Limited Liability Partnership

Understanding the Provision Regarding Strike off of LLP

The Ministry of Corporate Affairs (MCA) recently amended the provision relating to the strike off of LLP. The penalties for defaulting LLP’s in filing any statutory return is quite high; therefore, it would be wise for dormant LLP’s to wind up their business. In this form, they can avoid paying penalties, and they won’t be required to file various LLP forms and Income Tax Returns each financial year to maintain compliance. It would be a prudent decision for the entrepreneurs to close down LLP’s that are dormant or defaulting and are accruing penalties. 

The Ministry of Corporate Affairs released a notification on 16^th May 2017, providing relaxation to a Limited Liability Partnership (LLP). It provided that those LLP’s that has not carried of their business and has not filed any return with the concerned registrar and wants to strike off the LLP, shall have to file overdue returns for the years when the LLP actually worked. It means that the LLP’s don’t need to file returns for the period when the business was actually not on. However, a declaration must be provided by the designated partners with respect to the closure of their business. This article sheds light on various questions and queries related to the notification released by the MCA on 16^th May 2017, concerning the strike off of LLP.

Meaning of LLP

Limited Liability Partnership (LLP) is an alternate form of corporate business that provides benefits of limited liability to the partners. It is a body corporate, and like a company or a corporation, it is also a separate legal entity. The LLP can enter into a contract and can acquire property in its name.

The various advantages of LLP’s are that it is easy to form unlike a company where the process is time-consuming, the partners have limited liability, the ownership can be easily transferred, and there is no mandatory need of an audit. Another benefit of LLP is that the rate of taxation on LLP is comparatively lesser than that of a company.

Does a Company need to complete Annual filings with ROC prior to filing an application for strike off of LLP?

The statutory provisions regarding the strike off of LLP are given in the clause (b) of sub-rule 1, rule 37 of the LLP Rules, 2008. There is no provision of exemption for filing the e-form (LLP-8 and LLP-11) for strike off of LLP according to the rules. Every LLP must complete annual filing before strike off of LLP. 

However, with the LLP amendment rules, 2017, there has been some noteworthy change. The amendment rules say that the LLP in clause (b) of sub-rule 1, rule 37 shall, file overdue returns up to the end of the financial year in form 8 and form 11, in which the LLP ceased to carry on its business/ commercial operations before filing “strike off” form. It means that LLP’s will file overdue returns in Form 8 and 11 till the end of the financial year in which the LLP ceased its business or commercial operations. Therefore, under the provisions of the amendment rules, an opinion can be made that if an LLP that is non-operational seeks to strike off, and then it should file form 8 and form 11 till the end of the financial year in which the concerned LLP ceased to carry its business or its commercial operations.

Case by Case Analysis

In case a Limited Liability Partnership (LLP) has completed filing of e-forms (LLP-8 and LLP-11) till the date of strike off then there shall be no further query with respect to the completion of annual filing. The LLP can then proceed for strike off under rule 37 of the LLP Rules.

In case an LLP has filed the e-forms (LLP-8 and LLP-11) for end of the financial year, and from the beginning of a new financial year it has neither done any business nor carried any commercial operations, in that case, the LLP can file an application for strike off of LLP, under the amendment rule, 2017, with the Registrar of Companies without the completion of annual filing forms since the time it ceased to carry on its business.

In case an LLP has not filed the e-forms (LLP-8 and LLP-11) since its incorporation, and if it wants to apply for the provision of strike off under Rule 37, in that case under the amended rules, the LLP will have to complete the annual filing up to the financial year 2012-2013. It is vital to know that the llp late filing fees for completion of filing annual forms is Rs. 100 per day up to the date of filing the form.

There are two critical aspects related to this provision, firstly, that an LLP should be non-operational or must not be carrying any business for at least one year period secondly, it must be noted whether an LLP had filed any annual forms up to the date when it stopped its business or commercial operations.

Does a company need to file an Initial LLP Agreement and any amendment in LLP agreement with the Registrar of Companies prior to filing an application for strike off of LLP?

The LLP rule doesn’t state any exemption from filing LLP agreement in e-form with the Registrar of Companies. Hence, prior to filing an application for strike off of LLP, it has to file the LLP agreement with the registrar of companies.

