Limited Liability Partnerships – Back In Limelight

In about less than a month, the first ever amendment to the Limited Liability Partnership Act, 2008 (“LLP Act”) will come into effect (on and from 1st April 2022 onwards). The Limited Liability Partnership (Amendment) Act, 2021 (“Amendment”) was finally notified on 11th February 2022 together with the Limited Liability Partnership (Amendment) Rules, 2022 (“LLP Rules”). Limited Liability Partnerships (“LLPs”) often serve as an alternate quasi corporate vehicle offering the benefits of limited liability to its members, flexibility of organising their internal structure with fewer compliances and statutory requirements as compared to any company incorporated under Companies Act 1956/2013.

The intent behind the Amendment is to provide a much-needed impetus to India’s economic growth especially small and medium businesses which suffered considerably during the covid pandemic like most other countries worldwide.

Key Highlights
The important features and key highlights of the Amendment are mentioned below:

1. Small LLPs
1.1 The Amendment has introduced the concept of ‘Small Limited Liability Partnership’ which draws its inspiration from and is aimed to be in line with the concept of ‘Small Company’ under the Companies Act, 2013.

1.2A Small LLP is one in which (i) the contribution is up to Rs.2,500,000 (Rupees twenty-five lakhs only) or such other amount as may be prescribed, not exceeding Rs.5,00,00,000 (Rupees five crores only); and (ii) turnover of which is up to Rs.40,00,000 (Rupees forty lakhs only) or such other amount as may be prescribed, not exceeding 50,00,00,000 (Rupees fifty crores only), for the preceding financial year.L

2. Start – Up LLPs
2.1The Amendment has introduced the concept of start-up LLP. The central government (“Central Government”) has been afforded the power to recognise and designate certain LLPs as ‘start-up LLPs’ and issue notifications / regulations in relation thereto from time to time. While the Amendment is silent on definition of a start-up LLP, the move can be a huge boon to the start-up sector in India.

3. Offences – Monetary Penalties and Compounding
3.1The Amendment has decriminalised a number of penal provisions under the LLP Act. In the case of certain contraventions, only monetary penalties will apply to the LLP and its partners for these specific defaults. Some of these include (i) reporting of arrangements between an LLP and its creditors or partners; (ii) reporting of change of registered office, (iii) filing of statement of accounts and solvency, and annual return; (iv) reporting of changes in partners of the LLP; (v) reconstruction or amalgamation of an LLP.

3.2 The penalty payable by a Small LLP or a Start-Up LLP shall be subject to a maximum of Rs.1,00,000 (Rupees one lakh only) and Rs.50,000 (Rupees fifty thousand only) for every partner or designated partner. Having regard to the difference in the turnovers of LLPs versus Small LLPs and Start-Up LLPs, the latter have been given the benefit of reduced penalties and fines.

3.3 The Amendment has introduced “Regional Directors’ which means a person appointed by the Central Government for the purposes of the LLP Act and/or Companies Act, 2013. These Regional Directors have been given the authority of compounding various offences that are punishable with only fines. If an offence by an LLP or its partners is compounded, then a similar offence cannot be compounded for a period of 3 (three) years. Further, any second or subsequent offence, shall be deemed to be a first offence if that offence has been committed after the expiry of 3 (three) years from date on which it was previously compounded.

4. Special Courts, Adjudication Officers and Appeals
4.1 The Amendment provides for special courts to be established or designated as such by Central Government for expediting the trial of various offences under the LLP Act. The special courts will consist of a single judge holding office as ‘Sessions Judge’ or ‘Additional Sessions Judge’ in case of offences punishable with imprisonment of 3 years or more; and a Metropolitan Magistrate or a Judicial Magistrate of the first class in the case of other offences.

4.2 The Amendment also provides for ‘adjudicating officers’ to be appointed by Central Government for imposition and adjudging of penalties for any non-compliance or defaults committed under the relevant provisions of the LLP Act.

4.3 Under the LLP Act, appeals against orders of a National Company Law Appellate Tribunal (“NCLT”) lie with the National Company Law Appellate Tribunal (“NCLAT”). The Amendment now provides that appeals cannot be made against orders that have been passed with the consent of the parties and further that the appeals must be filed within 60 days (with a further grace period of 60 days in case of a sufficient due cause for delay) of the order.

5. Miscellaneous
5.1 According to the LLP Act, every LLP must have at least two authorised/designated partners, one of whom must be a resident of India. Prior to the modification, a resident of India was defined as someone who has spent at least 182 (one hundred and eighty-two) days in India in the previous year. Pursuant to the Amendment, the definition of designated partner is modified to include any person who has lived in India for not less than 120 (one hundred and twenty) days during the financial year.

5.2 No LLP shall be registered with a name that, in the opinion of the Central Government, is identical or too closely resembles that of any other limited liability partnership, a company, or a registered trademark of any other person as defined by the Trade Marks Act, 1999. Further, under the Amendment, the Central Government has the authority to order an LLP to change its name within 3 (three) months if it is identical to a trademark or resembles the name of another LLP.

5.3 In terms of the Amendment, the Central Government has been given the power to prescribe the standards of auditing and accounting, in consultation the National Financial Reporting Authority and as recommended by the Chartered Accountants of India to LLPs.

5.4 For the purpose of exercising such powers and discharging such functions as are conferred on the Central Government under the LLP Act and Amendment, the Central Government may by notification, establish such number of registration offices at such places as it thinks fit.

5.5 The LLP Act originally provided an upper limit of 300 days of time period for any delayed filings. Under the Amendment, this time limit has been removed and any late filings past their due date can now be done at a later stage by payment of additional fees.

5.6 In terms of the Amendment, any act committed with fraudulent intention/purpose by a LLP or its partners shall be punishable with imprisonment which may extend to 5 (five) years. It is to be noted that the LLP Act originally provided only for a period of 2 (two) years.

The Amendment is aimed to entice entrepreneurs and start-ups. The introduction of Small LLPs and Start-Up LLPs is especially interesting. It would encourage more people / businesses to choose LLPs as a preferred form of entity to run their businesses. The Amendment in essence reduces onerous provisions, provides for speedy trials, levies a heavier punishment for fraud and overall seeks to streamline the regulation and setup of LLPs. However, it is still a matter of sometime before the Amendment and the complementary LLP Rules are put to test. The markets will be able to ascertain the actual impact and benefit of the Amendment only after it comes into force on 1st April 2022.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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