Written by Ashutosh Mishra while pursuing the Diploma in Entrepreneurship Administration And Business Laws from NUJS, Kolkata.
INTRODUCTION
Limited Liability Partnership (hereinafter referred to as “LLP”) is a combination of partnership as well as a company. It is a form of partnership in which all or some partners have limited liability. Every partner is liable only for his/her acts and to the extent of capital/investment made by them, no liability of any one partner will be the liability of the co-partners. No joint-liability of partners is there due to any acts by them amounting to wrongful business decisions or professional misconduct. An LLP is a body corporate and has a separate legal entity as well as it enjoys the perpetual succession which is akin to the benefits a Company enjoys. It can continue its existence irrespective of changes in partners. The minimum number of requirement for starting an LLP is at least two partners, out of which one needs to be an Indian resident, whereas there is no maximum cap for the same.
LLPs are governed by a separate legislation which is the Limited Liability Partnership Act, 2008 as well as the rules drafted by the Central Government for the functioning of the LLP. Though the term partnership comes in an LLP Indian Partnership Act, 1932 has no applicability on an LLP and the agreements entered into between the partners regulate the working of an LLP. “LLPs are one of the most preferred business structures for service sector and for small and medium enterprises. The concept of LLP exists in the U.S.A., U.K., Canada, Japan, France, Singapore, etc.”[1] The need for an LLP was felt in India after the idea emerged from the reports of Dr. J.J. Irani Committee, Mr. Naresh Chandra Committees they envisioned that LLP would increase the global competition and enable the participation of small enterprises and joint ventures.
LLP can be for a particular venture, if stated in the LLP Agreement and can be limited by time as per their venture. The entity may file for the strike off of the name with the Registrar of Companies (ROC) from the Register after the limitation period of the venture gets over.
LLP provides an effective alternate corporate business vehicle, it gives the benefits of ‘limited liability’ similar to a company along with the flexibility as of a partnership firm with minimum compliances and maximum benefits.[2] The contractual agreements (if any) between the partners are applicable for the smooth functioning of an LLP which can be related to the partnership deed, in case of no LLP Agreement, the terms of Schedule I of LLP Act, 2008 will be applied.
The researcher would be dealing with the grounds for the strike off of the name of the LLP by the Registrar of Companies (ROC) with in-depth analysis of the necessary compliances to be followed for maintaining the smooth functioning of an LLP. The importance of various forms that need to be filed by LLPs and the remedy for an LLP if its name has been struck-off by the ROC.
GROUNDS FOR STRIKING OFF OF LLPs
In the matter of striking off of LLPs, Section 75 of the LLP Act, 2008 read along with Rule 37(1) of LLP Rules, 2009 states that a Registrar of Companies (ROC) has the power to strike off of the name of a defunct LLP. If the Registrar is under the impression that there is a reasonable cause for striking off the name and the entity was inoperative for 2 years or more as well as has not convened itself to the provisions and compliances specified under the above mentioned Act and Rules with the contemporary amendments related to the functioning of an LLP. [3]
The name of an LLP can be struck-off from the Register of the ROC, the Registrar shall send a notice to the LLP for striking off the name. LLP has a time period of thirty (30) days from the date of the notice of the ROC, to give such LLP an opportunity of being heard and present the relevant evidence to support their stand for not striking off their name. During the phase of the notice sent by the ROC till the cessation of the time period of 30 days, the status of that LLP is “Under Process of Strike off.”
- Annual Compliances: The annual compliances needs to be followed by the LLPs for the smooth functioning of the entity. An LLP is required to maintain certain books of accounts for each year of business with certain form filings which are mandatory to be made.
- Statement of Account and Solvency (Annual Filing)- Statement of Account of an LLP needs to be filed annually, certificate by a designated partner or the authorised representative stating that the Statement of Account & Solvency and Statement of Assets & Liabilities stating that the information provided is verified and has found it to be true and fair in his/her capacity.
Form 8 under LLP Act needs to be filed and is known as annual filing stating the statement of account.[4] The form needs to be filed within 7 months before the end of the financial year with the prescribed format and within the stipulated time-period for heeding to the purposes of the LLP. The liability of the partner who wilfully makes a false statement or manipulates the books of account can be penalized with up to 2 years of imprisonment and a monetary fine ranging from 1 lakh to 5 lakhs.
