Company Law Committee recommends decriminalisation of LLP Act, introduction of ‘small LLPs’
A high-level government panel recommended decriminalisation of 12 compoundable offences and the omission of one penal provision under the Limited Liability Partnership (LLP) Act. The Company Law Committee (CLC) also suggested, in a report released on Monday, the introduction of the concept of a small LLP in line with small companies under the Companies Act, and provision for issuance of non-convertible debentures (NCDs) by LLPs to raise funds.
The CLC, chaired by corporate affairs secretary Rajesh Verma, suggested decriminalisation of penal provisions under the LLP Act, relating to the maintenance of books of account, other records and audit (section 34), annual returns (section 35), schemes for compromise or arrangements (section 60) and reconstruction or amalgamation (section 62).
Apart from decriminalisation, the committee, which had TK Vishwanathan, former Lok Sabha secretary general, and Uday Kotak, chairman of Kotak Mahindra Bank, as members, recommended that certain offences be handled by an in-house adjudication mechanism while slashing the amount of monetary penalties that can be imposed under these sections.
The report proposed that section 73, relating to penal provisions in case of non-compliance with orders of a tribunal, be omitted as such offences can be dealt with under contempt jurisdiction.
Many of the proposed changes were to align the treatment of offences under the LLP Act with the amended Companies Act, 2020, and “to remove criminality of offences from business laws where no malafide intentions are involved”, said the report.
Since the law’s enactment in 2008, LLPs have become one of the most popular business vehicles for professionals and micro, small and medium enterprises, with more than 145,000 registered LLPs at present.
The CLC highlighted the need for the creation of a class of ‘small LLPs’ which would be subject to lesser compliances, fees and penalties to reduce the costs of compliance.
The proposed definition for small LLPs included conditions such as that the contribution of partners does not exceed Rs 25 lakh and an annual turnover not exceeding Rs 40 lakh.
“I am confident that the recommendations of the committee will result in incentivizing micro and small business enterprises to convert into bodies corporate such as LLPs and will create congenial business climate based on trust and compliances,” Verma said in the report.
The existing LLP Act and related rules do not permit LLPs to raise capital by way of issuance of debt securities.
“Such inability of LLPs to issue non-convertible debentures (NCDs), at par with companies, poses as a major impediment in business operations of LLPs, especially in sectors such as real estate and infrastructure which are capital deficient,” said the CLC.
To address this issue, the report recommended that LLPs be allowed to issue NCDs to Securities and Exchange Board of India or Reserve Bank of India regulated entities. However, it said, “LLPs may not be permitted to allot/issue NCDs to inpiduals (retail investors) so as to pre-empt fraudulent misuse of such instruments.”