[Hiranya is a student at National Law School of India University.]
As limited liability partnerships (LLPs) in the country continue to grow rapidly, the critical issue of protecting the rights of minority partners has received scant attention. This article examines this particular issue of protecting minority rights within LLPs in India. While the understanding of what constitutes minority partner(s) in an LLP is nascent, the use of the term in various case laws is illuminating. They demonstrate that minority can be defined in terms of numerical strength or share in decision-making powers. In multiple-member partnerships, certain partners may constitute a majority if their total decision-making power exceeds that of the remaining partner(s). While the rights of the partners are primarily governed by the LLP agreement which constituted the LLP, the First Schedule of the Limited Liability Partnership Act 2008 (LLP Act) provides some default protections in the absence of any agreement on a matter. For example, Clause 8 provides that each partner shall have one vote unless otherwise agreed. However, these protections may be inadequate where there is differential voting which is often the case in practice where each partner’s vote is as per his contribution in the firm. Thus, minority partner(s) may lack sufficient influence over how decision-making processes.
This article identifies such situations and highlights the legal protection gaps. As the LLP Act finds its basis in UK’s LLP Act 2000, this article draws parallels with the UK’s approach to protecting partners’ rights. This allows the article to argue that extending Section 241 of the Companies Act 2013 (Companies Act), which addresses oppression and mismanagement in companies, to LLPs would fill crucial gaps in minority protection. In doing so, it first analyses existing protections available to minority partner(s) and demonstrates why they are inadequate. Second, it discusses how minority rights are protected in the UK. Third, it argues for adoption of a similar approach in India. Lastly, it addresses the concerns that may arise in this regard.
Existing Protections and Inadequacies
An examination of LLP Act reveals that protections for minority rights in the First Schedule and Section 43 of LLP Act. The First Schedule recognises the need to protect rights of every partner, including provisions such as Clause 8 which states that decisions regarding the LLP are made by a majority vote, with each partner having one vote. Clause 13 specifies that a majority cannot expel a partner unless an express agreement allows it. While it may seem that these provisions ensure all partners have an equal stake, it must be noted that these protections are available only where the LLP agreement is silent on these aspects. This means the First Schedule does not cover situations where the LLP agreement already has provisions providing for decision-making powers, particularly where equal stakes are not guaranteed.
In practice, the LLP agreement rarely remain silent on such significant aspects. The lack of any protections in such situations means that the majority (in terms of number and/or decision-making power) can potentially make decisions adversely affecting other partners’ rights. This may include passing resolutions which admitting new partner(s) to restructure the decision-making powers to reduce an existing partner to minority stakeholder. This may allow the majority to later expel the minority partner (refer Atul Kumar v. State of Rajasthan and Ms Payal Sandhu Khurana v. Alabaama Design Consultants LLP). Similar instances where an allotment of shares reduces some shareholders to frail minority for unfair objectives despite such conduct are pretty common in companies and may be seen in LLPs too (refer Rajendra Kumar Tekriwal v. Unique Construction Private Limited). It must be noted that such acts might be in accordance with the provisions of the LLP agreement and thus do not suffer from any illegality. These are precisely the situations which extension of Section 241 can address.
In such cases where the prejudicial acts do not breach the LLP agreement, the only potential recourse may lie in Section 43 of LLP Act. Section 43(1)(a) allows partners to apply to the central government seeking an investigation in affairs of the LLP but requires support from at least one-fifth of total partners. Thus, the one-fifth requirement poses an obstacle, especially where some minority partner(s) might be acting in accord with the majority partner(s). In Anirudh Kumar v. Hydraulics and Pneumatics India LLP, the court refused an application to waive this requirement, although such requirements have been waived off previously in some cases in companies. Additionally, Section 43(1)(c) allows the Central Government to investigate LLP affairs when it believes that the LLP's business is being conducted oppressively or unfairly prejudicial to some partners. However, this depends entirely on governmental discretion and available information. Effectively, no direct channels exist for minority partner(s) to seek recourse in prejudicial situations.
