Batting For Ease of Business - Analysis of the Limited Liability Partnership (Amendment) Act, 2021

04-04-2022

The Limited Liability Partnership (Amendment) Act, 2021 (“LLP Amendment Act”) received the assent of the President of India on August 13, 2021. The LLP Amendment Act will now come into effect from April 1, 2022, vide notification issued by the Ministry of Corporate Affairs (“MCA”) bearing no. S.O. 621 (E) dated February 11, 2022 (“Notification”). The LLP Amendment Act aims to improve ease of doing business for limited liability partnerships (“LLPs”) by decriminalizing offences, introducing small LLPs and start-up LLPs, enabling compounding of offences, establishing special courts and appointing adjudicating officers, amongst other amendments. Another pertinent aim of the LLP Amendment Act is to incentivize unorganized business enterprises to an organized incorporated structure, while creating ‘congenial business climate based on trust and compliances’, as stated in the Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act 2008 (“Report”), issued in January 2021. Pursuant to the Notification and as an update to our previous post on the subject, we have placed hereunder the key changes brought about by the LLP Amendment Act and the Limited Liability Partnership (Second Amendment) Rules, 2022 (“LLP Amendment Rules”):

Decriminalization of Offences

The Limited Liability Partnership Act, 2008 (“LLP Act”), contained 24 (twenty-four) penal provisions, which has now been reduced to 22 (twenty-two) penal provisions while also reducing the maximum penalty from Rs. 5,00,000/- (Rupees Five Lakhs only) to Rs. 1,00,000/- (Rupees One Lakh only). These changes were made to remove criminality and prosecution for any technical or procedural omission or non-compliance in the ordinary course of business. Additionally, Section 76A has been introduced by the LLP Amendment Act for the appointment of officers not below the rank of registrar, as adjudicating officers for adjudication of penalties, and laying down the provision for appeal against the order of such adjudicating officers and also to provide procedures for such adjudications and appeal. The decriminalization of offences and appointment of adjudicating officers while providing ease of doing business, will ensure more flexibility to LLPs, improved corporate compliance and faster adjudication of penalties. Further, out of the 22 (twenty-two) penal provisions: (i) 12 (twelve) offences will be adjudicated by an in-house adjudication mechanism, (ii) 7 (seven) will be compoundable offences and (iii) 3 (three) will be non-compoundable offences. The 12 (twelve) offences brought under the in-house adjudication mechanism is as follows:

Introduction of Small LLPs

The LLP Amendment Act introduced the concept of small LLPs in line with the concept of small companies under the Companies Act, 2013 (“Companies Act”) for the creation of a class of LLPs which would be subject to lesser compliances, fees and penalties, helping reduce the burden of compliance and associated costs for start-up LLPs and small businesses. Small LLPs have been defined as LLPs having contribution not exceeding Rs. 25,00,000/- (Rupees Twenty-Five Lakhs only) and a turnover for the immediately preceding financial year not exceeding Rs. 40,00,000/- (Rupees Forty Lakhs only). Pursuant to the Section 76A (3) introduced by the LLP Amendment Act, small LLPs will be liable to lesser penalties i.e., half the penalty specified under the relevant provision, subject to a maximum penalty of Rs. 1,00,000/- (Rupees One Lakh only) for such small LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for every partner or designated partner or any other person, as the case may be. The introduction of small LLPs will be a lucrative model for smaller unregulated businesses providing greater flexibility and equal opportunity, while also providing such entrepreneurs with greater flexibility and protection from compliances and penalties under the LLP Act.

Compounding of Offences

Section 39 of the LLP Act has been amended to provide the principles for compounding of offences, manner, procedure, and effect of compounding on pending prosecutions in the trial courts, in line with Section 441 of the Companies Act. Accordingly, offences under the LLP Act which is punishable with ‘fine only’, will shift to the in-house adjudication mechanism (IAM) instead of being treated as criminal offences and the Regional Directors (“RDs”) or any other officer not below the rank of a RD, duly authorised by the Central Government, have been authorized to compound such offences for a sum not exceeding the maximum fine prescribed for such offences and not less than the minimum fine prescribed for such offences.

