Friday, June 20, 2008

The Limited Liability Partnership in Malaysia

Introduction

Traditional business models tend to veer between two options, that of a partnership and a corporation. While a partnership offers flexibility in allowing its members to agree and strike a bargain on the form of its arrangement, a corporation must adhere to a more mandatory framework with a division between its management and its members. However, a corporation enjoys its own separate legal personality with its shareholders enjoying limited liability.

Within the practice of law here, legal practitioners can only choose between operating as a sole practitioner or to form a partnership.

A need for flexibility in running a business and to overcome certain limitations in all the above business models have led to the call for a hybrid vehicle to be enacted, that of a Limited Liability Partnership (LLP).
...it combines the protection of limited liability whilst offering a degree of flexibility of the partnership arrangement...

As its name suggests, it combines the protection of limited liability for its members whilst offering a degree of flexibility of the partnership arrangement for the internal management of the business. The most attractive feature of an LLP is that it is a separate legal entity and has a continuing legal existence independent of its members as compared to the traditional partnership of which its legal existence is dependent upon its membership.

The Companies Commission of Malaysia (CCM) has revived the consultation process in relation to the LLP and issued a second consultative document. The CCM recommends that the LLP should be a vehicle afforded to all business and not merely certain professional groups. It believes that the LLP provides businessmen and investors the flexibility to select the best business entity suited for its business.

It has been reported that the CCM hopes to implement the LLP model by 2009.

This article will highlight and touch on the CCM's recommendations and the likely features of the LLP structure here in Malaysia. The discussion here highlights the proposals of the CCM.

The Conferment of Limited Liability Status

The proposed LLP Act will confer a separate legal entity status on the LLP - one that is distinct from its partners that will come into existence upon registration of the business entity.

Partners of the LLP will be accorded limited liability in respect of tort and contractual claims. However, it will not insulate a partner of the LLP which he would otherwise incur by his own wrongful act or omission, even though such acts were carried out in his role as a partner of the LLP. This is in line with the approach taken in the UK whereby the House of Lords applied the decision in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, HL, to LLPs.

The CCM was of the view that that there should be mandatory bonds/insurance for professional LLPs there should be mandatory bonds/insurance. For instance, Article 6 of the Jersey Act requires an LLP to make financial provision for a sum of £5 million to be paid by a bank/insurance company to creditors of the LLP upon the dissolution of the LLP.
Partners of the LLP will be accorded limited liability in respect of tort and contractual claims

However, the majority of the respondents in the first round of consultation disagreed that the bond requirement be mandated by the legislation as the requirement is specific for professionals only and instead, such requirement should be determined by the rule of the relevant professional bodies.

Registration Procedures

Registration will be simplified through the process of a single registration instrument. The CCM proposes that the information to be included in the registration form consists of inter alia the name and principal activities of the LLP, the address of the registered office of the LLP, the names and addresses of the partners and the name and address of a designated partner of the LLP. However, the Registrar may request additional information be included as part of the registration requirement. All this information will be made available for public inspection.

However, the partnership agreement will not be lodged with the Registrar in order to preserve the confidentiality of the agreement between the partners.

Membership Structure and Eligibility

The LLP should have a minimum number of 2 partners with no upper limit to its partnership. In the event that the number of partners drops below the required minimum, a certain grace period can be allowed to achieve the requirement, after which the LLP must cease to operate and be wound up.

Membership to an LLP should be made available to both natural and legal persons, in line with the Partnership Act 1961.

There were some concerns whether all partners to an LLP should be subject to the same disqualification and penalty provisions as that under sections 130 and 130A of the Companies Act, 1965, which is the position under the UK LLP Act. In Singapore however, the disqualification and penalty provisions are only applicable to the persons managing the LLP, who need not necessarily be a partner of the LLP. The CCM's recommendation is to follow the Singapore position. The person who is involved in the management of an LLP should be subject to the same disqualification criteria faced by directors of companies.

