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Unit 6: Articles of Association

fundamental levels in the WTO regime. At the government level, at the revenue authorities Notes
level and at the business unit level.” China was surprised. “Wow! These CA students are
so analytical,” he told himself. “You mean to say, accounting firms will have opportunities
at the international level,” queried Muskan, Wafer’s niece. She was in Class X.

“Yeah,” said Wafers. And added, “Actually, the opportunities are not just in the industry.
They are in practice as well.” China remarked, “But that comes with a huge price. If the
pink papers are to be believed, accounting firms in the US have millions of dollars worth
of legal suits pending against them.” Muskan asked, “So?” “So,” replied China, “the
liberalised trade scenario which offers potential to provide services across international
borders will augment greater liability to firms in case of default.” Muskan looked definitely
confused.
Wafers explained. “Legally, accounting firms in India are allowed to function as sole
proprietary concerns or as partnership firms. A partnership is the relationship between
persons who have agreed to share the profits of a business carried on by all or anyone of
them acting for all.” This set Muskan thinking. “So will I be liable for my partners’
shortcomings even if I have been honest in conducting my duties,” she asked. “That’s the
general idea,” said China impressed by the kid asking the right questions.

“This traditional model is not equipped to meet the multi-competency, multi-disciplinary
and multi-locational requirements of today’s global and domestic clients,” said China.
Wafers added, “Moreover, the major chunk of all benefits is drawn by the creamy layer of
large firms.” She had read a research report on “Who are India’s top auditors and how
much do they charge,” which had, among others, documented the great divide in the
accounting profession. “This is why the accounting fraternity is in favour of limited liability
partnership,” (LLP) she added. “But what is LLP?” asked China. Ha, that’s why she loved
China. The walking encyclopaedia had no inhibitions about seeking a clarification on a
doubt, if he had one.

“A limited liability partnership is a form of organisation which shields a partner’s assets
from limitless liabilities that may accrue from the omissions and commissions of other
partners,” answered Wafers. Not for nothing was Wafers considered strong in law. “In
LLP, every partner will be an agent of the partnership and not of the other partners,” she
added. “Isn’t this a merger of the partnership form of organisation and the company
form?” remarked China.
“Exactly,” said Wafers. “It promises perpetual succession and a distinct legal identity were
it to become law. Further, it requires only a minimum of two partners, having no cap on
the maximum number of partners a firm can have,” she added. “Section 11,” said China
hurriedly, “of the Companies Act bars the formation of a partnership consisting of more
than 20 persons. Won’t the firm have to register itself as a company?” “Yes and No.” said
Wafers “If LLP becomes law, Section 11 will have to be amended. The idea is to make LLP
a vehicle for business expansion.

“How?” asked Muskan. Replied Wafers, “Because of the legal stipulation of unlimited
liability among partners, Indian partnerships are mostly restricted to family members
and persons who know each other thoroughly.” She added, “LLP being a form of
partnership having characteristics of a company will limit liability in the case of business
failure or professional negligence litigation to the partner responsible.” “You mean, only
the negligent partner will be penalised and not the whole firm,” asked China. “Yes,” said
Wafers.

Contd...

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