is the agent of the LLP but not of other partners, and is liable only for his own wrongful acts. In a company, members are not liable at all beyond the unpaid amount on their shares.

How rigid is the governance? A partnership is governed entirely by the partnership deed, with the Partnership Act supplying defaults. An LLP is governed by the LLP agreement, with the First Schedule supplying defaults, plus a modest layer of filings. A company is governed by the Companies Act's mandatory machinery of meetings, resolutions, registers, returns and audit, which cannot be contracted out of.