LLPs Slated To More Stringent Reforms

Significant provisions soon to apply on LLPs

 

Payal Agarwal| Executive| Vinod Kothari and Company

 

Introduction

Limited Liability Partnerships (LLPs) being a hybrid form of entity with characteristics of both companies as well as partnerships are governed by the provisions of Limited Liability Partnership Act 2008 (LLP Act).  LLPs are popular since due to less compliance requirements as compared with a company.

In view of the existing framework for LLPs, the Ministry of Corporate Affairs (MCA) has published a news material on its website on 18th February 2021 stating that certain provisions of the  Companies Act 2013 (the Act) will be soon made applicable on the LLPs. Having said that while this news has been flashed, the notification in this regard is still not available.

While the notification in this regard is still not in place as well and so as the rules containing the details of the amendment, however, the notice on the MCA website has indicated the various sections of the Act which may soon be made applicable on the LLPs.

These include some very significant provisions like identification of Significant Beneficial Ownership (SBO), application of the criteria for disqualification, capping on the max number of partners/ DPs, etc.

Are these provisions effective?

No, it is only an advance notice of the proposed changes under the LLP Act.

Whether there is something immediately required as an actionable?

Nothing is immediately required as an actionable on the part of LLP on the basis of this update. The update only seems to be an advance notice of what is proposed to be implemented soon on LLPs.

It has been a trend in the recent years that more and more entities are seeking to be incorporated as LLPs. As against only 2917 LLPs incorporated in December 2019, there has been a sharp increase in the number of LLPs incorporated in December 2020 which amounts to 4322. A downfall was noted in April 2020 on account of Covid 19 outbreak.

LLPs are seen to be entities having less regulatory supervisions and more benefits of the corporate forms of entities. Therefore, conversion of companies into LLPs can be sought as a means of regulatory arbitrage. However, it has to be noted that the regulatory authorities are now set to bring LLPs under the ambit of some stricter supervision. The Company Law Committee Report on Decriminalization of LLP Act also indicated that the attention of the regulatory authorities are now shifted towards the LLPs. Our write up on the same can be read here

In India, mostly the professional service providers such as law firms, practising professionals etc are formed as LLPs. Also, the AIFs are mostly formed as LLPs. In the aforesaid report too, fund raising by way of issue of Non-Convertible Debentures (NCDs) by the LLPs were barred except for the entities regulated by SEBI or RBI. So, the intent of the Government seems to monitor the activities of LLPs.

Discussion on the proposed changes

The tabular presentation below discusses the requirements of the provisions which are intended to be made applicable on LLPS along with our analysis on each of them.

Sec No. Deals with Requirement under the provisions Impact analysis
90 except sub-section (12) Significant Beneficial Ownership (SBO) ·      Declaration of beneficial interest by SBO( 25% or more interest or as specified in the Rules)

 

·      Company shall maintain register of SBO

 

·      Inspection of such register by members

 

·      Co. shall file return of SBO with ROC

 

·      Co. shall take necessary steps for identification of SBO

 

·      Notice by co. to persons who are likely to be/have knowledge of/ were SBO and not registered.

 

·      Info to be given by concerned person within 30 days of notice

 

·      Co. shall apply to Tribunal within 15 days if info not provided by the concerned person

 

·      Tribunal may restricts rights on such shares relating to concerned persons after reasonable opportunity of hearing.

 

·      Aggrieved person may apply for lifting/ relaxation of such orders

 

·      Punishment on contravention

 

While this provision is proposed to be made applicable on LLPs, there could be various points to discuss so that the impact can be analysed. Some of these include:

 

·           The Act intends to identify a natural person controlling or exercising beneficial interest on the company. Under an LLP, the ownership and management need not be different as in the case of companies. LLPs can have partners of various categories like Limited Partner (one who only contributes capital) and General Partner (one who manages the LLP). As we understand, the intent behind introducing the SBO identification for LLPs should be similar to that for companies, i.e. to understand the beneficial owner.

