New Kid in Town

Lee Ai Hsian introduces the new form of business entity under the Limited Liability Partnerships Act 2012.

The Limited Liability Partnerships Act 2012 ("Act") became law when it was published in the Gazette on 9 February 2012. It is expected to come into operation later this year.

In this first of a two-part article, we will discuss the main features of the Act.

References in this article to a “Part”, “Schedule” or “Section” are references to a Part, Schedule or Section respectively of the Act.

FUNDAMENTALS OF A LIMITED LIABILITY PARTNERSHIP

The provisions of the Partnership Act 1961 and the rules of equity and of common law applicable to partnerships do not apply to a limited liability partnership ("LLP") (Section 4).

The key features which distinguish an LLP from a conventional partnership are as follows:

  • An LLP is a body corporate and is a separate legal entity from that of its partners (Section 3(1));

  • An LLP enjoys perpetual succession (Section 3(2));

  • Any change in the partners of an LLP does not affect the existence, rights or liabilities of the LLP (Section 3(3));

  • An LLP is capable of suing and being sued, acquiring, owning, holding and developing or disposing of property and doing and suffering such other acts and things as bodies corporate may lawfully do and suffer (Section 3(4));

  • An obligation of an LLP, whether arising in contract, tort or otherwise, is solely the obligation of the LLP. A partner remains personally liable in tort for his own wrongful act or omission but is not liable for the wrongful acts or omissions of the other partners of the LLP. The LLP is liable to the same extent as the partner who commits a wrongful act or omission in the course of the LLP’s business or with its authority and the liabilities of the LLP are to be borne out of the property of the LLP (Section 21); and

  • Every partner is an agent of the LLP and has the power to bind the LLP when the partner is acting within authority and the person with whom the partner is dealing with knows that the partner has authority or that he is a partner of the LLP (Section 23).

 

 

FORMATION AND REGISTRATION

General

Section 6 provides that, subject to Sections 7 and 8, two or more persons, whether individuals or bodies corporate, associated for carrying on any lawful business with a view to profit may form an LLP in accordance with the terms of an LLP agreement (“Agreement”). In view of the requirements of Section 6, an LLP may not be formed for a social, recreational or charitable purpose.

Section 13 requires the name of an LLP to end with the expression “Perkongsian Liabiliti Terhad” or the abbreviation “PLT”.

Application for registration of an LLP

An application for registration of an LLP must include a statement signed by every person who is to be a partner of the LLP which sets out the particulars specified in Section 10(2), namely:

  1. the name of the proposed LLP;
  2. the general nature of the proposed business of the LLP;
  3. the proposed registered office of the LLP;
  4. the name, nationality and usual place of residence of every proposed partner and where a partner is a body corporate, its corporate name, place of incorporation or origin, registration number and registered office;
  5. the name, nationality and usual place of residence of every person who is to be a compliance officer of the LLP; and
  6. such other information as the Registrar may specify.

Notice and certificate of registration of LLP

Upon being satisfied that the requirements for registration under the Act have been complied with, the Registrar will register and allocate a registration number to the LLP as well as issue a notice of registration under Section 11(1)(b). The LLP is deemed to come into existence on and from the date of registration stated in the notice of registration (Section 11(2)).

An LLP may apply to the Registrar for the issue of a “certificate of registration”. Although the certificate of registration appears to be a different document from the notice of registration issued under Section 11(1)(b), the Act does not explain the difference between these two documents.

Professional practice partnerships

Section 8 permits an LLP to be formed for the purpose of carrying on a “professional practice”. “Professional practice” as defined in the Act is confined to the professions stipulated in the First Schedule, namely chartered accountants, advocates and solicitors and secretaries.

Unlike other forms of an LLP, the partners of a professional practice LLP must consist of natural persons who are practising the same profession. Such an LLP must have in force a professional indemnity insurance cover for an amount approved by the Registrar or specified by a governing body of the professional practice, as the case may be.

In addition to the requirements of Section 10(2), an application to register a professional practice LLP is to be accompanied by a letter of approval from the relevant governing body (Section 10(3)).

LLP Agreement

Except as otherwise provided in the Act, the rights and duties of the partners of an LLP as between themselves, and as between the LLP and its partners, are to be governed by the Agreement. In the absence of specific provisions in the Agreement on the matters specified in the Second Schedule, the relevant provisions of the Second Schedule will apply (Section 9(1)).

 

OTHER OBLIGATIONS AND FEATURES

Some of the other notable obligations and features of an LLP include the following:

  1. Compliance officer - An LLP is required to appoint at least 1 compliance officer from amongst its partners or persons who are qualified to act as secretaries under the Companies Act 1965 (“Companies Act”). The responsibilities of a compliance officer are similar to that of a secretary of company. He must be a citizen or permanent resident of Malaysia and ordinarily resides in Malaysia (Section 27);

  2. Annual declaration - Every LLP is required to lodge with the Registrar an annual declaration by any 2 of its partners that, in their opinion, the LLP appears or does not appear to be able to pay its debts as they become due in the normal course of business (Section 68);

  3. Accounts and other records - Every LLP is required to keep such accounting and other records which will sufficiently explain the transactions and financial position of the LLP as well as give a true and fair view of the state of affairs of the LLP. Such records are to be retained for not less than 7 years. The accounts of an LLP need not be audited unless required under the Agreement (Section 69);

  4. Carrying on business with less than 2 partners - If an LLP carries on business with fewer than 2 partners beyond a period of 6 months or such longer period as may be permitted by the Registrar under Section 7(1), a person shall be personally liable, jointly and severally, with the LLP if at the time when the obligation was incurred, that person was a partner of the LLP and knew or ought to have known that the LLP was carrying on business with less than 2 partners beyond the period permitted under Section 7(1) (Section 7(2));

  5. Receivership and winding-up by the Court – Subject to the necessary modifications: (i) Part VIII of the Companies Act governs the receivership of an LLP, and (ii) Divisions 2 and 4 of Part X of the Companies Act and the Companies (Winding-up) Rules 1972 apply to the winding-up of an LLP by the Court (Sections 49(1)(a) and 49(1)(b));

  6. Voluntary winding-up - The procedures and laws that govern the voluntary winding-up of an LLP are set out in Section 50. An LLP which is unable to pay its creditors is not permitted to initiate a voluntary winding-up unless its creditors waive their claims against the LLP; and

  7. Foreign LLPs - Section 44 provides that a foreign LLP may not carry on business in Malaysia unless it is registered as a foreign LLP under the Act. The Third Schedule sets out a list of 10 activities which do not constitute the “carrying on of business.” These activities include (i) being a party to legal proceedings, (ii) holding meetings or carrying on other activities concerning its internal affairs, (iii) maintaining a bank account, (iv) effecting any sale through an independent contractor, (v) soliciting or procuring any order which becomes a binding contract only if the order is accepted outside Malaysia, (vi) conducting an isolated transaction that is completed within 31 days, not being one of a number of similar transactions and (vii) investing its funds or holding property.

 

CONVERSION

The Act permits a conventional partnership and a private company to convert to an LLP. The procedures for conversion and legal issues that arise from this process will be discussed in the next issue of LEGAL INSIGHTS.

CONCLUSION

The passing of the Act is timely as an LLP provides an alternative form of business entity to a conventional partnership and a company. An LLP provides the benefits of limited liability normally associated with companies whilst allowing its partners the flexibility of adopting an internal structure akin to a conventional partnership.

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