- Annual Return- Form 11 under the LLP Act includes an annual return to be filed by an LLP within 60 days from the cessation of the financial year. The return needs to be filed electronically through the portal each year with the Ministry of Corporate Affairs (MCA) to maintain the compliance and avoid the penalty.
Annual Filing and Annual Return are the documents that are made available at the ROC for public inspection. LLPs account statement and profit figures need to be in the public domain. Thereby, with the LLP being inoperative for 2 years or more, the Roc can strike off the name as the main essence of LLP is lost if its account statements are not made public.
- Non-functioning: If the Registrar has reasonable cause to believe that the LLPs are defunct or inoperative for 2 years or more, the Registrar can take suo-moto action for striking off the name of the LLPs.[5] It is a discretionary power provided to the Roc by the Central Government. The reasonable causes could be the inefficiency, non-compliances, etc.
In Sukhbir Saran Bhatnagar v. Registrar of Companies[6], the Court held that “the Registrar has the power to strike off a defunct company with a reasonable cause that the entity is not in operation.”
- Voluntary Striking off: The recent amendment of Limited Liability Partnership (Amendment) Rules, 2017 inserted a provision for the voluntary striking off of the name of the LLP by the LLP itself by making an application to the Registrar. Form 24 needs to be filed to the ROC under Rule 37(1) (b) and 37(1A) of LLP Rules, 2017. Under the voluntary striking off, the LLP needs to disclose nil assets and nil liabilities in the statement of account with the acknowledgment copy of the latest Income tax return, a copy of the limited liability partnership agreement when entered into and an affidavit signed by the designated partners, jointly or severally.
- Non-compliance to LLP Provisions: The compliances for maintaining the running of an LLP needs to be followed. An LLP should remain au courant with the legal provisions, amendments, government circulars, etc. related to the LLP.
The unawareness of the partner(s) regarding the filing of forms 8 and 11 and various other compliances are the grounds for the striking off of LLP. The reason behind this unawareness is the partner(s) considering the LLP in pari materia with the partnership firms which only file their Income Tax Return. Whereas in the case of an LLP, apart from the Income Tax Return filing, they have to file forms 8 and 11 which disclose the Annual return of the LLP and statement of Accounts & Solvency. Thereby, the acts of the LLPs are not absolved and amounts to ‘Ignorantia Juris Non-Excusat’ which means that ignorance of the law is no excuse. It is the responsibility of the LLPs to abide by the specific act and rules maintaining the LLP, the non-compliance with the provisions will amount to a penalty in the form of striking off of the name of the LLPs.[7]
WHAT TO DO IF AN LLP IS STRIKED-OFF
When a notice is sent to the LLP for strike off, the status of the LLP enlisted changes to “Under Process of Strike Off”. To enable the status of the LLP active again, the LLP is required to take appropriate action to the ROC within 30 days from the date of the notice. The entity should provide evidence and facts to the ROC stating the reason for not striking off the name of the LLP. The Registrar gives an opportunity to the LLP for presenting their reasons along with evidence to take their stand or substantiate their reasons.
The partners or the LLP itself can make a representation as to why they have failed to fulfill the provisions laid down for a given period along with copies of the relevant documents stating the reason for not striking off the name. If the LLP was operational then by presenting the books of accounts it can be supported. If it was non-operational then the reason why the existence of such should continue. Professionals should be consulted depending upon the type of business an LLP is into to initiate appropriate actions.[8]
Any person or stakeholder can object the proposed strike off by the ROC by sending a notice within one month from the date of the notice. The objection can not only be raised by the partners or the LLP but by the creditors or stakeholders who are under the impression that the LLP was functional or have some interest in the LLP.[9] The contentions by the creditors should be supported by valid documents and moreover, it could be any person related to the LLP who feels that loss would be incurred to them, can raise an objection on the notice of the Roc.
In the case of Vijayawada Chamber of Commerce and Industry v. Registrar of Non-Trading Companies[10], the ROC called for the strike off of the name of the Company. The company was actually functioning, only its returns to be filed were delayed. The striking off was later set aside.
As in the above-mentioned case, it is clearly evident that the striking off could lead to the loss of goodwill of the company and could involve a lot of time in the process of restoration of the LLP after getting struck off.
