Sunday, May 31, 2009

Limited Liability Partnership_10

What are the qualifications for becoming a partner?

Any individual or body corporate may be a partner in a LLP. However an individual shall not be
capable of becoming a partner of a LLP, if—
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending.

Limited Liability Partnership_9

Whether a body corporate may be a partner of an LLP?


Friday, May 29, 2009

Companies Act_Practical Problems_83

XYZ Limited has its subsidiary company PRM Ltd, which is formed to carry out some of the objectives of XYZ Limited. XYZ Limited suspends one of its several businesses, by passing a resolution at the company‘s extraordinary general meeting, with effect from Ist January 2008. The business so suspended continues to be suspended until March 2008. On Ist April 2008, a group of shareholders of XYZ Limited file a petition in the court for winding of the company on the ground of suspension of business by the company. Referring to the provisions of the Companies Act, 1956, decide:
(i) Whether the shareholders’ contention shall be tenable?
(ii) What would be your answer in case XYZ Limited suspends all its business?

Section 433 provides that if a company does not commence its business within a year from its incorporation or suspends its business for a whole year, it may be wound up by the court .The contention of the shareholders of XYZ Ltd that the company is liable to be wound up on the ground of suspensions of business, is not tenable for the following reasons:
(i) (a) A company may be wound up by court if a company suspends its business for a whole year. Here the business was suspended only on 1. 1.2008. Hence on 1st April, 2008 the business has not been suspended for the whole year to attract Section 433(c)
(b) Where a company having much business discontinues one of them, it cannot be said to have suspended business within the meaning of Section 433(c).
(c) Where a company ceases to do any business but is a holding company of subsidiaries engaged in the pursuit of the business, which it was previously doing, it cannot be said that the company has suspended its business (Ref; Eastern Telegraph Company Ltd).
(ii) Even if XYZ Ltd suspended all its business the suspension was not for a period of more that 1 year as on 1.4.1997 and hence the provisions of Section 433(c) are not applicable. Again for the reasons stated in (i) (c) above XYZ Ltd cannot be said to have suspended its business as its subsidiary in carrying on the business.

Wednesday, May 27, 2009


Administrative Dissolution

An involuntary dissolution of an LLC by an act of the Secretary of State or similar state authority, caused by the company's failure to comply with certain statutory requirements; especially the failure to file an annual report, to pay franchise taxes or maintain a valid Registered Agent.

Alter Ego

A doctrine of law which disregards the principle of limited liability enjoyed by a legal entity when it is proven that, in fact, no separate identity of the individual and company exists. The alter ego principle may also apply to relationships between entities and their subsidiaries.

Amended Certificate of Authority

A document issued by a state to a foreign LLC evidencing that the company has amended its original certificate of authority.


An addition to, deletion from, or a change of existing provisions of the articles of organization of a domestic LLC.

Annual Report

A required annual filing in a state, usually listing members, managers and financial information.


Official government authentication of a document, usually by the State Department, Justice Ministry or Foreign Ministry, which legalizes it for use in another country.

Application for Certificate of Authority

The form filed in many states to qualify an LLC to transact business as a foreign entity.

Articles of Organization

The title of the document filed in many states to register a limited liability company (LLC) with the state. Also known as articles of formation.

Assumed Name

A name other than the true name, under which a business organization conducts business. Also referred to as a fictitious name, a trade name or "doing business as" (d/b/a).

Certificate of Authority

Formal evidence of qualification issued by a state to a foreign LLC.

Certificate of Good Standing

A certificate issued by a state official as conclusive evidence that an LLC is in existence or authorized to transact business in the state. The certificate generally sets forth the company's name; that it is duly incorporated or authorized to transact business; that all fees, taxes and penalties owed the state have been paid; that its most recent annual report has been filed; and, that articles of dissolution have not been filed.


Commingling, is the sharing and pooling of personal and company assets. For example, rather than maintaining separate business and personal bank accounts, you choose to use one account for personal and business purposes. This is considered commingling and an easy way to become personally liable for LLC acts.


