Author: Jay Shah
Year of study: 4th
Institute of affiliation: NMIMS University, School of Law, Mumbai.
In order to promote ease of doing business in India, especially for start-ups and other stakeholders of the corporate world, it was paramount to decriminalize certain compoundable offences that involved very minor procedural violations of the Limited Liability Partnership Act, 2008. There was a growing realisation by the Ministry of Corporate Affairs (hereinafter referred to as “MCA”) that criminalization of minor bona fide acts during the course of business not only negatively impacts the business environment but also puts an excessive burden on an already overburdened judiciary. This article analyses some of the prominent amendments along with several new concepts like Small LLP and Secured Non-Convertible Debentures introduced by way of the Limited Liability Partnership (Amendment) Act, 2021. Lastly, the article proposes certain recommendations that should be made to the existing LLP framework in order to fully achieve the goals envisaged under the act.
Keywords: Ease of doing business, Limited Liability Partnership, Ministry of Corporate Affairs, and Small LLP.
In the last decade, Limited Liability Partnerships (hereinafter referred to as “LLP”) have become the most sought-after business model for Medium, Small and Micro Enterprises to undertake commercial activities in India. This is due to the fact that the LLP model (a hybrid of a body corporate and a partnership firm) provides great flexibility for businesses to organise their internal structure as a partnership firm and function as a separate legal entity distinct from its partners. A Company Law Committee on Decriminalization of the LLP Act, 2008 (hereinafter referred to as “the committee”) was set up under the aegis of MCA on 18th September 2019 to make recommendations to amend/omit certain provisions of the Act.
The Report prepared by the committee is divided into three chapters. The first chapter deals with the decriminalization of certain offences under the existing Act, the second chapter deals with the ease of doing business related changes like introducing the concept of “Small LLP” and the last chapter deals with miscellaneous provisions like prescribing accounting standards for LLPs, among others. The Committee decided to adopt the same principle-based approach which was adopted by it to recommend decriminalization of certain provisions of the Companies Act, 2013. Relying on the recommendations made by the committee, The Limited Liability Partnership (Amendment) Bill, 2021 was passed by both the houses of the Parliament, providing the MSME sector with a dynamic opportunity for national expansion and further strengthening their presence in the country.
KEY AMENDMENTS TO THE ACT
The Amendment Act decriminalizes twelve compoundable offences and omits one penal provision of the principal act. This move will help in reducing the influx of cases dealt with by National Company Law Tribunals and other special courts. The offences that are decriminalised broadly fall under the nature of non-compliance with certain norms regarding eligibility and appointment of designated partners, registration of changes in partners and maintenance of books of account and filing of annual returns. The committee had come up with three principles to decide whether a certain section needs to be decriminalised or should be left untouched due to the veracity of the offence and its impact on the general public. It has been recommended that minor/less serious compliance issues involving primarily objective determinations be referred to an In-House Adjudication Mechanism (hereinafter referred to as “IAM”) rather than being prosecuted as criminal offences. The reference of Section 8 (Liability of designated partners) in Section 10 (Punishment for contraventions of Sec. 7, 8, 9) is omitted as no separate offence is made out independently under Section 8.
Further, Section 13 of the act requires every LLP to have a registered office where notices can be addressed and received by LLP, the partner or the designated partner. The amendment act will align section 13 with the provisions laid down under section 12 of the Companies Act, 2013 thereby subjecting the offender to civil liability. Similarly, procedural violations laid down under Sections 21 (Publication of name and limited liability), 25 (Registration of changes in partner), Section 34 (Maintenance of books of accounts and other records), 60 (Compromise or arrangement of limited liability partnerships), 62 (Facilitating reconstruction or amalgamation of limited liability partnerships), and 74 (General Penalties) will be subjected to civil liability and will be referred to IAM. Lastly, Section 35 (2) and (3) are combined where the amount of penalty for the LLP and its designated partners has been reduced from Rs. 5 lakhs to 1 lakh for the LLP and Rs. 50000 from Rs.1 lakh for the designated partners.
The Committee recommended that the status quo be preserved for non-compoundable offences with an element of fraud intent to deceive and causing injury to the public interest, as well as non-compliance with orders of statutory authorities. Relying on these recommendations, no change has been made to the provisions laid down under Sections 11 (Incorporation document), 30 (Unlimited liability in case of fraud), 37 (Penalty for false statement), 38 (Power of registrar to obtain false information), 47 (Production of Documents & evidence), Paragraph 17 (1) of the Second Schedule, Paragraph 15 (1) of the Third Schedule and Paragraph 16 (1) of the Fourth Schedule of the LLP Act, 2008. The offences laid down under these provisions involve elements of fraud, intent to deceive and can cause injury to the public interest and hence were not decriminalised. The criminal liability attached to these sections will ensure financial discipline and timely compliance with the regulations of the LLP Act.