 

·           From here, we move to the next point for discussion, i.e. the meaning of beneficial interest. Section 89 of the Act defines beneficial ownership. Again, it has to be seen that the word “Significant” is defined under Section 90(1) to mean an interest of 25% or more or such other proportion as prescribed in the Rules. Currently, the same has been prescribed at 10%. It will be interesting to see if the similar threshold is also brought for LLPs for which one has to see the Rules that will come in this regard.

 

·           Further, sub-section (12) has not been made applicable on account of the fact that it relates to punishment under Section 447 of the Act.

 

164(1) and (2) Disqualification of Directors Cannot be a Director if –

·      Declared unsound mind

·      Undischarged insolvent

·      Applied to be adjudicated as insolvent

·      Convicted and sentenced imprisonment of 6 months or more and 5 years has not elapsed yet from release ( If sentenced for 7 years or more, permanently disqualified)

·      Disqualified by an order of Court or Tribunal

·      Not paid calls in respect of shares held by him for atleast 6 months from last day fixed for payment of call

·      Convicted of offence dealing with RPT u/s 188 during last 5 years

·      Not complied with Section 152(3)

·      Not complied with Section 165(1)

 

Cannot be appointed in any other co./ re-appointed in that co. for 5 years from the date of failure if is/has been a Director of a co. which has

·      Not filed financial statements/annual returns for 3 consecutive FYs.

·      Failed to repay deposits/debentures/pay interest thereon/ dividend declared for 1 year or more

 

·           The grounds of disqualification of Directors will be applicable to the LLPs as well. Since both sub-section (1) and (2) have been proposed to be applicable, the same is likely to cover Designated Partners  (DPs) and not all the partners considering the fact that only individuals can become DPs.

 

·           The various grounds for disqualification are linked with certain personal defaults and filing defaults.

 

·           Here, in our view, the “Director” may mean to cover only the DPs of LLP on account of following parameters:

 

o   Both of them are individuals, and cannot be body corporates.

o   The DP requires DPIN to function, just as the Directors require DIN.

o   Both of them are responsible for the management of affairs of the entity.

o   At time of voluntary liquidation, in case of a company, Directors are required to file a declaration of solvency. In case of LLP, the same duty has been vested upon DP.

 

o   Though these are certain prelim observations at our end, the views cannot be regarded as final on account of absence of any specific language of law in this regard.

 

o   How the word “director” appearing in the Act will link to the “partners/DPs” under LLP Act, how the word “company” will be construed, what will happen to the other provisions of the Act referred in the aforesaid Sections, whether the Rules corresponding to the relevant sections will also be made applicable on LLPs and many more other questions await response till the statute comes with a final text of law interpreting these questions properly.

 

165 except sub-section (2) Number of Directorships ·         Max no. of directorships- 20

o   Of which public cos. – max 10

o   Dormant co. not included

·         Person holding directorships above specified limit shall within 1 year of commencement of Act-

o   Choose to continue in companies within specified limit

o   Resign from other companies

o   Intimate his choice to the companies and the ROC

·         Resignation under (3)(b) will become effective immediately from despatch of notice to the co.

·         No person can hold excess directorship –

o   Once he resigns from the extra companies or

o   Expiry of 1 year from commencement, whichever is earlier

·         Penalty in case of violation

 

 

 

 

By making this section applicable on LLPs, we are of the view that the same intends to put a cap on the maximum number of partnership of an LLP. The question is whether all partners will be given this upper cap or only the DPs.
167 except sub-section  (4) Vacation of office by Director Office of Director becomes vacant when

·      Incurs disqualifications under Section 164

·      Absents himself from BM held in last 12 months

·      Contravention of Section 188

·      Fails to disclose interest u/s 184

·      Disqualified by an order of Court/Tribunal

·      Convicted and sentenced for imprisonment of 6 months or more

·      Removed in pursuance of this Act

·      Having appointed ex-officio, ceases to hold such office

·      Punishment on violation

 

·      Where all Directors vacate, the promoter ( CG in his absence) shall appoint required number of Directors till appointment of Directors in GM

 

On account of disqualification incurred, the partners will be required to vacant their positions.

