The Latest Hybrid in India: Limited Liability Partnership

Transcription

1 PLEASE DO NOT CITE OR QUOTE WITHOUT PERMISSION OF AUTHOR(S). The Latest Hybrid in India: Limited Liability Partnership Conference track: Corporate Accountability, Limited Liability and the Future of Globalization Submitted By: Vikramaditya Singh Malik Student, NALSAR University of Law, Hyderabad, India Submitted to: Centre for International Studies and Diplomacy Conference, and School of Oriental and African Studies (SOAS), University of London July, 2007 Page 1 of 21

2 Abstract This paper addresses the subject in two sections. While the first section deals with an introduction to the Indian economy, the contribution of the corporate sector to the growth story and various related initiates, the second section focuses on the new proposed legal framework of Limited Liability Partnerships. Corporates are known as the engines of economic growth, their success being measured in terms of high returns on equity at individual plane and its contribution to the nation s economic growth on a collective plane. Indian corporates are as well on a growth trajectory and are currently acquiring overseas companies and their operations. The Indian economy, with its sound fundamentals and inherent strengths, generates and invites global interest both for investment opportunities as well as wealth creation. Section 1 of this paper provides a peep into the stage of Indian economy at this juncture and various initiatives taken by the Government of India to avail of the opportunities that lie before it in the globalised economic environment. Section II of this paper attempts to bring out the legal concept of Limited Liability Partnership, which is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. Thus, being a hybrid between the two traditional forms, the paper explains how the LLP is a separate legal entity, being liable to the full extent of its assets, but at the same time, the liability of the partners is restricted to their agreed contribution. It is widely accepted as being an advantageous business model because it is organized and operates on the basis of an agreement. Also, it provides the flexibility without imposing detailed legal and procedural requirements, enabling professional expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner. The concept of Limited Liability Partnership is being widely understood and recognized across India in view of the newly proposed Limited Liability Partnership (LLP) Bill, 2006, which is already in the pipeline. Also, the paper attempts some answers to the questions being raised against the need for having a separate legislation for LLP and the reasons given by the Ministry of Corporate Affairs in that context as Page 2 of 21

3 to why can t amendments be simply made to the existing Companies Act or the Partnership Act. The paper brings out this concept, supplementing the information available with recommendations from various committees appointed by the government like the Naresh Chandra Committee and the Dr. J.J. Irani Committee. Most importantly, what has to be realized is that this concept of LLP has been found to be necessary as a separate concept because if a utopian situation is taken that the liability of a joint stock company is made unlimited, it may be beneficial to the economy, but is not as useful for the members of the company, including other stock holders. Therefore, instead of trying to convert one traditional form to a new form, the whole concept of Limited Liability Partnership is being introduced which brings about the specificity that is required on a scale such as this. Page 3 of 21

4 1. Introduction India has a rich set of choices in determining its future growth path in a globalised competitive business environment. The future choice or a combination thereof will depend on how well the government, the private initiative, and the civil society can work together to create a common understanding of the direction in which the economy should head and what it needs to get there. India can, no doubt, reap tremendous economic gains by developing policies and strategies that focus on making more effective use of its rich knowledge base to increase the overall productivity of the economy and the welfare of its population. In so doing, India will be able to improve its international competitiveness and join the ranks of countries that are making a successful transition to the knowledge economy. Joint Stock Companies, limited by shares or guarantees, have as significant a role to play in the economic processes of a country s economy as the other forms of businesses e.g. sole proprietorships or partnership firms or, for that matter, the limited liability partnerships. These business forms undertake operations across the manufacturing sector and the services sector, both of which account for a very large contribution to the overall development of a nation s economy. India is all set to provide a legal framework for the new hybrid business form, the Limited Liability Partnerships (LLPs), which combine the benefits of a company and a partnership, in view of the opportunities this form offers for the organised growth and a promising future of the Indian knowledge sector, more particularly, the professionals. 1.1 Indian economy on the growth path The Indian economy has recorded a growth of 8.5% in , 7.5% in , 9% in and 9.2% in The vigorous growth, sustained for the fourth year in succession, has inspired confidence in the strong fundamentals of Indian economy. Page 4 of 21

