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LIMITED LIABILITY PARTNERSHIPS – AN OVERVIEW Presented by : Vivek

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The particular presentation is about the much desired & long awaited LLP i.e, Limited Liability Partnership Act which is a result of efforts of various Expert Committees..!!

Transcript of Law

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LIMITED LIABILITY PARTNERSHIPS – AN OVERVIEW

Presented by : Vivek

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Indian history

2003: Naresh Chandra Committee Report which highlighted need for

LLPs & suggested application of LLPs to Service industry, Chartered

Accountants, Lawyers, Architects, etc. 2005: J J Irani Expert Committee on Company Law recommended

introduction of LLPs-suggested small enterprises be included in scope

of LLP & there should be a separate LLP Act 2006: LLP Bill introduced in Parliament 2007: Bill referred to Parliamentary Standing Committee (PSC) for

examination 2008: Lok Sabha passes New LLP Bill as revised by PSC

The arrival of much-desired & long-awaited LLP Act was result of efforts of several expert committees which includes:-

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2009: LLP Act, 2008 receives presidential assent &

is published in Official Gazette

2009: LLP Act, 2008 gets notified w.e.f March 31st,

2009 3239 LLPs Registered till June 2011

Indian history

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Different Chapters of the Act• Chapter I-Preliminary (Ss. 1 & 2)• Chapter II-Nature of LLP (Ss. 3-10)• Chapter III-Incorporation & Incidental Matters

(Ss. 11-21)• Chapter IV-Partners & their Relations (Ss. 22-

25)• Chapter V-Extent & Limitation of Liability of

LLP & Partners (Ss. 26-31)• Chapter VI-Contributions (Ss. 32 & 33)• Chapter VII-Financial Disclosures (Ss. 34-41)• Chapter VIII-Assignment & Transfer of

Partnership Rights (S. 42)• Chapter IX-Investigation (Ss. 43-54)

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Different Chapters of the Act• Chapter X-Conversion to LLP (Ss. 55-58)• Chapter XI-Foreign Limited Liability Partnerships (S. 59)• Chapter XII-Compromise, Arrangement or

Reconstruction of LLPs (Ss. 60-62)• Chapter XIII-Winding Up & Dissolution (Ss. 63-65)• Chapter XIV-Miscellaneous Provisions (Ss. 66-81)• First Schedule-Mutual Rights & Liabilities of Partners &

LLP• Second Schedule-Conversion of Partnership Firm to LLP• Third Schedule-Conversion of Private Company to LLP• Fourth Schedule-Conversion of Unlisted Public

Company to LLP

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Preliminary (Ch. I)Short title, extent & commencement

This Act may be called the Limited Liability Partnership Act, 2008

It extends to the whole of India All sections which have been notified as on March 31st, 2009,

vide notification no. S.O. 891(E)

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Preliminary (Ch. I)Important Definitions:

Body Corporate [S. 2 (1) (d)]:

‘means a company defined in section 3 of the Companies Act, 1956 and includes-

(i) a limited liability partnership registered under this Act;

(ii) a limited liability partnership incorporated outside India; and

(iii) a company incorporated outside India,but does not include-

(i) a corporation sole;(ii) a co-operative society registered under any law

for the time being in force; and(iii) any other body corporate (not being a company

as defined in section 3 of the Companies Act, 1956 or a limited

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Preliminary (Ch. I) Business [S. 2 (1) (e)]:

‘includes every trade, profession, service and occupation’

Financial Year [S. 2 (1) (l)]:‘in relation to limited liability partnerships,

means the period from the 1st day of April of a year to the 31st day of March of the following year:

Provided that in case of a limited liability partnership incorporated after the 30th day of September of a year, the financial year may end on the 31st day of march of the year next following that year’

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Preliminary (Ch. I)• Limited Liability Partnership Agreement [S. 2 (1)

(o)]:‘means any written agreement between the partners of

the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership’

• Registrar [S. 2 (1) (s)]:‘means a Registrar, or an Additional, a Joint, a Deputy or

an Assistant Registrar, having the duty of registering companies under the Companies Act, 1956’

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Comparison with Partnership FirmsBasis Partnership Firms LLP

Governing Law Partnership Act, 1932 Limited Liability Partnership Act, 2008

Registration Not Compulsory; but is preferred Compulsory

Creation By partnership Agreement By LawLegal Status Partners collectively known as

‘Firm’; no separate legal statusLLP has separate legal status apart from partners

Succession Firm would cease to exist on change in partnership, unless otherwise provided in agreement