Establishment of Special Courts

The LLP Amendment Act has introduced Sections 67A enabling the Central Government to establish special courts for the purpose of providing speedy trial of offences and has introduced Sections 67B and 67C to deal with procedure and powers of the Special Courts along with appeals and revisions. The special court will consist of a single judge:

1. holding office as Sessions Judge or Additional Sessions Judge, in case of offences punishable under the LLP Act with imprisonment of three years or more; and
2. a Metropolitan Magistrate or a Judicial Magistrate of the first class, in the case of other offences, who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court.

Further Section 77 has been amended and the powers of Judicial Magistrate of the first class or Metropolitan Magistrate have been transferred to special court which will have the power to impose punishment under Section 30 of the LLP Act. Also, all the criminal cases pending against the LLPs, its partners, designated partners, and any person concerned will be transferred to the Special Court under Section 67A. The LLP Amendment Act has introduced Section 77A empowering special courts to take cognizance of any offence punishable under the Act on a complaint in writing made by registrar or any officer not below the rank of registrar duly authorized for such purpose. Until such time the special courts are designated and established, special courts in terms of Section 435 of the Companies Act have been designated as special courts for the purpose of trial of offences punishable under the LLP Act and a Court of Sessions or the Court of Metropolitan Magistrate or a Judicial Magistrate of the first class, as the case may be, exercising jurisdiction over the area has been designated as special courts for criminal offences. Such special courts will be instrumental in reducing the burden of pending cases in courts and faster disposal of cases.

Auditing and Accounting Standards for LLPs

Since more and more companies are converting to LLPs and with a view to augment the financial reporting and disclosure standards of LLPs, the LLP Amendment Act now empowers the Central Government to prescribe accounting and auditing standards for certain classes of LLPs in consultation with the National Financial Reporting Authority. While LLPs already enjoy reduced compliance requirements, the aforesaid amendment will bring better transparency in the financial affairs of LLPs.

LLP Amendment Rules

The MCA recently notified the LLP Amendment Rules vide notification dated March 4, 2022, whereby several clerical and procedural amendments were made for easing compliances for LLPs. The major amendments prescribed therein are detailed below: Apart from the aforementioned amendments, various forms given below have been substituted / updated for easy usage:

Final Takeaways

Regulatory stance regarding LLPs is a mix of strict and soft touch. On one hand, the government extended certain stern company law provisions to LLPs on February 17, 2021, such as disqualification of partners / designated partners on failure to file Annual Returns for 3 (three) years; identification of significant beneficial owner of the LLP; restricted limit of maximum number of partnerships for partners / designated partners and enabling of regulatory power to inspect books and documents and undertake investigation. On the other hand, the government is also keen to make the LLP structure lucrative for stakeholders and with the amendments introduced vide the LLP Amendment Act and the LLP Amendment Rules, it is clear that the government’s intent is to enable ease of doing business for LLPs. The introduction of small LLPs and start-up LLPs, decriminalization, relaxed penalty regime, compounding of contraventions, as well as prescribed procedural efficiencies will attract more entrepreneurs and investors from the unorganized sector into the fold of LLPs and allow them to work in a business-friendly environment with lesser compliance requirements and greater flexibility. Industry stakeholders need to evaluate the ideal structure for incorporation based on their needs as the LLP structure personifies both simplification and even standardization of compliances vis-à-vis companies. That said, only time will tell the efficacy of LLPs, in line with the evolving business environment, changing regulatory stance and different stakeholder interests.  DISCLAIMER: The views and opinions expressed in this article are those of the author alone. This article is for general information purposes only and should not be construed as legal advice or be a substitute for legal counsel on any subject matter. No reader should act or rely on any information contained in this article, without first seeking appropriate legal or other professional advice.