LLP Amendments

The Rajya Sabha on August 9, 2021, passed the Limited Liability Partnership (Amendment) Bill, 2021 (“Bill”). The Bill seeks to amend the Limited Liability Partnership Act, 2008 (“Act”) which regulates limited liability partnerships (“LLPs”). The Bill converts certain offences into civil defaults and changes the nature of punishment for these offences. The Bill, inter alia, coins the expression “small” LLP, provides for appointment of certain adjudicating officers, establishes special courts and intends to promote a start-up ecosystem.

Some of the key features of the Bill include:

1. Decriminalisation of certain offences: The Act regulates the operations of LLPs and makes contravention of certain compliances punishable with a fine only (ranging between two thousand rupees and five lakh rupees). These compliances include failure in: (i) reporting of changes in partners of the LLP, (ii) reporting of change of registered office, (iii) filing of statement of accounts and solvency, and annual return, and (iv) reporting of the arrangement between an LLP and its creditors or partners and reconstruction or amalgamation of an LLP. The Bill decriminalises these provisions and imposes a monetary penalty in the event of contravention.
2. Change of name of LLP: The Act states that the central government may direct an LLP to change its name on certain grounds (such as the name being undesirable or identical to a trademark pending registration). Failing to comply with such direction is punishable with a fine ranging from ten thousand rupees to five lakh rupees. The Bill removes the ground of the name being ‘undesirable’ as it is ambiguous and can lead to varied interpretations and empowers the central government to allot the LLP a new name.
3. Increased punishment for fraud: In terms of the Act, if an LLP or its partners carry out an activity to defraud their creditors, or for any other fraudulent purpose, every person party to it knowingly is punishable with imprisonment of up to two years and a fine between fifty thousand rupees and five lakh rupees. The Bill increases the maximum term of imprisonment from two years to five years thereby making fraudulent activities liable for higher penalties.
4. Non-compliance of orders of Tribunal: Under the Act, non-compliance with an order of the National Company Law Tribunal (“NCLT”) is punishable with imprisonment up to six months and fine up to fifty thousand rupees. The Bill removes this offence.
5. Compounding of offences by Regional Director: In terms of the Act, the central government may compound any offence under the Act which is punishable with a fine only. The amount imposed may be up to the maximum fine prescribed for the offence. The Bill amends this to provide that a Regional Director (or any officer above his rank), appointed by the central government, may compound any offence under the Act which is punishable by fine only. The amount imposed may extend to the amount of the maximum fine prescribed but not lower than the minimum amount prescribed for the offence. However, if an offence by an LLP or its partners was compounded, then future offences cannot be compounded for a three-year period from the date of the last compounded offence.
6. Adjudicating Officers: Under the Bill, the central government may appoint adjudicating officers for awarding penalties under the 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.
7. Special Courts: The Bill enables the central government to establish special courts for ensuring speedy trial of offences under the 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 the High Courts.
8. Appeals to Appellate Tribunal: Under the Act, appeals against orders of the NCLT lie with the National Company Law Appellate Tribunal. The Bill stipulates that appeals cannot be made against any orders that have been passed with the consent of the parties. Furthermore, Appeals must be filed within sixty days (extendable by another sixty days) of the order.
9. Small LLP: The Bill has introduced a concept of small LLP where: (i) the contribution from partners is up to twenty five lakh rupees or such higher amount but not exceeding five crore rupees, as may be prescribed, (ii) turnover for the preceding financial year is up to forty lakh rupees or such higher amount but not exceeding fifty crore rupees, as may be prescribed. Such LLPs will qualify as a small LLP and would be entitled to lesser compliances. Currently under the Act, an LLP in which contribution from partners does not exceed twenty five lakh rupees, or whose turnover for the preceding financial year does not exceed forty lakh rupees is not required to get its accounts audited.
10. Standards of accounting: Under the Bill, the central government may prescribe the standards of accounting and auditing for classes of LLPs, in consultation with the National Financial Reporting Authority.

The intent of the Bill is to promote establishment of LLPs, encourage start-up eco system, rationalise the imposition of penalties in case on non-contravention, set up special courts for adjudication and impose higher penalty in case of fraudulent activities. The concept of small LLPs has been expanded and will be subject to reduced fee, lesser compliance and smaller penalties in the event of non-compliance.