After shell firms, govt looks to weed out defunct LLP firms

As a follow-up to its drive against suspected shell companies, the government has now turned its focus on growing number of Limited Liability Partnership (LLPs) firms. There has been a spike in the number of LLPs over the last two-three years to tide over the higher compliance requirements under the new company law. According to the latest data from Ministry of Corporate Affairs, there are 94,304 active LLPs, as of June 2017. On an average 2,500 to 3,000 LLPs get registered every month, say corporate lawyers. 

“Registrar of Companies is on a spree of striking-off the defunct LLPs from its register,” says Vikas Gupta, partner, Nangia & Co.

In his Independence Day speech, Prime Minister Narendra Modi said the government has identified over three lakh shell companies and registration of 1,75,000 such companies had been cancelled. The government has been on a drive against the generation of black money and money laundering through use of shell companies.

What has caught the attention of government is the steady rise in the number of LLPs registered in course of the last one year, peaking at 3,518 in March 2017. The period from April to June 2017 saw no let-up in the creation of LLPs with 8,019 getting registered in the three months, as per MCA data. Many legal experts feel the demonetisation of high-value currency notes in November last year has given a fillip to LLPs.

An analysis of the nature of business of these LLPs in the April-June period shows that bulk of them are business services (46 per cent), followed by manufacturing and trading (12 per cent each), community, personal and social (nine per cent), construction (eight per cent), real estate and renting (six per cent), among others. Experts say LLPs are getting a wider appeal among businesses, other than services.

Since the time the Companies Act, 2013 came into effect in April 2014 there has been a trend of converting existing companies into LLPs and creation of new LLP firms. Around 6,000 companies converted to the LLP structure as of June 2017. No government approval is required for conversion of certain companies to LLPs.

What has caught the fancy of the business owners was the minimal compliance and regulatory requirements under LLP structure. On an annual basis, an LLP is only required to file Annual Return and a Statement of Account & Solvency. All other filings are event-based, triggered by any change in LLP partners, retirement, resignation, change of address, among others.

What has also come as a shot-in-the-arm is that over the last two years the government and the Reserve Bank of India have liberalised norms for allowing foreign direct investment in LLPs, while allowing the appointment of foreign partners. Recent RBI amendment has allowed LLPs to avail of external commercial borrowing (ECBs), including masala bonds. Going forward legal experts expect LLPs to attract the greater slice of foreign direct investment.

As per Section 75 of Limited Liability Partnership Act, 2008 and the Rules, the Register of Companies (RoC) could suo moto take action against an LLP if it does not carry out any business or profession for a period of two year or more. The RoC could deregister the LLP if it is not satisfied with the reasons given by the firm for its inactivity, says Hitender Mehta, partner, Vaish Associates Advocates. An LLP on its own could also apply for de-registration if it has not carried out business or operation for a period of one year or more. “In case of an active LLP winding-up can be initiated voluntarily or by tribunal only,” says Nishit Dhruva, managing partner, MDP & Partners.

Most experts expect de-registration of defunct LLP firms to gather steam in the coming months.

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