5 1.2 Sectoral contribution to the economic growth The contribution of various sectors to the overall economy is indicative of the robust directions in which the Indian economy is moving. A reference to the figures contained in the table given below, taken from the Economic Survey (a Government of India publication) would be in order in this connection. Sr. Sector No. I Agriculture & Allied II Industry III Services IV Total Source 1 While growth of the agriculture sector remains uncertain, with a substantial dependence on the monsoons year after year, the contribution from the secondary and tertiary sectors shows a certain degree of stabilisation and maturity of the manufacturing and the services sectors. A further break-up for the year shows that the manufacturing sector accounts for 11.3% while, amongst the services, those pertaining to Financial, real estate and business services account for about 11.1%, whereas trade, hotels, transport and communication has registered 13% growth. 1.3 Vast opportunities: Indian economy has moved by now to a position of centre-stage, or at least a position which is none too far from the centre-stage for its sound fundamentals on a number of counts. A democratic polity well entrenched with a strong and independent judiciary, besides its economic growth story and sound macroeconomic fundamentals, India s strength, as already perceived by the international businesses, lies in its vast market potential, trained human capital in its doctors, engineers, management and IT professionals, Chartered Accountants, Company Secretaries and lawyers, a buoyant capital market with Sensex having crossed the mark of only recently. Page 5 of 21

6 2. Overall Business Environment Among the various business forms that operate in India within the given legal framework are the (i) sole proprietorships, (ii) partnership firms, and (iii) the joint stock companies operating under the Companies Act, The overall composition presents an interesting mix as the sole proprietorships, partnership firms and the SMEs, which are largely family owned/ promoted enterprises, account for a major part of the economic players in the secondary and tertiary sectors of Indian economy. Out of a little more than 0.8 million companies, those listed on the stock exchanges are a little less than ten thousand and those which are actively traded are no more than 3000 entities accounting for a major part of the capital market tappings. While the Securities Exchange Board of India (SEBI) is the regulator for the capital and securities market, the Ministry of Corporate Affairs is the nodal ministry responsible for the administration of the companies Act, 1956 and other major initiatives that significantly impact the corporate sector as a whole. 3. New Initiatives The erstwhile Department of Company Affairs, attached to the Ministry of Finance till before the formation of the present government, and carved out as an independent ministry in May, 2004 and now positioned as the Ministry of Corporate Affairs, has taken a number of initiatives for the growth and regulation of the Indian corporate sector. A brief mention of some of these measures would be highly contextual: i) Enabling framework for the growth and regulation of professional services: The Ministry of Corporate Affairs is responsible for provision of a statutory framework for the growth and regulation of the professions of Chartered Accountants, Cost & Works Accountants and the Company Secretaries. The country has a strength of about 1,50,000 qualified Chartered Accountants and over 40,000 Company Secretaries. These professionals play a major role in the affairs of the corporate sector in the country. The Ministry has amended the related statutes with a view to providing opportunities of growth with greater accountability for the professionals from these institutes. Page 6 of 21

7 ii) Notification of Accounting Standards: The Accounting Standards, following the best international practices, have been developed and notified by the Ministry of Corporate Affairs in December 2006 with a view to mapping Indian Accounting systems with the international standards and practices, and strengthening the disclosures with good corporate governance practices. These would be instrumental in integrating the Indian corporate accounting systems with the internationally recognised practices in a seamless manner. iii) Company Law under comprehensive revision: The Companies Act, 1956, having been amended 25 times since its introduction, is all set to be comprehensively revised with a view to bringing the legal framework in sync with the aspirations and requirements of the corporate sector in a global business environment. Though a Bill on the new law is yet to be introduced in the parliament, it is understood that it is envisaged to be simpler, shorter and marks a shift from an approval based regime to empowerment of the shareholders for decision making in the affairs of the corporates. The process of revision follows from a wide consultative process of all the stakeholders. As stated by the Minister of Corporate Affairs in his various press meets, the Ministry would like to play the role of a facilitator for the growth of business while ensuring compliance of laws. iv) Keeping in view the enormous opportunities for the growth of service sector and the knowledge based industry, the Ministry of Corporate Affairs (GoI) has introduced a Bill in the Parliament in December, 2006 for creation of an enabling legal framework on the Limited Liability Partnerships. The Bill is presently under examination of the Standing Committee of Parliament. The implications of the LLP, as a hybrid business form, have been discussed in detail in the later part of this paper. v) The Ministry has placed another concept paper on its website for regulating the profession of valuation professionals through a statute in the same manner as in the case of Chartered Accountants and the Company Secretaries. The valuation professionals are expected Page 7 of 21