UK’s Approach to Minority Protection
Keeping in mind the need to address minority protection, in the UK, Section 994 of the Companies Act 2006, which deals with protections for shareholders against unfair prejudice, was extended to LLPs. This allows partners to petition the court if the “LLP's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members or some part of its members (including at least the petitioner).” Additionally, this provision extend to LLPs, unlike in cases of companies, and allows the partners to contract out of it through the LLP agreement.
While “unfair prejudice” lacks a precise definition, in O’Neill v. Phillips it has been asserted that it involves breaching rules or using rules contrary to good faith. F&C Alternative Investments (Holdings) Ltd v. Barthelemy and Culligan illustrates this approach in practice. In this instance, two individual members (40% stakeholders together) petitioned against F&C Holdings (60% stakeholder) in an LLP. Despite the LLP agreement providing for equal representation in management committee and board, Holdings attempted to shift decision-making to members' meetings where voting power was stake-based. The court held this constituted unfair prejudicial conduct, despite the majority's technical compliance with voting procedures.
Extending the UK Approach to India
A similar protection can be extended to Indian LLPs since a provision analogous to Section 994 of the UK Companies Act already exists in India's Companies Act 2013. Section 241, read with Section 244, allows certain proportions of members to apply to the National Company Law Tribunal for relief when "the affairs of the company have been or are being conducted…in a manner prejudicial or oppressive to him or any other member or members." A prejudicial act refers to an act that adversely affects the interests of petitioning shareholders. For instance, the single act of issuing additional shares to alter the shareholding pattern in certain shareholders' favour was held to be prejudicial in RN Jalan v. Deccan Enterprises Private Limited. As already highlighted in the previous section, such situations may arise in the context of LLPs too. Additionally, in SP Jain v. Kalinga Tubes Limited, the court stated that for an act to be oppressive, "the conduct must be burdensome, harsh, and wrongful, involving a lack of probity or fair dealing to a member in the matter of his proprietary rights”. The remedy can be invoked even where the act is lawful. If this provision is extended to LLP Act, recourse in instances which are lawful but prejudicial to the interests of the minority stakeholders will lie.
Considering the similarities that companies and LLPs share, the legislature has already provided Section 67 in the LLP Act allows for application of provisions of Companies Act by the Central Government with necessary modifications. Since National Company Law Tribunal already adjudicates LLP matter, extending Section 241 would be procedurally easy. The legislature should also incorporate the highlighted modification which allows partners to exclude the application of Section 241 through unanimous written agreement. Additionally, the Centre should waive off the minimum number of partners requirement for tribunal applications, considering that usually LLPs typically have lesser partners than shareholders in companies.
Addressing Concerns
While the First Schedule allows parties to choose arbitration, extension of Section 241 would broaden the scope of recourse available. Actions that are legally permissible but inherently oppressive cannot be adequately addressed by arbitration. Unlike arbitration's narrow scope, Section 241 empowers tribunals to investigate the entire conduct of LLP affairs, examine the genuine intent behind decisions, and provide comprehensive remedies.
Concerns about increased litigation due to application of Section 241 may exist. These are valid but can be mitigation. The possibility of litigation can serve as a deterrent against oppressive conduct and the ability to contract out preserves the fundamental principle of freedom of contract.
Conclusion
The extension of Section 241 of the Companies Act to LLPs represents a crucial step in addressing the highlighted current inadequacies in legal protection. This approach would encourage more transparent decision-making, incentivize good faith negotiations, and provide a safety valve for partners who might otherwise be marginalized as the Indian economy witnesses the growth of LLPs. Moreover, the ability to contractually opt-out ensures that the provision does not impose a rigid framework, but instead offers a flexible, adaptable protection mechanism that can be tailored to the specific needs of different LLPs. By adopting this measure, India can significantly strengthen its LLP legal framework as it is in its nascent stages.
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