LIMITED LIABILITY PARTNERSHIP

Limited Liability Partnership is a new type of business entity introduced by Limited Liability Partnership Act, 2008. It is an artificial legal entity recognized independent from its partners and has a perpetual succession. Introduction of LLP in India was much awaited and its arrival ensured that Indian economy has taken one more step towards the globalization. Numbers of Committees were working on this issue including Bhatt Committee in 1972 and Naik Committee in 1992. It is an alternative corporate vehicle that provides benefit of limited liability but at the same time the partners are free to determine the internal rules and regulations as per their wish. A company has a limited liability but lot of compliances. A Partnership firm has least number of Compliances but it has got unlimited liability. So in order to combine the benefits of a corporate entity and freedom of a Partnership firm the new entity was introduced called Limited Liability Partnership. As a Company has Directors, a LLP has Designated Partners (DP) for conducting affairs of the LLP. Every LLP has at least two designated partners out of which at least one of them has to be Indian resident. If a LLP is formed by two Companies together, then DP can be duly authorized representatives of the Companies. A DP shall be responsible for doing all acts done on behalf of the LLP and to make Compliances with the requirements of the LLP act including filing of documents with government authorities.

LLP is new concept for India and hence it is natural to have doubts about its recognition as an corporate entity. The Concept yet to attract popularity among business entities as most of them prefer to form traditional partnership and Companies for their business. However as the time will pass it will get some recognition and we as professionals also understand the complexities of issues relating to it. 

 

Apart from India other Countries that Recognize LLP includes the countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislations in various countries, the LLP Act is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members.

What is limited liability?

Now from layman`s point of view two things are essential to understand i.e. “what is limited liability?” and “Limited to what?” so here the liability is limited to the Contribution you are going to bring in the LLP. Which means that, if I bring Rs. 50,000/- as my contribution, my liability is limited to Rs. 50,000/- only. This benefit was attached only to the Limited Companies. The shareholder of a limited Company was liable to pay only that much money which he was agreed to pay at the time of subscription.

What do you mean by Contribution? Can it be increased?

Contribution in reference of LLP can be termed as, what a partner is contributing towards the Limited Liability Partnership for running of his business. A contribution of a partner may consist of tangible, movable or immovable or intangible property or other benefit to the limited liability partnership, including money, promissory notes, agreements to contribute cash or property, and contracts for services performed or to be performed. The Contribution can be increased. Contribution of LLP would be provided under the LLP Agreement and the same can be increased by way of amendment in the LLP Agreement.

Major advantages as compared to Company

Now going further we need to know why exactly we should form a LLP if we have option to form a limited company. For this purpose we need to understand what advantages are there of a LLP over a Company.

1. No need of converting into Public Company to have members more than 50 as there is no limit on maximum number of partners.
2. Minimal Government Intervention. 
3. Minimal cost of conversion
4. Less Compliance level (No Annual Compliance Certificate from Company Secretary)
5. No requirement of holding any meeting.
6. No requirement of maintenance of Large statutory records.
7. Limited Liability as in case of Companies.
8. No need to pay large fees for increasing the contribution , as required in case of capital.
9. Llp is also not liable to pay dividend distribution tax (DDT)
10. No limit on Partners Remuneration as in case of Company
11. No stamp duty on conversion of Company into LLP as same entity is converted.

Can an existing Company get itself converted into a LLP?

Now considering the advantages of LLP, an existing Company may want to convert into a LLP. It is possible by following simple procedure of Conversion. It is essential to note that on conversion, all the members of the Company shall become the partners of the LLP. It is provided that no other person would become partner on conversion into an LLP for the simple reason that on conversion, it should be a mirror image. On conversion, all the tangible (movable and immovable) property and the intangible property, all assets, interest, rights, privileges, liabilities, obligations of the Company shall stand transferred to, and vest in, the LLP. Also, the Company so converted into an LLP shall cease to exist upon conversion.

Comparative Study of Company, Traditional Partnership & LLP

Feature	Company	Traditional Partnership	LLP
Registration	Company is registered the Registrar of Companies of respective state.	Not compulsory. Unregistered Partnership Firm will not have the ability to sue.	Compulsory registration required with the ROC
Capital	Private company should have a minimum paid up capital of Rs. 1 lakh and Rs.5 lakhs for a public company	Deed Specifies but no specific guideline	Deed Specifies
Legal Status	Separate Legal Status	No Separate Legal Status	Separate Legal Status
Liability	Limited to the extent of unpaid capital.	Unlimited	Limited to the extent of the contribution
No. of shareholders	For a Private limited Company minimum 2 and max 50. For a Public Company minimum 7 and max unlimited	2-20 partners	Minimum 2 and max no limit.
Meetings	Meeting in every quarter mandatory.	Not requirement	Not requirement
Annual Return	Every year with ROC	Not required	Every year with ROC
Audit	Compulsory	Compulsory	Only if contribution exceeds 25 lacs or turnover exceeds 40 lacs.
Dissolution	Very stringent procedure.	By agreement between partners.	Less procedural compared to Company.

COMPOUNDING OF OFFENCES UNDER SECTION 621A OF COMPANIES ACT, 1956

Provisions and procedure for Compounding of offences, which are punishable under Companies Act, 1956 are stipulated under section 621A of the act. The meaning of word compounding of offence is not defined under Companies Act, 1956. However if we try to analyze the section 621A, we can draw one clear interpretation i.e. “It`s nothing but admission of guilt” In the process of compounding, the person may either Suo Moto or on receipt of notice of default/initiation of prosecution, admits the commission of default and make an application for compounding of the concern offence. The defaulters agree to pay penalty which may be ordered by the Central Government. We will try to analyze the provisions and procedure of compounding.

