Limited Liability Companies – Back In Limelight – Company Law/Commercial Law

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introduction

In less than about a month, the very first amendment to the Limited Liability Companies Act 2008 (“LLP Act“) will come into force (from 1st from April 2022). Limited Liability Companies (Amendment) Act 2021 (“Amendment“) was finally notified on 11and February 2022 together with the Limited Liability Companies (Amendment) Rules 2022 (“LLP
Rules“). Limited Liability Companies (“LLP“) often serve as an alternative quasi-corporate vehicle offering the benefits of limited liability to its members, the flexibility to organize their internal structure with fewer legal compliances and requirements compared to any corporation incorporated under the companies 1956/2013.

The intention behind the amendment is to give a much needed boost to India’s economic growth, especially small and medium enterprises which have suffered greatly during the covid pandemic like most other countries in the world.

Highlights

Important features and major highlights of the amendment are mentioned below:

1. Small LLPs

1.1 The Amendment introduced the concept of “Small limited liability company‘ which is inspired by and wants to be in phase with the concept of ‘Small business‘ under the Companies Act 2013.

1.2 A Small LLP is an LLP in which (i) the contribution is up to Rs.2,500,000 (Rs. twenty-five lakhs only) or such other amount as may be prescribed, not exceeding Rs.5,00,00,000 (Rs. only five crores); and (ii) whose turnover is up to Rs.40,00,000 (rupees forty lakhs only) or such other amount as may be prescribed, not exceeding 50,00,00,000 (rupees fifty crores only), for the previous year. I

2. Start-Up LLP

2.1 The amendment introduced the concept of start-up LLP. The central government (“central government“) was granted the authority to recognize and designate certain LLPs as “start-up LLPs” and to issue notices/regulations relating thereto from time to time. Although the amendment is silent on the definition of a start-up LLP, the decision can be a huge boon for the start-up sector in India.

3. Offenses – Financial penalties and capitalization

3.1The Amendment decriminalized a number of criminal provisions under the LLP. In the case of certain contraventions, only pecuniary sanctions will apply to SENCRL and its partners for these specific breaches. Some of these include (i) the declaration of arrangements between an LLP and its creditors or partners; (ii) declaration of change of registered office, (iii) filing of the statement of accounts and solvency, and annual declaration; (iv) notification of changes in LLP partners; (v) rebuilding or merging an LLP.

3.2 The penalty payable by a Small LLP or a Start-Up LLP shall be subject to a maximum of Rs.1,00,000 (one lakh rupees only) and Rs.50,000 (fifty thousand rupees only) for each partner or nominated partner. Given the difference in turnover of LLPs compared to Small LLPs and Start-Up LLPs, the latter benefited from reduced penalties and fines.

3.3 The Amendment introduced “Regional Directors”, meaning a person appointed by the Central Government for the purposes of the LLP Act and/or the Companies Act 2013. These Regional Directors were given the power to aggravate various offenses which are only punishable by If an offense committed by an LLP or its partners is aggravated, a similar offense cannot be aggravated for a period of 3 (three) years. In addition, any second offense or subsequent offense will be considered a first offense if such offense was committed after the expiration of a period of 3 (three) years from the date on which it was previously composed.

4. Special Tribunals, Adjudicators and Appeals

4.1 The Amendment provides for the establishment or appointment of Special Courts by the Central Government to expedite the trial of various offenses under the LLP Act. The special courts will be composed of a single judge exercising the functions of “judge of the sessions” or “judge of the additional sessions” in the case of offenses punishable by a prison sentence of 3 years or more; and a Metropolitan Magistrate or First Class Judicial Magistrate for other offences.

4.2 The Amendment also provides for “arbitration officers” to be appointed by the central government to impose and impose penalties for non-compliance or breaches committed under the relevant provisions of the LLP Act.

4.3 Under the LLP, appeals against the orders of a National Company Law Appeals Tribunal (“NCLT“) are subject to the National Company Law Appeals Tribunal (“NCLATThe amendment now provides that appeals cannot be made against orders which have been made on the consent of the parties and further that appeals must be filed within 60 days (with an additional 60 days in the event sufficient delay cause of delay) of the order.

5. Miscellaneous

5.1 According to the LLP Act, every LLP must have at least two authorized/designated partners, one of whom must be a resident of India. Prior to the amendment, an Indian resident was defined as a person who spent at least 182 (one hundred and eighty-two) days in India in the previous year. In accordance with the amendment, the definition of designated partner is amended to include any person who has lived in India for at least 120 (one hundred and twenty) days during the financial year.

5.2 No LLP shall be registered under a name which, in the opinion of the Central Government, is identical with or closely resembles that of any other limited liability company, company or registered trademark of any other person such as defined by the trademarks. Act 1999. Further, under the amendment, the Central Government has the power to order an LLP to change its name within 3 (three) months if it is identical to a trademark or resembles the name of another LLP.

5.3 Under the terms of the amendment, the central government has been given the power to prescribe auditing and accounting standards, in consultation with the National Financial Reporting Authority and as recommended by the Chartered Accountants of India to LLPs.

5.4 For the purposes of exercising the powers and performing the functions conferred on the Central Government under the LLP Act and its amendment, the Central Government may, by notice, establish the number of Registrars at the locations which he deems appropriate.

5.5 The LLP originally provided an upper limit of 300 days for any delayed filing. Under the amendment, this time limit has been removed and any late filing after the due date can now be made later upon payment of additional fees.

5.6 Under the terms of the Addendum, any act committed with fraudulent intent/intent by a SENCRL or its partners is punishable by imprisonment for up to 5 (five) years. It should be noted that the LLP originally only provided for a period of 2 (two) years.

Conclusion

The amendment aims to attract entrepreneurs and start-ups. The introduction of Small LLPs and Start-Up LLPs is particularly interesting. This would encourage more people/businesses to choose LLPs as their preferred form of entity to run their businesses. The amendment essentially reduces onerous provisions, provides for speedy trials, imposes a heavier penalty for fraud, and overall aims to streamline the regulation and establishment of LLPs. However, it is still a matter of time before the Amendment and Supplementary LLP Rules are put to the test. Markets will only be able to determine the actual impact and benefits of the amendment after it comes into effect on 1st April 2022.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.