8 provide a significant value addition to the scope of future LLPs looking after the work of companies facing insolvency proceedings. vi) It is in the process of setting-up the Competition Commission of India for which certain amendments in the 2000 Act are envisaged soon. Similarly, efforts are on way to set-up Company Law Tribunals for expediting the process of liquidation of companies. vii) E-governance and MCA21: On the administrative side, the Government has implemented an e-governance project known as MCA21, under which all the manual processes on corporate interface with the Registry have been shifted to the e-governance mode, thereby introducing transparency in delivery of services with speed and certainty. All the Indian corporates are now mandatorily required to file all their documents in electronic form w.e.f. September 16, It has led to significant ease of transaction of all services for the corporates, empowerment of the general citizen/ public by providing on-line access to all corporate records available in the public domain, and an effective compliance management for the government. The programme has been perceived as a major step towards facilitating good Corporate Governance practices; Following the economic concept of neo-liberalism and economic globalisation, economic policies of countries are driven by their self-interests, which in turn are founded on their inherent strengths. In addition to the sound macroeconomic fundamentals of Indian economy, its latest strength lies in its knowledge based industry with a large pool of professionals across various sectors. The Indian economy has already taken advantage of the accelerated pace with which the BPO industry has found its roots with the huge IT industry related strengths. The future also holds significant promises in other knowledge sectors related to professionals from legal, financial, business and engineering professions. A legal framework enabling combining of these professions for providing knowledge based services appears to have good future prospects. It is in this context that the Indian Government has initiated steps towards creating this legal framework in the form of LLPs, which is discussed in detail in Part-II of this paper, that follows. Page 8 of 21

9 Limited Liability Partnership 4. Nature of LLP LLP is an alternative corporate business form that gives the benefit of limited liability of a company and the flexibility of a partnership. It is a new corporate form that is organised and operates on the basis of an agreement, without imposing detailed legal and procedural requirement of a joint stock company. One of the major advantages of this form is that it enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. It can continue in existence, irrespective of the changes in the constitution of partners. It is capable of entering into contracts and holding property in its own name. It is its structure that gives it a hybrid form as it is a combination of various features of both, a traditional partnership firm and a company. LLPs in other countries and India: The LLP structure is available in countries like United Kingdom, United States of America, Singapore, Australia, and various gulf countries. However, the Indian LLP Bill is broadly based on the UK LLP Act, 2000 and the Singapore LLP Act of Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members. The concept of LLP had its origin in USA in 1991 and has now been adopted by almost every state of the USA. In India, the LLP Bill was introduced in the Rajya Sabha on December 15, 2006 and currently it is under examination of the Parliamentary Standing Committee on Finance. The author of this paper had a six-week internship with the Ministry of Corporate Affairs, Government of India, during November-December, This period provided an opportunity to witness and understand the processes behind the drafting of the Bill and the steps taken by the Ministry in this regard. Therefore, given Page 9 of 21

10 below are the various stages of drafting of this legislation and followed by an analysis of the differences between and LLP, a traditional partnership firm and a Company. 5. Processes followed in Drafting the Bill in India: 2006: Various stages behind the drafting of the Limited Liability Partnership Bill, i) Two high level expert committees (i) Naresh Chandra Committee II and (ii) Dr. J.J. Irani Committee on New Company Law were set up by the Ministry of Corporate Affairs who recommended a separate LLP Legislation for the country; ii) iii) iv) A concept paper on LLP law was prepared by a technical group comprising representatives of ICAI/ICSI/ICWAI working with the Ministry officials, and placed on the website in November 2005 seeking public comments; The concept paper was also circulated to a large number of other departments and ministries and received good response and comments which were then internally examined by the ministry; Corresponding legislations of other countries like the United Kingdom, United States of America and Singapore were consulted during examination; v) Taking the feedback received into consideration, a draft LLP Bill was prepared based on the concept paper. A draft Cabinet Note was circulated to the concerned Ministries/Departments; vi) Vetting by the Legislative Department was finally carried out, before it was laid before the Parliament. 6. Recommendations of the Naresh Chandra and Dr. J.J. Irani Committees The Naresh Chandra Committee-II that developed the concept of LLP in India observed that in an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to say the least, Page 10 of 21

