Designated Partner, Internal Borrowing Limits and the Sleeping Partner's Liability in an LLP
Aarambh Design LLP was registered in 2019 with three partners: Rhea (designated partner, 45% contribution), Kabir (35%) and Naveen (20%, a sleeping partner). Clause 11 of the LLP agreement says: 'No partner shall, without the prior written consent of all partners, borrow more than ₹15 lakh at a time or create any charge on LLP property.' Clause 18 says: 'Rhea is the designated partner authorised to manage the day-to-day affairs and operate bank accounts.' In November 2024 Rhea borrowed ₹48 lakh from Sahayak Finance for working capital, signed the loan documents as designated partner, created a charge over the LLP's receivables, and added her personal guarantee on the last page. Sahayak's credit officer had obtained a copy of the LLP agreement in 2022 and it is on the lender's file. The LLP defaulted after three EMIs and the money was used for the LLP's rent and salaries. Sahayak has sued the LLP and all three partners personally for ₹44 lakh. Naveen says he is liable only to the extent of his agreed contribution, part of which is still unpaid. Kabir says he signed nothing.
1. Is the LLP bound by Rhea's borrowing and the charge she created? Apply the law of agency in the LLP Act, 2008 and the effect of the lender's knowledge of clause 11.
Read the worked answer
Partner as agent. Section 25 of the LLP Act provides that every partner is, for the purposes of the business of the LLP, the agent of the LLP but not of the other partners. Rhea's borrowing for working capital was within the ordinary course of the LLP's business, so prima facie the LLP is bound.
The statutory exception. Section 26 provides that an LLP is not bound by anything done by a partner in dealing with a person if (a) the partner in fact has no authority to act for the LLP in doing that particular act, and (b) the person knows that the partner has no authority, or does not know or believe the partner to be a partner of the LLP. Both limbs are satisfied here: clause 11 withdraws authority for borrowings above ₹15 lakh unless all partners consent, Rhea obtained no consent, and Sahayak's file contains the LLP agreement obtained by its own credit officer. That is actual knowledge, and a lender cannot rely on apparent authority against actual knowledge of its limits.
Designation is not enlargement of authority. Clause 18 authorises Rhea to manage day-to-day affairs and operate bank accounts. Designation makes her a designated partner for compliance purposes; it does not confer unlimited borrowing or charging power, particularly when the lender has the deed.
The charge. A charge created by a partner without authority, where the lender knows of the restriction, does not bind the LLP's assets. Registration of a charge, if any was filed, does not cure the absence of authority.
Residual claim. Because the ₹48 lakh was applied for the LLP's rent and salaries, the LLP received and retained the benefit. Sahayak may recover that benefit from the LLP under s.70 of the Indian Contract Act, 1872, on a claim for money had and received, but not on the strength of the unauthorised loan contract.
Conclusion. The LLP is not bound under the loan contract and the charge is unenforceable against its receivables; Sahayak's remedy against the LLP is restitutionary and limited to the benefit proved. Rhea is personally liable for the unauthorised borrowing and for breach of clause 11.
2. What is the extent of Naveen's and Kabir's personal liability to Sahayak?
Read the worked answer
Limited liability is the rule. An LLP is a body corporate with perpetual succession and a legal entity separate from its partners. Section 27 provides that a partner is not personally liable, directly or indirectly, for an obligation of the LLP solely by reason of being a partner; the obligation of the LLP is met out of its property, and a partner's liability is limited to the contribution agreed in the LLP agreement. Section 28 lifts that protection only where the LLP or a partner acts with intent to defraud creditors, in which case the liability becomes unlimited.
Naveen. He is a sleeping partner and took no part in the borrowing. He signed no loan document and made no representation to Sahayak. Nothing suggests fraud or intent to defraud creditors; an unauthorised borrowing by another partner, without more, is not fraud by the sleeping partner. His personal assets are therefore protected. His only obligation is to bring in the unpaid portion of his agreed contribution, which the LLP and its liquidator can enforce under the contribution provisions of the Act. That contribution, once paid, is available to all creditors but does not extend beyond the agreed amount.
Kabir. Not having signed anything is not decisive either way, but it reinforces that he made no representation. As a partner he is not personally liable for the LLP's obligations, and there is no allegation of a holding-out by him under which he allowed himself to be represented as personally liable.
The contrast with Rhea. Rhea is liable because she did the unauthorised act, gave a personal guarantee, and is liable for her own wrongful act; the LLP's protection does not extend to a partner's own wrong.
Conclusion. Sahayak's claim against Naveen and Kabir personally is unsustainable. The suit should be decreed against Rhea and, on a restitutionary basis, against the LLP; a decree against Naveen and Kabir can be passed only for their unpaid contributions, and only in favour of the LLP or in winding up.
3. Is Rhea's personal guarantee enforceable by Sahayak if the LLP itself is not bound, and what is her position if the guarantee fails?
Read the worked answer
A guarantee needs a principal debt. Under s.126 of the Contract Act a contract of guarantee is a collateral contract to perform the promise or discharge the liability of a third person in case of default. Under s.128 the surety's liability is co-extensive with that of the principal debtor and cannot exceed it. If the LLP is discharged because Rhea had no authority and the lender knew it, the principal debt on which the guarantee rests does not exist, and the guarantee ordinarily fails with it.
But the guarantee is not Rhea's only exposure. She signed the loan documents as designated partner and received the money for the LLP. Three independent routes make her personally liable. First, she is liable for breach of warranty of authority: having represented that she had authority to bind the LLP, she must indemnify the lender for the loss caused by the absence of that authority. Second, since the LLP is not bound, she is the person who obtained and applied the money and is liable as principal debtor, or for money had and received. Third, she is liable to the LLP for breach of clause 11 and must make good the loss caused by the unauthorised borrowing, charge and interest.
Interpretation issue. If the guarantee is read as an independent, unconditional promise to pay on demand rather than a true guarantee, it may be enforceable even if the LLP is not bound. Courts read such documents as a whole and against the drafter; a single line on the last page of the loan document, without a demand clause or independent-payment wording, is more likely to be construed as a guarantee.
Conclusion. Sahayak should not rest on the guarantee alone. It should sue Rhea as principal debtor and for breach of warranty of authority, and the LLP in restitution. Rhea's defence that the guarantee fails for want of a principal debt may succeed as against the LLP's liability but will not free her from personal liability for money she actually borrowed and applied.