2021 act brings LLPs into the modern world

The Limited Liability Partnership (Amendment) Act, 2021 (act), recently took effect. It introduced significant changes to the Limited Liability Partnership Act, 2008 (principal act), applicable to limited liability partnerships (LLPs). The act makes the following key changes.

1. The act decriminalises numerous instances of non-compliance and substitutes monetary penalties ranging from INR2,000 (USD25) to INR500,000 (USD6,500). It has replaced 12 penal provisions with civil penalties. Section 10 of the act substitutes “liable to a penalty” for the words “punishable with fine”, and reduces the amount of fines. Civil penalties now apply to non-compliance with the requirements of section 13 for changes in registered offices, maintenance of books of accounts, other records and audit under section 34 and the filing of annual returns under section 35.Section 73 of the principal act, which provided for punishment for non-compliance with the order of a tribunal, is deleted, and section 62 which made failure to file a certified copy of an order of transfer of property on amalgamation a punishable offence, is amended to make the LLP liable to a civil penalty. However, the act amends section 30 of the principal act to increase imprisonment for fraudulent activity from two years to five.

2. The act introduced the concept of small LLPs in order to provide leniency in non-compliance by budding LLP enterprises where contributions do not exceed INR2.5 million (USD33,450), and whose turnover does not exceed INR4 million. In order to reduce the burden for non-compliance with any of the provisions under the principal act, section 76A(3)(2) provides that penalties levied on small or startup LLPs are half of the penalty specified, subject to a maximum of INR100,000 for LLPs and INR50,000 for every partner.

3. A new section 34A allows the government to prescribe standards of accounting and of auditing for a class or classes of LLPs in consultation with the National Financial Reporting Authority constituted under section 132 of the Companies Act 2013, and as recommended by the Institute of Chartered Accountants of India under section 3 of the Chartered Accountants Act, 1949.

4. A new section 67A provides for the establishment of a special court for the trial of disputes arising under the act. A new section 77A specifies that no court other than the special court established under the act shall deal with offences under the act.

5. A new section 76A provides for an in-house adjudicating mechanism, to which the government can appoint persons not below the rank of registrar as adjudicating officers, and provides for appeal against the orders of such officers.

6. Section 62 of the principal act is amended to expressly restrict the amalgamation of LLPs with companies.

7. Section 69 of the principal act, which provides for the levy of additional fees for delay in filing of returns, is amended to provide for the charging of different fees for different classes of LLPs.

8. A new section 68A provides for the establishment of regional offices for the registration of LLPs and for the appointment of registrars thereto.

9. The system of recognition of individual startup LLPs introduced in the act to boost the start-up ecosystem is yet to be brought into force by the government.

The decriminalisation of offences and lowered fees will be an incentive for existing LLPs to comply with the operational structures in the act. The introduction of small LLPs will be an incentive for partnerships to convert to LLPs, and startups will see small LLPs as a better option at the initial stage of their incorporation. The amendments are likely to enhance the ease of doing business for small businesses and startups. Although the act does not explicitly permit LLPs to issue non-convertible debentures (NCD), the changes in the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021, may be a step towards promoting finance for LLPs. This is in line with the recommendation of the Company Law Committee, which observed that the industry suffers from a lack of finance. The permission to issue NCDs will encourage LLPs to enter the real estate and infrastructure sectors. The principal act, however, needs clarification on issuing NCDs and establishing the special courts.

Manoj Kumar is the founder and managing partner at Hammurabi & Solomon Partners