Designated Partner- Provisions Regarding a Designated Partner who is found to be of Unsound mind

To incorporate a Limited Liability Partnership, the basic requirement is two members who can act as partners and designated partners of Limited Liability Partnership. It is necessary for any individual to become a partner or designated partner to be fit in to the eligibility criteria of becoming a partner of an LLP. In this article we will discuss about the provisions regarding a Designated Partner who is found to be of unsound mind.

Limited Liability Partnership  

A limited Liability Partnership means a business where a minimum of two members are required and there is no limit on the maximum number of members. The liability of the members of an LLP is limited.

Designated Partner in LLP  

Designated Partners are similar to the Directors of a Private Limited Company. However, the Partner in an LLP when compared to the Director of a Company, enjoy more rights and privileges.

Eligibility Criteria for Partner in LLP

• As per section 5 of the Limited Liability Partnership Act, 2008, any individual or body corporate may become the partner in a LLP.
• However, an individual is prohibited from becoming a partner if,

➤ He is found to be of unsound mind;

➤ An undischarged insolvent; or

➤ He has applied to be adjudicated as an insolvent and his application is pending.

• Hence, if a person is of unsound mind, he will not be able to become a partner of a Limited Liability Partnership.

Provision regarding Designated partner found to be unsound mind

• First, the person of Unsound mind will not be able to become a partner of an LLP.
• However, at a later stage, a person shall cease to be a partner of an LLP if he is declared to be of unsound mind by a competent Court.
• Hence, if a designated partner is found to be of unsound mind, he shall be removed as per the provisions laid down in the LLP agreement.
• However, if there is nothing mentioned about the same in the LLP Agreement, then the Schedule I of the LLP Act, shall be applicable to the LLP.
• According to Schedule I of the LLP Act, a partner can be expelled with the consent of all the partners only. That means, majority of partners can not remove a partner from an LLP.

Process of removing a Partner of unsound mind from an LLP

• When one of the partners is declared of unsound mind, the other partner needs to file a notice to the Registrar of Companies in Form 4 within the 30 days of such declaration.
• Also, it is mandatory for the LLP to have minimum 2 partners. Hence, if there are only 2 partners, of which one is declared of unsound mind, the sole surviving partner has the right to continue operations of the Limited Liability Partnership for a period of 6 months.
• If within the 6 months, the remaining partner is not able to appoint one more designated partner, then the ROC may initiate winding off / striking off of the LLP.

Hence, to avoid striking off of LLP, the surviving partner shall appoint another Designated Partner within the 6 months. The LLP needs to file LLP Form 4 for the appointment of the new designated partner within the 30 days of such appointment along with the amended LLP Agreement in LLP Form 3.

Suggested Read: All about Partner and Designated Partner in LLP