Winding up of LLP
Winding up of LLP
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.
In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation. Some states require one partner to be a “general partner” with unlimited liability, meaning he/she is ultimately responsible for the debts of the business and for any lawsuits such as personal injury or breach of contract. Unlike corporate shareholders, the partners have the right to manage the business directly. In contrast, corporate shareholders have to elect a board of directors under the laws of various state charters.
Historical Background of LLP
The issue of LLP has been a matter of discussion in India for over a decade now. The Abid Hussain Committee recommended legislation on LLP way back in 1997. Later, the concept of LLP and the need to introduce it in India was recommended in the report of Naresh Chandra Committee (2003) set up for suggesting regulation of private companies. J.J Irani Expert Committee on Company Law (2005) recommended introduction of LLP law.
While Naresh Chandra Committee preferred the application of the LLP to the service industry, Irani Committee recommended that small enterprises should also be included within the scope of LLP. The need for introduction of a LLP legislation was felt for a long time but the process gained momentum only when the second Naresh Chandra Committee submitted its report in July 2005. Consequently, the Limited Liability Partnership Bill 2006 was introduced by the Ministry of Corporate Affairs on 15 December 2006 in the Rajya Sabha on 22 October 2008 for the formation and regulation of limited liability partnerships and for matters connected therewith or incidental thereto.
LLP Winding Up
- Section- 63, 64 and 65 of LLP Act 2008, regulates the process of winding up an LLP.
- A Limited Liability Partnership being an artificial person cannot die a natural death. It comes into existence through legal proceedings and hence ceases to exist in the same manner.
- Winding up means closing up of a company’s concerns, which may be by reason of insolvency or otherwise, by the realization of assets, payment of liabilities and distribution of surplus if any amongst the partners of LLP.
- The winding up of an LLP may be either Voluntary or by Tribunal and LLP, so wound up may be dissolved.
- Dissolution is an event wherein the name of LLP is removed from the register of LLP’s and the fact is notified. Dissolution puts an end to the existence of a company.
Voluntary Winding Up
LLPs can also be wound-up easily with the approval of 3/4th of the partners.
To start the liquidation process for a LLP, a greater part of the designated partners, will have to make a declaration that the LLP has no debt or that it will be competent to pay the debts in full within a period of not more than 1 year from the start of winding up.
Further, the LLP partners must declare that the LLP is not being wound up to defraud any person or persons.
This declaration for winding up of the LLP must be prepared along with a statement of assets and liabilities until the most recent practicable date right before the making of declaration for winding up.
A valuation of the assets related to the LLP prepared by a valuer must also be submitted, if there are assets in LLP.
Voluntary winding up will be deemed to start on the date of passing of resolution for the reason of voluntary winding up.
Striking Off
The Ministry of Corporate Affairs has amended Limited Liability Partnership Rules, 2009 by introducing the Limited Liability Partnership (Amendment) Rules, 2017 with effect from 20th May, 2017.
With this amendment, LLP Form 24 has been introduced by the MCA and it is now possible to easily close a LLP by making an application to the Registrar for striking off name of LLP.
Before the introduction of the Limited Liability Partnership (Amendment) Rules, 2017, the procedure for winding up a LLP used to be long and cumbersome.
However, with the introduction of LLP Form 24, the procedure has been made easy and simple.
Winding Up by Tribunal
Winding up of LLP can be initiated by a Tribunal for the following reasons:
The LLP wants to be wound up.
There are less than two Partners in the LLP for a period of more than 6 months.
The LLP is not in a position to pay its debts.
The LLP has acted against the interests of the sovereignty and integrity of India, the security of State or public order.
The LLP has not filed Statement of Accounts and Solvency or LLP Annual Returns for five consecutive financial years.
The Tribunal is of the opinion that it is just and equitable that the LLP should be wound up.
Effect of Winding Up of LLP
Once the winding up process has begun, a company can no longer pursue its business, except in order to complete the liquidation and distribution of its assets.
At the end of the process, the company will be dissolved and will effectively cease to exist.
Advantages of Limited Liability Partnership
Easy to Form
Forming an LLP is an easy process. It is not complicated and time consuming like the process of a company.
Liability
The partners of the LLP is having limited liability which means partners are not liable to pay the debts of the company from their personal assets.
No partner is responsible for any other partner misbehaves or misconduct.
Perpetual Succession
The life of the Limited Liability Partnership is not affected by death, retirement or insolvency of the partner.
The LLP will get winded up only as per provisions of the act of 2008.
Management of the Company
All the decisions and various management activities are seen and done by the directors of the company.
Shareholders receive very less power as compared to the board of directors.
Easy Transferability of Ownership
There is no restriction upon joining and leaving the LLP.
It is easy to admit as a partner and to leave the firm or to easily transfer the ownership on others.
Taxation
Limited liability partnership is exempted from various taxes such as dividend distribution tax and minimum alternative tax.
The rate of tax on Limited Liability Partnership is less than as compared to the company.
Disadvantages
Not Covered in All States
Due to various tax benefits and provisions many states restrict the formation of LLP in their states.
Less Credibility
Many people do not consider LLP as a credible business structure.
Partners Not Consulting
Partners of LLP may not consult each other during important decisions and agreements.
Transfer of Interest
Though ownership can be transferred, it usually involves lengthy formalities.
Lack of Recognition
LLP was introduced in India in 2009 and still lacks recognition in some sectors.
Benefits of Closing LLP
Avoid Compliance
LLP winding up can be used to close an inactive LLP and avoid regular compliance responsibilities.
Avoid Fines
A LLP that doesn't file compliance on time incurs fines and penalties.
Low Cost
A dormant LLP may acquire more penalty if compliance is not maintained every year.
Easy to Close
Formalities for winding up a dormant LLP are relatively simple and easy.
Easy Process
MCA has simplified the process for winding up of LLP through various initiatives.
Modes of Winding Up of LLP
There are two ways under the LLP Act of 2008 to wind up the LLP:
1. Voluntary Winding Up of LLP
Under this, partners can decide between themselves to stop and wind up the operations of the LLP.
LLP may initiate winding up voluntarily with approval of at least three-fourths of the total number of Partners.
If the LLP has lenders, approval of lenders is also required.
Procedure
Passing of Resolution
Declaration of Solvency by Designated Partners
Approval of Creditors
Publication of Resolution
Appointment of Liquidator
Preparation of Final Report by Liquidator
Passing of Dissolution Order
2. Compulsory Winding Up of LLP
LLP may also be wound up by the order of Tribunal/Court.
Where number of partners falls below two for more than six months.
LLP is unable to pay debts.
LLP acts against sovereignty and integrity of India.
Failure to file Statement of Account and Solvency or annual return for five years.
Tribunal believes it is just and equitable to wind up LLP.
LLP Winding-up Procedure
Petition for winding up can be filed by LLP, partner, creditor, Registrar or Central Government.
Tribunal exercises special powers after presentation of petition.
Tribunal fixes hearing date and issues public notice.
Certified copy of winding-up order must be filed with ROC.
Winding-up order acts as notice of discharge to employees and officers.
No suit or legal proceedings can continue without Tribunal permission.
Declaration of Dissolution of LLP by Registrar
The Registrar may declare that the LLP is dissolved if:
No objection is received from partner or creditor.
Objections are withdrawn subsequently.
Registrar believes objection is without justification.
The declaration of dissolution takes effect only upon notification to the Registrar.