LLP would not be affected on change in partnership (Perpetual Succession)

Ownership of Assets

Partnership cannot own assets in its name; assets must be in name of Partners

LLP can own assets in its own name

Liability of Partners

Unlimited Limited

Minor’s Position Minor can be admitted to benefits of Partnership

Law silent on position of Minors

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Comparison with CompaniesBasis Company LLP

Governing Law Companies Act, 1956 Limited Liability Partnership Act, 2008

Name Must contain suffix ‘Ltd’ or ‘Pvt Ltd’

Must contain suffix ‘LLP’

Common Seal Common Seal is compulsory Common Seal is optional

Organizational Structure

Rigid & governed by Companies Act

Flexible & governed by LLP Agreement

Appointment of Auditors

Specific Resolution required for appointment of auditors at every AGM

Auditors shall be deemed to be re-appointed in case no specific appointment is made (unless otherwise decided)

Audit All companies are subject to audit of accounts

Only LLPs having turnover of more than Rs. 40 Lacs or contribution of more than Rs. 25 Lacs are subject to audit of accounts

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Nature of Limited Liability Partnership (Ch. II)• LLP is body corporate formed & incorporated under LLP

Act 2008 [S. 3 (1)]• LLP is legal entity separate from its partners [S. 3 (1)]• LLP has perpetual succession [S. 3 (2)]• Existence, Rights & Liabilities of LLP not affected by

change in partners [S. 3 (3)]• Indian Partnership Act, 1932 does not apply to LLPs [S. 4]• Partners Individuals / Body Corporate can be partners [S. 5] Minimum two partners [S. 6 (1)] Maximum unlimited partners

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Nature of Limited Liability Partnership (Ch. II)• If no. of partners fall below 2 for more than 6 months

&

• Remaining partner has knowledge of such no. of partners falling below two for period more than 6 months

• Then remaining partner will be personally liable for liabilities incurred by LLP [S. 6 (2)]

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Nature of Limited Liability Partnership (Ch. II)• Designated Partners (DP) [S. 7 (1)] Every LLP shall have at least two DPs Only Individuals can be DPs Every LLP shall file particulars of ‘Designated Partners’

with the Registrar At least one DP shall be a resident of India Every DP to obtain a Designated Partner Identification

No. (DPIN) from central Government• Responsibilities & Liabilities of DPs [S. 8] Responsible for doing all acts, matters & things required

to be done by LLP w.r.t compliance of LLP Act including filing of any document, return, statement & like report under LLP Act & as specified in LLP Agreement

Liable to all penalties imposed on LLP for any contravention of above

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Nature of Limited Liability Partnership (Ch. II)• Changes in DPs [S. 9] LLP to appoint DP within 30 days of vacancy If no DP is appointed or if, at any time, there is only 1 DP,

each partner shall be deemed to be a DP• Penalty for Contravention [S. 10] For S. 7 (1): LLP & its every partner shall be fined > Rs.

10,000 (Maximum Rs. 5 Lacs) For Ss. 7 (4) & (5), 8 & 9: LLP & its every partner shall be

fined > Rs. 10,000 (Maximum Rs. 1 Lac)

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Nature of Limited Liability Partnership (Ch. II)Disqualifications of DPs• R. 9 (1): No person can be DP of LLP, if- He is declared as insolvent within preceding 5 years He has suspended payment to his creditors & not made

any composition with them within preceding 5 years He is convicted by Court for any offence including moral

turpitude1 & sentenced to imprisonment not less than 6 months

He is convicted by Court for offence under Section 30 of LLP Act

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Incorporation & Incidental Matters (Ch. III)• Incorporation Document [S. 11] Is among Prime Documents of LLP Must be submitted to registrar in ‘Form-2’ [R. 11] S. 11 (2) requires particular information to be contained in

Incorporation Document- Name of LLP Proposed Business of LLP Address of Registered Office (RO) Names & Addresses of Partners Names & Addresses of DPs Other Information as may be prescribed

• RO shall be place of all correspondence for LLP [S. 13 (1)] On Contravening provisions relating to RO, LLP & its every partner

shall be punishable with fine upto Rs. 25,000 but not less than Rs. 2,000 [S. 13 (4)]

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Effect of Registration [S. 14]: On Registration, a LLP will be able to, in its own name-

Sue & be sued Acquire, hold & develop or dispose off any property Have a common seal Do & suffer such other acts & things as bodies corporate may

lawfully do or suffer Name of LLP must end with words ‘Limited Liability Partnership’

or acronym ‘LLP’ [S. 15 (1)] Change in name of LLP [S. 17]