Designated Compliance Officer

An LLP will require a designated compliance officer to ensure that the compliance requirements under the proposed LLP Act are fully adhered to. This will be a similar role to that of company secretaries and directors in relation to the Companies Act 1965.

The designated compliance officer need not necessarily be a partner of the firm. It is proposed that further conditions to be imposed on the designated compliance officer is that he or she must be a natural person ordinarily resident in Malaysia and subject to the same disqualifications criteria under sections 125, 130 and 130A of the Companies Act 1965.

Liability of Partners

Limited liability is to be given to innocent partners only and that it should be clearly stated that the defaulting partner is jointly liable with the LLP for the damage, loss or injury suffered by a third party.

Partners of an LLP should be accorded limited liability in respect of tort and contractual claims. A partner of an LLP should not, by reason only of being a partner of the LLP, be held personally liable for the conduct of other partners or the transactions or liabilities of the LLP.

It is also proposed that in the event an LLP becomes insolvent, a partner’s liability should be limited to the amount of his capital contribution to the LLP subsisting at the time.

Partners' Authority to Bind LLP

The proposed LLP Act shall provide that partners of an LLP are deemed to be its agents and therefore they may act or represent on behalf of the LLP.

The circumstances in which an LLP will not be bound by acts of its partners are the following: -
...partners of an LLP are deemed to be its agents and therefore they may act or represent on behalf of the LLP

(i) the partner has no authority to act on behalf of the LLP; or

(ii) the third party dealing with the partner is aware of this; or

(iii) the third party does not know or believe that the partner is a partner of the LLP.

In the case of transactions with a former partner of an LLP, such transactions are still valid transactions binding the LLP unless the third party has actual notice that the partner is no longer a partner of the LLP at the time of the transaction.

It has been recommended that only actual notice will suffice and that constructive notice should not be applicable where transactions with a third party are concerned. This may be controversial since it may be too onerous on former partners if the doctrine of constructive notice is not applied. The respondents in the first round of consultation seemed to go both ways on this issue.

It may be in the public interest to only allow for actual notice and this view is supported by the approach taken by the Jersey LLP Act where it provides that for the purposes of determining whether a partner has authority to act on behalf of an LLP, no person is deemed to have notice of any records by reason only that they are made available by the Registrar for inspection.

Relationship between the LLP and Partners

The CCM is of the view that default rules should be provided in the proposed LLP Act. However, such default rules are only applicable in the absence of a partnership agreement or when certain matters are not dealt with in such agreement.

The default rules will cover areas relating to inter alia:
(i) Contribution of capital, sharing of profit and loss;
(ii) Right to indemnify;
(iii) Involvement in the management of the LLP;
(iv) Remuneration of members; and
(v) Introduction and withdrawal from membership to the LLP;

Creation of Debentures or Charges

The LLP should be allowed to create debentures or charges in order to raise loans and the CCM is in favour of this. Traditional partnerships would have to rely on the personal guarantee of the partners to secure a loan.

Creditors' Protection Mechanism

The proposed LLP Act will contain claw-back provisions requiring contributions from partners and former partners who have withdrawn any property from the LLP within a stipulated time frame of the commencement of the winding up, if it can be shown that the LLP was insolvent at the time of withdrawal or that the partner(s) knew or have reasonable grounds for believing that the LLP was or would not be able to pay its debts.

The time frame may mirror the 6-month window under insolvency laws or a longer period may be adopted.

Such claw-back provisions should be limited to only the amount withdrawn by the partner or former partner of the LLP.

An LLP is deemed to be insolvent if at anytime the LLP is unable to pay its debts when they are due in the normal course of business or at any material time the value of the LLPs’ assets is less than the value of its liabilities. This is a clearer definition of insolvency than that contained in the Companies Act 1965 and codifies one of the common law tests for insolvency.