This term refers to a level of completion of a legal entity's responsibilities to maintain the formalities of LLC existence under the laws of the jurisdiction in which it is formed.

Consent Resolution

A consent resolution is any resolution signed by members or managers that authorizes a particular action. This act eliminates the need for face-to-face meetings of members and managers.

Contract Creditors

Contract creditors are people or businesses which you owe money or property to because of a written or verbal contractual agreement.

Corporate Seal

A corporate seal is a device made to either emboss or imprint certain company information onto documents. This information usually includes the company's name and date and state of formation. Corporate seals are often required when opening LLC bank accounts, distributing membership certificates or conducting other company business.


The statutory procedure that terminates the existence of a domestic LLC.

Double Taxation

When a company must pay taxes on its earnings and individual shareholders must also pay taxes on any dividends that are distributed. General, "C" corporations are doubly taxed in this manner, unlike Limited Liability Companies.


How long a business will be recognized as a legal entity. A company with a perpetual duration will last forever unless the state dissolves the company. A 30-year duration means that the company will automatically dissolve on its 30th anniversary of existence.

Employment Agreement

An employment agreement is a contract between your company and an employee. These agreements can be written or verbal; although all employment agreements should be in writing. Employers are more likely to have employment agreements with key employees. The terms and conditions of an employment agreement should be consistent with statutes, articles, operating agreements, and any existing shareholder agreements.

Fiduciary Relationship

A relationship in which one party (the fiduciary) must act in good faith and with due regard to the best interests of the other party or parties.

Foreign LLC

A term applied to an LLC doing business in a state other than its state of formation.

Franchise Tax

A tax or fee usually levied annually upon a limited liability company or similar business entity for the right to exist or do business in a particular state. Failure to pay the franchise tax or similar fees may result in the administration dissolution of the company and forfeiture of the charter.

Good Standing

An LLC is said to be in good standing when it has remained current with the necessary reports and fees required by the regulatory jurisdictions under which it operates.

Involuntary Dissolution

The termination of an LLC's legal existence pursuant to an administrative or judicial proceeding; dissolution forced upon an LLC rather than decided upon by the company.

Judicial Dissolution

Involuntary dissolution of an LLC by a court at the request of the state attorney general, an owner or a creditor.


Specific notary language citing, under oath, that a signature has been witnessed.

Legalization of Certified Documents

Needed for companies (overseas) that are not part of the Hague Convention. Companies in a country that is not part of the Hague will not benefit from an Apostille. (1) To make legal or lawful; authorize or sanction by law.

Limited Liability Company (LLC)

An artificial entity created under and governed by the laws of the jurisdiction in which it was formed. Limited liability companies are generally able to provide the limited personal liability of corporations and the pass-through taxation of partnerships or S Corporations.

Limited Personal Liability

The protection generally afforded a member of a limited liability company from the debts of and claims against the company.


The individuals who are responsible for the maintenance, administration and management of the affairs of a limited liability company (LLC). In most states, the managers serve a particular term and report to and serve at the discretion of the members. Specific duties of the managers may be detailed in the articles of organization or the operating agreement of the LLC. In some states, the members of an LLC may also serve as the managers.


The owner(s) of a limited liability company (LLC). Unless the articles of organization or operating agreement provide otherwise, management of an LLC is vested in the members in proportion to their ownership interest in the company.

Membership Certificates

Evidence of ownership of and membership in a limited liability company.


The statutory combination of two or more business entities in which one of the companies survives and the other companies cease to exist.


The written record of transactions taken or authorized by the members or managers. These are usually kept in the minute book in diary fashion.

Name Registration

The filing of a document in a foreign state to protect the LLC name, often in anticipation of qualification in the state.

Name Reservation

A procedure that allows an LLC to obtain exclusive use of a business name for a specified period of time.

Notice of Service of Process

Official notification of an action or proceeding by the delivery of a legal or court document, with a request to answer in a specific period of time.

Operating Agreement

A contract among the members of a limited liability company governing the membership, management, operation and distribution of income of the company.


A business organization in which two or more persons agree to do business together.

