What is Limited Liability Partnership? Which provisions of LLPs are decriminalised?

The Amendment Bill seeks to facilitate greater ease of living to law-abiding corporates and to decriminalise certain provisions of the Act

LLP Amendment Bill 2021 gives a booster shot to ease of doing business in India

File photo of the Parliament. PTI

Limited Liability Partnership (Amendment) Bill 2021 was introduced in Rajya Sabha on 29 July 2021 after the Union Cabinet gave its approval on 28 July 2021. The Amendment Bill seeks to facilitate greater ease of living to law-abiding corporates and to decriminalise certain provisions of the Act.

The key changes as proposed in the bill include the introduction of the concept of ‘small companies’, de-criminalisation of certain offences, empowering government to establish special courts, authorisation to regional directors with respect to the compounding of offences, empowering government to prescribe ‘AS’ and ‘Auditing Standards for a certain class of LLPs among others.

What is Limited Liability Partnership?

  • A Limited Liability Partnership (LLP) is a partnership in which some or all partners have limited liability. It, therefore, exhibits elements of partnerships and corporations.
  • In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. This is an important difference from that of an unlimited partnership.
  • In an LLP, some partners may have a form of limited liability similar to that of the shareholders of a corporation.

Who faces liability?

  • As per the new feature, limited liability does not allow creditors to go after a partner’s personal assets or income if the partnership fails
  • These kinds of LLPs are common in professional business-like law firms, accounting firms and wealth managers

What are the key highlights of the bill?

Decriminalisation of certain offences: There are now 24 criminal provisions, 21 of which are compoundable and three of which are non-compoundable. The overall number of criminal provisions under the LLP Act will be reduced to 22, with compoundable offences reduced to 7, non-compoundable offences reduced to 3. A total of 12 offences are to be decriminalised under LLPs. The decriminalised offences will then get shifted to an internal adjudication mechanism to help unclog criminal courts from routine cases.

Introduction of Small LLPs: The Bill provides for the formation of a small LLP where: (i) the contribution from partners is up to Rs 25 lakh (may be increased up to Rs 5 crore), (ii) turnover for the preceding financial year is up to Rs 40 lakh (may be increased up to Rs 50 crore). The Central government may also notify certain LLPs as start-up LLPs (as recognised through notifications). The Bill seeks to amend the LLP Act to introduce the concept of “Small Limited Liability Partnership” in line with the concept of “Small Company” under the Companies Act, 2013. The government approved the creation of a class of small LLPs to encourage entrepreneurs. These LLPs will be subject to fewer compliances, reduced fee or additional fee, and smaller penalties in the event of default.

Standards of accounting: In order to align with the Companies (Accounting Standards) Rules, the bill proposes the Accounting Standards for a class or classes of limited liability partnership. The Central government may, in consultation with the National Financial Reporting Authority prescribe the standards of accounting. It may prescribe the standards of auditing, as recommended by the Institute of Chartered Accountants of India constituted under section 3 of the Chartered Accountants Act, 1949, for a class or classes of limited liability partnership.

Compounding of offences: Under the Act, the Central government may compound any offence under the Act which is punishable only with a fine. The Bill proposes to allow the Regional Director or any other officer not below the rank of Regional Director to compound any offence under the LLP Act which is punishable with a fine only. The application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments to the Regional Director or any other officer not below the rank of Regional Director authorised by the Central government. The amount imposed may be up to the maximum fine prescribed for the offence. If an offence by an LLP or its partners was compounded, then a similar offence cannot be compounded within a three-year period.

Establishment of special courts: The Bill proposes to empower the Central government to establish or designate Special Courts with a view to providing speedy trial of offences under the LLP Act. The special court will consist of: (i) a Sessions Judge or an Additional Sessions Judge, for offences punishable with imprisonment of three years or more; and (ii) a Metropolitan Magistrate or a Judicial Magistrate, for other offences. They will be appointed with the concurrence of the Chief Justice of the High Court. Appeals against orders of these special courts will lie with high courts. The Bill seeks to empower special courts to try an offence other than an offence under this Act with which the accused may, under the Code of Criminal Procedure, 1973 may be charged at the same trial.

Establishment of the Appellate Tribunal: Under the Act, appeals against orders of the NCLT lie with the National Company Law Appellate Tribunal (NCLAT). The Bill says that appeals cannot be made against orders that have been passed with the consent of the parties. Appeals must be filed within 60 days (extendable by another 60 days) of the order. In order to provide relief to the aggrieved party, the Bill seeks to bring more clarity on the filing of an application to the Appellate Tribunal if a person is not satisfied with the judgement of the Tribunal.

Adjudicating Officers: Under the Bill, it has been proposed to appoint as many officers as adjudicating officers to adjudicate penalties under the LLP Act. These will be Central government officers not below the rank of Registrar. Appeals against orders of the adjudicating officers will lie with the Regional Director.

Change of name of LLP: Under the provisions of the Act, the Central government may direct an LLP to change its name on certain grounds or pay a fine ranging from Rs 10,000 to Rs 5 lakh if it fails to comply. However, the amended Act now empowers the Central government to allot a new name to such an LLP instead of levying a fine.

Non-compliance of Tribunal orders: The amended Bill removes non-compliance of NCLT order as an offence which was earlier punishable with imprisonment up to six months and a fine up to Rs 50,000.

Punishment for fraud: The amended Bill increases the maximum term of imprisonment from two years to five years for every person party to it knowingly if an LLP or its partners carry out an activity to defraud their creditors, or for any other fraudulent purpose. A fine between Rs 50,000 and Rs 5 lakh may also be imposed.

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