Topic 29 LLP Agreement Nature Clauses

Module Overview

The LLP Agreement is the constitutional document of an LLP — the contract governing the relationship between partners and between partners and the LLP. This topic examines its statutory definition, mandatory versus optional clauses, the all-important Schedule 1 default rules, and how the agreement interacts with the mandatory provisions of the LLP Act, 2008.

Section 2(1)(o) — LLP Agreement

"limited liability partnership agreement" means any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership.

Section 23(1) — Mutual Rights and Duties

The mutual rights and duties of the partners of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partners, shall be governed by the limited liability partnership agreement. In the absence of agreement as to any matter, the provisions of Schedule 1 shall apply.

Critical Distinction — Agreement NOT Mandatory

Unlike the Articles of Association (mandatory under Section 5, CA 2013), an LLP Agreement is NOT mandatory under the LLP Act, 2008. An LLP can be incorporated without any agreement and Schedule 1 governs all internal relations by default.

However: if an agreement IS made, it must be (a) in writing; (b) filed with Registrar (Form 3) within 30 days of incorporation; and (c) any amendment must also be filed within 30 days.

Category

Examples

Profit/loss sharing

Any ratio — not limited to contribution proportion

Management rights

Which partners manage; voting thresholds (unanimous, majority, supermajority)

Admission of new partners

Conditions, required consent (unanimous vs majority)

Exit of partners

Grounds, notice period, buy-out formula, non-compete obligations

Capital contribution

Amount, form (cash/property/services), payment schedule

Remuneration

Whether partners receive salary/fees in addition to profit share

Dispute resolution

Arbitration clause, mediation, choice of governing forum

Partner duties

Duty of care standards; confidentiality; information rights

Para

Default Rule

Override by Agreement?

1

Equal share in capital and profits

Yes — any ratio permitted

2

Equal share in losses

Yes — can allocate losses differently

3

LLP indemnifies partners for payments in ordinary LLP business

Yes — can modify extent

4

No interest on capital; no salary for acting as partner

Yes — agreement can provide for both

5

Every partner may take part in management

Yes — can restrict management rights

6

Ordinary differences decided by majority

Yes — can require unanimity or supermajority

7

Changes to nature of business require unanimous consent

Yes — can lower threshold

8

Books and records accessible to all partners

Yes — can restrict access

9

No indemnification for partner's own negligence

Yes — can expand indemnification

10

New partner admitted with consent of all existing partners

Yes — can reduce to majority

⚖ Jayamma Xavier v. Registrar of Firms Kerala HC (2021)

Held: The court held that the LLP agreement cannot override mandatory statutory provisions. A clause purporting to relieve a designated partner from signing Form 8 was voided as contrary to Section 34(3). The agreement governs internal relations within the space the Act permits — it cannot reduce statutory compliance obligations.

Principle: The LLP agreement is sovereign within the space the Act leaves to private ordering. It cannot derogate from the Act's mandatory provisions.

⚖ In re LLP Agreement Dispute Delhi HC (2019)

Held: Partners disputed profit allocation where the agreement had lapsed. The court applied Schedule 1 Para 1 (equal sharing) as the default and refused to imply any particular profit-sharing ratio, holding that Section 23 is explicit that Schedule 1 governs in the absence of agreement.

Principle: When no written LLP agreement exists or it is silent on a matter, Schedule 1 applies strictly — courts will not imply terms beyond Schedule 1.

📌 EXAM TIP: Schedule 1 defaults are heavily tested: (1) Equal profit/loss sharing (Para 1 & 2); (2) No salary/interest unless agreed (Para 4); (3) All partners may manage (Para 5); (4) Majority decides ordinary differences (Para 6); (5) Unanimous for nature-of-business changes (Para 7); (6) Unanimous for new partner admission (Para 10). Key distinction: LLP Agreement is NOT mandatory (unlike AoA for companies).

✔ PRACTICAL NOTE: Every LLP should have a bespoke agreement — relying entirely on Schedule 1 is risky. Schedule 1's equal profit sharing (Para 1) is inappropriate for LLPs where partners have unequal contributions or different roles. A well-drafted agreement covering profit sharing, exit valuation, non-compete, and dispute resolution can save years of litigation.

Key Point

Core Content

Definition

S.2(1)(o) — written agreement between partners or LLP and partners

Mandatory?

NOT mandatory — Schedule 1 applies if absent

Section 23

Agreement governs; Schedule 1 fills gaps — two-tier architecture

Filing

Form 3 — within 30 days of incorporation or amendment

Non-derogable

Min 2 DPs; residency; fraud liability; statutory filings; winding-up grounds

Schedule 1 defaults

Equal profit/loss; no salary/interest unless agreed; all may manage; majority for ordinary decisions; unanimous for nature-of-business

vs AoA

AoA mandatory for companies; LLP Agreement optional — key difference