BackAn easier exit route in the works for limited liability partnerships
An easier exit route in the works for limited liability partnerships
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New Delhi: Within a year of allowing limited liability partnership (LLP) firms to be established in India, the government is revisiting their closure norms to permit more flexible and easier winding up of these entities.
The norms for shutting LLPs are yet to be notified and, hence, are not enforceable.
The ministry of corporate affairs (MCA) is doing this to make it consistent with the winding-up rules proposed in the Companies Bill, 2009, which the government introduced in the just-concluded budget session of Parliament. The new norms have been sent by the MCA to the law ministry for its consent.
LLP is a business structure that has elements of both partnership and corporate firms but combines the limited liability benefits of a company with the flexibility of a partnership.
India’s Limited Liability Partnership Act, 2008, passed in Parliament last year, was published in the official Gazette of India on 9 January, and has been notified with effect from 31 March. The law aims to give professionals such as chartered accountants, lawyers and venture capitalists more flexibility in setting up LLP firms.
So far, 96 LLPs have been registered. LLPs, like partnership and corporate firms, need to be registered with the government to start functioning.
“We have already framed winding-up norms, which are very much in line with those mentioned for body corporates in the new Companies Bill. The new set of norms have gone to the law ministry for vetting," said an MCA official who did not want to be identified. He added that the new set of guidelines will be notified once the law ministry gives its consent. “We are hoping that new guidelines defining a flexible winding-up structure will be notified within a month," the official said.
Under the proposed Companies Bill, which is in the process of being referred to a parliamentary standing committee, a convention that applies to all important Bills, a company can be wound up either by a tribunal or on a voluntary basis.
Voluntary winding-up can be done by passing a resolution in a board meeting that declares that the directors have made full inquiry into the affairs of the company and either the company has no debt or the debts would be cleared by selling its assets.
A tribunal is needed when a company is unable to pay its debts, if the company has acted against the sovereignty of the country or conducted the affairs of the company fraudulently. It is also needed if the company has defaulted in filing its financial statements, annual reports or other statutory statements.
“These processes are much less complicated and time consuming than what Companies Act, 1956, contains," the ministry official said.
G.R. Bhatia, partner at Luthra and Luthra Law Offices, said the new system, if enforced, will change the way winding-up is done in India.
“Since the very concept of LLP is to make the process of doing business simple and entry laws have suitably been designed, the exit law should also be simple, quick, smooth and inexpensive," Bhatia said.
He added that LLPs are primarily meant for professionals who, after completing particular assignments, may like to move on and that winding up through the voluntary route will come in handy for them.
Bhatia was also of the opinion that under the current Companies Act, the long-drawn process of going to a high court and appointment of an official liquidator, who is meant to facilitate the process of winding up, results in assets lying dormant for years.
“Any plant and machinery languishing for years is against national interest," said Bhatia.
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