INTRODUCTION OF NEW CONCEPTS UNDER THE AMENDMENT ACT
- Small LLP: The amendment act introduces the concept of Small LLP by creating a category of LLP, subjected to lesser compliances thereby facilitating ease of operations for the MSME sector. The same concept has already been implemented for companies under the Companies Act, 2013. A small company is bestowed with certain benefits like holding a reduced number of board meetings (2 instead of 4) in one year, no mandate to maintain a cash flow statement as a part of the financial statements, being subjected to lesser penalties in case of non-compliance, etc. It is also exempt from complying with the mandate laid down under Section 139 (2) with respect to the rotation of auditors. Introducing a similar concept for LLPs will go a long way in creating a conducive environment for start-ups to prosper and push India’s rank further ahead on the Ease of Doing Business indices.
- Secured Non-Convertible Debentures (NCDs): An LLP can contract debt for the purpose of conducting its business, however the LLP Act, 2008 and the Limited Liability Partnership Rules, 2009 prohibits an LLP to raise capital through the issuance of debt securities like NCDs. In other jurisdictions such as the United Kingdom, LLPs have been allowed to issue debentures by establishing a charge on their assets. In the UK, the Limited Liability Partnerships (Application of Companies Act 2006) Regulations, 2009 has a provision that states that since an LLP has a separate legal identity, it can “issue debentures to secure its borrowing. Issuing NCDs has the potential to attract a lot of investors as these financial instruments offer substantial returns due to their high interest rates compared to fixed deposits. As NCDs pose low risks on investment, the LLP can attract even those investors with a less risk appetite, who are looking to diversify their portfolio, enabling the LLP to kick start the business operations without taking heavy bank loans. Section 33A has been inserted in the amendment act, permitting LLPs to issue non-convertible debentures to entities regulated by the Securities and Exchange Board of India or Reserve Bank of India. It must be noted that LLPs can issue NCDs only to trusts and body corporates and not to retail investors in order to curb any form of fraudulent activity.
- Adjudication of penalties: As a number of offences are being decriminalized under the old LLP Act, and the same would be brought under IAM, it is essential that provisions for the adjudication of penalties and appointment of adjudication officers are provided under the Act. Accordingly, the amended act has inserted Section 77 A in the Act for adjudication of penalties, on the same lines as Section 454 of Companies Act, 2013.
- Accounting and auditing standards: An enabling provision is also inserted in the amendment Act to empower the Central Government to prescribe accounting and auditing standards to certain classes of LLPs. The same is reflected under Section 34A and 34 AA in Chapter VII of the Act.
It is visible that boosting ease of doing business has been one of the biggest agendas of the ruling NDA Government. In the recent past, the Central Government has undertaken several measures to boost investors’ confidence in the Indian economy by introducing initiatives such as “Make in India” and “Atmanirbhar Bharat”, decriminalization of minor offences and non-compliances under the Companies Act, FDI relaxations under the government and automatic route, etc.
The amendment act will go a long way in reviving the Indian economy during the COVID-19 pandemic by creating millions of new jobs and boosting the country’s GDP growth rate. The unpredictability in legal processes, as well as the time spent by courts in resolving disputes, has posed a significant barrier for the investors. The fear of being prosecuted for minor and petty offences serve as a deterrent for investors before engaging in any commercial activity or investing in such business models. The decriminalisation of minor offences will raise the spirits of such investors to engage in commercial activities and make investments without the fear of criminal prosecution. Having said that, the incumbent Government’s recent efforts to decriminalise petty offences under numerous statutes, including this one, are commendable.
However, certain provisions of the amendment act need some further clarity. For example, the Government should provide clear guidance as to when the jurisdiction of constitutional courts could be invoked to appeal against orders passed by in-house adjudicators. The Central Government should also keep in mind that some of the crimes that are being decriminalised, are serious in nature, and decriminalising them could have serious ramifications for MSMEs and the entire start-up industry. It is vital to analyse the nature of non-compliance, such as fraud versus negligence or unintended omission, as well as the habitual pattern of non-compliance, prior to such decriminalisation. Furthermore, Explanation II inserted under Section 62, prohibiting the amalgamation of an LLP with a company may hinder the future growth of that LLP as it will not be able to achieve synergetic benefits that an entity gets post amalgamation. Barring a few misses, the newly introduced amendments to the LLP Act not only cast a promising future for the MSME sector but also marks a new era for the start-up ecosystem in India.