‘’Where the Central Government is satisfied that on LLP has been registered , through inadvertence or otherwise, under a name which is identical with or too nearly resembles the name of any other LLP or Body Corporate, it may direct such LLP to change its name & the LLP shall comply within 3 months from date of such direction’’

Incorporation & Incidental Matters (Ch. III)

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Penalty for improper use of words ‘Limited Liability Partnership’ or ‘LLP’ [S. 20]

Punishable with fine of Rs. 50,000 but may extend upto Rs. 5 Lacs

Publication of name, address of RO, Registration No. & Statement of limited liability [S. 21]

Incorporation & Incidental Matters (Ch. III)

Every LLP shall ensure that its invoices, official correspondence & publications bear the following , namely:

a) the name, address of its registered office & registration number of the LLP; &

b) a statement that it is registered with limited liability

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Partners & their Relations (Ch. IV)• Eligibility to be partners [S. 22]

Persons who subscribe to Incorporation Document By LLP Agreement

• Relationship of partners [S. 23]

Rights & duties of partners with other partners & with LLP shall be governed by LLP Agreement

In absence of any agreement, principles set out in First Schedule will apply

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Partners & their Relations (Ch. IV) Cessation of Partnership

i. In accordance with LLP Agreement with other partners [S. 24 (1)]

ii. By resignation notice in writing of not less than 30 days to other partners [S. 24 (1)]

iii. On death, dissolution of LLP, or if he is of unsound mind or insolvent as declared by court [S. 24 (2)]

Liability of Outgoing Partner – he still remains liable to the extent of obligations he incurred while he was a partner [S. 24 (3)]

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Every Partner shall inform the LLP of any change in his name or address within a period of fifteen days of such change.

A LLP shall—I. where a person becomes or ceases to be a partner,

file a notice with the Registrar within thirty days from the date he becomes or ceases to be a partner; &

II. where there is any change in the name or address of a partner, file a notice with the Registrar within thirty days of such change

Registration of changes in partners / details of partners [S. 25]

Partners & their Relations (Ch. IV)

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First Schedule (Ch. IV) Relates to mutual rights & duties between partners & LLP & its partners

absence of Agreement on such matters• Partners of LLP entitled to share equally in capital & profits / losses• Partners shall be indemnified by LLP in respect of payments made &

liabilities incurred by him- In ordinary & proper conduct of business of LLP In anything necessarily done for Preservation of business or property

of LLP• LLP shall be indemnified by Partners for any loss caused by his fraud in

conduct of business of LLP• Partners may participate in management of LLP• Partners shall not be entitled to any remuneration for acting in business

or management of LLP• No partner may be introduced without consent of all other partners• Any ordinary matter regarding LLP may be decided by resolution passed

by majority of partners

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• However, change in nature of business may be decided only by consent of all partners

• Every decision taken by LLP be recorded in minutes book within 30 days of such decision

• Minute Book be maintained & kept at RO of LLP• Partners must render true accounts & full information of all things

affecting LLP to any partner or his legal representative• Partners to account for & pay over all profits earned from business of

similar nature & competing with LLP, to LLP if there is no consent from LLP in that respect

• Partners to account to LLP for any benefit derived by him without LLP’s consent, from any transaction concerning LLP or from use of name, property or business connection of LLP

• No partner may be expelled by a majority unless there is an express power conferred by LLP Agreement to do so

• All disputes which cannot be resolved by LLP Agreement can be referred to for arbitration as per Arbitration and Conciliation Act, 1996

First Schedule (Ch. IV)

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Liability of LLP & Partners (Ch. V) Just like partnership, every partner is an agent; not of

other partners but of LLP [S. 26]

EXTENT OF LIABILITY OF LLP

[S. 27] An LLP is not bound by unauthorized acts of partners if,

the partner has no authority to act for the LLP in doing such act [S. 27 (1)]

LLP liable in respect of wrongful acts or omissions of partners in course of its business or with its authority [S. 27 (2)]

Obligation of LLP, whether arising in contract or otherwise is solely an obligation of LLP & shall be met out of property of LLP [S. 27 (3) & (4)]

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Liability of LLP & Partners (Ch. V) EXTENT OF LIABILITY OF PARTNER [S. 28]

Partners not personally liable, solely by reason of being a partner of LLP[S. 28 (1)]

Liability of partner(s) committing wrongful acts or omissions will be unlimited [S. 28 (2)]

Unlimited Liability in case of fraud [S. 30] If fraud done with knowledge / authority of LLP, LLP’s

& partner’s liability will be unlimited. LLP’s liability = Partner’s liability

Otherwise, LLP will not be liable Imprisonment for 2 years & fine upto Rs. 5 Lacs

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Liability of LLP & Partners (Ch. V) Whistle Blowing2 [S. 31]

Court / Tribunal may reduce penalty if partner / employee assists Court / Tribunal if-

a. such partner or employee of a LLP has provided useful information during investigation

b. when any information given by partner or employee leads to LLP or any partner or employee being convicted in this act or any other act.

