Analysis of Limited Liability Partnership (Amendment) Bill, 2021

By

Sakshi Shairwal

Anjali Kumari

Introduction:

The Limited Liability Partnership (Amendment) Bill, 2021, was recently passed by the Union Cabinet, amending the Limited Liability Partnership (LLP) Act, 2008. On July 30, 2021, the Limited Liability Partnership (Amendment) Bill, 2021 was introduced in the Rajya Sabha. The Limited Liability Partnership Act of 2008 is being amended by this bill. The Act regulates limited liability partnerships (LLPs) (LLP). A limited liability partnership (LLP) is a type of corporation that differs from ordinary partnership organizations. A partner's liability in an LLP is limited to their interest in the company. The bill changes the nature of punishment for some offenses by converting them to civil defaults. It also establishes special courts, defines small LLPs, and provides for the appointment of specific adjudicating officers.

What is a Limited Liability Partnership (LLP)?

A Limited Liability Partnership (LLP) is a business entity in which some or all of the participants are personally liable. As a result, it has aspects of both partnerships and corporations. A Limited Liability Partnership (LLP) is a cross between a partnership and a corporation in which some or all partners (depending on the jurisdiction) have limited liability.

In an LLP, one partner is not responsible or liable for the misbehavior or carelessness of another partner. Each partner in an LLP is not responsible or liable for the misbehavior or carelessness of another partner. An LLP's partners are only accountable to the extent of their agreed-upon capital contribution.

They are not liable for the other partners' unauthorized acts.

The following are the key characteristics of an LLP:

An LLP is a separate legal and corporate organization from its partners. It is a never-ending cycle. The provisions of the Indian Partnership Act, 1932 do not apply to an LLP because it is governed by a distinct statute (the LLP Act, 2008), and it is governed by a contractual agreement between the partners.

As the last words of its name, every Limited Liability Partnership must use the words "Limited Liability Partnership" or its acronym "LLP."

The importance of LLP and the need for it:

The LLP format is an alternative corporate business vehicle that gives the benefits of limited liability for a company while also allowing its members the option of arranging their internal administration on the basis of a mutually agreed-upon structure, similar to a partnership firm.

This structure would be extremely beneficial to small and medium businesses in general, as well as businesses in the service industry in particular.

LLPs are the preferred company structure around the world, particularly in the service industry and for activities involving professionals.

Offenses are being decriminalized: There are currently 24 penal provisions, 21 compoundable offences, and three non-compoundable offences. Twelve of these offences would be decriminalized under the law. Offenses that should be prosecuted under other laws are recommended to be excluded from the LLP Act. Because fines connote criminality, the bill alters key parts of the Act to turn offences into civil defaults and to change the nature of sanctions from fines to monetary penalties. The Act describes how LLPs should operate and stipulates that failure to comply with these standards will result in a punishment (ranging between two thousand rupees and five lakh rupees). Changes in partners are one of these criteria.

Mechanisms Developed in-House: Instead of being regarded as criminal offences, minor/less serious compliance issues involving primarily objective determinations are recommended to be moved to the In-House Adjudication Mechanism (IAM) framework. The Ministry of Corporate Affairs (MCA) is also focusing on establishing a regulatory framework.

Alter of LLP name: The Act says that the central government has the authority to order an LLP to change its name if certain conditions are met (such as the name being undesirable or identical to a trademark pending registration). Failure to follow such instructions might result in a fine ranging from Rs 10,000 to Rs 5 lakh rupees. Instead of imposing a punishment, the Bill removes some of these reasons and authorizes the central government to assign a new name to such an LLP. Dishonest action by an LLP or its partners is punishable under the Act by up to two years in prison and a fine if the activity is carried out with the intent to defraud creditors or for any other fraudulent purpose.

Non-compliance with Tribunal orders: Non-compliance with a National Company Law Tribunal (NCLT) order is punishable by imprisonment for up to six months and a fine of up to Rs 50,000 under the Act. This offence is abolished by the bill. The amendment permits LLPs to issue fully secured Non-Convertible Debentures to SEBI or RBI-regulated investors.

It will make it easier for LLPs to raise funds and finance their activities.

Compounding of offences: Under the Act, the federal government has the authority to compound any offence penalized simply by a fine. The fine levied could be up to the maximum fine for the offence. The Bill changes this to allow the federal government to designate a regional director (or any person above his rank) to compound such offences. If an LLP or its partners committed a compounded offence, a comparable offence cannot be committed within three years.

