Extent of Liability of LLP and Partners (Sections 26–31)

The entire commercial appeal of the limited liability partnership rests on one promise: a partner can carry on business, bind the firm, and yet not lose his house if the venture collapses. Sections 26 to 31 of the Limited Liability Partnership Act, 2008 are the statutory engine that delivers that promise. They tell us who acts for whom (the partner is the agent of the LLP, not of fellow partners), whose pocket bears the debt (the LLP's property, not the partner's), and where the protective wall cracks (fraud and holding out). For the judiciary and CLAT-PG aspirant, this cluster of sections is examined relentlessly because it sits at the precise intersection of agency, the law of partnership, and the corporate doctrine of separate legal personality. This chapter works through each provision with verified bare text, contrasts it sharply with the unlimited joint-and-several liability of an ordinary firm, and identifies the two doors through which personal liability re-enters.

The statutory scheme of Chapter V

Sections 26 to 31 form Chapter V of the LLP Act, 2008, titled "Extent and Limitation of Liability of Limited Liability Partnership and Partners." The architecture is deliberate and reads almost as a single connected argument. Section 26 establishes the agency relationship; Section 27 fixes liability on the LLP and ring-fences it as the LLP's sole obligation; Section 28 protects the individual partner; Section 29 imports the equitable doctrine of holding out; Section 30 punctures the shield where fraud is present; and Section 31 protects whistle-blowers who expose wrongdoing within the firm.

This scheme is the operational heart of what the Act promises in its preamble. As explained in the introduction to the LLP Act, the LLP was conceived as a hybrid that fuses the internal flexibility of a partnership with the limited-liability and perpetual-succession features of a company. Chapter V is where that hybrid character becomes legally concrete. The key to reading these sections correctly is to remember that the LLP is, under Section 3, a body corporate with a legal personality separate from its partners. Everything in Chapter V flows from that single foundational fact, which is developed at length in the chapter on the nature of an LLP as a body corporate.

Because the LLP is a distinct legal person, it can owe debts in its own name, hold property in its own name, and be sued in its own name. The partners are not the LLP; they are its agents and members. That distinction, drawn directly from company-law jurisprudence, is the reason a partner's exposure can be capped while the entity's exposure remains full.

Separate legal personality: the foundation of limited liability

The protective effect of Sections 27 and 28 is only intelligible against the backdrop of separate legal personality. The principle traces back to the House of Lords' decision in Salomon v. A. Salomon & Co. Ltd. [1897] AC 22, where it was held that a duly incorporated company is in law a distinct person altogether from its members, so that the company's debts are the company's alone and not those of the shareholders, even where one person effectively controls it. That single proposition, that incorporation creates a veil between the entity and its members, is the conceptual ancestor of LLP liability.

Indian courts adopted and applied the same principle to corporate bodies. In Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40, the Supreme Court reaffirmed that a company is a separate juristic entity distinct from its shareholders and declined to lift the corporate veil merely because the shareholders were Indian citizens, holding that the corporation itself was not a citizen and could not borrow its members' fundamental rights. The same logic governs the LLP: the entity's separate personality is real and is not to be disregarded except where the statute itself directs otherwise, as it does in Section 30 for fraud.

Section 27(3) gives statutory voice to Salomon in the LLP context by declaring that an obligation of the LLP, whether in contract or otherwise, is solely the obligation of the LLP. Section 27(4) completes the thought: the liabilities of the LLP shall be met out of the property of the LLP. The creditor's recourse is to the firm's assets, not to the partners' private estates.

Section 26: Partner as agent of the LLP

Section 26 is short but structurally decisive. It provides: "Every partner of a limited liability partnership is, for the purpose of the business of the limited liability partnership, the agent of the limited liability partnership, but not of other partners." Two ideas are packed into this sentence.

First, the partner is an agent of the LLP. This means the ordinary principles of agency apply: acts done by a partner within the scope of the LLP's business, or with its authority, bind the LLP as principal. The partner is the hand; the LLP is the body that is bound. This is what makes the LLP capable of transacting at all, since a body corporate can only act through human agents.