Pass-Through Taxation

Rather than tax the income of the entity, taxation is "passed through" to the individual shareholders in S Corporations (and LLCs). Income or losses are declared on their individual tax returns.

Perpetual Existence

Unlimited term of existence; characteristics of most business corporations.

Piercing the Corporate Veil

Piercing the corporate veil is a legal theory sometimes used to impose personal liability on members and managers for LLC acts. This theory permits a court to disregard the separate identity of the business.


The filing of required documents by an LLC to secure a certificate of authority to conduct its business in a state other than the one in which it was formed.

Registered Agent

A person or entity designated to receive important tax and legal documents on behalf of the business. The Registered Agent must be located and available at a legal address within the specified jurisdiction at all times. Failure to maintain a Registered Agent in the jurisdiction in which an LLC is registered, may result in the forfeiture of good standing status. Also known as a Resident Agent.

Registered Office

The statutory address of an LLC. In states requiring the appointment of a Registered Agent, it is usually the address of the Registered Agent.


Returning an LLC that has been administratively dissolved or had its certificate of authority revoked, to good standing on a state's records.


A formal statement of any item of business that has been voted upon.

Restated Articles of Organization

A document that combines all currently operative provisions of an LLC's articles of organization and amendments thereto.

Sole Proprietorship

An unincorporated business with a sole owner in which the owner may be personally liable for business debts and claims against the business.


A tort is any act or failure to act (if there was a duty to act) which causes harm or damage. Examples of torts include assault, battery, fraud, misrepresentation, defamation, libel, slander, invasion of privacy, and negligence. If there is a claim against your LLC, other than a claim by the government, it will likely be based in contract or tort.


A word or mark that distinctly indicates the ownership of a product or service, and that is legally reserved for the exclusive use of that owner.

Voluntary Dissolution

Action by members or managers to dissolve an LLC.

Winding Up

The discharging of an LLC's liabilities and the distributing of its remaining assets to its members in connection with its dissolution.


The statutory procedure whereby a foreign LLC obtains the consent of a state to terminate its authority to transact business there.

Saturday, May 23, 2009

Limited Liability Partnership_8

What are the restrictions in respect of minimum and maximum number of partners in an LLP?

A minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum number of partners.

Limited Liability Partnership_7

Whether provisions of Indian Partnership Act, 1932 would be applicable to LLPs?

No, these shall not be applicable to LLPs.

Friday, May 22, 2009

Limited Liability Partnership_6

Whether an entity which has objectives like “charitable or other not for profit objectives” would be able to set up under LLP Act?

No. The essential requirement for setting LLP is ‘carrying on a lawful business with a view to profit’.

Limited Liability Partnership_5

Difference between LLP & a Company

• A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas for an LLP it would be by a contractual agreement between partners.
• The management-ownership divide inherent in a company is not there in a limited liability partnership.
• LLP will have more flexibility as compared to a company.
• LLP will have lesser compliance requirements as compared to a company.

Wednesday, May 20, 2009

Comapnies Act_Practical Problems_82

A Group of shareholders of a company while filing a petition for relief against mismanagement in the conduct of the affairs of the company feel that since the matter has become so serious that they feel that the ultimate relief for mismanagement will be by way of filing a petition for winding up and hence they prefer to file two petitions, one for relief against mismanagement and the other for winding up. State whether simultaneous petitions or composite petition is maintainable.

Supreme Court in Worldwide Agencies (P) Ltd. v. Mrs. Margaret T. held that "a composite petition under sections 397, 398 and 433(f) of the Act is maintainable." This judgement overrides the previous juedgements of several High courts.

Tuesday, May 19, 2009

Limited Liability Partnership_4

Difference between LLP & “traditional partnership firm”

• Under “traditional partnership 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.
• Under LLP structure, liability of the partner is limited to his agreed contribution. Further, no partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.

Limited liabilities Partnership_3

Other countries where this form is available ?

The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislations in various countries, the LLP Act is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members.

Sunday, May 17, 2009

Limited Liability Partnership_2

What are the advantages of LLP form ?

