Decriminalisation of Offences Under LLP Act | 25 Jan 2021

Why in News

Recently, the Company Law Committee (CLC) has recommended that 12 offences under the Limited Liability Partnership (LLP) Act 2008 be decriminalised and that LLPs be allowed to issue Non-Convertible Debentures (NCDs) to raise funds with the aim of improving ease of doing business for LLP firms.

  • The Company Law Committee (CLC) was set up by the Ministry of Corporate Affairs in September, 2019 to promote Ease of Living in the country by providing Ease of Doing Business to law-abiding corporates and fostering improved corporate compliance for stakeholders at large.

Key Points

  • Company Law Committees (CLC’s) Recommendations:
    • Decriminalisation of Offences:
      • Several offences related to timely filings, including annual reports and filings on changes in partnership status of the LLP, not related to fraud have been recommended for decriminalisation.
      • While none of these provisions recommended for decriminalisation currently have prison terms as a possible punishment, the committee has recommended that companies be required to pay penalties for non-compliance, instead of fines which are imposed after a partner or the LLP is found guilty of misconduct by a court.
    • Risk Involved in Imposing Fines:
      • The Committee has noted that there is a risk of a convicted person being disqualified or becoming ineligible for various posts in the case of fines imposed by courts, which would not be the case for penalties imposed by an appropriate authority.
    • Authority to Levy Penalties:
      • The Registrar of Companies (ROC) would have the authority to levy penalties for any contravention of provisions of the LLP Act.
      • ROC appointed under Section 609 of the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies and LLPs floated in the respective states and the Union Territories.
    • Permission to Issue NCDs:
      • LLPs which are currently not allowed to issue debt securities should be permitted to issue NCDs to facilitate raising of capital and financing operations.
  • Beneficiaries:
    • The move is likely to benefit startups and small firms in sectors which require heavy capital investment.

Limited Liability Partnership

  • About:
    • It is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities.
    • In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence.
    • The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
    • 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.
  • LLP vs Traditional Partnership Firm:
    • Under “traditional partnership firm”, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner.
    • Under LLP structure, liability of the partner is limited to his agreed contribution. Thus, individual partners are shielded from joint liability created by another partner’s wrongful acts or misconduct.
  • LLP vs a Company:
    • The internal governance structure of a company is regulated by statute (i.e. Companies Act, 2013) whereas for an LLP it would be by a contractual agreement between partners.
    • The management-ownership divide inherent in a company is not there in a limited liability partnership.
    • LLP will have more flexibility as compared to a company.
    • LLP will have lesser compliance requirements as compared to a company.

Non-Convertible Debentures

  • Debentures are long-term financial instruments that are issued by companies to borrow money.
  • Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the debenture holder.
  • The debentures which cannot be converted into shares are called non-convertible debentures (or NCDs).
  • There are two types of NCDs-secured and unsecured.
    • Secured: A secured NCD is backed by the assets of the company. If the company fails to pay the obligation, the investor holding the debenture can claim that through liquidation of those assets.
    • Unsecured: Contrary to secured NCD, there is no backing in unsecured NCDs if the company defaults.