11 risky and unattractive. Indeed, this is the chief reason why partnership firms of professionals, such as accountants, have not grown in size to successfully meet the challenge posed today by international competition. This makes an LLP a most suitable vehicle for partnerships among professionals such as lawyers and accountants. 2 The Dr. J.J. Irani Committee, while recommending the formation of LLPs, pleaded very strongly for the enactment of a separate legislation in this regard 3. The Naresh Chandra Committee recommended its application to the service industry while the Irani Committee extended its application to the small enterprises also. 4 The service sector is gaining importance by the day, especially professional services such as lawyers, chartered accountants, cost accountants, taxation experts, doctors, etc. In such a situation, to make these professionals globally competitive, the LLP form of business has become a need of the day. This is specially going to help the lawyers and accountants because it will help them to organise their business better and enlarge the number of partners. The original number of partners allowed under the Companies Act is 20 and now it can be increased, so this means expansion of one s operations in one s respective profession. Also, no partner would be liable on account of the independent or unauthorised actions of other partners, allowing individual partners to be shielded from joint liability created by another partner s wrongful business decisions or misconduct. 7. Proposed Structure of the LLP An examination of the structure proposed in the Bill is summed up as under: i) LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs. ii) A minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum number of partners. Page 11 of 21

12 iii) iv) Appointment of at least two Designated Partners shall be mandatory for all LLPs. Designated Partners shall be accountable for regulatory and legal compliances. The Designated Partners shall be individuals and at least one of the Designated Partner shall be a resident of India. The mutual rights and duties of partners, and LLP & its partners shall be governed by the agreement between partners or between the LLP and the partners. In the absence of any agreement, the mutual rights and liabilities shall be determined by the Bill. 8. Limited Company vs. LLP vs. Partnership Firm Based on the empirical study of the three concepts and consultation with senior officers of the Ministry of Corporate Affairs and the ICAI/ICSI/ICWAI, the researcher has finally come up with the following analysis, after studying the Companies Act, 1956; the Indian Partnership Act, 1932; and the Limited Liability Bill, 2006: Parameter Limited Company LLP Partnership Firm Statutory Framework Companies Act, 1956 LLP Bill, 2006 (proposed) Partnership Act, 1932 Liability of Limited to amounts Limited to amount of Liability is Members/ Partners unpaid on shares capital agreed to be contributed, unlimited; jointly as well as severally. according to LLP Constitution Memorandum of Association (MOA) and Articles of Association (AOA) are the basic documents under which a company would regulate its affairs. Filing of MOA and AOA and any change there in must with ROC. Agreement. Agreement between members recommended but not essential. In case of no agreement, default provisions as per schedule I to the Bill would be applicable. Further only certain essential particulars of the Agreement, to be specified by way of rules, would be required to be filed with the ROC at the time of registration of Partnership Agreement between members recommended but not essential. Filing of certain statements/docume nts relating to constitution of Partnership Firm with the Registrar of Firms mandatory for registration of firm. Registration of a Page 12 of 21

