INTRODUCTION
The
Limited Liability Partnership Act, 2011 was assented into law and commenced
operation on 16th March, 2012.
The Act repeals Limited Partnerships Act, Cap 30 of the Laws of Kenya, which
previously governed the formation, management and regulation of limited
partnerships.
IMPLICATIONS OF THE
LIMITED LIABILITY PARTNERSHIPS ACT
Registration of an
LLP
An
LLP may be registered reserving the proposed name. The name is reserved for a
period of two months from the date on which the application for reservation was
lodged with the registrar.
Thereafter,
two or more persons desirous of conducting business for profit [therefore,
LLPs cannot be registered with only one proprietor or be used for charitable
purposes] under the reserved name may lodge the prescribed form with the
registrar. The statement should contain:
- name of that LLP (which name should not be: prohibited by any law, undesirable, identical to that of any other LLP corporation or business name, or identical to a name that is being reserved under the LLP Act, the Business Names Act or Companies Act);
- nature of the proposed business;
- the proposed registered office;
- the name, identity document (if any), nationality, and usual place of residence of each person who will be a partner of the partnership;
- if any of the persons referred to in paragraph (d) is a body corporate:
1. the body’s
corporate name;
2. the body’s place of
incorporation or registration;
3. the body’s
registration number (if any); and
4. the registered
office of the body to which all communications may be addressed;
6.
the
name, identity document (if any), nationality and the usual place of residence
of each person who will be a manager of the partnership and, if any such person
is a body corporate:
1. the corporate name,
place of incorporation or registration number (if any) of the body; and
2. the registered
office of the body to which all communications may be addressed; and
3. such other
information concerning the proposed limited liability partnership as may be
prescribed by the regulations.
The
name of an LLP must end with the word “LLP” or its long form. The Act also
envisages change of name of the LLP as the partners may wish from time to time.
Separate Legal
Personality
The
Act envisages that an LLP shall be a corporate entity with a legal personality separate
and distinct from its owners. The now repealed Cap 30 envisaged partnerships as
separate from its owners and therefore, under the former Act, the liability of
the firm in the event of insolvency could be settled from personal property of
the proprietors. In LLPs registered under the Act, the liabilities of LLP are
payable out of the property of the LLP.
Perpetual
Succession
A
limited liability company also enjoys perpetual succession such that death or
departure of a partner doesn’t affect the existence of the firm. This is advantageous
especially for professional services firms because a change in the partners of the LLP does not affect the existence, rights or obligations of the LLP.
Powers of an LLP
As
an incorporated body corporate, an LLP may in its own name and seal: sue and be sued, and hold and dispose of property.
Power to Form an
LLP
Natural
persons and body corporates (except trade unions) may form an LLP.
Liability in an LLP
The
liability of any partner in an LLP can only arise by contract or tort, and may
not arise solely for the reason of one being a partner in an LLP. Accordingly,
partners in an LLP will agree on the degree of their liability in respect of
any matter.
The
Act doesn’t waive liability for tortuous acts arising from individual partner’s
action or omission. By extension, one partner in an LLP setup is not liable for
wrongful acts/omissions of another partner within the LLP.
However,
an LLP would be responsible for a wrongful act or omission committed by a partner
to another person (other than a partner of the LLP) in the course of the
business of the LLP or with its authority a person.
Agency Relationship
between Partners and LLP
Partners
of an LLP exercised are agents of an LLP. Such agency is however repudiatable
in circumstances where: (a) the partner in question acted without authority of
the LLP; or the person dealing with the partner knows that that partner has no
authority but proceeds to transacts with such partner.
The
Act also obliges LLPs to formally notify the Registrar of any change in
partnership of the LLP to avert adverse claims.
Regulation of
Partners’ Relation
Under
the LLP Act, the relationship of the partners
themselves and the relationship between the partners and the LLP are governed by the Limited Liability Partnership
Agreement. In the absence of such an agreement, the First Schedule of Act which
contains default provisions regarding governance/management of would apply. Decisions
of the LLP are to be through resolutions passed with the requisite quorum as may
be stipulated in an LLP agreement.
Cessation from
Partnership
Partners
in an LLP have three options for exiting the Firm, namely:
a) In accordance with
the provisions of an LLP agreement;
b) issuances of a 90 days’
notice to the other partners of the LLP of the intention to resign; or
c) upon death of that
partner or on dissolution of the partnership.
Resignation
or death terminates all management rights of such a partner.
The Act also protects
the interest of resigning partner or his/her beneficiaries (on death).
