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LIMITED LIABILITY PARTNERSHIPS UNDER CAMA, AN OVERVIEW

 

Introduction:

 

The Companies and Allied Matters Act, 2020 (the Act) was signed into law on 7th of August, 2020 by President Mohammadu Buhari. The Act repeals the Companies and Allied Matters Act, 1990, the Companies and Allied Matters (Amendment) Act 1990, the Companies and Allied Matters (Amendment) Act, 1991, the Companies and Allied Matters (Amendment) Act, 1992 and the Companies and Allied Matters Act, 1998.[1] The purport of the Act is to advance the ease of doing business in Nigeria in contributing to building an attractive business atmosphere for both local and foreign investors.

 

Amongst other innovative provisions, the Act introduces a Limited Liability Partnership and a Limited Partnership as units of business organizations.[2] Prior to the Act, the only provisions regulating partnership in the repealed Acts were Section 573 (1) (a) and Section 19 (1), which provided for the registration of a firm having a name other than the true surnames of the partners; and the minimum and maximum number of partners. This is not to say that they were no laws governing partnerships in Nigeria. Partnerships were regulated in Nigeria by the Partnership Act of 1890[3] and the laws of states (with some state laws making provision for limited partnerships)[4].

 

 

The Limited Liability Partnership

Sections 746 to 796 of the Act regulate the formation, incorporation, control and management of a Limited Liability Partnership (LLP). The Act considers a LLP as a body corporate and having a distinct legal personality from those of its partners.[5] Unlike a general partnership lacking in assured continuity, a LLP enjoys perpetual succession that cannot be disrupted by any change in its partners. Also, the liability of the partners is limited to their contributions to the partnership and as such, creditors cannot go after the personal property of the partners.

 

The incorporation of a LLP is provided for under Part C of the Act. The Corporate Affairs Commission (the Commission) is mandated by the Act to incorporate a LLP and issue a Certificate of Incorporation within 14 days of compliance with the requirements of incorporation.[6] The LLP shall have either the words ‘”Limited Liability Partnership” or the acronym “LLP” as the last words of its name.[7]

 

Effect of Incorporation

 

Corporate Entity- on incorporation of a LLP, it assumes the status of a body corporate, with a legal personality distinct from the partners. This feature is similar to that of an incorporated company and it is the major feature that distinguishes it from other forms of partnership. Being a body corporate, it possesses the power to act as a corporate entity and may –[8]

  1. sue and be sued in its name

  2. enter into contracts in its own name;

  3. acquire, own and develop or dispose of property, whether moveable or immovable, tangible or intangible;

  4. have a common seal (if it so decides).

 

Perpetual Succession- Section 746 (2) of the Act accords a LLP with perpetual succession. Thus, a LLP continues to exist until it is wound up either voluntarily (by its partners) or by the court. The death, insanity, retirement or bankruptcy of one or more partners cannot result in the dissolution of a LLP. Section 746 (3) states that:

“Any change in the partners of a limited liability partnership does not affect the existence, rights or liabilities of the limited liability partnership.”

 

Limited Liability of Partners- the liability of the partners is limited to their contributions to the LLP business; a partner is not personally liable, directly or indirectly for the obligations and/or the liabilities of the LLP. The limited liability of a partner extends to his legal representative or estate. By the provisions of Section 768 (2) of the Act, the legal representative or estate of a deceased partner shall not be liable for any act of the LLP done after the death of the partner notwithstanding the continued use of the LLP name or the deceased partner’s name as part thereof. However, Section 769 (1) provides an exception to the limited liability of a partner in cases of fraud. The liability of a partner shall be unlimited where he acts with the intent to defraud creditors or for any other fraudulent purpose.

 

The limited liability of partners is an attraction for small businesses, while for persons dealing with the LLP, conversely, they may be a put off as they cannot go after the personal assets of the partners in the event of a winding up. Although in the Partnership Law of Lagos State[9], Section 56 (2) allays the fears of creditors by imposing on the partners an obligation to contribute to the assets of the LLP in the event of its being wound up or dissolved; there is no similar provision in the Act. However, it is believed that the court can make such an order where it finds it just and equitable to do so.

 

Number of Partners and Eligibility of Partners

The minimum number of partners that a LLP can have is two. Unlike a limited partnership where the Act puts the maximum at 20, there is no express provision on the maximum number of partners a LLP can have. However, it could be argued that Section 19 (1) of the Act which limits the number of partnership to 20 (except where it is a partnership of lawyers and accountants formed for the purpose of carrying on practice as legal practitioners and as accountants) applies to all forms of partnership. Section 19 (1) states:

 

“No association, or partnership consisting of more than 20 persons shall be formed for the purpose of carrying on any business for profit or gain by the association, or partnership, or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuant of some other enactments in Nigeria”

 

Where the number of partners of a LLP falls below the statutory minimum for a period exceeding six months, the standing partner shall be personally liable for the obligations of the LLP incurred during that period provided that he has knowledge that the LLP is carrying on business with him alone.[10]

 

Any individual or body corporate may be a partner in a LLP. Section 747 of the Act disqualifies an individual adjudged a person of unsound mind by a court in Nigeria or elsewhere and an undischarged bankrupt from being a partner of a LLP.

