Ben Oregbemhe October 7 2013 Review of LLPs under the Partnership Law of Lagos State SPA Ajibade & Co | Corporate & Commercial - Nigeria Ben Oregbemhe Corporate & Commercial BackgroundNature of an LLPLegal personalityLiabilityRegistrationRegulationJurisdictionCommentBackgroundThe scope and nature of business enterprise in Lagos State has been reinvigorated since the introduction of limited liability partnerships (LLPs). The Partnership Law of Lagos State 2003 was amended in 2009 to provide for LLPs, whose introduction has given new impetus to the general partnership laws in the state.The global increase in litigation resulting in the personal liability of partners and the consequent threat to partnership firms and their partners have necessitated the introduction of a dynamic form of partnership that provides for a limitation of liability analogous to that enjoyed by directors of limited liability companies. This is timely and important, particularly for individuals and groups providing professional services. In the same vein, the desire to protect investors and keep up with the growing trend of LLPs in emerging economies across the globe encouraged the Lagos State government to push for the creation of LLPs.However, the UK Partnership Act 1890, a statute of general application, is still applicable in most Nigerian states, with the exception of a few (eg, Lagos State) which have enacted their own partnership laws. In amending the Partnership Law to include LLPs, the Lagos government affirmed the essence and importance of LLPs to the growth and development of businesses. According to the state government, the law is essentially a legal vehicle for the association of persons who intend to engage in a joint trade or business for profit, allowing them to enjoy most of the benefits afforded to limited liability companies.The amended law introduced the concept of LLPs into the scheme of relationships among types of business partnership and set out the procedure for forming LLPs. Investors that register their businesses as LLPs under this law enjoy reduced responsibility in the event that the partnership breaks up or the venture fails.Nature of an LLPLLPs are provided for in Part 4 of the Partnership Law and are subject to the conditions contained therein.LLPs generally combine the benefits of a corporate structure (eg, limited liability companies) with those of a partnership structure, and may best be described as a hybrid between an incorporated company and a partnership.Before the inception of LLPs, a partnership could not benefit from limited liability protection. As stated by the court in Cox v Hickman,(1) "the liability of one partner for the acts of his co-partners is in truth the liability of a principal for the acts of his agent".However, with the amendment of the Partnership Law, limited liability protection is now available under an LLP. Generally, an LLP is a partnership where some or all partners enjoy limited liability. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation, and one partner is not responsible or liable for another partner's misconduct or negligence.There is no definition of 'LLP' under the Partnership Law. Rather, the law focuses on the requirements for forming an LLP and the liability of its members. This differs from the UK position, where the Limited Liability Partnerships Act 2000 defines an 'LLP' as a body corporate (with legal personality separate from that of its members), which is formed through incorporation.A definition of an 'LLP' under the Partnership Law would be beneficial, in that it would clarify the boundaries between LLPs and other forms such as as general partnerships or a limited partnerships. A definition would also help in drawing a comparison with LLPs in other jurisdictions and facilitate understanding of how the structure of LLPs in Nigeria is coloured by the local environment.Legal personalityGenerally in law, a partnership has no independent corporate legal existence distinct from that of its members. The Partnership Law is based on the law of agency, with each partner becoming an agent of the others.Section 58(4) of the Partnership Law confers legal personality on an LLP, as it can sue and be sued in its registered name. A significant aspect of an LLP is that a partner will be liable to be sued in his or her personal capacity for acts of the partnership in case of fraud, misrepresentation or other alleged improper conduct. An LLP partner will also be liable where it is established that it is in the reasonable interest of the public for an action to be maintained against such individual. However, such action can be maintained only through written consent by the commissioner for justice.The converse is the case under a general partnership, where each partner is an agent of the firm and his or her other partners for the purpose of the business of the partnership. The actions of each partner in the course of conducting the normal business of the firm of which he or she is a member bind the firm and his or her partners, unless the partner has no authority to act on behalf of the firm in the particular matter and the person with whom he or she is dealing either has knowledge of this or does not know or believe him or her to be a partner.The main feature of a partnership is the relationship between the members, whereas with an LLP it is the act of association that creates the entity. This rests on the fact that in a partnership, each member is an agent of the partnership and an agent of the other partners, whereas in an LLP each partner is an agent of the LLP itself, but not of the other partners.However, the extent of legal personality derivable under the Partnership Law raises certain questions as to whether incidents of legal personality arise under Section 58(4), which provides that:"A Limited Liability Partnership may sue and be sued in its registered name…however a limited liability partner will be liable to be sued in his personal capacity for acts of the partnership in the following circumstances:(a) Cases of fraud, misrepresentation and other conduct alleged to have been committed by the limited liability partner;and(b) With the written consent of the Commissioner where it is established that it is in the reasonable interest of the public for an action to be maintained against an individual limited liability partner."The answer to this is in the affirmative. However, a further implication of this section is that separate legal personality does not necessarily insulate partners from personal liability with regard to third parties. In fact, the thrust of the law lies in the extent of liability that can be incurred by the partners of the business. The entities on which the law ascribes legal personality are:human beings;companies incorporated under the Companies and Allied Matters Act 2004;corporations sole with perpetual succession;trade unions;partnerships; andfriendly societies.