Before turning to the procedural part, we must understand the basic provisions relating to compounding and authorities to be approached for compounding of offence. Accordingly following are the important provisions pertaining to Compounding of Offences.

I. Applicability: - Only those offences which are punishable with either Penalty or Penalty or imprisonment i.e. where it is at discretion of the court to impose penalty or imprisonment, are compoundable under section 621A. In other words offence which is specifically punishable with imprisonment only or imprisonment plus fine is non-compoundable.

Similarly, offence must not be a subsequent offence committed within period of 3 years from Compounding of offence of similar nature. It means if an offence is compounded in favour of a person and if that person commits that offence once again within span of three (3) years from the previous compounding then the subsequent offence shall not be eligible for compounding. However if the period of 3 years has lapsed from previous compounding then the subsequent offence shall be considered as fresh offence and shall be eligible for compounding.

II. Jurisdiction: - the power of Compounding of offence is conferred upon Company Law Board and Regional Director. Where the maximum amount of fine which may be imposed for the commission of the offence does not exceed ` 50,000/- that offence is compounded by the Regional Director. All other applications for compounding of offences shall be entertained and tried by the Company Law Board. The Regional Director acts under direction, control and supervision of the Company Law Board.

III. Penalty: - Penalty, which may be imposed under the order of compounding by the CLB or RD shall not exceed the maximum amount of fine which may be imposed for commission of that offence. Means if the maximum fine for an offence is 10 times of basic fees, then the penalty shall not exceed the 10 times of basic fees.

The fine imposed under the order of Compounding is considered as additional fees and payable under section 611 (2) and not regarded as penalty. This has a significant implication for qualifications and disqualifications of Directorship.

IV. Effects of Compounding: - Compounding has very significant impacts. They are as follows;

i. Once the offence is compounded, no further prosecution shall be initiated either by registrar or shareholder or any other person in respect of that offence.

ii. If the offence is committed for non filing of any return or document with registrar, then that return or documents needs to be filed with the registrar along with fees and additional fees as may be imposed under the order and within such time frame as may be stipulated under the order.

iii. If any prosecution is going in any court in respect of the offence, then on successful compounding of the same, the person against whom the prosecution is going on shall be discharged.

iv. Failure of compliance with the order of Compounding is an offence punishable with imprisonment of six months or fine not exceeding ` 50,000/- or with both.

v. Once the offence is compounded, the intimation of compounding needs to be given to the Registrar within period of seven days from the day on which the offence is so compounded.

PROCEDURE FOR COMPOUNDING

1. The procedure for compounding of offence under section 621A can be suo moto or on initiation of prosecution by government authorities i.e. Registrar of Companies. A petition is required to be prepared in form no. 1 of Companies (court) Rules, 1959 (Please refer annexure I). Following documents are required to be attached with petition;

• Board resolution authorizing director for filing petition.
• Affidavits duly notarized
• Power of attorney / Memorandum of Appearance
• Sometimes Copies of 3 years attested financial statements.
• Copy of agreement (if any)

2. E-form No. 61 is required to be filed with Registrar of Companies.

3. The complete set for petition is to be prepared in triplicate

i. One for filing with Registrar of Companies

ii. One for presenting in Company Law Board/Regional Director

iii. One as an acknowledgment.

4. Once the form 61 is filed and physical set of petition is submitted with the ROC, he forwards the same with his comments for Compounding.

5. After that application can be made to the CLB or RD as the case may be for compounding of offence.

6. Once the order of Compounding is passed, the same needs to be filed with the registrar of companies in e-form 21.

SIGNIFICANCE OF COMPOUNDING OF OFFENCES

The question may be asked by management of the Company that, if no notice for default has been received by the Company, then why should company go for compounding? In such cases a very important reference can be given to Part 1 of Schedule XIII of Companies Act, 1956. Part 1 of schedule XIII stipulates the conditions to be full filled for the appointment of a Managing or Whole Time Director or a Manager without the approval of the central government. According to clause (a) sub-clause (vi) if a person has been punished with imprisonment for any period or a fine exceeding ` 1000/- he shall be disqualified to be appointed as Managing Director or a Whole Time Director or as a Manager.

And therefore if it is found out that by negligence any provisions have been violated, immediately Compounding should be sought to prevent unnecessary further damage.

ANNEXURE I

DRAFT PETITION

BEFORE THE HON`ABLE COMPANY LAW BOARD, ________ BENCH, MUMBAI

Petition No. ________/2011

IN THE MATTER OF

__________ Limited

…………………………. (Petitioner)

VERSUS

___________ (ROC)

…………………………. (Respondent)

APPLICATION UNDER SECTION 621A OF THE COMPANIES ACT, 1956

SEEKING COMPOSITION OF OFFENCE UNDER SECTION ________.

CONTENTS OF PETITION

1. Name of the company.

2. Date of incorporation and registration number of the company

3. Registered office of the company

4. Capital structure of the company

5. The authorized capital as on 31^st march ________ (latest year ending)

6. Issued, subscribed and paid-up capital as on 31^st march ________

7. Present business of the company:

8. Facts of the case

9. Section of default and other details of non-compliance.

10. Submissions

11. Representation on behalf of the company

12. Prayer

13. Signature

* The petition is required to be printed on ledger paper.