13 Parameter Limited Company LLP Partnership Firm LLP. firm under the Partnership Act is optional. However there are effects (like non enforcement of contracts etc) which follow pursuant to section 69 of the Partnership Act, in case a firm is not registered under the Partnership Act. Status Capital Profits Taking out capital/ Drawing Management Has a separate legal personality can own land, can borrow in its name, sue and be sued in its name etc. Company limited by shares must have a minimum authorised and paid up share capital. Share capital has to be divided into shares. May pay salaries and dividends from distributable profits. Not permitted generally, though companies may be able to purchase or redeem their own shares subject to provisions of the Act. Management through Board of directors. Private company to have at least two directors, public company to have at least three directors. Has a separate legal personality can own land, can borrow in its name, sue and be sued in its name etc. Can do any thing which a body corporate can do. No mandatory requirement for capital/contribution. This would be regulated through agreement among LLP Partners. Capital is not divided into shares. LLP Agreement would determine all such issues. Depends on the LLP Agreement At least two Designated Partners are must. One of Designated Partners must be resident in India. Subject to this requirement and Not a separate legal entity. Can act only through its partners. No mandatory requirement for capital in the Act. Partnership Agreement is the basis for capita contribution/withdr awal etc. Capital is not divided into shares. Partnership Agreement determines all such issues. Depends on the Partnership Agreement At least two partners are must as per Partnership Act, Maximum number of members restricted to 10 in case of banking Page 13 of 21

14 Parameter Limited Company LLP Partnership Firm subject to LLP firms and to 20 in Agreement, all case of other firms. partners would have The restriction equal powers. relating to Companies may also become partners of maximum number of partners has been LLP. provided under section 11 of the Companies Act, 1956 and not under the Partnership Act, 1932 Decisions Majority rules LLP Agreement to Partnership taking prevails in directors decide decision Agreement mechanism meetings. In case of taking mechanism. In decides decisionmaking shareholders, there case there is no LLP mechanism. can be ordinary Agreement, default In the absence of resolution (majority provisions specified any agreement, rule) or there can be in the Bill would be provisions of the special resolution applicable. According Partnership Act, (not less than 75% to such Default 1932 are applicable. majority) provisions, except for a few decisions on which unanimous approval of partners is required, majority rule would prevail. Meetings Written resolutions At least one Annual General Meeting (AGM) of members required. Board of directors to meet at least four times in a year. Decisions are taken by way of written resolutions Investment Outside investors may contribute share capital subject to MOA and AOA and become members of the company. No such requirement. No such requirement. There is no requirement in the proposed Bill of taking decisions by way of written resolutions, Outside investors can not become partners freely. LLP Agreement would indicate conditions which would enable introduction and cessation of partners. No requirement. such Outside investors can not become partners freely. Partnership Agreement would indicate conditions which would enable introduction and cessation of Page 14 of 21

15 Parameter Limited Company LLP Partnership Firm partners Disclosures Accounts to be filed with ROC. Annual Provisions similar to companies would be No requirement of filing of accounts. Return and other applicable for LLP. timely disclosures Though like changes in number/nature of directors/registered office etc. required to disclosure requirements would be filed with ROC. be lesser/less stringent in case of Audit Mandatory for all companies Taxation Registration as a Non for Profit Organisation Company taxable as a separate entity Possible for companies under section 25 of the Companies Act LLPs. Exemptions for smaller LLPs are being provided for in the Bill. From tax angle, LLP would be given treatment similar to what is given to Firm as per Partnership Act, Under the Income tax Act, 1961 a partnership firm is taxable as a separate entity and the profits from firm earned by partners are exempt from tax. Not permitted Audit not provided under the Partnership Act. Though for bigger Partnership Firms, tax audit has been prescribed under the Income Tax Act. Partnership Firm is taxable as a separate entity. Profits from firm earned by partners are exempt from tax. Not permitted. Page 15 of 21

16 9. Applicability of the LLP Bill, 2006 Any two or more persons engaged in a lawful activity for profit may avail of the LLP form of organization. It may be mentioned that the Naresh Chandra Committee had suggested that the LLP form should be initially made available only to professionals such as lawyers, company secretaries, accountants and the like which are governed by statutes that control and discipline errant professional conduct. However, during various discussions held and inputs received by this Ministry, it was felt that the framework should not be restricted to professional services alone, but should be permitted for various knowledge-based entities and small scale enterprises that could benefit from this new framework. As a result of those discussions and inputs, the proposed Bill does not restrict the benefit of LLP structure to professionals only. India has witnessed considerable growth in services sector and the quality of its professionals is acknowledged internationally. It is necessary that knowledge growth and risk capital combine to provide a further impetus to an impressive economic growth. Thus, the applicability of the LLP Bill is huge, especially in the near future and thus can be used for many enterprises, such as: i) Persons providing services of any kind. ii) Small sector enterprises (including Micro, small and medium enterprises) iii) Venture capital funds where risk capital combines with knowledge and expertise. iv) Enterprises in new knowledge and technology based fields where the corporate form is not suited. v) Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and production of services. vi) For professionals such as Chartered Accountants, Cost and Works Accountants, Company Secretaries, and Advocates, etc. Page 16 of 21