Second, and this is the radical departure from ordinary partnership law, the partner is not the agent of the other partners. In a traditional firm governed by the Indian Partnership Act, 1932, Section 18 makes every partner an agent of the firm and mutual agency between partners is the very test of partnership recognised in Cox v. Hickman (1860) 8 HLC 268, where the House of Lords held that the true test of partnership is whether the business is carried on by persons acting as agents for one another. The LLP deliberately severs that mutual agency. One partner's act does not automatically make a co-partner personally liable, precisely because there is no agency relationship running between the partners themselves. This severance is the doctrinal hinge on which Section 28's protection turns, and it is reinforced by the framework of mutual rights and duties of partners set out in the Act and the LLP agreement.

Section 27: Extent of liability of the LLP

Section 27 has four sub-sections, and each does distinct work. Sub-section (1) deals with the limits of a partner's authority: an LLP is not bound by anything done by a partner in dealing with a person if the partner in fact has no authority to act for the LLP in doing that particular act, and the person either knows that the partner has no authority or does not know or believe him to be a partner of the LLP. This protects the LLP against unauthorised dealings where the third party is not innocent or is not relying on partnership status, a statutory echo of agency principles on apparent versus actual authority.

Sub-section (2) is the central liability rule: the LLP is liable if a partner is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the LLP or with its authority. This is vicarious liability of the principal for the agent's tort or wrong committed in the course of business, the same conceptual structure as a master's liability for a servant's act in the course of employment.

Sub-section (3) declares that an obligation of the LLP, whether arising in contract or otherwise, shall be solely the obligation of the LLP. Sub-section (4) provides that the liabilities of the LLP shall be met out of the property of the LLP. Read together, sub-sections (3) and (4) deliver the entity-shielding promise: the debt belongs to the firm and is paid from the firm's assets. The partner who entered the contract on the LLP's behalf does not thereby make the obligation his own. This is the contractual counterpart of the Salomon principle examined above, and it is the reason creditors of an LLP look first and last to the LLP's balance sheet.

Section 28: Extent of liability of the partner

Section 28 is the shield itself, and it has two sub-sections that must be read with surgical care because they balance protection against accountability. Sub-section (1) provides that a partner is not personally liable, directly or indirectly, for an obligation referred to in Section 27(3), solely by reason of being a partner of the LLP. The qualifier "solely by reason of being a partner" is critical: mere membership of the LLP attaches no personal liability for the firm's contractual or general obligations.

Sub-section (2) then carves out the limit of that protection. It states that Section 27(3) and Section 28(1) shall not affect the personal liability of a partner for his own wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the LLP. This produces a precise allocation: a partner remains answerable for the consequences of his own tort or default, yet he is insulated from the wrongs of his co-partners.

This is the single most important contrast with the ordinary partnership. Under Section 25 of the Indian Partnership Act, 1932, every partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner. In a general partnership the misconduct of one partner can bankrupt all of them. The LLP reverses this. Because Section 26 has already abolished mutual agency between partners, Section 28(2) can safely confine each partner's personal liability to his own wrongdoing. The innocent partner of an LLP sleeps soundly; the innocent partner of a general firm does not. This protective allocation is one of the structural advantages that makes the LLP attractive to professionals, as discussed in the chapter on the nature of an LLP.

Personal liability for one's own wrongful act

It is a common examination trap to assume that the LLP form gives a partner blanket immunity. It does not. The combined effect of Sections 27(2) and 28(2) is a two-track liability. Where a partner commits a wrongful act or omission in the course of the LLP's business, Section 27(2) makes the LLP vicariously liable to the injured person; but Section 28(2) preserves the partner's own personal liability for that wrong. The wrongdoing partner and the LLP can therefore both be liable to the third party, the LLP as principal and the partner as the actual tortfeasor.

What the partner is protected against is the wrong of another partner. If partner A commits professional negligence while partner B was on holiday and knew nothing of the matter, B is not personally liable for A's negligence, although the LLP itself is liable under Section 27(2) and A is personally liable under Section 28(2). The creditor or victim can therefore reach the LLP's assets and A's personal assets, but not B's. This is the LLP's defining feature and the reason it is favoured by professional firms whose members do not wish to be ruined by a colleague's malpractice.

