- By Diana Mathias and Vaibhav Gandhi
Ease of Doing Business for MSMEs: India introduced the LLP Act in 2009 and more than a decade considering the fact that its introduction, Limited Liability Partnerships (LLPs) have steadily gained momentum as an alternate format to the classic kind of partnerships and very regulated kind of a corporation. LLPs have provided the substantially-expected flexibility for entrepreneurs to conduct their companies along with the protection in the kind of restricted liability.
However, quite a few startups and entrepreneurs had been shying away from the LLP format on account of lack of adequate incentives for startups, flexibility in issuance of instruments like debentures, and criminalisation of quite a few procedural lapses like delay in appointment of designated companion, upkeep of registered workplace, and so forth. Thus, in a move to facilitate ease of undertaking organization and encourage more entrepreneurs, the government has introduced the Limited Liability Partnership (Amendment) Bill, 2021.
Dealing of offences below the Act
Defaults in the existing LLP Act are “punishable with fine” on the LLP and the partners. Fine is the quantity of income that a court can order to spend for an offence following the conviction of an accused in a course of action of the criminal trial. Whereas penalty is the punishment imposed by the suitable authority for failing to comply with provisions of law exactly where no harm to public interest is brought on or no criminality is intended.
Based on the recommendation of the CLC in January 2021, the Bill as a result seeks to decriminalise several offences below the Act and has as a result changed the provisions from “punishable with fine” to “liable to penalties”. Further, an adjudication mechanism has been introduced for adjudication of penalties below the Act for offences that are not of criminal nature.
Recently, the Union Cabinet also authorized decriminalisation of 12 offences below the Act relating to default of procedural compliances like responsibilities of designated partners to file document, return, and so forth. or appointment of designated companion on vacancy, upkeep of registered workplace, filing of annual return, and so forth. The Bill has also lowered some of the penalties from the maximum threshold of Rs 5 lacs to Rs 1 lac for LLPs and Rs 50,000 for partners.
Apart, from the above compoundable offences are lowered to seven offences dealing with the upkeep of books and accounts, default below delivering data to registrar or production of data, and so forth., and non-compoundable offences to 3 which deal with fraud, intent to deceive, or injury to the public interest. However, if an LLP or its partners carry out an activity to defraud their creditors, or for any other fraudulent goal, the Bill increases the maximum term of imprisonment from two years to 5 years for each and every individual party to it knowingly. The Bill also proposes to establish a Special Court below the Act for speedy trials of offences committed below the Act.
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Introduction of the notion of compact LLP and begin-up LLP
The Bill proposes to introduce the notion of compact LLP in line with the notion of compact corporations. Small LLPs shall be LLPs obtaining contribution not exceeding Rs 25 lacs which can be extended to Rs 5 Crores and turnover not exceeding Rs 40 lacs which can be extended to Rs 50 crores. The notion of startup LLPs has been introduced in the Act. While the definition of a begin-up LLPs is however to be notified by the Government the move is becoming seen as a increase to the begin-up ecosystem whereby begin-ups who do not intend to register as corporations now have an option operating structure.
To incentivise compact and startup LLPs, the Bill seeks to limit the penalty levied on the Act for any non-compliances below the act to only one-half of the quantity of penalty prescribed topic to thresholds. However, unless tax sops are introduced for compact and startup LLPs like they have been made accessible to compact and startup companies, this initiative would be rather lackluster.
Debentures
The Bill for the initially time has dealt with the issuance of debentures by an LLP as a mode of fundraise. These debentures shall have a charge on the assets of the LLP and can be raised from entities regulated by SEBI or RBI. This move will undoubtedly attract institutional funding to LLPs which had been resistant in delivering funds as there had been no laws in LLPs that would provide a secured instrument.
Amalgamation with corporations
The Bill proposes to restrict LLPs from amalgamating into corporations. Thus, all LLPs who intend to enter into any M&A activity with a corporation in the future would necessarily have to initially convert themselves into a corporation initially and then proceed to amalgamate with one more corporation. This could outcome in enhanced timelines and may well also derail M&A possibilities.
Resident companion
Currently, it is mandatory to have one designated companion resident in India which suggests a individual who has stayed in India for a period of not much less than 182 days in the course of the promptly preceding one year. With Foreign Direct Investment permitted in LLPs for sectors in automatic route, this requirement proved a dampener for foreign investors intending to set base in India.
The amendment now seeks to minimize the quantity of days to 120 days in the course of the monetary year. This may well provide some relief for the foreign investors who had difficulty in sustaining one designated companion resident in India.
Accounting / Auditing Standards
A new section 34A has been introduced so as to empower the Central Government to prescribe the Accounting Standards or Auditing Standards for a class or classes of restricted liability partnerships in consultation with NFRA constituted below Companies Act, 2013.
Conclusion
The objective of the Bill is to market the notion of LLP as a body corporate to allow experienced knowledge and entrepreneurial initiative in a versatile, revolutionary, and effective manner. The Bill comprises of extended-awaited adjustments expected to facilitate higher ease of undertaking organization for corporates and stakeholders in the market and specifically decriminalization of offences shall incentivize compliance and market congenial organization climate.
Diana Mathias – Partner and Vaibhav Gandhi – Senior Consultant, N. A. Shah Associates LLP. Views expressed are the authors’ personal.