Hundreds of LLPs may be vanishing soon

By Sandeep Kumar Mishra, (corplaw@vinodkothari.com)

Introduction

After issuing of show cause notices[1] (SCNs) for striking of names of more than 3 lakh non-operating companies, the Registrar has now taken the same action for LLPs. It seems that government has decided to heavily come down on existence of non-operative Limited Liability Partnerships (‘LLPs’) or say fake firms which are causing significant buzz all over in the corporate sector. The Finance Minister had already indicated through his bold statement that actions will be initiated against the body corporate which have been strictly meant for the purpose of circulation of black money and are not carrying any business activity. It now seems that the Registrar of Companies  (RoC) Kolkata, have given the non-operative firm an ultimatum to either make the compliances and start doing the business activity for which they were formed or else be ready to pack up for ever.

Looking at the long list of LLPs which have been issued SCNs under section 75 of Limited Liability Partnership Act, 2008 (the “Act”); it is evident that these LLPs have failed to comply with the provisions of the Act. These LLPs are required to either furnish reason for non-compliance or get struck down from the Register of Companies being maintained by the RoC.

Provisions of law

Section 75 of the Act read with rule 37(1) of Limited Liability Partnership Rules, 2009 (‘LLP Rules’) provides that –

(a) where the Registrar has reasonable cause to believe that an LLP is not carrying on any business or operation for a period of two years or more; or

(b) where the LLP is not carrying out business for a period of one year or more and has made an application in Form 24 to the Registrar, with the consent of all partners of the limited liability partnership for striking off its name from the register

the Registrar shall send a SCN to such LLP and all its partners, of his intention to strike off the name of the limited liability partnership from the Register and at the same time request the recipients to send their representations along with copies of the relevant documents, if any, within a period of one month from the date of the SCN.  However, such SCN shall not be given where the LLP has made an application for striking off its name.

Provided further that where the limited liability partnership is regulated under a special law, the above application for removal of its name shall be accompanied by approval of the regulatory body constituted or established under that law.

Registrar my struck off name of limited liabilities partnership firm from register of Limited liabilities partnership maintain by ROCs, after giving reasonable opportunity of being heard—

Curing step taken by the ROCs

Recently, RoC of West Bengal, Shillong and Odisha has sent SCN to hundreds of LLPs.  This bold step taken by the government is giving clear indication to the Partner/Promoter of LLPs, who device such mechanism merely for circulation of fund under shadow concept separate legal entity of body corporate. Either to comply with provision of law in true sprite in letter or cease to be perpetual existence as separate legal entity. With these SCNs coming, now LLPs are rushing to professionals to seek advisory on the response to be submitted, If such LLPs accept their default and agree for being struck down then the designated directors shall be held liable for the non-compliances made so far and on the other side if someone wants to revive the LLPs then the burden of making the defaults good shall be nothing less than incurring huge expenses.

A critical question mark on the fate of creditors and stakeholders

With the SCNs flowing in, the names of most of the LLPs will get struck off, either willingly or unwillingly at the hands of the RoCs. However, one needs to understand the fate of creditors and other stakeholders holding any interest in such LLPs.

Conclusion

With the wide spread epidemic of non-operative and bogus LLPs encompass in the Indian corporate sector taking shadow of concept of separate legal entity for circulation of  fund and deriving tax benefit, Now the ROCs have come up with a well devised mechanism to cure the same from its root. At this moment, we await to see what shall be the next step of the ROCs against the response being submitted by the LLPs which more or less shall be over by the end of this month as all of the LLPs are given just one month time to respond to the SCNs. To sum up, ROCs have turned the tables in the game, better late than never.

Further we have analyzed similar issue pertaining to strike off of more than 3 lakh companies from register of companies maintained by ROCs

http://vinodkothari.com/corporate-laws/

[1] http://www.icai.org.in/LLP%20Rules.pdf

http://www.mca.gov.in/Ministry/pdf/PublicNotice_27072017.pdf

http://www.mca.gov.in/Ministry/pdf/ROCWBLLPNotice_26072017.pdf

http://www.mca.gov.in/Ministry/pdf/Notice_listofLLP.pdf