The amendment rules say that the LLP shall (if entered into and not filed) enclose a copy of initial LLP agreement along with any change in the agreement in case where the LLP has not begun its business or commercial operations since its incorporation.

Therefore what it means is that under the provisions of amendment rules, an LLP can file an application for strike off of LLP without filing the e-form (LLP-3) with the registrar of companies if the LLP is non-operational since its incorporation.

Case by Case Analysis

If a Limited Liability Partnership (LLP) has begun its business and it forgets to file the initial LLP agreement then if it desires to apply for strike off it has to file the LLP-3 with the initial agreement as per the amendment rule. 

In case an LLP has neither begun its business nor operation since its incorporation and has not filed an LLP agreement and any amendment in the LLP agreement then the LLP, as per the amendment rule, 2017, can file an application for strike off of LLP with the registrar of companies without completion of the filing of forms.

If an LLP, that has commenced business and filed the initial agreement with the registrar of companies but failed in filing the amendment in the initial LLP agreement, wants to apply for strike off, then it has to file an amendment in initial LLP agreement in LLP-3 with the registrar of companies under the amendments rules. Again it’s vital to know that the late fee for completion of filing annual forms is Rs. 100 per day up to the date of filing the form.

It is critical to know here whether the LLP has filed any initial LLP agreement and whether it has filed an amendment in the initial LLP agreement if any. In case the LLP has not filed any of the two agreements mentioned above, then it must be checked whether the LLP has carried any business or operations since its incorporation. 

What are the ways of striking off an LLP?

A Limited Liability Partnership (LLP) can adopt the following ways to strike off its business:

• By declaring the LLP as defunct

If an LLP is not carrying on a business operation for the period of one year or more or if the LLP wants to close its business, it can make an application to the registrar of companies to declare the LLP as defunct and to remove the name of the LLP from the register.

• By winding up of LLP

Winding up of LLP means where the assets of the companies are disposed off to meet the liabilities and if there is any surplus, it is distributed among the owners. An LLP can be winded up in two ways- a) Voluntary winding up and b) Compulsory winding up.

The procedure of Strike Off of LLP

If an LLP is either not carrying on any business for one year period or more or if the LLP wants to close its business, it can make an application to the Registrar of Companies to declare the company as defunct and further to remove the name of the LLP from its register of LLP. In this segment, we shall discuss the procedure for striking off the name of the LLP.

An application must be filed in e-form 24 to the registrar of companies to strike off the name of the LLP along with the following documents:

• An account statement notifying no assets and no liabilities that have been certified by a CA (Chartered Accountant) in practice and that is made up to date that is not earlier than 30 days of the date of filing of form-24,
• A copy of the acknowledgement of the latest Income Tax Return,
• A copy of the initial LLP agreement, (if it is entered into and has not been filed) with any changes thereof,
• An affidavit duly signed by the designated parties (jointly or severally) stating that-
  • The LLP has not commenced its business, or after it commenced business, it ceased to carry on the business from such date.
  • The LLP has no liabilities and indemnifying any liability that could arise after its name is struck off from the register.
  • The LLP has not opened any bank account, and if it were opened, the bank account has been closed since, with certificate or statement from the said bank showing the closure of the Bank Account.
  •  The LLP has not filed any Income Tax Return where it has not carried any business since its inception, if applicable.
• A copy of the application in detail mentioning the full details of LLP along with the reason for closure,
• A copy of the authority to make the application signed by all the partners.

The name of the Limited Liability Partnership can be struck off by the registrar or by the LLP itself in Form-24 by the consent of all the partners. After the receipt of the application, the registrar shall send a notice to the LLP and all its partners about his intention to remove the name of the LLP from the register. He shall request them to send representations with the copies of the relevant documents within 30 days from the date of the notice. After the time in the notice expires, the registrar shall, if satisfied that there are no adverse representations from LLP partners or from the public, strike off the name of the LLP from the register and publish a notice in the official gazette.

Conclusion

The provision of strike off of LLP is a huge positive for the entrepreneurs having dormant or defaulting LLP. The introduction of the LLP Amendment Rules, 2017^[1] has made the process of winding up less cumbersome. The owners are now able to strike off the LLP’s that are non-operational and are accruing penalties. The process shall ensure that the owners of the LLP’s get relief from heavy penalties.