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

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

After cracking its whip on suspected shell companies, the government has turned its focus on the growing number of Limited Liability Partnership (LLPs) firms. In such a partnership, partners can’t be held liable for another’s misconduct or negligence.

As a first step, the government is in the process of identifying and deregistering inactive LLP firms. “The Registrar of Companies (RoC) is on a spree to strike off inactive LLPs from its register,” says Vikas Gupta, partner, Nangia & Co. 

The government has been on a drive against generation of black money and money laundering through use of shell companies. In his Independence Day speech, Prime Minister Narendra Modi said that the government had identified over 300,000 shell companies and registrations of 175,000 such firms had been cancelled. Experts point out, just like shell companies, inactive LLPs could be used for tax evasion and money laundering.

The trend of converting existing companies into LLPs and creation of new LLPs spiked after the Companies Act, 2013, came into effect in April 2014, seemingly to tide over the higher compliance requirements. Around 6,000-odd companies converted themselves into the LLP structure as of June 2017 over the last two-three years.

Corporate lawyers say that on an average, 2,500-3,000 LLPs get registered every month. According to the data from the ministry of corporate affairs (MCA), there were 94,304 active LLPs as of June 2017.

What has caught the attention of the government is the steady rise in the number of LLPs in the last one year, peaking at 3,518 in March 2017. In the three months from April to June 2017, 8,019 new LLPs got registered, according to the MCA data.

Many legal experts feel that the de-monetisation of high-value currency notes in November last year gave a fillip to LLPs. The rise in the number of LLPs could also have been fuelled by the fact that obtaining government approval is not a requirement to convert certain companies into LLPs. 

The minimal compliance and regulatory requirements under the LLP structure may have caught the fancy of business owners. On a yearly basis, an LLP is only required to file an annual return, and a statement of account and solvency. All other filings are event-based, triggered by any change in LLP partners, retirement, resignation and change of address, among others. 

Over the past two years, the government and the Reserve Bank of India have also liberalised norms for allowing foreign direct investment in LLPs, while allowing the appointment of foreign partners. A recent RBI amendment allowed LLPs to avail of external commercial borrowing (ECB), including masala bonds. Going forward, legal experts expect LLPs to attract a greater slice of foreign direct investment.

An analysis of the nature of business of the LLPs that got registered between April and June shows that a bulk of them are business services (46 per cent), followed by manufacturing and trading (12 per cent each), community, personal and social (9 per cent), construction (8 per cent), and real estate and renting (6 per cent), among others. Experts say LLPs are getting a wider appeal among businesses, other than services. 

As per Section 75 of Limited Liability Partnership Act, 2008, the RoC can suo moto take action if an LLP does not carry out any business for a period of two years or more. The RoC can also 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 can also apply for deregistration if it has not carried out business 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 say deregistration of inactive LLP firms would gather steam in the coming months.