LLP form is a form of business model which:
(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk taking
capacity in an innovative and efficient manner

Friday, May 15, 2009

Limited Liability Partnership_1

What is concept of “limited liability partnership” ?

• LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
• The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
• Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
• Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity. Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

Wednesday, May 13, 2009

Companies Act_Practical Problems_81

Alpha Ltd. and Beta Ltd. entered into a scheme of amalgamation by which Alpha Ltd. would transfer its entire undertaking to Beta Ltd. However, the Central Government raised an objection that unless the objects clause of the companies are similar, and memorandum empowers to do so, the scheme of amalgamation cannot be permitted. Is the contention of the Central Government correct?

The power to amalgamate may flow from the memorandum or it may be acquired by resorting to the statute. Section 17 of the Companies Act, 1956 indicates that a company which desires to amalgamate with another company will take necessary steps to come before a court for alteration of its memorandum in aid of such amalgamation. The statute confers a right on a company to alter its memorandum in aid of amalgamation with another company. The provisions contained in sections 391 to 396 and 494, illustrate instances of statutory power of amalgamating a company with another company without any specific power in the memorandum. [Hari Krishna Lokia (v) Hoolungooree Tea Co,].

Section 391 is not only a complete code, but it is in the nature of a single window clearance system to ensure that parties are not put to avoidable, unnecessary and cumber some procedure for making repeated applications to court for various alterations and changes. What is to be seen is the over all fairness mid feasibility of scheme of amalgamation and there need not be any 'unison of objects of both transferor and the transferee company. [R Morarjee Gokuldas spg. & wrg. Co.,]. To amalgamate with another company is the power of the company and not an object of the company. Irrespective of the objects clause, the court is empowered to sanction scheme of amalgamation provided it does not prejudice the interest of the public. Therefore, based on the above judicial rulings, the contention of the central government is not correct.

Tuesday, May 12, 2009

Companies Act_Practical Problems_80

A scheme of merger of XYZ Ltd with ABC Ltd was approved by the shareholders at an extraordinary general meeting and the exchange ratio of 3 shares of ABC Ltd for 20 shares in XYZ Ltd was approved. The proposal was also okayed by a lending financial institution which held 45% shares in XYZ Ltd. The valuation was carried out by one of the directors of XYZ Ltd who is a member of the Institute of Chartered Accountants of India. The valuation was affirmed by three independent valuers nominated by the shareholders in general meeting. However, certain leaseholder properties, under license, which were not transferable, were not taken into account in the valuation. While the scheme was awaiting the Court's sanction, it was challenged by certain shareholders on the ground that the exclusion of leasehold assets in the valuation made the scheme 'Unfair'. Decide giving reasons:
(i) Whether the contention of the shareholders is tenable?
(ii) What factors would the Court take into account in approving the exchange ratio?

The contention of the shareholders in this case shall not be tenable. The court is not to disturb a scheme unless the person who challenges the valuation satisfies the court that the valuation arrived at was grossly unfair. Valuation in this case was approved by the shareholders and also okayed by the lending institution(s) which are usually well-informed and scrutinize the scheme with expert’s eye and which are also presumed to act bonafide. In the similar case of Tata Oil Mills Ltd. Re. (1994), the court held that the presumption of fairness was writ large on the face of the scheme. The Court did not attach importance to the fact that certain leasehold assets and properties held under license were excluded from valuation. Such assets, the court said, were neither transferable nor heritable. They are in the nature of a personal privilege. The Supreme Court affirmed this decision in Hindustan Lever Employee‘s Union v. Hindustan Lever Ltd., (1994) and accepted the exchange ratio proposed. The Supreme Court found no objection to the
valuation being done by one of the directors of TOMCO (XYZ Co. in this case). His report did not show any prejudice and was also affirmed by the independent valuers. Supreme Court also enumerated all the possible methods of valuation such as, market price, book value and yield basis and pointed out that a combination of all or some of the methods, may have to be adopted in circumstances of a particular case. Thus based on the above explanation and the decisions given by the Supreme Court, it can be concluded that the contention of the shareholders that the
exclusion of certain leasehold assets in the valuation has made the scheme unfair, shall not be tenable.