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Contributions (Ch. VI)

• Form of Contribution in any manner- in cash or in kind [S. 32 (1)]

• Accounting & Disclosure of Contribution must also involve the nature & amount of Contribution [S. 32 (2) & R. 23 (1)]

• R. 23 (2): Contribution in kind must be valued by practicing CA or CWA or approved valuer from panel maintained by Central Government

• Obligation of a partner to Contribute shall be as per LLP Agreement [S. 33 (1)]

• Creditor may enforce Original Obligation against partner in case if he was unaware of compromise between partners [S. 33 (2)]

FORM OF CONTRIBUTION[S. 32]

OBLIGATION to CONTRIBUTE[S. 33]

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Financial Disclosures (Ch. VII) Maintain proper books of accounts as prescribed in R. 24- Must disclose all sums of money spended & received & matters pertaining

thereto Must record all assets & liabilities of LLP State all purchases & sales & record all information regarding inventories Other particulars which partners may decide

Cash or Accrual; Double-Entry System of Accounting [S. 34 (1)] Maintain books at RO for period of 8 years as per R. 24 (3) Prepare ‘Statement of Accounts & Solvency’ in prescribed ‘Form-8’ within 6

months from end of FY & must be signed by DPs [S. 34 (2)] Must be filed with ROC alongwith prescribed fees Audit as per rules [R. 24 (8)] – Exempt if turnover < / = 40 L or Contribution < / =

25 L File annual return (Form-11) with ROC within 60 days from end of FY [R. 25 (1)] Must be accompanied by certificate issued by CS confirming veracity of

particulars / statements in such return, if turnover exceeds Rs. 5 Crores or Contribution exceeds Rs. 50 Lacs, else certificate must be issued by DP [R. 25 (2)]

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Assignment & Transfer of Partnership Rights (Ch. VIII) Right of partner to share profits & losses of LLP are

transferable / assignable (in whole or in part) [S. 42 (1)] Transfer does not imply that transferor / assignor has

ceased to be partner [S. 42 (2)] Likewise, transferee / assignee does not have right to

participate in management [S. 42 (3)] Transferee / assignee has no right to obtain any

information of transactions of LLP [S. 42 (3)]

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Investigation (Ch. IX) [S. 43 (1) & (3)]: Central Government (CG) may appoint one or more

inspector(s) to investigate into affairs of LLP & report thereon, if- Not less than 1/5 th of partners apply for investigation on payment of

prescribed security to Central Government LLP applies for investigation CG is of opinion that-

Business of LLP is with intent to defraud its Creditors, Partners or any other Person

Affairs of LLP are not being conducted in accordance with provisions of this Act

On receipt of Report of Registrar or any other Regulatory Agency, there exist sufficient reasons that affairs of LLP ought to be investigated

Inspector cannot be partnership firm, body corporate or other association [S. 45]

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. 47 (1)]: It shall be duty of DPs & Partners to- Preserve & produce before investigator all documents

relating to LLP or, as case may be, any other entity Give assistance to investigator in connection to

investigation Investigator has power to keep such documents in custody

upto 30 days [S. 47 (3)] Failure to comply with requirements as above will result in

punishment of person in default with fine upto Rs. 25,000 but not less than Rs. 2,000 & further fine of upto Rs. 500 but not less than Rs. 50 for everyday of default [S. 47 (5)]

Investigation (Ch. IX)

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[S. 48]: Investigator has power to seize documents relating to LLP, if he believes that such documents may be-

Destroyed Mutilated Altered Falsified or Secreted

Investigation (Ch. IX)

Investigator shall make reports (Interim & Final) to CG & such report such act as evidence in any legal proceeding [S. 49 ]