Adjudicating Officers: The federal government may designate adjudicating officers to award fines under the Act, according to the Bill. These will be central government officials with a rank of Registrar or higher. The Regional Director will hear appeals against the Adjudicating Officers' orders. By incorporating section 34A into the bill, accounting and auditing standards for LLPs have been introduced. This is done to introduce standardization to the operations, as LLPs did not have access to the same standard accounting systems as their counterpart businesses under the Companies Act of 2013.

Special courts: The Bill empowers the federal government to create special courts to ensure that offences under the Act are tried quickly. For offences punishable by imprisonment of three years or more, the special court will consist of :

(i) a Sessions Judge or an Additional Sessions Judge; and

(ii) a Metropolitan Magistrate or a Judicial Magistrate for all other offences.

They will be appointed with the Chief Justice of the High Court's approval. High Courts will hear appeals from these special courts' orders.

Appeals to the Appellate Tribunal: The National Company Law Appellate Tribunal hears appeals from NCLT orders under the Act (NCLAT). The bill also states that challenges against orders made with the parties' consent are not permitted. Appeals must be submitted within 60 days of the order (extendable by another 60 days).

Small LLP: The Bill allows for the formation of a small LLP if the following conditions are met: (i) the contribution from partners is up to Rs 25 lakh (which can be enhanced up to five crore rupees), and (ii) the previous financial year's turnover was less than Rs 40 lakh (may be increased up to Rs 50 crore). Certain LLPs may also be designated as start-up LLPs by the federal government (as recognized through notifications).

Standards of accounting: Under the Bill, the federal government, in collaboration with the National Financial Reporting Authority, may impose accounting and auditing standards for different types of LLPs.

LLPs and Traditional Partnership Firms: What's the Difference?

In a partnership firm, all partners are jointly and severally accountable for any conduct taken by any partner, and the liability is unlimited.

In an LLP, however, the scope of a partner's liability is decided by the amount of capital that he or she has invested.

Legal Protection: An LLP and a partnership firm are governed by separate statutes.

The Limited Liability Partnership Act of 2008 and the Companies Act control LLPs, while the Indian Partnership Act of 1932 governs partnerships.

A limited liability partnership (LLP) has its own legal entity and is liable to the full amount of its assets (partners' liability is limited), but a partnership business does not have its own legal entity.

Perpetual Succession: LLPs follow the principle of perpetual succession, but regular partnership firms do not. Regardless of possible partner changes, an LLP can continue to operate. It has the ability to form contracts and possess property in its own name.

In a traditional partnership, the partners are referred to as the firm, rather than as individuals.

Number of Partners: In both the LLP and Partnership firms, a minimum of two members is required. For a regular partnership firm, however, 20 is the maximum number. In the case of an LLP, there are no such restrictions.

Foreign Nationals in Partnership: Foreign nationals can become partners in LLPs, but they cannot become partners in partnership firms.

Minors as Partners: Minors are not eligible for LLP benefits. In a traditional partnership firm, however, minors can be permitted to participate in partnership benefits with the approval of the current partners.

Risk-Taking Capacity: Although a partnership firm has professional experience, the risk-taking capacity of the partners is frequently harmed due to large liabilities.

The LLP offers an alternative since it combines the advantages of professional experience with the partners' risk-taking capacity, giving them viable options.

Next Steps:

Increasing Angel Investors' Access to LLPs: An angel investor is a wealthy individual who agrees to invest in a small startup company with limited money. To be qualified as an angel investor, LLPs must meet specific conditions.

Even if the LLP's partners qualify as "angel investors" in their individual capacities, the LLP may not be. By making it easier for LLPs to attract angel investors by simplifying the rules, a bigger number of entrepreneurs will be able to do business.

LLP Registration Promotion in India: In India, no two NRIs can form an LLP at the same time; one of the partners must be a resident of India.

Furthermore, because Foreign Direct Investment (FDI) in an LLP may only be made through the government, the time required to form this partnership is significantly longer.

Apart from the decriminalization of the offence, it is also critical that the regulations for registering and creating LLPs in India are entrepreneur-friendly so that entrepreneurs regard India to be a favorable location for launching their businesses.

Employee Stock Ownership Plan (ESOP): An ESOP is an employee benefit plan that provides employees a share of the company's ownership.

An LLP does not permit the issuance of ESOPs, which are currently widely regarded as the most effective instrument for retaining key employees.

Conclusion

Limited Liability Partnerships are the most flexible type of business and provide partners with a highly secure business environment. The most recent revisions proposed in the Bill will encompass a wide range of small and large businesses and provide the advantages of a corporation as well as traditional partnership organizations.

However, in order to provide more chances to new enterprises, more flexibility in the rules is needed, particularly in terms of gaining access to Angel investors and issuing ESOPs.

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