 

In a given situation where we have one DP and others as ordinary partners, if the said DP becomes disqualified then by virtue of the said provision, will be required to be vacate his office. Once the DP vacates, there will be a question on how will new DP be inducted. In the give situation for a company, the promoter has been given the power to induct a new director, however, in case of an LLP this again becomes a grey area for the rules to clarify.

 

 

206(5) Inspection The Central Government may, if it is satisfied that the circumstances so warrant, direct inspection of books and papers of a company by an inspector appointed by it for the purpose. Powers of inspection into the affairs of LLP has been given to Central Government by way of inclusion of these provisions under the LLP Act.

 

It is to be noted that powers of investigation already lies with the Central Government under Chapter IX of the LLP Act.

207(3) Conduct of Inspection and Inquiry Notwithstanding anything contained in any other law for the time being in force or in any contract to the contrary, the Registrar or inspector making an inspection or inquiry shall have all the powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the following matters, namely:—

(a) the discovery and production of books of account and other documents, at such place and time as may be specified by such Registrar or inspector making the inspection or inquiry;

(b) summoning and enforcing the attendance of persons and examining them on oath; and

(c) inspection of any books, registers and other documents of the company at any place.

Necessary powers with respect to the conduct of inspection and inquiry has been vested upon the concerned officer by way of these provisions.
252 Appeal to Tribunal against strike-off ·      Agg person against order of ROC dissolving a company, may appeal to Tribunal within 3 years to get the name restored

·      ROC may also file app. for restoration if satisfied that name struck off on incorrect particulars

·      Tribunal’s order filed with ROC within 30 days to restore name

·      Company, its member, creditor, or workman, if aggrieved, can apply to Tribunal within 25 years of striking off order.

The striking off of LLPs are governed by Section 75 of the LLP Act read with Rule 37 of the LLP Rules.

 

The inclusion of the given provision will provide a way for restoration of LLPs whose names were struck off.

439 Non-cognizable offences ·      Notwithstanding CrPC, every offence under this Act except u/s 212(6) shall be deemed to be non-cognizable

·      No court shall take cognizance unless complaint made by ROC, a shareholder or member of company, or person authorised by CG

·      Issue and transfer of securities, or non-payment of dividend – court may take cognizance on complaint by SEBI

·      Personal appearance of ROC, or person auth. by CG not necessary unless Court requires the same

·      The provisions of (2) shall not apply on actions taken by liquidator on any offence during winding up.

Section 212(6) of the Act provides that only those offences that are covered under Section 447 of the Act are cognizable.

 

Section 447 of the Act dealing with fraud is not recognised under the LLP Act.

 

This renders a non-cognizable nature to the offences of the LLP.

NO court will be able to take cognizance of any offence by an LLP or its partners/DPs unless complaint is made by some specified persons, such as Registrar, or any person authorised by Central Government.

 

This may be said to be in furtherance of the Report on Decriminalization of offences of LLPs.

 

 

460 Condonation of delay ·      Application to be filed with Central Government not filed within time/ Document to be filed with ROC not filed within time

·      Central Government may condone delay

·      Reasons to be recorded in writing

The same is already made applicable on LLPs vide MCA notification dated 30.01.2020

Conclusion

The provisions of the Act that are sought to be incorporated under the LLP Act seems to have a wide-spread effect. These will bring major changes in the regime of LLPs once they come into effect. However, it is to be noted that though the provisions seem to have far-reaching consequences, the extent and manner of applying them on the LLPs will only be clear once the rules come out in this connection.

The integration of various provisions of the Act with the LLPs indicate an era of LLPs becoming similar with companies.

 

Our write-ups related to the topic can be viewed here-

 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *