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Validating the dynamics of Limited Liability Partnership (amendment) Bill, 2021

The Limited Liability Partnership is a hybrid representation of a partnership firm and a company where the partners are not accountable or liable for any illegality undertaken by any other partner. Lok Sabha has passed the Limited Liability Partnership (amendment) Bill, 2021 on 9th of August 2021. The Bill prominently emphasizes on bolstering the startup […]

Parliament
Parliament

The Limited Liability Partnership is a hybrid representation of a partnership firm and a company where the partners are not accountable or liable for any illegality undertaken by any other partner. Lok Sabha has passed the Limited Liability Partnership (amendment) Bill, 2021 on 9th of August 2021. The Bill prominently emphasizes on bolstering the startup eco-system and boosting the ease of doing business in India. The objective of the Central Government is to make norms that are less stringent and are advantageous to various LLPs so as to encourage the establishment of various startups across the country. The bill was introduced in the Rajya Sabha on 30th of July, 2021 and was subsequently passed on 9th of August, 2021. The bill aims to amend certain regulations of LLP Act. The concept of Limited Liability Partnership runs parallel to the traditional partnership. The major regulations of the bill are inclusive of substituting certain criminal offences to civil defaults and re-establishing the nature of penalization for various offences. Furthermore, defining the concept of small LLPs and the administrative modification introduced the establishment of special courts along with the appointment of adjudicating officers and a regional director.

While elaborating on every aspect of the bill the underlying objective of making the business ecosystem entrepreneur friendly can be undeniably witnessed. The decriminalization of certain offences is a favorable initiative to modify the stringent norms and encourage the ease of doing business in India. At present, there are in totality twenty-four penal provisions of which twenty-one fall under the compoundable offences and the remaining three are dealt as non-compoundable offences. The bill seeks to regularize twelve of the compoundable offences and decriminalizing the same with the objective of merging them under the ambit of civil defaults. Furthermore, certain offences that can be more significantly dealt under other laws are proposed to be omitted from the LLP Act. The Act meticulously specifies the manner of operation of LLPs and undistinguishably state the imposition of monetary penalty ranging from two thousand rupees to five lakh rupees in case of any violation of the stated requirements. The requirements are inclusive of changes in partners of an LLP, change of the registered office, timely filing of statement of accounts, solvency and the annual return and most importantly forming the well-structured arrangement between its partners and restructuring or amalgamation the LLP.

The LLP Act states that the Central Government may order any LLP to change its name on various rational grounds viz. the name being antagonistic or identical to any trademark pending registration. Negligence to comply by the directions issued by the Central government involves monetary penalty ranging between fifty thousand rupees to five lakh rupees. The bill introduced has removed some of the grounds and has empowered the Central Government to allot a new notional name to the LLP concerned instead of levying a heavy monetary penalty.

The Limited Liability Partnership (amendment) bill, 2021 has indisputably shown rigid discouragement against fraudulent partners involved in any deceptive activity that has a prima facie impact on the creditors, by increasing the maximum term of imprisonment from two years to five years in case of illegal activity undertaken by any partner. The bill has additionally revoked the offence of non-compliance of orders of the National Company Law Tribunal that was previously punishable with imprisonment up to six months and additionally with a fine of Rs. 50,000.

The bill has modified certain confines where the offences which imposed a fine were compounded by the Central Government and has additionally mentioned the requirement of appointing a Regional Director by the Central Government who shall be accountable for compounding offences. The amount so imposed should be within the minimum and maximum amount sphere for the stated offence. If an offence is compounded by an LLP or its designated partners then an offence of a similar nature cannot be compounded within three years period from which the compounding was done. The bill furthermore mentions the obligatory requisite of establishing a Special Courts for ensuring speedy trials and deliverance of justice timely. The special courts shall be inclusive of (i) Sessions Judge or an Additional Sessions Judge specifically dealing with offences stating penalization of imprisonment with three years or more and (ii) Metropolitan Magistrate or a Judicial Magistrate for other offences. The appointment shall be made with the concurrence and consensus of the Chief Justice of the High Court and the appeals against the orders of the special courts so established shall lie with the High Court. The appointment of Adjudicating Officers for awarding penalties is also a predominant section of the bill. The Adjudicating officers shall be Central Government employees equivalent to the rank of registrars or can be higher to that. The appeals against the Adjudicating officer so appointed shall lie before the Regional Officer.

The bill furthermore provides for the formation of Small LLP where the contributed capital by the designated partners shall be up to twenty-five lakh rupees which maybe increased to one crore rupees and the turnover of the preceding financial year is up to forty lakh rupees and furthermore be increased to fifty crore rupees. The Central Government may also notify several LLPs as start-up LLPs. The objective of the small LLPs is to encourage entrepreneurs, the small LLPs shall be subject to less compliances and reduced fee. The compliance liability is less on small LLPs and the monetary penalty imposed in case of civil defaults shall also be less in figures.

The bill has additionally introduced Section 34-A that mentions the accounting and auditing standards for LLPs. This initiative shall conduct standardization in the procedures of accounting and auditing as the LLPs previously lacked a well-structured standard that their counterpart always had under the Companies Act, 2013. The amendment also permits the LLPs to issue fully secured non-convertible debentures from investors regulated by SEBI or RBI. The objective behind introducing this class of security is to facilitate LLPs in raising capital and financing the operations of LLPs.

The Inhouse Adjudicating Mechanisms have also been introduced in the bill which mentions that the offences that are involved in less serious compliance issues and incorporating objective determination are suggested to be transferred to Inhouse Adjudication Mechanism framework instead of treating it under the criminal infringement. The Ministry of Corporate Affairs is also functioning towards setting up an e-adjudication platform in the new portal of MCA21.

WAY FORWARD

The Limited Liability (Amendment) bill, 2021 has introduced major changes in the LLP Act so as to achieve the objective of ease of doing business and make the business ecosystem entrepreneur friendly. Several other amendments and modifications can be introduced in the near future to achieve the stated objective and to strengthen the Limited Liability Partnerships in India. Increasing theaccess of Angel Investors to LLPs by mitigating the stringent norms will indisputably benefit numerous entrepreneurs financially. Another way of introducing financial potential is by promoting the Registrations of LLPs in India. At present two NRIs are not permitted to form an LLP in India, as the pre-requisite of one individual being an Indian citizen is essential. Moreover, the Foreign Direct Investments in Limited Liability Partnerships can only pierce in through the Government route and the formation of LLP in India is time consuming entangled with stringent norms and mandates. Requirement for legally convenient registration procedures and enabling LLP formation to be more entrepreneur friendly is required to make India a favorable destination for establishing LLPs and financially boosting the LLPs. The introduction of Employee Stock Ownership Plan (ESOP) to LLPs shall benefit the employees and provide them with ownership interests in the firm and will help several partnerships to retain highly skilled experienced employees and embark the possibility financial growth of the firm. An LLP at present does NOT permit issuance of ESOP which is considered to be the most effective tool to retain the key personnel of the firm. The Limited Liability Partnership is the most efficient form of doing business as the liability of the partners is not shared and provides a secured environment to the designated partners. The latest amendments proposed through the bill will undeniably provide benefits to LLPs. Certain other provisions like issuance of ESOPs and easing the registration of LLPs in India can irrefutably make the system more secure and inviolable.

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