The Limited Liability Partnership (“LLP”) structure is a specialised hybrid business vehicle combining the benefits of a regulated company and providing the flexibility of a partnership firm. Amongst other advantages, it has the advantage of limiting the individual liability of its partners as against the business entity akin to a company and at the same time permitting relaxed discretion for internal governance vide the LLP agreement while generally enjoying lesser compliance burden.
The Government has been systematically carrying out legislative reforms to incentivise the entrepreneurial endeavours of the unorganized sector and to promote a favourable business environment to spur innovation and economic activity in the country. Accordingly, The Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act, 2008 (“Report”) dated January 4, 2021, recommended reforms to the Limited Liability Partnership Act, 2008 (“Act”) and thereafter, the Union Cabinet on July 28, 2021, announced its decision to amend the Act for the first time since the Act came into effect in 2009.
Given the above decision, the Limited Liability Partnership (Amendment) Bill, 2021, was passed by both Rajya Sabha and Lok Sabha, and subsequently received the President’s assent on August 13, 2021, thereby attaining the status of the Limited Liability Partnership (Amendment) Act, 2021 (‘Amendment Act’).
With the focus to provide greater ease of doing business to LLPs and to decriminalize compoundable offences involving “minor, procedural or technical violations”, the Amendment Act gives further impetus to the viability of the LLP structure by introducing the changes.
The amendments can be categorized as follows:
As stated in the Report, the rationale behind decriminalization is that ordinarily an act which is punishable with a fine, contains an element of “mens rea” i.e. a guilty mind which is usually affiliated with serious and pre-meditated fraudulent acts, and are typically tried by a criminal court. However, bona fide business-related omissions, technical and minor violations that do not involve mens rea should not be treated with criminal convictions and instead be subjected to civil penalties enforced through an in-house adjudication mechanism.
In view of the above, the Amendment Act offsets criminal liability and decriminalizes the following offences as detailed below by prescribing only civil liability in the form of monetary penalties under the in-house adjudication mechanism:
|Section 10 - Punishment for contravention of Sections 7 and 9
|Description: Contravention relating to general obligations of designated partners. Comment: While completely omitting contravention under Section 8, the Amendment Act, decriminalises punishments under Sections 7 and 9 by prescribing monetary penalties.
|Section 13 - Registered office of LLP and change therein
|Description: Contravention pertaining to registered office of the LLP and change therein. Comment: The Amendment Act decriminalises the offence under Section 13 by prescribing monetary penalties.
|Section 17 - Change of name of LLP
|Description: Failure to comply with the directions of the Central Government in relation to change of name of LLP. Comment: Section 17 has been overhauled by prescribing procedural provisions that enable an existing company, LLP or proprietor to notify the Central Government of the resemblance in a LLPs name that was incorporated subsequently. Further, the Amendment Act also eradicates the punishment for failure to change the name of LLP on the direction of the Central Government by stipulating that a different name will be auto-allotted to the LLP by the Central Government instead of penal consequences. The Section also provides the LLP with an option to subsequently change its name by following the prescribed provisions.
|Section 21 - Publication of name and limited liability
|Description: Failure to display basic information regarding LLP on invoices, official correspondences and publications. Comment: The Amendment Act decriminalises the offence under Section 21 by prescribing monetary penalty.
|Section 25 - Registration of changes in partners
|Description: Failure to notify registrar regarding changes in the partners of the LLP within stipulated time. Comment: The Amendment Act decriminalises the offence under Section 25 by prescribing monetary penalty.
|Section 34 - Maintenance of books of account, other records and audit, etc.
|Description: As stated in the Report, Section 34 provides for two different compliances, namely: § ‘Maintenance of books of accounts as prescribed at the registered office and regular preparations of accounts and its audit in line with the prescribed rules.§ Filing of a Statement of Account and Solvency within a period of six months from the end of each financial year.’Comment: Since the first compliance is meant for ensuring financial discipline and integrity of financial data, the punishment for failure in complying with Sections 34 (1), (2) and (4) requires no change and any defaulting LLP and every defaulting designated partner of such LLP shall be punishable with fine.However, non-filing of financial statements i.e., Statement of Account and Solvency within the prescribed time is altered to a civil liability being a procedural violation and hence a LLP that fails to comply with the provisions of Section 34 (3) shall be liable to pay penalty.