Accordingly, on resignation or upon death, that partner or his personal
representatives/assigns is entitled to receive from the LLP an amount:
a) equal to the
person’s capital contribution to the LLP and the person’s right to share in the
accumulated profits of the LLP after the deduction of losses of the limited
liability partnership; and
b) determined as at
the date the person ceased to be a partner.
LLPs, LLP Partners and
Bankruptcy
An
LLP Agreement may restrict the application of provision of the Act regarding
management of bankruptcy of partners. Generally however, bankruptcy of a
partner doesn’t cause such a partner ceasing being a partner in the LLP,
although such a partner may not participate in the management of the Firm.
The
above notwithstanding, an official receiver or a trustee of the estate of the
bankrupt partner is entitled to receive distributions of profits from the LLP
that the bankrupt partner is entitled to receive under the LLP agreement.
Assignment Rights
The
Act is novel in that a partner in an LLP may, unless otherwise provided under
an LLP Agreement, assign his rights to receive distribution from the
partnership. Whereas the assignment terminate the assigning partner’s rights in
the Firm, it entitles the assignee the right to participate in the management
of the Firm. By reason of the assignment, anyone may become a member of the LLP and participating in its management affairs. Accordingly, this is an
area that ideally should be well considered when drafting an LLP Agreement.
There appears to be an inconsistency between section 15 (2) and Section 15 (3) (b), as the former limits assignee's rights to only receipt of distributions from the partnership which the assignor would otherwise have been entitled to receive, while the the latter entitles an assignee to participate in the management of the partnership. Accordingly, exclusion of right of assignment by way of a LLP Agreement as envisaged under Section 15 (1) will prove critical for most LLPs.
There appears to be an inconsistency between section 15 (2) and Section 15 (3) (b), as the former limits assignee's rights to only receipt of distributions from the partnership which the assignor would otherwise have been entitled to receive, while the the latter entitles an assignee to participate in the management of the partnership. Accordingly, exclusion of right of assignment by way of a LLP Agreement as envisaged under Section 15 (1) will prove critical for most LLPs.
Conversion
of Partnerships and Limited Liability Companies to LLPs
The
Act is novel in Kenya as it allows conversion of partnerships and limited
liability companies to LLPs. However, such
conversion does not terminate rights and obligations which subsisted immediately
before the conversion, which rights and obligations are transferred by
operation of law to the new LLP.
Requirement for a
Manager
An LLP must have a
manager who must be a natural person, and whose particulars must be lodged with
the registrar in the prescribed form. The role of a manager is to ensure that
the LLP lodges annual declaration of solvency or insolvency, file changes in
registered office of the LLP and ensure that invoices or other document issued
relating to the partnership business bears (a) the name and registration number
of the partnership; and (b) a statement that it is registered with limited
liability.
CONCLUSION
LLPs have several
advantages over other forms of vehicles for conduct of business. LLPs are a
cross between a partnership and company structure. They have principally been
introduced to afford professional services firms (PSFs) which mostly trade as
partnerships (accountants, lawyers, surveyors etc) the opportunity to benefit
from limited liability. They provide partners in PSFs with the benefits of
limited liability, and accordingly protecting their personal assets from any
potential business creditors as is the case with limited liability companies.
While Limited Liability Companies (LLCs) can have
multiple members (upto 50), they are not as good at attracting investors as
LLPs. This is because, as highlighted above, LLP structure isolates each
partner when it comes to claims, for instance, of negligence. In a LLP, unlike an LLC, a claimant
may only direct his negligence or malpractice claims toward the negligent
partner, and thus protecting the partnership and the other partners.
For tax advantage,
LLPs are often used to save on tax obligations and therefor increase
shareholder value.
Accordingly, we
expect that a majority of professional service firms will henceforth be
registered as LLPs rather than business names under the Registration of
Business Names Act (Cap 499 of the Laws of Kenya) or limited liability
companies under the Companies Act (Cap 486 of the Laws of Kenya) or converted
to LLPs as envisaged under the LLP Act.
We hope the synthesis above suffices your concerns regarding the implications of the Limited Liability
Partnerships Act, 2011.
For further
enquiries regarding registration of LLPs, preparation of Limited Liability
Partnership Agreements, conversion of partnerships of limited liability
companies into LLPs or change of LLP names, please contact us at info@stralexgroup.co.ke. You may also
reach us on +254 715 310 677.
For: Strategic Legal Solutions Group Limited
Corporate Law & Business Services Consulting - a participating consultancy firm in the SLS
Group of consultancies.
