INVESTIGATION OF AFFAIRS OF LLPS AND ROLE OF GOVERNMENT TO CHECK UNSCRUPULOUS LLPS ETC.
42. What are the measures, which can be taken against an LLP, which has engaged in fraudulent activities?
Central Govt may appoint inspectors to investigate the affairs of an LLP. The manner and procedure for conduct of investigation has been specified in the Act.
43. What will be the role of Government in regulation of LLPs? How will the Act able to prevent ‘fly-by-night’ promoters or LLPs vanishing after incorporation?
LLP structure is proposed to allow entrepreneurs and businessmen/servicemen to combine themselves with a view to run a business/service for profit in a more flexible manner than companies. The internal processes of LLPs shall be governed by the LLP Agreement. To protect interests of various stakeholders, following approach has been followed in the LLP Act:-
- mandatory incorporation of LLPs with registrar with suitable due diligence to be followed by promotes/professionals at the time of incorporation. Provisions for mandatory Designated Partners Identification Number (DPIN) to be obtained by every designated partner (similar to DIP for directors of companies) have been proposed in the Act.
- MCA-21 e-Governance process will be used for incorporation purposes which will help to track any unscrupulous promoter/partner of an LLP.
- Details of partners and any changes made therein shall be required to be filed with the registrar;
- Filing of annual documents like (SAS and Annual Return) with the Registrars will be mandatory. Such documents will also be open for public inspection;
- Audit of all LLPs (except small LLPs which may be exempted by way of notification by Central Govt) shall be mandatory;
- Provisions have been proposed in the Act to empower Registrar to conduct scrutiny of documents filed with him and for calling of any other relevant information from LLP or its partners/officials and also for summoning of LLPs’ partners/officials in certain cases.
- The Act also contains provisions for investigation of affairs of LLPs by competent inspectors to be appointed by Central Government, wherever circumstances so require.
TAXATION
44. What is the tax treatment being provided for LLPs?
As advised by the Ministry of Finance, Taxation of LLPs has been left to be provided for under the Income Tax Act, 1961.
Note: Indian LLPs would eventually extend their operations beyond Indian borders and would also have international presence as in the case of LLPs in countries such as UK, USA, etc. In such situation, the taxation regime would have a significant impact on the viability of LLPs since it would determine the manner in which the LLP and its individual partners would be taxed, avoid situations resulting in double taxation and provide for carry forward of losses in the event of conversion from other forms to LLP and vice versa. The attractiveness of LLPs as a suitable vehicle for venture capital would also require a tax treatment that provides appropriate incentives for innovation and investment. It would, therefore, be necessary to provide for a regime for taxation of LLPs with clarity on the above issues and in a manner that does not adversely affect the competitiveness of Indian LLPs internationally.
CONVERSION OF OTHER ENTITIES INTO LLPs AND VICE VERSA
45. Whether other business entities like firm or company would be able to convert themselves into LLP?
Yes. The LLP Act contains enabling provisions pursuant to which a firm (set up under Indian Partnership Act, 1932) and private company or unlisted public company (incorporated under Companies Act) would be able to convert themselves into LLPs. Provisions of clause 58 and Schedule II to Schedule IV to the Act provide procedure in this regard.
46. Whether LLP would be able to convert itself into company under the Companies Act, 1956?
This would not be allowed under LLP Act. However, enabling provisions would be required to be made in the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised.
47. What is the treatment for stamp duty issues, both in terms of original incorporation and conversion from other business structures? Would there be any stamp duty exemption in case of conversion?
The Act does not contain any provision for treatment of stamp duty issues either on incorporation of an LLP or on conversion of other entities into LLP since this is a subject reserved for the States. This, however, is an important issue from the point of view of making the LLP structure more attractive.
48. What are the requirements and consequence provided in the Act in respect of licences, permits, approvals etc obtained by a firm, private company or an unlisted public company, prior to its conversion into LLP?
It has been provided in the Act that on conversion of a firm/private company/unlisted public company into LLP, any approval, permit or licence issued to the firm/private company/unlisted company under any other Act shall, subject to the provisions of such other Act under which such approval, permit or licence was issued, be transferred in the name of converted entity viz LLP.
MERGER AND WINDING-UP OF LLPS
49. Whether two LLPs would be allowed to merge?
Provisions of clauses 60 to 62 of the Act provide for the manner in which compromises or arrangements including mergers and amalgamations involving LLPs shall be allowed.
50. What would be the provisions in respect of winding- up of LLPs?
It is proposed to provide the provisions and procedures required to be complied with when the affairs of an LLP are to be wound-up and dissolved, by enabling the Central Government to make rules under the LLP Act, 2008.
OFFENCES & PENALTIES AND JURISDICTION OF COURTS/TRIBUNAL
51. Broad provisions in respect of Offences and Penalties
Offences and penalties arising out of the non-compliance with the provisions of the Act have been defined along with the substantive provisions themselves. However, for defaults/ non-compliance on procedural matters such as time limits for filing requirements, penalties have been provided for application in a non-discretionary manner, through the levy of a default feefor every day for which the default continues. Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing (as prescribed in relevant provision) upto a period of three hundred days. Charging of such default fees would, however, be without prejudice to any other action or liability under the Act, in case the filing is made beyond the expiry of three hundred days.