|Section 35 - Annual return
|Description: Non-filing of Annual Return. Comment: The Amendment Act decriminalises the offence under Section 35 by prescribing monetary penalty.
|Section 60 - Compromise, or arrangement of LLPs
|Description: Non-filing of the order of Tribunal within the prescribed time.Comment: The Amendment Act decriminalises the offence under Section 60 by prescribing monetary penalty.
|Section 62 - Provisions for facilitating reconstruction or amalgamation of LLPs
|Description: Non-filing of the order of Tribunal within the prescribed time.Comment: While decriminalising the offence under this Section by prescribing monetary penalty, an important clarification in the form of explanation (ii) has been introduced stating that ‘a LLP shall not be amalgamated with a company’. The aforesaid amendment has put to rest the long overdue clarification regarding amalgamation of a LLP with company. Accordingly, a LLP intending to amalgamate with a company will necessarily have to convert itself into a company.
|Section 73 – Non compliance of any order passed by Tribunal
|Description: Penalty for failure to comply with any order passed by the Tribunal. Comment: The Amendment Act has omitted the Section in entirety by relying on the Tribunal’s power to invoke its contempt jurisdiction in the event of failure to comply with the order passed by the Tribunal.
|Section 74 – General penalties
|Description: General penal provision for instances where no penalty or punishment is provided for contravention Comment: The Amendment Act decriminalises the offence under Section 60 by prescribing monetary penalty.
Further, the Amendment Act has reduced the maximum penalty from Rs. 5,00,000/- (Rupees Five Lakhs only) to Rs. 1,00,000/- (Rupees One Lakh only) for LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for designated partners. Such reduced penalties will prove to be a financial relief for LLPs with default on procedural lapses.
The Government has, however, maintained the status quo for serious non-compliances which involves an element of fraud, deceit, injury to public interest and wrongful dealings in line with the extant provisions of the Act. Furthermore, the Amendment Act extends the imprisonment provision from two years to five years for every person guilty of fraud under Section 30 of the Act.
The Amendment Act introduces “Small LLPs” akin to “Small Companies” under the Companies Act, 2013 (“Act, 2013”) to attain the same underlying principles of extending compliance relaxations and fee reductions to small scale/start-up businesses for facilitating ease of business and incentivising corporate compliances.
The structural machinery of LLPs owing to their inherent flexibility is often employed by micro and small enterprises as a preferred business structure. The legislative intent of Small LLP is to create a class of LLPs that is subject to lesser compliances, lesser fees, to reduced cost of compliance and further to subject such class of LLPs to lesser penalties in the event of default.
Section 2 (ta) of the Amendment Act stipulates that “small limited liability partnership” means a LLP:
and fulfils such terms and conditions as may be prescribed.
Accordingly, Section 69 of the Act containing the provisions of the payment of additional fee is also amended indicating that a different fee or additional fee may be prescribed for different classes of LLPs or for different documents or returns required to be filed under the Act or rules made thereunder.
Further, it is also exclusively provided under Section 76A that, if a penalty is payable for non-compliance of any of the provisions of this Act by a Small LLP or a start-up LLP (“Start-up LLP”) or by its partner or designated partner or any other person in respect of such LLP, then such LLP or its partner or designated partner or any other person, shall be liable to a penalty which shall be one-half of the penalty specified in such provisions subject to a maximum of one lakh rupees for LLP and fifty thousand rupees for every partner or designated partner or any other person, as the case may be. For the sake of clarity, Start-up LLP is explained to mean a LLP incorporated under the Act and recognised as such in accordance with the notifications issued by the Central Government from time to time.
Reduced fees and penal consequences would not only reduce the cost of compliances for LLPs falling under the category of Small LLPs but will also incentivize the micro and small enterprises to corporatize their business. Therefore, the efficiency posed by Small LLPs will be lucrative for interested stakeholders looking to structure and scale their businesses with lesser compliance costs.
The Amendment Act substitutes all references to the erstwhile Companies Act, 1956 with the Act, 2013.