(2)LiabilityUnder a general partnership, each partner in the firm is liable jointly with other partners for all debts and obligations incurred while he or she is a partner of the firm; further, in the event of a partner's death, his or her estate is also severally liable in due course of administration for unfulfilled debts and obligations, subject to the prior payment of his or her separate debts.Section 75(3) of the Partnership Law provides that an LLP partner shall not be liable for the debts, acts or omissions of the LLP beyond the amount subscribed by such partner under the registration or partnership agreement. The general implication of this is that partners in an LLP are personally immune to lawsuits if the LLP is taken to court. This differs from limited partnerships, which must consist of one or more persons ('general partners'), at least one of whom must have unlimited liability.RegistrationThe requirements that partners take out indemnity bonds and maintain professional liability insurance as a prerequisite for registration ensures the protection of the public. Section 60 of the Partnership Law sets out the conditions which must be met in order to register an LLP. Having an existing partnership in place is a prerequisite for registering an LLP. The law also provides that two or more persons associated with conducting lawful business with a view to making profit must add their names to the registration document, which must be submitted to the registrar of limited partnerships along with a partnership agreement, where such exists.In addition, the subscribers or the legal adviser engaged in the formation of the LLP must provide the registrar with a statement confirming that the requirement that two or more persons associated with conducting lawful business with a view to making profit have added their names to the registration document has been met.However, the position is different in the United Kingdom, India and several other jurisdictions in which LLPs are also provided for under the law. In such jurisdictions, LLPs are formed by an incorporation process that is similar to that for limited liability companies. For example, in the United States, each individual state has its own law governing the formation of LLPs, which typically requires the filing of certificates with county and state offices.For the purpose of registration as an LLP under the Partnership Law, all or a majority of the partners must agree that the partnership be registered as an LLP.The effect of registration, as provided for under Section 60, is to confer LLP status with its consequent protection from liability for the debts, acts or omissions of the partnership on its partners.The mere affixation of 'LLP' to a company name may not be conclusive proof of LLP status, as provided for by Section 62 of the Partnership Law. Only the production of a certificate of registration is conclusive evidence of LLP registration. This provision takes cognisance of the Supreme Court's decision in Magbagbeola v Sanni,(3) in which it was held that the best evidence of incorporation of a company is the production of the certificate of incorporation.All limited partnerships in Lagos State must be registered at the Lagos State Limited Partnership RegistryRegulationLLPs are regulated by the relevant law as administered by the state commissioner for justice, who possesses general regulatory powers to ensure that the law related to LLPs is administered in a manner that facilitates easy completion of registration and other processes under the law. To this extent, the Partnership Law falls outside the scope of the Companies and Allied Matters Act. Further, recourse may also be had to Section 66 of the Partnership Law, which provides that:"Except as otherwise provided by this law or any other enactment, the mutual rights and duties of the limited liability partners of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partnership and its partners, shall be governed:by agreement between the partners, or between the limited liability partnership and its partners, orin the absence of agreement as to any matter, by any regulations made under this Law incorporating any rules relating to partnerships in general and limited liability partners in particular."In the event of a conflict between any general law relating to partnerships and Part 4 of the 2009 Partnership Law (as may be amended from time to time), Part 4 has precedence, and such general law relating to partnerships shall be considered modified to the extent of any inconsistency in respect of its application to LLPs.This provision restricts the regulatory scope of an LLP to the agreement between the partners or the provisions of the Partnership Law. Section 81 of the Partnership Law provides that "nothing in this Law shall be construed as precluding the registration of a registered Limited Liability Partnership as a business name under any existing law".An existing LLP can still be registered as a business name, thus bringing it within the remit of Part B of the Companies and Allied Matters Act. Thus, the applicability of the act to an LLP extends only to an LLP being registered as a business name.Furthermore, in terms of regulation, the state commissioner for justice, in consultation with the registrar of limited partnerships, may make rules concerning fees to be paid and forms to be used in the registration of an LLP, as well as the general conduct and regulation of registration and any matter incidental to the operation of the law as provided for under Section 73 of the Partnership Law.By contrast, Section 15 of the UK Limited Liability Partnerships Act prescribes the applicability of company law, rather than partnership law. Under the UK act, despite the name, an LLP is specifically legislated as a corporate body rather than a partnership – that is, it has a continuing legal existence independent of its members, as compared to a partnership which may (but in England and Wales does not) have a legal existence dependent on its membership. In the United States, Section 306(c) of the Revised Uniform Partnership Act 1997 (a standard statute adopted by the majority of states) grants LLPs a form of limited liability similar to that of a corporation.JurisdictionThe position of an LLP which is registered in Lagos, but operates outside the state is that while it is regulated by the Partnership Law, outside state boundaries it will be bound by the partnership laws of the corresponding state. It may retain the abbreviation LLP, but in practice it may not operate as an LLP outside Lagos because there is no provision for the status of an LLP in other Nigerian states.In such circumstances, an LLP registered in Lagos has two options:to open offices in other states in furtherance of its business objectives. It may continue its business as a partnership – albeit not as an LLP – pursuant to the Partnership Act 1890, which is still being used by most Nigerian states; orto operate as a business name. Section 81 of the Partnership Law allows an existing LLP to be registered as a business name.CommentThe amendment of the Partnership Law to include LLPs is commendable. It is expected that this provision will engender the growth of more partnership groups that wish to restrict the liability to be incurred by their partners. The LLP provision has also created leeway for more individuals and professionals groups to aggregate their resources, while simultaneously limiting their liability in furtherance of their business objectives. However, the LLP provision is not a perfect piece of legislation and further amendments still need to be made. It is hoped that more individuals will embrace and take advantage of the provision for LLPs under the 2009 Partnership Law.For further information on this topic please contact Benedict Oregbemhe or Afolabi Odeleye at SPA Ajibade & Coby telephone (+234 1 472 9890), fax (+234 1 280 0987) or email ([email protected] or [email protected]).(1) (1860) 8 HL Cas 268.(2) See Fawehinmi v NBA (No2) 1989 2NWLR Pt 105.(3) (2005) 4 SCM.