Thursday, May 07, 2009

Companies Act_Practical Problems_79

The Board meeting of Fortune Ltd. has the following schedules for the year 2009:
1st Meeting - 1st January, 2009
2nd Meeting - 30th June, 2009
3rd Meeting - 1st July, 2009
4th Meeting - 31st December, 2009
State whether the Board Meetings schedules are as per compliance with the provisions of the Companies Act, 1956. What would be your views if the meeting to be held on 30th June, 2009 is adjourned due to lack of quorum?

As per Section 285, in the case of every company, a meeting of the Board of Directors shall be held at least once in every three months and at least four such meetings shall be held in every year. The section does not state the gap between two board meetings. In the present case four meetings have been scheduled for the year 2009 even though the gap between two board meetings is more than 3 months. However, as per the section there appear to be no contravention. If the Board meeting to be held on 30th June, is adjourned due to lack of quorum, again a meeting is held on some other date, the company shall not be deemed to have
contravened the provisions of Section 285. If the said meeting is proposed to be held on 30th June, 2009 and assumingly to be adjourned for want of quorum, the meeting automatically stand adjourned by virtue of Section 288 (1) till the same day in the next week, at the same time and place. And if the same day is a public holiday, then the meeting stands adjourned till the next succeeding day which is not a public holiday.

Companies Act_Practical Problems_78

In a public company the total number of directors are 12 and 2 office of the directors have fallen vacant. Referring to the relevant provisions of the Companies Act, 1956.
(a) What would be the quorum for the Board meeting?
(b) Can the articles of a company fix the quorum (higher or lower) for the Board meeting?
(c) Assuming if there are 15 directors in the company and of which 13 happen to be interested directors, what would be the quorum?
(d) How do you resolve the situation if all the directors are interested in a particular transaction?

Where total number of directors are 12 and 2 offices of the directors have fallen vacant, we find: 1/3 of (12-2) = 1/3 of 10 = 3 1/3 directors. If the fraction of 3rd were to be rounded off as one then 4, i.e. 3+1 directors would constitute the quorum for the Board meetings. If at any time the number of the remaining directors exceeds or is equal to two thirds of the total strength, the number of the remaining directors who are non-interested but present at the meeting, not being less than two shall constitute the quorum. For example, there are in all 15 directors and the Board meeting commences with all the 15 directors. During the currency of the meeting, an item comes up for discussion in respect of which 13 happen to be “interested” directors. In this case, in spite of the excess of the interested directors being more than two-thirds, the prescribed minimum number of noninterested directors constituting the quorum, namely, 2 present at the meeting are to transact the particular item of business.

Saturday, May 02, 2009

Companies Act_Practical Problems_77

Out of the powers exercisable by the Board under Section 292, the board wants to
delegate to the Managing Director of the company the power to borrow monies otherwise than on debentures. Advise whether such a delegation is possible? Would your answer be different, if the delegation is given to the manager or any other principal officer including a branch officer of the company?

It has been held in [P. Rangaswami Reddiar and Another vs. R. Krishnaswami Reddiar and another (1971) 43 Comp. Case 232] that where borrowing is permissible under the company’s articles and moneys were borrowed on promissory notes, such transaction would come within the powers of the director. It has also been held in the same case that where a person was appointed as the managing director of the company by the Board’s resolution vested with full powers of the management of the affairs of the company and authorised to sign all the papers of the company, he would have full powers to borrow money on a promissory note even without a resolution of the Board as contemplated by Section 292(c) of the Act.

Companies Act_Practical Problems_76

The Board of Directors of Sun Star Ltd. are contributing every year to a charitable
organization a sum of Rs.1 lac. In a particular year, the company suffered losses and the directors are contemplating to contribute the said amount in spite of the losses. In this connection, state whether the directors can do so?

The power to donate to general charities is not conditional to existence of any profit. In such a case they may contribute up to the limit given in Section. 293(1) (e), even though the company may be working at a loss. Under the section a public company can contribute in any financial year not exceeding Rs 50,000 or 5% of its average net profits during the three preceding financial years whichever is greater.