The circumstances of the LLP’s inability to pay debts should be made consistent with section 218(2) of the Companies Act 1965 which states that the inability of a company to pay its debts is when the company is indebted in a sum exceeding five hundred ringgit loans. This in itself may be controversial since there already is a criticism of the low 500 ringgit threshold for companies, and any amendment to the Companies Act 1965 to raise this limit should similarly be adopted under the proposed LLP Act.

Dissolution of the LLP

The partnership agreement can dictate the methods for dissolving an LLP and an LLP should not be affected by the death or bankruptcy of its partner.

An LLP can be voluntarily dissolved if its partners agree to do so. This may very well entail the filing of the necessary certificate of solvency with the Registrar or the making of a statutory declaration that the LLP is solvent before the commence of the winding up process (as is the position under the UK LLP Act).

The Court may also be empowered to order an LLP to be dissolved in certain
circumstances. The CCM is in favour of adopting the Singapore position, where some of the circumstances in which the Court can dissolve an LLP are:

(i) the partners have resolved that the LLP be wound up by the Court;
(ii) the LLP is unable to pay its debts;
(iii) the Court is of the opinion that it is not reasonable/practicable to carry on the business of the LLP in conformity with the partnership agreement;
(iv) the Court is of the opinion that it is just and equitable that the LLP be wound up; or
(v) the LLP is being used for unlawful purposes or for purposes prejudicial to public peace, welfare or good order or against national security or interests.
...the benefits enjoyed by the partners of the LLP must also be tempered with the protection of the public...

Conclusion

It is very encouraging to see the CCM pushing hard for the implementation of the LLP model. Aside from the proposed LLP Act which will adopt most of the above features, legislation like the Income Tax Act, and other statutes governing professional bodies, for instance the Legal Profession Act, will also have to be amended accordingly. It may be too much to ask to implement the entire structure by 2009 but at least that is the targeted time frame presently.

This new LLP vehicle will aid small and medium sized business as well as professionals in the running of their respective businesses. The CCM is already mindful that the benefits enjoyed by the partners of the LLP must also be tempered with the protection of the public dealing with the LLPs.

4 comments:

Anonymous said...

Hi Lee Shih,

Thank you for the very informative post on the LLP in Malaysia. I would like to enquire as to the differences between the LLC model with the LLP model, as can be seen in the law firms in Singapore adopting the LLC.

Thanks

leesh said...

Hi Anon

I will try to answer this, although I do not hold myself out to be an expert in this area. First of all, there are no real set features of a LLP, as it is entirely a creature of statute, so different countries may have a different LLP model.

Comparing the LLP with that of the LLC model in Singapore, the main difference would be in the organisational structure, especially in terms of management. The owner-management divide inherent in the LLC, in terms of shareholders and management carried out by a Board of Directors, does not feature in the LLP, where the partners are the managers and members.

Another possible significant difference is that of disclosure. The LLC would have a Memorandum and Articles of Association, which would be a public document filed with the Companies Commission. The LLP's partnership agreement is confidential. Accounts for the LLC may also have to be disclosed.

Why did Singapore initially adopt the LLC model rather than the LLP? Well, allowing for the LLC only required the creation of the necessary Legal Corporation (Law Corporation) Rules with amendments to the LPA, so the LLC was exclusive to the legal profession at that time. The AG Chambers was looking into a LLP Act, which would be applicable to all businesses and professional bodies, but the Law Society felt it could not wait so long for the eventual enactment of the LLP. Hence, law firms could adopt the LLC model at that time.

Anonymous said...

Hi, Read your doc and find it interesting. Its has been over a year now that the document has been documented. Is the LLP incorporated in Malaysia yet?

kiddo said...

Hi,

I feel quite interesting too, well I'm doubting if there is LLP in Malaysia. However, you can try to go through Section 26 (a) of Partnership 1961. Rules as to interests and duties of partners, subjects to special agreement. All the partners are entitled to shared for profits and liabilities even in an event a partner (dormant partners) subjected himself in an agreement stating he is not liable, as it defeating the intention of partnership where one cannot negate with.

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