17 10. Need for a separate legislation for LLP The companies Act, 1956 is not suited to the liability and governance structure intended for LLPs. The overall intent of the legislation to regulate widely-held companies is different. Therefore, in accordance with the recommendations of the Irani Committee, it is felt appropriate to bring a new legislation for LLPs. The administration and enforcement of partnership firms under the Indian Partnership Act, 1932 is at the State level. Besides, a partnership firm involves full joint and several liabilities of the partners. Because of this, many enterprises engaged in biotech, information technology, etc find traditional partnerships unsuitable. Also, the traditional partnership firms are very unsuitable for multi-disciplinary combinations like the combination of lawyers and accountants, which is the hot combination today. 11. Prominent Features of Limited Liability Partnership Firms Since the researcher is limited by time and space, all the features are not being discussed in detail, rather briefly and conversion into LLPs and Winding up of LLPs would be discussed in detail. So, below are some of the essential features of a LLP: i) LLP shall be registered with the Registrar of Companies (ROC) as defined in the Companies Act, 1956 and shall have a registered office. An Incorporation Document subscribed by at least two partners must be delivered to the ROC in a prescribed form. Contents of LLP Agreement, as may be prescribed, shall also be required to be filed with ROC. ii) iii) A person may cease to be a partner in accordance with the agreement or in the absence of agreement, by giving 30 days notice to the other partners or upon his death or upon the dissolution of the LLP. Notice is required to be given to ROC when a person becomes or ceases to be partner or for any change in partners. Every partner of an LLP would be an agent of the LLP but not of the other partners. Liability of partners shall be limited except in case of unauthorized acts, fraud and negligence. But a partner shall not be personally liable for the Page 17 of 21

18 wrongful acts or omission of any other partner. The liabilities of LLP shall be met out of the property of the LLP. iv) Partner s contribution may consist of both tangible and/or intangible property and any other benefit to the LLP. A partner may, however, lend money to and transact other business with the LLP and shall have the same rights and obligations with respect to the loan or other transactions as a person who is not a partner. v) A partner s economic rights in the LLP shall be transferable. However, such a transfer shall not by itself cause the partner s disassociation or a dissolution and winding up of the LLP. However, such transfer shall not entitle the transferee or assignee to participate in the management or conduct of the LLP s activities. vi) vii) viii) 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 Bill. Conversion of firm, private company and unlisted public company into LLP is allowed. ROC shall have power to strike off defunct LLPs. Electronic filing of returns by LLPs shall be allowed. Enabling provisions have been made in the Bill for applying provisions of Companies Act, 1956 (with or without modifications) to LLPs. 12. Conversion of other entities into LLPs and vice versa The LLP Bill contains enabling provisions pursuant to which a firm (set up under the Indian Partnership Act, 1932) and private company or unlisted public company (incorporated under the Companies Act, 1956) would be able to convert themselves into LLPs. Schedule II to Schedule IV to the Bill provide procedure in this regard. However, the Bill 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. Page 18 of 21

19 Also, an LLP cannot convert itself into a company under the Companies Act, However, enabling provisions would have to be made in the Companies Act in this regard and the Ministry of Corporate Affairs proposes to do so during the revision of the Companies Act, which is also a currently on-going process. 13. Mergers and Winding up of LLPs It is proposed to provide for compromises by LLPs with their creditors or arrangements, including mergers and amalgamations, involving LLPs, through rules to be notified by the Central Government. Clause 58 of the LLP Bill provides for compromise, arrangements or reconstruction of LLPs. Clauses talk about the winding up and dissolution of a limited liability partnership. Winding up of an LLP may be either voluntary or by the Tribunal. The various grounds of winding up of an LLP by a tribunal are 5 : i) If the LLP decides (by resolution) that the LLP would be wound up by the tribunal; ii) iii) iv) If the number of partners of the LLP is reduced below two; If the LLP is unable to pay its debts; If the LLP has acted against the interests of the sovereignty and integrity of India, the security of state or public order; v) If the LLP has made a default in filing with the Registrar the statements of accounts and solvency or annual return for any five consecutive financial years; vi) If the tribunal is of the opinion that it is just and equitable that the LLP be wound up. Page 19 of 21

