What Is Limited Liability Partnership (Amendment) Bill, 2021

The Limited Liability Partnership (Amendment) Bill, 2021, was introduced in Rajya Sabha on 30th July 2021, which subsequently became an Act on 9th August 2021 after being passed in the lower house with a majority of voice votes. Thereafter, the Amendment Act received assent from the President on 13th August 2021. The bill was passed amid the parliamentary protests of the opposition parties against the Pegasus Case and Farm Laws.

The 2021 Bill amended certain regulations of the Limited Liability Partnership Act, 2008, which as per the government, will strengthen the startup ecosystem via boosting the ease of doing business for MSMEs in India. The Amendment follows the recommendations of the Company Law Committee (CLC) given in January 2021.

Functioning of Limited Liability Partnership

Before we delve into the key aspects of the Act and its impact on the startup ecosystem, it is crucial for us to understand the basic functioning of a “Limited Liability Partnership.”

LLP, as the name suggests, is an alternative corporate business structure that enjoys the benefits of limited liability of a company and the flexibility of a partnership. Under this hybrid model, the LLP is considered a separate legal entity holding sole liability of its assets, but the liability of its partners (2 or more) is limited as per their individual contribution, thus shielding them from a joint liability created by another partner’s misconduct, unlike the partnership firms.

In addition, the LLP corporate entity can live beyond its partners as it continues to exist irrespective of a change in partners as it is capable of holding property or contract in its name. Further, the management-ownership divide in a company is not operational in an LLP as it is governed by the contractual agreement between partners instead of a statute.

All the features granted the professionals and budding Micro, Small Enterprises a platform to dogged the obstacles of partnership firms while enjoying the benefits of the Company Act, 2013. The number of registered LPP exponentially increased to over 2,36,000 since the enactment of the LLP Act, 2008. However, certain regulations like lack of incentives to raise capital and criminalization of procedural lapse, as per CLC, were seen as a hindrance to a flexible startup ecosystem, which the recent Amendment aims to modify. Let’s now dive into key aspects of the LLP Act, 2021.

Key Features of the Limited Liability Partnership (Amendment) Act, 2021

Formation of Small Limited Liability Partnership and Startup LLP

Under Section 2, a clause has been inserted which introduces the concept of Small Limited Liability Partnership, which falls along with the idea of a small company under the Company Act 2013. As per the clause,

the contribution from the partners in a small LPP will be up to 25 lakhs Rupees, which cannot exceed 5 crore Rupees, and
the turnover for the same should range between 40 lakhs Rupees to 50 crore Rupees (the latter being the upper limit) as per the Statement of Accounts and Solvency for the immediately preceding financial year

Further, the Amendment inserts a clause under Section 74, which confers the Central Government with the power to recognize certain LLP as Start-up LLPs. This classification provides leverage to the two new classes as the payable penalty for non-compliance of the LLP Act either by a Small LLP or a Startup LLP or its partners, or designated partners shall be one-half of the penalty specified in such provisions, with a maximum limit of Rupee one lakh rupees for limited liability partnership and fifty thousand rupees for its partners or designated partners or any other person.

Modification in the definition of a Resident of India

An LLP requires at least two partners, out of which one has to be a Resident of India, which according to the principal Act (LLP, 2008) was defined as a person who has stayed in India for a period of “108 days during the immediately preceding 1 year“. However, in order to boost NRI investments in India, the Amendment Act has reduced the residency period to “120 days during the financial year” for a person to be entitled as a Resident of India under Section 7(1) of the principal Act.

Decriminalization of various offenses and non-compoundable offenses

The major golden feature of the LLP Act, 2021 is that it seeks to reduce the total number of penal provisions and compoundable offenses in the principal Act from 24 to 22 and from 21 to 7, respectively, with the 3 non-compoundable offenses remaining the same. The idea behind this reduction is in line with the recommendations given by the CLC (which have been incorporated in LLP Act, 2021). It states:

Offenses relating to minor compliance issues can be shifted in an “In-House Adjuration” mechanism.
Offenses that are more appropriate to be dealt with under other laws should be omitted from the Act.
In respect of the 3 Non-Compoundable Offences which stand in violation, such as fraud or intention to deceive, or impacting the public interest; Status Quo should be maintained.

The Amendment Act has regularized 12 compoundable offenses and decriminalized them with the objective of merging them under the ambit of civil defaults. Thus the violation of these provisions shall not result in a criminal proceeding. Hence, the fines and punishment for these provisions are being substituted with civil monetary penalties. These provisions have been decriminalized as they do not fall under the ambit of fraud or impact the public interest, or no criminality is intended. Rather it consists of procedural lapse or minor omissions. These provisions are as follows:

Section 9 and Section 25: Changes in Partners of LLP and their registration
Section 13: Change in Registered Office of LLP
Section 34 and Section 35: Timely filing of Statement of Accounts, Solvency, and the Annual Return
Section 60: Compromise and arrangement between LLP and its partners or creditors, etc.
Section 62: Restructuring or amalgamation of an LLP
Section 74: General/residual default committed, but no specific punishment is mentioned.

This shift from fines to civil monetary penalties for the violations was necessary to create an entrepreneur-friendly business environment. As when a “Fine“- monetary punishment imposed by the court after the accused person is convicted via a criminal procedure is imposed on an LLP or its partners due to non-compliance, then it associates risk with the convicted person of being disqualified or ineligible for various posts and designations, which shall hamper their future. However, the monetary penalty nullifies this risk as it is mainly imposed by an appropriate authority.