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Investigation (Ch. IX) Winding-up of LLP pursuant to investigation [S. 51] An LLP may be wound up if-i. It is liable to wound up in this Act; orii. Under the Investigation report, the Central Government

thinks it is expedient to do so; oriii. the LLP is being wound up by Tribunal; oriv. a petition has been filed for winding up of LLP with an

equitable cause Expenses of Investigation [S. 53] It shalI be borne by :-i. any person who is convicted in prosecution; orii. a person who is ordered to pay damages u/s 52;

or iii. any entity in whose name proceedings are

brought

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Conversion of Firm to LLP (Ch. X)This part is governed by Section 55 & Second Schedule of Companies Act, 1956 All partners of LLP must be partners of original firm & no one else On such conversion- All assets & liabilities of firm would get vested in LLP Firm stands dissolved Will be removed from records of Registrar of Firms Every partner will continue to be personally liable jointly & severally

with LLP, for liabilities prior to conversion / arising out of contract entered prior to conversion

Partner to be indemnified by LLP in respect of such liability subject to anything contrary in LLP Agreement

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Conversion of Firm to LLP (Ch. X) Partnership Firm proposing to convert to LLP must apply to ROC

in prescribed ‘Form-17 (Part A)’ alongwith Statement of Partners in ‘Form-17 (Part B)’ [R. 38 (1)]

ROC must issue certificate of registration in ‘Form-19’ [R. 32 (1)]

Upon receipt of ‘Form-19’, LLP must apply, within 15 days of registration, to Registrar of Firms to strike-out name of Firm in prescribed ‘Form-14’ [R. 33 & 38 (3)]

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Conversion of Companies to LLP (Ch. X)This part is governed by Section 56 (for private companies) & Section 57 (for unlisted public companies) Governed by Third Schedule in respect of Private Companies Governed by Fourth Schedule in respect of Unlisted Public

Companies Company can be converted into LLP provided- All partners of LLP must be shareholders of that company & no

one else There is no security interest in its assets

Upon conversion, all assets & liabilities get vested in LLP and principally all other provisions are similar as that for firms

Listed Public Company cannot be converted into LLP Application for conversion to be made to ROC in prescribed

‘Form-18 (Part A)’ alongwith Statement of Shareholders in ‘Form-18 (Part B)’ [R. 39(1) & 40(1)]

Same procedures as regards conversion of Firms

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Foreign LLPs (Ch. XI) Foreign Limited Liability Partnerships [S. 59]

LLP Act gives power to CG to make rules for establishment of place of business of Foreign LLPs & conduct of business

Rules regarding setting up of Foreign LLPs in India is provided in Chapter XI of LLP Rules, 2009

R. 18 (3) provides that Foreign LLPs may reserve name by which they are known in their country by application in ‘Form-25’

This reservation will be valid for 3 years & must be renewed R. 34 (1) provides for application to be filed with ROC

alongwith prescribed documents in prescribed ‘Form-27’ within 30 days from establishment of business in India

Every Foreign LLP must file Statement of Accounts & Solvency in ‘Form-8’ within 30 days from end of 6 months of FY [R. 34 (4)]

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Compromise, Arrangement or Reconstruction of LLPs (Ch. XII) Compromise or Arrangement of LLPs [S. 60]

Where a compromise or arrangement is being proposed –a. b/w a LLP & its creditors, or b. b/w a LLP & its partners,

the Tribunal may order a meeting of the creditors , or of the partners to be called , held & conducted in the specified manner.

If the 3/4th majority of the Creditors or Partners at the meeting agree for any compromise or arrangement, such compromise/arrangement, if sanctioned by the Tribunal shall be binding on all creditors & partners.

An order sanctioned by the Tribunal , shall be filed by the LLP within 30 days with the Registrar.

The order shall come into effect, after it is so filed.

Default shall be punishable with fine which may extend upto Rs. 1 lakh

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Winding Up and Dissolution (Ch. XIII) The winding up of a LLP may be either voluntary or

by the Tribunal or LLP so wound up may be dissolved [S. 63]

Circumstances of Winding Up [S. 64] A LLP may be wound up by the Tribunal;i. If LLP decides to be wound up by Tribunalii. If, for a period of more than 6 months, the number of partners

of the LLP is reduced below 2iii. If the LLP is unable to pay its debts iv. If the LLP has acted against the interests of the sovereignty &

integrity of Indiav. If the LLP has made a default in filing with the Registrar the

statement of Accounting Annual Return for any five consecutive financial years,

vi. If the Tribunal is of the opinion that it is just & equitable that the LLP would be wound up.

The Central Government may make rules for the provisions in relation to Winding Up & Dissolution of LLPs[S. 65]

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Thank you…