 

Doubts have been raised as to whether a legal practitioner can partner in a LLP. Generally, a lawyer is permitted to form a partnership provided that such partnership is not formed with a non-lawyer or with a lawyer who is not admitted to practice law in Nigeria, if any of the activities of the partnership consist of the practice of law.[11]

Section 5 (5) of the Rules of Professional Conduct for Legal Practitioners prohibits a legal practitioner from carrying out legal practice as a corporation. A LLP is not a corporation; a legal practitioner is thus permitted to partner in a LLP.

 

Designated Partner

Designated Partner means any partner designated as such pursuant to [12]Section 749 of the Act. Similar to directors, designated partners are in charge of the administrative functions of the LLP. During registration of LLP, the incorporation documents must specify the names and addresses of persons who are to be designated partners. Every LLP must have at least two designated partners and at least one of the designated partners must be resident in Nigeria. Only individual partners or individuals nominated by a body corporate partner can be designated partners.

 

Duties of a Designated Partner

The Designated partner is responsible in taking actions to ensure the compliance with the relevant provisions of the Act as it affects a LLP and shall (in some cases) be liable for penalties imposed on the LLP for contraventions of the provisions. Some significant duties of a designated partner are as follows:

i.       File with the Commission the particulars of every individual who has given his consent to act as a designated partner within 30 days of his appointment.[13]

ii.      Notify the Commission of change in the registered address of the LLP within 14 days of the passing of a resolution changing the registered address of the LLP.[14]

iii.     Ensure that the invoices, official correspondence and publications of the LLP bear the name, registered address and registration number of the LLP and a statement that the LLP is registered with limited liability.[15]

iv.     File the LLP agreement and any changes therein with the Commission.[16]

v.      Notify the Commission of cessation of a partner from the LLP within 30 days from the date of cessation.[17]

vi.     Notify the Commission of new partner(s) within 30 days from the date of becoming a partner.[18]

vii.    Notify the Commission of change in the name or address of a partner within 30 days of the change.

viii.   Ensure the maintenance of such proper books of account as may be prescribed relating to the affairs of the LLP at the registered office of the LLP.[19]

ix.     Ensure the preparation and filing with the Commission statement of account and solvency within six months from the end of each financial year.[20]

x.      Ensure the accounts of the LLP is audited in accordance with prescribed rules except were the LLP is exempted by the Minister.[21]

xi.     File annual returns with the Commission within 60 days of closure of the LLP’s financial year.[22]

xii.    For the purposes of investigation of the affairs of the LLP, to preserve and produce before an inspector all books and papers of or relating to the LLP.[23]

xii.    Notify the Commission information of partners having significant control over the LLP and the particulars of such significant control not later than one month of receiving the information or any change therein.[24]

xiii.   Ensure the maintenance of a register of persons with significant control.

xiv.   File annual returns with the Commission within 60 days of closure of the LLP financial year.

xv.    Register or cause to be registered with the relevant tax authority a certified true copy of the partnership agreement and notice of any subsequent change therein.[25]

 

Rights and Duties of Partners

The rights and duties of a LLP and its partners are governed by the Limited Liability Partnership. Thus, the partnership agreement should be carefully worded and should contain standard provisions covering the capital to be contributed by each partner; the ratio in which profits are to be shared; the rate of interest (if any) to be charged on partnership drawings; remuneration of designated partners, introduction of new partners etcetera.

Regarding the obligation of a partner to contribute to a LLP, the Act provides that the contributions by partners may be in cash or in kind. Section 770 of the Act states thus:

“A partner’s contribution may consist of tangible, intangible, movable, immovable or property or other benefit to the limited liability partnership, including money, promissory notes, other agreements to contribute cash or property, and contracts for services performed or to be performed”

 

Extent of liability of a LLP[26]

A LLP will be liable where:

1.      Act of a partner in dealing with third parties- The Act considers a partner of a LLP an agent of the LLP for the purpose of the business of the LLP. Thus, in line with the principle of agency, the LLP is generally bound by the actions or steps taken by the partner for the purpose of the LLP business. However, there are circumstances where the LLP is not bound by the actions of a partner in dealing with a third party. Section 766 (1) of Act provides for two exceptions as follows:

  1. Where the partner does not have the authority of the LLP to do a particular act; and

 

  1. Where the third party with whom the partner deals knows that the partner has no authority to so act, does not know or believe him to be a partner of the LLP.

 

2.      Liability of a Partner to a person in the course of the business of the LLP – the LLP is liable where a partner of the LLP 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 the LLP’s authority.

3.      Obligation arising in contract – obligation (s) of the LLP arising in contract shall be the sole obligation of the LLP.