The practical lesson is that limited liability in an LLP is liability limited to the firm's assets plus the wrongdoer's own assets where he personally committed the wrong, not an absolute personal immunity. A partner can never contract out of liability for his own fraud or his own tort.

Section 29: Liability by holding out

Section 29 imports into LLP law the venerable equitable doctrine of holding out, also called partnership by estoppel. Sub-section (1) provides that any person who by words spoken or written, or by conduct, represents himself, or knowingly permits himself to be represented, to be a partner in an LLP is liable to any person who has on the faith of such representation given credit to the LLP, whether or not the person representing himself knows that the representation reached the person giving credit. A proviso adds that where credit is so received, the LLP is liable to the extent of the credit received or any financial benefit derived.

This mirrors Section 28 of the Indian Partnership Act, 1932, which lays down the identical principle for ordinary firms, that one who holds himself out as a partner is liable as a partner to whoever has given credit on the faith of that representation. The doctrine rests on estoppel: a person who creates a false appearance of partnership cannot later deny it to the prejudice of one who relied on it. The classic articulation of the principle, that the holding out must have induced the giving of credit, is reflected in English authority such as Smith v. Bailey on representation-based liability, and the rule is firmly part of Indian partnership doctrine.

Sub-section (2) supplies a humane limitation: where after a partner's death the LLP's business is continued in the same LLP name, the continued use of that name, or of the deceased partner's name as part of it, does not of itself make the deceased's legal representative or his estate liable for any act of the LLP done after his death. The estate is not held out merely because the firm trades on under the old name. Holding-out liability is therefore an exception to the protective scheme, but a narrow one, triggered only by representation actually relied upon by a creditor.

Section 30: Unlimited liability in case of fraud

Section 30 is the most important crack in the LLP shield and the provision examiners love most. Sub-section (1) provides that in the event of an act carried out by an LLP, or any of its partners, with intent to defraud creditors of the LLP or any other person, or for any fraudulent purpose, the liability of the LLP and of the partners who acted with intent to defraud, or for any fraudulent purpose, shall be unlimited for all or any of the debts or other liabilities of the LLP. A proviso states that where such an act is carried out by a partner, the LLP is liable to the same extent as the partner unless the LLP establishes that the act was without its knowledge or authority.

This is the statutory equivalent of lifting the veil. Where fraud is present, the careful separation between entity and partner that Sections 27 and 28 erect is set aside, and the fraudulent actor's liability becomes unlimited. The principle is the same one Indian courts apply when they lift the corporate veil to reach individuals who have used a corporate form for fraud, an exception recognised even in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40, where the Court acknowledged that the veil may be lifted in cases of fraud or improper conduct although it declined to do so on the facts.

Sub-section (2) imposes criminal liability: every person who was knowingly a party to the carrying on of the business in the fraudulent manner is punishable with imprisonment and fine. Following the Limited Liability Partnership (Amendment) Act, 2021, which came into force on 1 April 2022, the maximum term of imprisonment was raised from two years to five years, with a fine of not less than fifty thousand rupees and up to five lakh rupees. Sub-section (3) provides for civil compensation: where an LLP, or any partner, designated partner or employee, has conducted the affairs of the LLP in a fraudulent manner, the LLP and such person shall, without prejudice to any criminal proceedings, be liable to pay compensation to any person who has suffered loss or damage by reason of such conduct, the LLP being excused only where it establishes the act was without its knowledge.

The scope of Section 30 and the burden of proof

Three features of Section 30 deserve close attention for examination purposes. First, the unlimited liability attaches only to those partners who acted with intent to defraud or for a fraudulent purpose. A partner who was genuinely ignorant of the fraud does not become unlimitedly liable merely because a co-partner committed it; this preserves consistency with Section 28(2). Fraud is personal and intent-based.

Second, the proviso to sub-section (1) and the exception in sub-section (3) place a reverse burden on the LLP: once a partner's fraudulent act is shown, the LLP is liable to the same extent unless it proves that the act was without its knowledge or authority. The statute thus makes the entity presumptively answerable for the fraud of its partners and requires the entity to exonerate itself, a strong protective stance towards the defrauded creditor.

