How to Close an LLP? Procedure related to Winding up of LLP

Minakshi Bindhani

27 Jul, 2023

Limited Liability Partnership, also called LLP, is a new form of business entity introduced in 2008 through the LLP Act. It has the benefit of company and partnership. It is a partnership where some or all partners have limited partnerships.

In an LLP, the partners have limited liability, which means their assets are protected from the partnership’s debts and liabilities. This characteristic is similar to a corporation, where shareholders‘ liability is restricted only to the amount they have invested in the company.

An LLP is typically formed by two or more individuals or entities who become partners. These partners contribute resources to the partnership, such as capital, skills, or property. The partnership agreement outlines the partners’ rights, responsibilities, and profit-sharing arrangements.

One significant advantage of an LLP is its flexibility in management and operations. Unlike a traditional partnership, an LLP allows partners to have limited involvement in the business’s day-to-day activities while still maintaining their limited liability status. This feature can be particularly appealing to professionals who want to have a degree of separation from the partnership’s operations.

Winding Up of LLP

• An LLP can be wound up in one of two ways: voluntarily by the members or compulsorily by a Tribunal. A Limited Partnership must approve a resolution to close the LLP, which requires the consent of three-quarters of the total number of partners. If an LLP has lenders, the lender’s permission is also necessary before the LLP can be closed.
• Securing an LLP was lengthy and inconvenient before introducing the Limited Liability Partnership (Amendment) Rules in 2017. The introduction of LLP form 24 has made the procedure easier and simpler.
• Owners with dormant or defaulting LLPs accumulating penalties should take advantage of this opportunity to close the LLP.

Reasons Why LLP Winding-Up Is Required

The reason behind winding up an LLP could be various. Some of them include the following:

• To avoid compliance and filing responsibilities for the LLPs which are not active.
• To avoid fines and penalties for late filing, it is better to officially Wind up inactive LLPs.
• Compared to maintaining compliance for Dormant LLP, it might be cheaper to Wind Up and incorporate again when the time is right.
• It makes it easy for inactive LLPs with NIL assets and liabilities to close down or Wind Up.
• When the LLP is not in a position to pay its debts.
• Where the LLP has acted against the interests of India’s integrity and sovereignty.
• Where a tribunal believes that it is equitable and just that the LLP should wound up.

Modes of Winding Up of LLP

There are two ways under the LLP Act of 2008 ¹to windup the LLP:

Voluntary Winding Up of LLP

Under this, partners can decide between themselves to stop and wound up the operations of the LLP.

LLP may initiate winding up voluntarily. They must pass a Partners resolution to wind up the LLP with the approval of at least three-fourths of the total Partners. If the LLP has lenders, secured or unsecured, then the approval of the lenders would also be required for winding up of the LLP by adopting the following procedure:

• Passing of Resolution
• Declaration of solvency by designated partners
• Approval of Creditors
• Publication of Resolution
• Appointment of Liquidator
• Preparation of the Final Report by the Liquidator
• Passing on Dissolution Order

Compulsory Winding Up of LLP

The Tribunal/court order may also wind up the firm, and this kind of winding up is known as Compulsory Winding up. The circumstances in which Limited Liability Partnership may wound up compulsorily are:

• Where for more than six months, the number of partners of LLP has been reduced below two;
• LLP is unable to pay its debts;
• LLP has acted against the interests of the sovereignty and integrity of India, the security of the State or public order;
• LLP has made a default in filing with the Registrar the Statement of Account and Solvency or annual return for any five consecutive financial years; or
• The tribunalis of the opinion that it is just and equitable that the LLP shall be wound up.
• LLP Winding-Up Procedure

The Winding-up Procedure of LLP is Provided Below:

• The petition or an application for winding up of an LLP could be filed with the tribunal by the LLP itself or by any of its partner(s) or creditor(s) or by the Registrar or by Central Government, or by a person authorized by Central Government.
• The tribunal is empowered with the special powers that can be exercised by the Tribunal as per his discretion on the presentation of the petition.
• Once the Tribunal has received the petition for winding up of the LLP, it fixes a date for its hearing and issues notice to the LLP to appear and justify its position. The Tribunal gives public notice to inform everybody, particularly the creditors and the partners, about winding up so that their concerns or objections can also be considered.
• The petitioner and the LLP shall ensure that a certified copy of the winding-up order has been filed with the ROC so that the Registrar can notify the fact in the Official Gazette.
• The winding-up order serves as a notice of discharge to all the employees and officers of the concerned Limited Liability Partnership.
• No suit or legal proceedings can be commenced against the LLP without the leave of the court. Even a suit, which is pending against the LLP at the date of winding up the order, cannot be preceded unless the permission of the Tribunal is obtained.

Effect of Winding Up of LLP

Once the winding-up process has begun, a company can no longer pursue its business except to complete the liquidation and distribution of its assets. The company will be dissolved at the end of the process and effectively cease to exist.

• Declaration of Dissolution of The LLP by The Registrar
• The Registrar may, by notice in writing, declare  that  the  LLP  is dissolved if:
• There is no objection received from any partner or creditor of the LLP;
• The objection to the proposed dissolution of LLP was subsequently withdrawn; or
• The Registrar believes that the objection to the proposed repeal is without justification.
• The declaration of dissolution of the LLP shall only take effect upon such notification is given to the Registrar, and the court cannot use the LLP after liquidation.

Conclusion

In conclusion, for LLP and winding up LLP, you are advised to go through the LLP Act 2008 and Limited Liability Partnership (Winding up and Dissolution) Rules, 2010. Closing an LLP involves several essential steps. The partners must first agree to the closure and notify the relevant government authorities. All outstanding debts, obligations, and liabilities should be settled, and stakeholders should be informed of the closure. Dissolution documents may need to be filed, and any remaining assets should be liquidated and distributed among the partners. Licenses, permits, and registrations must be cancelled, and final tax filings should be completed. Proper record-keeping is essential throughout the process. Seeking guidance from a legal or financial professional is highly recommended to ensure compliance with all necessary procedures and requirements for closing an LLP.

FAQs

Read our article:Special Notice Resolutions: Resolutions Requiring Special Attention

1. https://incometaxindia.gov.in/pages/acts/limited-liability-partnership-act.aspx