A LLP will not be liable where:

1.      Person holding out himself as a partner of a LLP- a LLP will not be liable to a person who gives credit to the LLP on account of a person who by words spoken or written or by conduct, represents himself, or knowingly permits himself to be represented as a partner in the LLP. However, where the LLP received credit as a result of the misrepresentation, the LLP shall be liable to the credit received by it or any financial benefit derived thereon.[27]

2.      Liability in cases of fraud - The LLP is liable to the same extent as its partner for the fraudulent act of the partner unless it is established by the LLP that the act was carried out without the knowledge or the authority of the LLP. The intention of the law is to prevent fraudulent practices by the partners.[28]

 

Investigation of the Affairs of LLP

The affairs of a LLP could be subject to investigation by –

  1. an order of court;

  2. an application of at least one-fifth of the total number of partners of the LLP;

  3. an application of the LLP; or

  4. the suggestion of the Commission;

An application for investigation by the partners must be accompanied by supporting evidence and security amount as may be prescribed.

 

Winding up and dissolution

The winding up of a LLP may be effected –

  1. voluntarily

  2. by the court

By Section 790 of the Act, a LLP may be wound up by the court if-

  1. The partners decide that the LLP be wound up by the court;

  2. The number of partners falls below two for a period exceeding six months;

  3. The LLP is unable to pay its debts;

  4. The LLP has acted against the sovereignty and integrity of Nigeria or against her security or public order;

  5. The LLP has defaulted in filing the statement of account and solvency or annual return with the Commission for any 10 consecutive financial years; or

  6. The court is of the opinion that it is just and equitable that the LLP should be wound up.

 

Taxation

A LLP enjoys a tax advantage over a company. This is so because a LLP is not regarded as a separate entity for tax purposes. A LLP is treated as a partnership, thus the individual and corporate partners are subjected to personal income tax on their share in the partnership profit.[29] Where a partner is a designated partner, his remuneration (if any) for his administrative functions will be subject to personal income tax.[30]

The definition of a company in the Company Income Tax Act[31] does not extend to a partnership. Thus, the company income tax is not applicable to a partnership as such would amount to double taxation on the partnership earnings.

 

Conclusion

The recognition of a LLP by the Companies and Allied Matters Act, 2020 is a welcome and a long awaited development. It affords small business owners the opportunity to partner in a business venture while enjoying limited liability as in a company and the tax advantage and flexibility of a partnership.

It is expected that court-based adjudication on disputes and differences most likely to arise amongst the partners under the LLP agreement will enhance the interpretation of key provisions and further inform our understanding of the LLP in Nigeria.

__________________

Shelley Anoka

Rosefields Solicitors.

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References

[1] CAMA, 2020, s. 869 (1)

[2] Ibid.  ss 746-810

[3] The Partnership Act of 1890 is applicable in Nigeria as a statute of general application in force in England by 1st January, 1900. However, this Act is not applicable in the states of the former Western and Midwestern Regions, since the Region passed a Partnership Law in 1959.

[4] The Partnership (Amendment) Law, 2009, Cap. P1, Laws of Lagos State of Nigeria, 2015 governs and regulates Limited Partnership and Limited Liability Partnership carrying on business within the State of Lagos.

[5] CAMA, 2020, s.746 (1)

[6] Ibid. s.754 (1)

[7] Ibid. s. 757 (1)

[8] Ibid. s. 756

[9] Partnership (Amendment) Law, 2009, Cap. P1, Laws of Lagos State of Nigeria, 2015

[10] CAMA, 2020, s. 19(1) & (2) and s. 748

[11] s. 5 (1) of the Rules of Professional Conduct for Legal Practitioners, a subsidiary legislation of the Legal Practitioners Act, Cap L11, LFN 2004.

[12] CAMA, 2020, s.868 (1)

[13] Ibid. s. 749 (4)

[14] Ibid. s. 755 (4)

[15] Ibid. s. 760 (1) (a)

[16] Ibid. s. 762 (2)

[17] Ibid. s. 764 (2)

[18] Ibid. s. 764 (2)

[19] CAMA, 2020, s. 772 (1)

[20] Ibid. s.772 (2) & (3)

[21] Ibid. s. 772 (4); s. 868 (1) defines Minister to mean the Minister charged with the responsibility of trade.

[22] Ibid. s.773 (1)

[23] Ibid. s.779 (1)

[24] Ibid. s.791

[25] s. 8, Personal Income Tax, Cap. P8, LFN, 2004.

 

[26] CAMA, 2020, s. 766

[27]CAMA, LFN, 2004, s. 768(1)

[28] Ibid. s. 769 (1)

[29] s. 29 (8) of the Company Income Tax Act recognizes the profit sourced by a corporate partner from its engagement in a partnership as a separate profit and the taxable portion of that profit shall be determined under the Personal Income Tax Act in like manner as that of an individual partner in that partnership

[30] s. 8, Personal Income Tax Act, Cap. P8, LFN, 2004

[31] s. 105 of the CITA defines a company to mean “any company or corporation (other than a corporation sole) established by or under any law in force in Nigeria.)

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