20 14. Further Strengths of LLP Apart from the above mentioned merits in the Act, there are some further observations with regard to LLPs. These are briefly given below: 1. With LLP professionals would be able to form multidisciplinary partnerships. 2. Business can be expanded depending upon the increase in area of operations. 3. A partner is not responsible for any wrongful act or omission of any other partner. 4. Flexibility of operations as broad/general and extraordinary general meetings are not required to be conducted. 5. The Liability of an LLP is met out of the property of the LLP, the partner is not personally liable 15. Critical Analysis of LLP The new LLP Bill has been criticized by many theorists and some have even gone to the extent of saying that the LLP Bill is no more than a hotchpotch of existing statutes as in culinary recipe. It may satisfy the tastes of some consumers but whether it is healthy is open to question. Whatever it is, it is not novel. We are reminded of the old joke of a scientist s friends who glued together the dismembered parts of different species of insects and asked him to indicate the taxonomy of the new type of bug they had created. His bland reply was that it was a humbug. 6 However, some further points of weaknesses are given below 7 : 1. No collective responsibility for every action of the LLP. The first Schedule is not exhaustive as in the absence of LLP agreement shall apply. 2. The Centre would have enormous rule making power under the Act as there are 33 specific matters under Sub-section 2 of Section 72 of the Act, which require the central government to make rules. This means the legislation is cumbersome, tedious and expensive. 3. Lack of ceiling on the number of partners may make LLPs unmanageable. 4. The Bill does not provide for conversion/reconversion of LLPs into firms/ private companies and unlisted companies. 5. Financial disclosures may act as a deterrent for the formation of LLPs. Page 20 of 21

21 6. Fines/Penalties/Prosecution and imprisonment provided for in the Act may prove a major irritant for forming LLPs. 7. The control of the Registrar of Companies on LLPs would be substantial as there are 12 circumstances/matters, which require compliance to ROC under the Act. 16. Conclusion Having discussed the proposed LLP framework in India in the foregoing paragraphs, it now remains to be seen as to the role of these body corporates in the context of the theme of this conference. However, one thing remains basic i.e. whatever the form, the private initiative shall always focus and concentrate in optimising its own wealth creation and all other social objectives take a secondary position. Concepts of good corporate governance practices or the corporate social responsibility make sound business only when the investments on these are in the enlightened business interests. Ultimately, the business of business remains business and constitutes the guiding principle for any business form. Be it sole proprietorship or partnerships or LLP or a joint stock company, the effort always remains at minimizing the risks for self and wealth creation. The control over undesirable practices ultimately remains the subject of an efficacious regulatory system and perhaps, to some extent, are a matter of self-applied business ethics standards. 1 Economic Survey Table 1.2 page 3 2 Ministry of Finance and Company Affairs (2003), Naresh Chandra Committee- Second Report on Regulation of Private Companies and Partnerships, Academic Foundation, Economic India, 2004, pp Dr. J.P. Sharma, Limited Liability Partnership Bill, 2006 some observations, [2007] 78 CLA (Mag.) 10 4 Sumant Batra (2007), LLP may be growth vehicle for entrepreneurs & professionals, Economic Times, 10 Jan, 2007, at p Dr. J.P. Sharma, Limited Liability Partnership Bill, 2006 some observations, [2007] 78 CLA (Mag.) 10 6 K Srinivasan, Warts noticeable on a closer look, [2007] 76 CLA (Mag.) 19 7 S. Bhasker, LLPs- A SWOT Analysis, Business Line, 31/5/07, p. 11 Page 21 of 21