Section 7 of the Act prescribes that every LLP shall have at least one resident Designated Partner. The Amendment Act revises the residency requirement contained therein from erstwhile one hundred and eighty-two days to one hundred and twenty days during the financial year. Reduction in number of days to qualify as ‘resident in India’ will be an added advantage to individuals or entities resident outside India intending to become a resident designated partner in LLPs given that 100% (one hundred percent) FDI is now permitted in specified LLPs under the extant FDI regulations. Furthermore, the aforesaid amendment will be beneficial to those designated partners facing difficulty due the travel restrictions imposed owing to the COVID-19 pandemic and will provide an added relief to designated partners facing difficulties in maintaining residential status under the Act.
The Amendment Act grants power to the Central Government to prescribe accounting and auditing standards for a class or classes of LLPs vide Section 34A in consultation with the National Financial Reporting Authority and the Institute of Chartered Accountants of India. The accounting and auditing standards will usher enhanced financial discipline for the LLPs and bring about transparency commensurate with best practices to attract enhanced commercial and investor interest.
With the object of ‘delineating principles for compounding of offences, manner and procedure thereof and effect of compounding on pending prosecutions in the trial courts’ as stated in the Report, the Amendment Act amends Section 39 by substituting the said Section entirely with a modified Section thereby incorporating in the Act the principles of compounding and procedures as prescribed under Section 441 of the Act, 2013.
Accordingly, the Regional Director or any other officer not below the rank of Regional Director recognised by the Central Government will be authorised to compound any offence under the Act which is punishable with only fine. Compounding will not be allowed for an offence committed by an LLP or its partner or its designated partner within three years from the date on which a similar offence committed by it or them was compounded. Any second or subsequent offence committed after the expiry of the period of three years from the date on which the offence was previously compounded, shall be deemed to be the first offence.
The Amendment Act introduces a new judicial regime under Sections 67A, 67B and 67C spearheaded by Special Courts to be established by the Central Government for swifter dispute resolution for LLPs and also amends provisions related to appeals under Section 72. This will significantly drive ease of doing business for involved stakeholders along with bringing efficiency, transparency, and much-needed certainty for providing speedy trial of offences under the Act.
The Special Court shall consist of a single judge:
Procedure and powers of Special Courts along with appeals and revisions are further postulated under Sections 67B and 67C.
To exercise the power and discharging functions conferred on the Central Government and for the purpose of registration of LLPs under this Act, the Central Government, by notification has been empowered to establish such number of registration offices at such places as it thinks fit and to specify the jurisdiction. This move is aimed at decongesting the extant offices of the registrar of companies who is at present responsible to oversee the administrative functions for both companies and LLPs.
Section 18 which relates to an application for direction to change the name in certain circumstances; Section 73 which relates to penalty on non-compliance of any order passed by Tribunal; and Section 81 which relates to transitional provisions are omitted from the Act owing to duplication and/or redundancy.
These were some of the major amendments brought in by the Amendment Act. By virtue of the amendments, it can be seen that the Government has initiated a beneficial overhaul of the existing LLP regime by introducing ease of compliance for honest and ethical entrepreneurs and opening gateways to foster a healthy business environment. Given that one of the eligibility conditions under the Start-up India Action Plan is that a start-up should be incorporated as a private limited company, registered partnership firm or a LLP, the regulatory changes concerning LLPs will catalyse interests to formalize emerging business operations as LLPs and simultaneously promote domestic individual entrepreneurship.
Decriminalization and a comparatively relaxed penalty regime brought in by flexibility to compound minor contraventions and policy infrastructure for speedy dispute resolution will foster the ease of living for law-abiding LLPs. While the amendments are forward-looking, the Government has failed to regularise the debenture issuance for LLPs in contrast to the Report which envisaged that an LLP may issue secured non-convertible debentures to specified bodies corporate or trusts which are regulated by the Securities and Exchange Board of India and the Reserve Bank of India. The inability of LLPs to issue non-convertible debentures and access to debt markets, at variance with companies, will continue to pose as a major impediment in raising capital under the current regime.
LLPs, akin to any other legitimized business structure will require a responsive regulatory regime matching global best practices. While the industry reaction to most of the amendments is welcoming, we will have to see if the Government continues to proactively evolve the LLP regulations to retain and foster its commercial relevancy.
By Mr. Manu Varghese (Partner – Head of General Corporate & Commercial)
and Mr. Jones Vaidya (Associate) on September 7, 2021