Under the LLP Act, 2021, Section 30 has been modified, as the specified term of imprisonment has been increased from “2 years” to “5 years” if any fraudulent act is committed either by the LLP or its partner with an intent to defraud its creditors. Thus, these provisions certainly incentives the law-abiding LLP corporations while enacting stringent action against offenses impacting public interests at large.

Compounding of Offences

Previously the compounding power under this Act lay with the Central Government. However, the Amendment Act modified Section 39 by appointing Regional Director as the competent authority (recognized by the Central Government) to compound offenses by collecting from a person reasonably suspected of having committed the offense under this Act.

Further, it has also been signified that if an offense by an LLP or its partner is compounded, then a similar offense cannot be compounded for a period of 3 years. If a similar offense has occurred after the expiry period of the previous offense (after 3 years), then it would be deemed to be the first offense.

Section 17: No Penal Provision

As per the Amendment Act, the Central Government is bestowed with the power to direct an LLP to change its name within a period of 3 months if the same is (upon its registration or on its registration of new name) identical or resembles the name of any other LLP or company or a trademark registered under the Trade Marks Act, 1999. However, if the LLP fails to find a new name within the speculated time period, then the Central Government may allot a name to the LLP instead of imposing a fine, done previously.

Establishment of Registrars

Section 68A has been inserted via the Amendment Act, which assigns the Central Government with the task to establish a number of registration offices at suitable places in order to draw specific jurisdiction. Further, appointing various officials like Registrars, Additional Registrars, etc., as per the requirement, who shall be conferred with the responsibility of registering the LLP falling under their jurisdiction, along with discharging their duties under this Act. The establishment of such jurisdiction shall smoothen the functioning of LLP across the country, as the burden upon the Central Government would be lessened.

Establishment of Special Court and Adjudicating Officers

As per the inserted Section 67A, 67B – Special Courts will be established or designated by the Central Government for the speedy adjudication of offenses under the LLP Act. All the offenses of an LLP under this Act are triable only by the Special Courts falling under the registered jurisdiction of the concerned LLP. While trying an offense under this Act, a Special Court may also try any other offense at the same trial with which the accused may be charged under the Code of Criminal Procedure, 1973. The jurisdiction and power to impose punishment on an LLP or its partners under Section 30 (Fraudulent Actions) lies with the Special Courts. Thus, any pending case before the court of Judicial Magistrate or Metropolitan Magistrate shall be transferred to the Special Court as per jurisdiction once they are established (Section 77).

Further, Adjudicating Officers at par at the Registrars shall be appointed by the Central Government as per the jurisdictions for the purpose of imposition of penalties under this Act. The functions of the officers are mentioned under the new Section 76A.

Appeal to the Appellate Tribunal

Prior to the Amendment Act, no time frame was specified to appeal the Appellate Tribunal. However, clarifications have been made via amending Section 72 of the principal Act. The current substitution marks a clear time window of 60 days to file an appeal to the Appellate Tribunal, starting from the date when the copy of the order made by the Tribunal is given to the aggrieved person. However, the Appellate Tribunal may entertain an appeal after the expiry of the said period of sixty days, but within a further period of not exceeding sixty days at its own discretion. The modification further clarified that an appeal to the Appellate Tribunal could not be made against an order which was passed by the Tribunal upon the consent of both parties.

Additional Fees

The modification under Section 69 clarifies that if an LLP or its partner fails to register or file any document or return within the prescribed time mentioned in the Act, it may do the needful afterward by paying an additional fee. However, different additional fees shall be charged for different classes (i.e., LLP, Small LLP, or Start-up LLP) and for different documents.

Standardization of Accounting and Audit of LLP

The Amendment Act, inserted Section 34A, confers the Central Government with the power to prescribe the standards of auditing and accounting for all the classes of LLP. This standardization shall provide LLP with the benefits of a company. These measures shall be implemented in consultation with the National Financial Reporting Authority constituted under Section 132 of Companies Act, 2013, and the Chartered Accountants of India.

Implication

The revised Act aims to strengthen the ease of doing business in India while gearing its startup culture and building an entrepreneur-friendly ecosystem. The new classes under LLP – Small LLP and Startup LLP, will not only provide the budding entrepreneurs a corporate mechanism with fewer compliances, reduced fees, and lesser penalties but shall also smoothen the functioning of its legal framework as various offenses of LPP Act, 2008 has been decriminalized and modified into civil defaults. Thus, promoting the continuity and growth of new businesses by garnering them a platform to easily implement new innovations, models, and business ideas without being apprehensive about criminal proceedings for minor or non-substantive omissions or delays. These provisions, along with the reduction in residency period, will undeniably attract investors.

As per the Ministry of Corporate Affairs, the idea behind specifying the turnover range of Small LLP (Upper threshold 50 crore Rupees) was solely done to increase their risk appetite. If there is an expected increase in the profit margins of an LLP, and it crosses its turnover threshold, the LLP will be converted into a company, thus generating employment opportunities in the long term.

Lastly, the establishment of Special Courts and Adjudicating Officers as per the Registrar’s jurisdiction will unclog the judicial system via disposing of the trials in an efficient manner within a speculated time frame. However, it remains to be seen if these reforms transform the corporate and startup culture in India or if the system alleges implementation and structural flaws.