The LLP ecosystem has been revitalised

KVR Murty | Updated on August 09, 2021

The decriminalisation of minor defaults and addition of new concepts should incentivise limited liability partnerships

Rabindranath Tagore in his immortal poem Gitanjali had written: “Where the mind is without fear and the head is held high… my Father, let my country awake.”

These verses by one of India’s greatest minds have been the inspiration for the Government in its pursuit to take a new and young India towards greater heights and enhance the quality of lives of citizens by making their daily lives and businesses more productive, easier and stress free.

During the last seven years, a host of bold and transformative initiatives targeted towards corporates, the common citizens and the youth associated with them have been taken.

Another path-breaking step has now been taken by the Government. After a span of more than a decade, the Limited Liability Partnership Act, 2008 (LLP Act) has been amended for the first time, with the passage of the LLP (Amendment) Bill, 2021 in Parliament.

The amendments are primarily aimed at decriminalisation of two-thirds of the compoundable offences involving minor procedural or technical defaults, akin to the process of decriminalisation carried out under the Companies Act, 2013 based on the recommendations by the Company Law Committee, while at the same time promoting ‘Ease of Doing Business’ for LLPs.

This would provide a strong incentive for the unorganised unincorporated types of businesses to shift to an organised incorporated LLP form of business structure now that minor technical and procedural defaults which do not involve fraud or intent to deceive have been de-criminalised. So far, the fear and stigma of having to face criminal prosecution for even minor defaults acted as a disincentive for budding entrepreneurs and the youth.

While the LLP Act has retained the suppleness of a traditional partnership by allowing the partners to carry out their objects and manage their governance in accordance with their agreement, as a corporate vehicle LLP has three-fold advantages over a partnership simpliciter — that is, unlike a partnership, LLP has a separate legal identity, distinct from its partners; it allows the liability of the partners to remain limited to the extent of their contribution; and it has a perpetual succession.

Historically, the vehicle of LLP first gained relevance in the US, to provide the benefit of limited liability to professional firms, which could not organise themselves as companies. It was the Naresh Chandra Committee which, in its report submitted in 2003, had initially recommended that there should be a law for establishing LLPs in India.

Gaining traction

In India, the vehicle of LLP has gained a lot of traction during the last few years. This is evident from the fact that the number of active LLPs have risen to 2,13,014. There has been an annual growth of about 17 per cent in the number of LLPs incorporated during the fiscal year 2020-2021. A lot of these LLPs are part of the MSME sector, and many are run by budding entrepreneurs as start-ups. The services sector accounts for about 75 per cent of the LLPs, the industrial sector 23 per cent, and about 1.75 per cent of the LLPs are working in the agricultural sector.

This Bill has therefore, rightly, introduced new concepts of ‘small LLP’ and ‘start-up LLP’, to provide benefits of lesser compliances, lesser fees and lesser penalties in case of minor violations by such classes of LLPs.

The quantum of additional fees, in case of delayed filings, had got hard-coded in the LLP Act in 2008 and was the source of much agony for many LLPs, which had to pay a large amount on account of additional fees for delayed filings.

In a significant relief, now, the Government would exercise powers to provide the quantum of additional fee through rules, thereby allowing itself the judgment to fix it for a class of LLPs, based on size.

Besides this, the minimum criteria to qualify as a “resident in India” has been reduced from 180 days to 120 days. This would facilitate foreign partners in the process of nomination of a resident designated partner in the LLP as also professionals who travel frequently even as they run their LLPs.

This Bill rides on the regulatory architecture created under the Companies Act, insofar as it leverages the concept of Special Courts, already designated under the Companies Act for speedier trial of offences under the LLP Act, and creation of an internal adjudication mechanism by appointment of adjudicating officers for dealing with violations by levying civil penalties, post-decriminalisation.

Prescribing standards

Considering that public interest may also get involved after an LLP attains a particular size, a new provision allows the Central Government to prescribe the Standards of Accounting or Standards of Auditing for such LLPs.

Underlining the approach of the Government that decriminalisation should not be seen as dilution of the enforcement mechanism when it comes to dealing with fraudulent actions of the corporates, the period of imprisonment in case of fraud has been increased from two years to five years.

The Bill represents an earnest reform brought in by the Government, which has taken a frontline position to bring about greater ‘Ease of Doing Business’ for the law-abiding corporates, by creating a facilitative environment which allows doing of business without unnecessary threat of prosecution.

The passage of this Bill represents a watershed moment for the business community in the country, as the reform of decriminalisation has been carried out in respect the two most important business entities of the organised sector — company and the LLP. It is expected that this reform would give rise to a more organised economy and spur growth, so that we can achieve the goal of a $5 trillion economy.

The writer is Joint Secretary, Ministry of Corporate Affairs. The views are personal.

Published on August 09, 2021

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