Third, the word "fraud" carries its ordinary legal meaning of dishonest intention, and intent to defraud must be established; mere commercial failure, imprudent borrowing, or an inability to pay debts does not engage Section 30. The provision is aimed at deliberate dishonesty, not at honest business collapse. This is why the section sits comfortably alongside the limited-liability scheme: it does not dilute the protection for legitimate business risk-taking, but withdraws it entirely from those who weaponise the LLP form to cheat creditors.

Section 31: Whistle blowing

Section 31 is the enforcement complement to the fraud provisions and is frequently overlooked by candidates, which is exactly why it appears in objective papers. Sub-section (1) empowers the Court or Tribunal to reduce or waive any penalty leviable against any partner or employee of an LLP where it is satisfied that such partner or employee has provided useful information during the investigation of the LLP, or that information given by him (whether or not during an investigation) has led to the LLP, or any partner or employee of it, being convicted under the Act or any other Act.

Sub-section (2) provides protection against victimisation: no partner or employee of any LLP may be discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of his partnership or employment merely because of his providing, or causing to be provided, information pursuant to sub-section (1). This is a classic whistle-blower-protection clause, designed to encourage internal disclosure of fraud and misconduct by insulating the informant from reprisal.

The placement of Section 31 immediately after Section 30 is purposeful. Section 30 punishes fraud with unlimited liability and imprisonment; Section 31 incentivises insiders to expose that fraud by promising leniency and protection. Together they form a carrot-and-stick mechanism for policing dishonesty within the limited-liability structure.

LLP liability compared with firms and companies

The cleanest way to fix Chapter V in memory is comparison. In an ordinary partnership under the Indian Partnership Act, 1932, Section 25 imposes joint and several liability on every partner for all acts of the firm, and Section 18 makes every partner an agent of the firm with mutual agency between partners (the Cox v. Hickman test). Personal exposure is unlimited and collective. In a company under the Companies Act, 2013, the Salomon principle gives shareholders limited liability capped at the unpaid amount on their shares, and the company is a wholly separate person.

The LLP sits between these poles but leans heavily towards the company model. Like a company, it is a body corporate with separate personality (Section 3), its obligations are its own (Section 27(3)), and its partners enjoy limited liability (Section 28(1)). Unlike a general firm, there is no mutual agency between partners (Section 26) and no automatic joint-and-several personal liability. Yet, like a partnership, its internal governance is contractual and flexible, resting on the LLP agreement and the mutual rights of partners. The two situations where personal or unlimited liability re-enters, holding out (Section 29) and fraud (Section 30), are the same two equitable exceptions that pierce limited liability in company law. For a fuller treatment of the body-corporate character and how the LLP is brought into existence, see the chapters on the nature of an LLP and the procedure for incorporation, and return to the LLP Act hub for the full chapter map.

Examination takeaways

For rapid revision, hold these propositions firmly. (1) Under Section 26 a partner is the agent of the LLP but not of other partners, abolishing the mutual agency that defines an ordinary firm. (2) Under Section 27, the LLP is bound by a partner's authorised acts, is vicariously liable for a partner's wrongful act in the course of business, and its obligations are solely its own, met from its own property. (3) Under Section 28, a partner is not personally liable for the LLP's obligations merely by being a partner, and is not liable for a co-partner's wrong, but remains liable for his own wrongful act or omission. (4) Under Section 29, a person held out as a partner is liable to a creditor who gave credit on the faith of that representation. (5) Under Section 30, fraud makes the liability of the LLP and of the partners who acted fraudulently unlimited, with criminal punishment now up to five years' imprisonment after the 2021 Amendment, and civil compensation under sub-section (3). (6) Under Section 31, the Court or Tribunal may reduce or waive penalties for partners or employees who supply useful information, and such whistle-blowers are protected from victimisation.

The unifying theme is that the LLP's limited liability is genuine but conditional: it protects honest business risk and the innocent partner, but it is withdrawn the moment dishonesty (Section 30) or misrepresentation inducing credit (Section 29) enters the picture. Master the two exceptions and you have mastered Chapter V.