The offences can be punished either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender. The Judicial Magistrate of the first class, or, as the case may be, the Metropolitan Magistrate shall have jurisdiction to try offences under the LLP Act.
Though most of the offences in the Act provide for punishment by way of charging fine, imprisonment has been provided for in respect of violations relating to
(i) making by any person a false statement at the time of incorporation of LLP (ii) carrying on business of LLP with intent todefraud or for any fraudulent purposes and (iii) making, knowingly, false statements or omitting any material fact, in any return, documents etc under the Act. The offences which are punishable with fine only can be compounded by the Central Government, by collecting a sum not exceeding the amount of maximum fine prescribed for the offence.
Further, for defaults/non-compliance on procedural matters such as time limits for filing requirements provisions have been made for charging default fees (on daily basis) in a non-discretionary manner.
52. Whether offences would be compounded under the LLP Act? Whether any protection to whistle-blowers is being proposed in the Act?
The Act contains provisions empowering Central Government to compound any offence punishable with fine only by collecting a sum not exceeding the amount of maximum fine prescribed for the offence.
Enabling provisions have also been made in the Act in respect of protection to “Whistle Blowers”.
MISCELLANEOUS PROVISIONS
53. What are the provisions being proposed in the Act for striking off defunct LLPs? Whether LLPs would be allowed a less stringent framework for closing of business?
The Act empowers Registrars to strike off names of LLPs which are not carrying on any business or operation. They will be under obligation to give an opportunity of being heard to LLP concerned. Details for manner of striking off would be prescribed through rules. Since LLPs would be governed by LLP Agreement it would be possible for LLPs to make suitable clauses in such Agreement prescribing time limits or duration of LLPs. In such cases, provisions for striking off names could be used.
Besides, the Act empowers Central Government to make rules in respect of winding up and dissolution of LLPs. It is proposed to prescribe a simple procedure for voluntary winding up of LLPs under such rules.
54. Whether electronic filing of documents with ROC would be allowed? How far MCA-21 e-Governance initiative will be extended and be useful for LLPs structure under the Act?
The Act contains enabling provisions for use of electronic mode for filing of documents with Registrars. Details would be specified in the Rules. Authentication of documents as per Information Technology Act, 2000 has also been recognized in the LLP Act.
It is proposed that existing mechanism and infrastructure being used by Registrar of Companies for registration of companies and allowing inspection of documents under various provisions of the Companies Act, 1956 would be used for LLPs as well.
55. Whether provisions of the Companies Act, 1956 would be applicable to LLPs?
Since LLP shall be in the form of a body corporate, it is proposed that to address various situations applicable to LLPs as such, the relevant provisions of the Companies Act, 1956 may be made applicable to LLPs at any time in the future by Notification by Central Government, with such changes or modifications as appropriate.
56. Whether, amendments will be required in the Regulatory Acts governing the various professional services so that these can be aligned with the objectives of the Act?
Yes. Amendments to various such Acts would be necessary which can be considered by concerned Ministries/Departments.
INTRODUCTION OF LLP BILL, 2006 IN THE PARLIAMENT AND EXAMINATION BY STANDING COMMITTEE AND SUBSEQUENT ACTION
57. When was the LLP Bill, 2006 was introduced? Whether the Bill was referred to Standing Committee? Has the Bill been revised?
The Limited Liability Partnership (LLP) Bill, 2006 was introduced in the Rajya Sabha on 15th December, 2006. The Bill was referred to the Lok Sabha Standing Committee on Finance, for examination. The Standing Committee consulted various chambers of commerce, professional institutes and other experts and also heard the M/o Corporate Affairs.
The said Committee presented/submitted its report to the Parliament on 27th November, 2007. Based on such report the Ministry of Corporate Affairs revised the LLP Bill and the revised LLP Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008. This was passed by the Rajya Sabha on 24th October, 2008. The Bill was passed by Lok Sabha on 12th December, 2008. The President has given assent to this Bill on 7th January, 2009.
58. Whether all recommendations made by Standing committee have been accepted by the Government?
All the recommendations except one made by Hon’ble Standing Committee have been accepted by the Government. The recommendation which has not been accepted related to proposing a restriction on number of LLPs in which a designated partner may become designated partner. During examination of this recommendation, it was felt that since under the Companies Act, 1956 there is no restriction on a person to be come directors in any number of private companies. Since proposed structure for LLPs would be similar to private companies, it was felt that putting a restriction relating to maximum number of LLPs in which a person may become designated partner may not be necessary.
59. Whether the ongoing financial crisis across the globe requires any change in thoughts regarding the LLP Act, 2008?
The ongoing financial crisis across the globe does not appear to have affected Indian economy. The Indian companies and other business entities, including those engaged in banking and financial business are not likely to have any major impact in view of financial crisis of US or Europe, thanks to the strict and conservative legal and regulatory systems working in India.
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