MINISTRY OF CORPORATE AFFAIRS VIGILANT ACTION ON LLPs
The recent matter of striking off of 1171 LLPs under Section 75 of LLP Act, 2008 read along with Rule 37(1) of LLP Rules, 2009 by Roc of NCT of Delhi and Haryana depicts the severity of the matter involved.[11] The constant compulsion from the government to streamline the entities and to make it think that the legal compliances in the acts relevant to the LLP are not voluntary in nature. The action taken by the Roc clearly indicates the provisions laid down to be followed to enjoy the perpetual succession. The entities running their businesses should abide by the day to day and annual compliances.
The action of the Roc is clearly evident that the compliances need to be followed by the LLPs. The LLPs were struck-off due to being inoperative or defunct for 2 years or more.
CONCLUSION
With the enormous numbers of fictitious LLPs coming into the global market for availing the benefits of a separate legal entity and of limited liability along with various tax benefits, the ROCs along with the Ministry of Corporate Affairs is becoming vigil in eliminating the bogus ones which they seem to be defunct for 2 years or more. The Registrar can send a notice for striking off of the name of the LLP if he/she has a reasonable cause to believe that the LLP was inoperative or has not abided by the compliances to be followed.
The suo-moto power of the ROC in striking off of the name of the LLPs could be unreasonable, arbitrary and be violative of Article 14 of the Constitution of India.[12] In certain cases with the mere belief of the Registrar that the LLP was inoperative could amount to the striking off of the name of the LLP. The decision can later be challenged by the LLP but for that duration the company’s time, money and goodwill can go away. The creditors and stakeholder’s nemesis lies with the ROC. Though the creditors and stakeholders can file an appeal against the decision of the ROC within 30 days from the date of the notice it is a time-consuming process.
There needs to be a proper listing of the reasons for the striking off of an LLP, publicly. One of the main essentials of an LLP is that the books of accounts, annual returns shall be public in nature and therefore, specific grounds for striking off of LLP should be mentioned and not just the ‘reasonable ground’ as the ROC finds out, with the reasons being publicly displayed after thorough information as received by the ROC. If the ROCs contentions are negated then it will amount to the loss of goodwill and business of the company and therefore, the public mention of the specific grounds for striking off is necessary.
[1] Hitender Mehta, Limited Liability Partnerships Law and Practice (Wolters Kluwer 3) (2016)
[2] Why your Startup should be an LLP The Economic Times, https://economictimes.indiatimes.com/small-biz/legal/why-your-startup-should-be-an-llp/articleshow/47440287.cms (last visited Jul 28, 2018)
[3] Striking Off The Name Of A Defunct LLP New Requirements In Terms Of The Limited Liability Partnership (Amendment) Rules, 2017 – Corporate/Commercial Foreign Direct Investment In Turkey – International Law – Turkey, http://www.mondaq.com/india/x/600140/Corporate Commercial Law/Striking Off The Name Of A Defunct LLP New Requirements In Terms Of The Limited Liability Partnership Amendment Rules 2017 (last visited Jul 28, 2018)
[4] Is your LLP placed in “Notice of Striking off? Why & what to do? TaxGuru, https://taxguru.in/corporate-law/llp-notice-striking.html (last visited Jul 28, 2018)
[5] Avtar Singh, Company law (Eastern Book Co.) (2009)
[6] Sukhbir Saran Bhatnagar v. Registrar of Companies, (1972) 42 Comp Cas. 408 (Del)
[7] Navin Kumar Agarwal v. Commissioner of Income Tax, (2015) 278 CTR 206
[8] RoC proposed strike off of LLPs: Read the remedies availableGet Expert Legal Services Online for Startups in India, https://www.legalwiz.in/blogs/roc-proposed-strike-off-of-llps-read-the-remedies-available/ (last visited Jul 27, 2018)
[9] Staff Publication Vinod Kothari Consultants, http://vinodkothari.com/blog/hundreds-of-llps-may-be-vanishing-soon/ (last visited Jul 27, 2018)
[10] Vijaywada Chamber of Commerce and Industry v. Registrar of Non-Trading Companies, (2004) 122 Comp Cas 796 (AP)
[11] Ministry of Corporate Affairs, In the matter of striking off of LLPs under Section 75 of LLP Act, 2008 read with Rule 37 of LLP Rules, 2009 (REGISTRAR OF COMPANIES, NCT OF DELHI & HARYANA) (2018)
[12] Anwar Ali Sarkar v. State of West Bengal, AIR 1952 Cal 150
