Topic 19 Who Can Be Partner Section5

THE LEGAL BRIDGE

Judiciary Examination Study Material

Topic 19

Who Can Be a Partner — Section 5

Eligibility, Disqualifications & Body Corporates as Partners

Pillar 3 — Incorporation & Registration (Sections 5–14)

Module Overview

Section 5 of the LLP Act, 2008 defines who can become a partner in an LLP. This topic analyses the broad eligibility rule, the specific disqualifications that exclude persons from partnership, the special case of body corporates as partners, and the provisions for partner capacity — all essential knowledge for judiciary examinations.

19.1 Section 5 — Eligibility to Be a Partner

Section 5 — Partners

"Any individual or body corporate may be a partner in a limited liability partnership: Provided that an individual shall not be capable of becoming a partner of a limited liability partnership, if— (a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force; (b) he is an undischarged insolvent; or (c) he has applied to be adjudged as an insolvent and his application is pending."

19.2 The General Rule — "Any Individual or Body Corporate"

The opening words of Section 5 establish an inclusively broad eligibility rule. There is no restriction based on nationality, residency, profession, or sector. Specifically:

Individual: Any natural person — Indian national, foreign national, NRI, OCI, PIO — can be a partner, subject to FEMA regulations for non-residents. Minors cannot be partners (common law capacity rule, supplemented by Indian Contract Act, 1872 — a minor cannot enter a contract and being a partner requires contractual capacity).
Body corporate: Under Section 2(1)(d), "body corporate" includes a company under the Companies Act, an LLP registered under the LLP Act, and a foreign LLP. So a company can be a partner, an Indian LLP can be a partner in another LLP, and a foreign LLP can be a partner in an Indian LLP (subject to FEMA/FDI rules).
No sector restriction: Unlike the Naresh Chandra Committee I's recommendation that LLP be restricted to service industries, Section 5 places no such restriction — any individual or body corporate in any sector may be a partner.

19.3 Three Disqualifications for Individuals

Disqualification	Legal Basis	Nature	Practical Effect
Found to be of unsound mind by Court and finding is in force	Section 5(a)	Court-determined mental incapacity	Cannot enter into a valid partnership; any purported admission is void. Recovers eligibility when finding is set aside.
Undischarged insolvent	Section 5(b)	Formal insolvency status (IBC 2016 or earlier law)	Personal assets are vested in Official Assignee/Resolution Professional; cannot bind self with new financial obligations. Eligibility restores on discharge.
Applied to be adjudged insolvent and application is pending	Section 5(c)	Pendency of insolvency application	Prospective protection — once insolvency petition is filed, the applicant cannot create new partnership obligations while the application is pending.

19.4 Minor as Partner — The Legal Position

Section 5 does not expressly address minors. However, by application of Section 11 of the Indian Contract Act, 1872 (which provides that a minor cannot enter into a contract), and the fact that becoming a partner requires entering the LLP agreement (a contract), a minor cannot be a partner in an LLP. This is in contrast to IPA 1932, where Section 30 allows a minor to be admitted to the benefits of a partnership (though not as a full partner).

Contrast with IPA 1932 on Minors

Under Section 30 of IPA 1932, a minor can be admitted to the BENEFITS of a firm — meaning the minor receives profit share but is not personally liable for firm obligations. This "minor admitted to benefits" concept has no equivalent in LLP law. In an LLP, the LLP agreement requires contractual capacity — a minor simply cannot be party to it.

19.5 Body Corporate as Partner — Practical Implications

When a body corporate (company or LLP) is a partner in an LLP, the following practical issues arise:

Voting and management: The body corporate exercises its partnership rights through an authorised representative — typically a director or officer authorised by board resolution.
Designated partner rule: Section 7 requires that designated partners must be individuals — a body corporate cannot be a designated partner. If all partners are body corporates, Section 7 requires nominees of the body corporates to act as designated partners.
Contribution: A body corporate can contribute cash, movable/immovable property, or other assets as its contribution to the LLP.
FDI implications: A foreign company or foreign LLP as partner constitutes FDI — subject to RBI/FEMA regulations on the sector and applicable FDI limits.

⚖ Juggilal Kamlapat v. Commissioner of Income Tax (1969) 1 SCC 270 (SC)

Held: Pre-LLP case establishing that capacity to contract is the foundational requirement for becoming a member/partner of any business entity. A person without contractual capacity (minor, person of unsound mind, undischarged insolvent) cannot validly assume the obligations of partnership. This principle was codified in Section 5's disqualification list.

Principle: Contractual capacity is the sine qua non of partnership — Section 5's disqualifications directly flow from this fundamental principle of contract law.

⚖ Bacha F. Guzdar v. Commissioner of Income Tax (1955) 1 SCR 876 (SC)

Held: Though dealing with a shareholder in a company, the Supreme Court's principle that a member's financial rights and their status as a member are distinct legal concepts applies to LLP partnerships. A body corporate as an LLP partner holds an "economic interest" in the LLP — but that interest is the LLP's asset, not the company's directly-owned property.

Principle: The distinction between a partner's status and their economic rights is fundamental — particularly important when body corporates are LLP partners.

📌 EXAM TIP: Section 5 disqualifications appear frequently in objective rounds: "Which of the following CANNOT be a partner in an LLP?" The three disqualifications are: (a) unsound mind by Court finding; (b) undischarged insolvent; (c) pending insolvency application. Note: a discharged insolvent CAN be a partner. A foreign national CAN be a partner. A company CAN be a partner. A minor CANNOT (Contract Act, 1872 — not directly under Section 5 but by necessary implication).

✔ PRACTICAL NOTE: In practice, before admitting any new partner to an LLP, due diligence should verify: (1) Is the person declared of unsound mind by any court? (2) Is the person an undischarged insolvent or has filed insolvency? (3) For a body corporate partner — is it authorised by its constitutive documents to hold partnership interests? For a foreign partner — is FEMA compliance in place?

Quick Revision — Topic 19

Key Point	Core Content
Section 5 general rule	Any individual OR body corporate may be a partner
Disqualification (a)	Unsound mind — Court finding in force
Disqualification (b)	Undischarged insolvent
Disqualification (c)	Applied to be adjudged insolvent; application pending
Minor as partner	Cannot be — Indian Contract Act 1872 (Section 11): minors lack contractual capacity
Body corporate as partner	Yes — company, LLP, foreign LLP; but designated partner must be individual (Section 7)
No sector restriction	Section 5 is open to all sectors — overrides Naresh Chandra I's narrow recommendation