Winding Up of LLP

Winding up a Limited Liability Partnership (LLP) involves the formal procedure of terminating the LLP’s operations, disposing of its assets, and settling its obligations. This occurs when the LLP ceases its business activities and dissolves as a legal entity.

Law Governing – LLP Winding up

The regulations governing the winding up and dissolution of Limited Liability Partnerships (LLPs) in India are primarily outlined by the following provisions and notifications:

• Section 65 of the LLP Act, 2008: This provision authorizes the Central Government to establish regulations concerning the winding up and dissolution of LLPs.
• Section 67 of the LLP Act, 2008: This section confers upon the Central Government the power to apply, with or without adjustments, any provisions of the Companies Act, 1956, to LLPs. This includes provisions related to winding up, allowing for a more adaptable approach to overseeing the dissolution processes of LLPs by incorporating relevant provisions from the Companies Act.
• Notification via GSR 6(E), dated January 6, 2010: Exercising the authority granted under Section 67, the Central Government issued this notification to specifically dictate that certain sections of the Companies Act, 1956, are applicable to the winding up of LLPs.
• Limited Liability Partnership (Winding Up and Dissolution) Rules, 2012: These rules, promulgated under notification No. [F.No. 1/7/2012-CL-V] dated July 10, 2012, comprehensively address the procedures, forms, and fees associated with the winding up and dissolution of LLPs.

LLP Winding Up vs. Dissolution of an LLP

Winding up and dissolution are two different stages in ending the operations of a Limited Liability Partnership (LLP). The following table will define a simplified comparison:

Modes of LLP Winding Up

There are multiple methods available for winding up an LLP, each carrying its own distinct procedures and legal consequences.

1. Voluntary Winding Up
   In this approach, the partners of the LLP opt to voluntarily wind up the partnership’s affairs. This decision may arise from mutual consensus among the partners or for reasons outlined in the LLP agreement.
2. Insolvency and Bankruptcy Code (IBC), 2016
   While the IBC mainly concentrates on restructuring and reviving entities like LLPs under certain circumstances, the National Company Law Tribunal (NCLT) holds authority to order the liquidation of an LLP. This introduces a distinctive aspect to the winding-up process, particularly in insolvency scenarios.
3. Compulsory Winding Up by the Tribunal
   This method is triggered by an external directive rather than the LLP’s partners. The tribunal may order the winding up of the LLP due to reasons such as failure to comply with statutory obligations, inability to settle debts, or other grounds deemed adequate by the law.

Voluntary Liquidation

Voluntary liquidation of a Limited Liability Partnership (LLP) is a process initiated by the partners themselves, where they opt to dissolve and wind up the LLP’s operations without external pressure, such as a court mandate. This choice can stem from various factors, such as financial challenges, a unanimous agreement among partners to cease activities, or the fulfilment of the LLP’s original objectives.

Pre-requisites for Voluntary Liquidation

To commence a voluntary liquidation under the Insolvency and Bankruptcy Code (IBC), 2016, a corporate entity like a Limited Liability Partnership (LLP) must fulfil the following prerequisites:

• Solvency: The LLP must be financially stable, indicating its capability to settle all debts entirely. Solvency implies that the LLP’s assets surpass its liabilities, guaranteeing full repayment to all creditors.
• Declaration by Designated Partners: Most of the designated partners must issue a declaration. This declaration should confirm the LLP’s ability to fully repay all debts from the proceeds generated by selling its assets during the liquidation phase. This formal statement ensures that the liquidation process is carried out with fiscal prudence.
• No Intent to Defraud: The voluntary liquidation process must be conducted without any intention to deceive or defraud any individual. This requirement ensures that the liquidation is conducted in good faith and for genuine purposes, rather than to evade financial obligations or legal responsibilities.

Procedure for Voluntary Liquidation Of LLP

The process of voluntary liquidation for a Limited Liability Partnership (LLP) encompasses several crucial steps, detailed as follows:

Commencement of Liquidation

• Declaration of Solvency (DOS): Acquire a declaration from the majority of designated partners, validated by an affidavit, affirming the LLP’s capacity to settle its debts.
• Accompanying Documents: The DOS should be supported by audited financial statements for the past two years or since inception, along with a valuation report of assets prepared by a registered valuer.
• Resolution: Pass a resolution for voluntary liquidation and designate an insolvency professional as the liquidator within four weeks of acquiring the DOS.
• Creditors’ Approval: If the LLP carries debts, creditors representing at least two-thirds of the total debt value must endorse the resolution within seven days.
• Notification: Notify the Registrar and the Insolvency and Bankruptcy Board of India (IBBI) regarding the resolution within seven days.
• Liquidation Proceedings: Liquidation is considered to commence from the date of resolution, contingent upon creditors’ sanction.

Effect of Liquidation

From the liquidation commencement date, the LLP is required to halt all business operations except for activities essential to the winding-up process.

• The LLP remains in existence until the dissolution is finalized.
• Appointment and Remuneration of Liquidators
• Select an insolvency professional as the liquidator, meeting specific eligibility criteria.
• The resolution for appointment should outline terms, conditions, and remuneration, which constitute part of the liquidation expenses.

Reporting

The liquidator is responsible for preparing and submitting various reports, including a Preliminary Report, an Annual Status Report, minutes of consultations with stakeholders, and a Final Report, as stipulated by regulations.

Public Announcement by the Liquidator

Within five days of the liquidator’s appointment, a public announcement must be made, inviting stakeholders to submit their claims within 30 days.

The announcement should be published in newspapers with extensive circulation and on relevant websites.

Verification of Claims

The liquidator verifies the submitted claims within 30 days from the last date of receipt as well ashaving the authority to admit or reject them wholly or partially.

Realization of Assets

The liquidator holds the responsibility of valuing and selling the LLP’s assets in an approved manner and mode, recovering dues, and realizing unpaid capital contributions from partners.

Deposit and Distribution of Proceeds

Open a bank account in the name of the LLP ‘in voluntary liquidation’ to deposit all received funds.

Distribute the proceeds from the realization to stakeholders within six months after deducting the liquidation expenses.

These steps are designed to establish a methodical and transparent process for dissolving the LLP, while also safeguarding the interests of creditors and stakeholders.

Winding Up of LLP By Tribunal

Winding up of a Limited Liability Partnership (LLP) by a Tribunal can be initiated for several reasons:

• Voluntary Winding Up: The LLP decides and consents to be wound up voluntarily.
• Insufficient Number of Partners: The LLP has fewer than two partners for six consecutive months, as an LLP requires at least two partners to legally operate.
• Inability to Pay Debts: The LLP is financially insolvent and unable to fulfill its debt obligations.
• Activities Against National Interest: The LLP engages in activities that pose a threat to the sovereignty, integrity of India, state security, or public order.
• Non-compliance with Statutory Filings: The LLP fails to submit the Statement of Accounts and Solvency or Annual Returns to the Registrar for five consecutive financial years, indicating a lack of operational transparency and regulatory compliance.
• Just and Equitable Grounds: The Tribunal determines that it is just and equitable for the LLP to be wound up. This criterion is broad and subjective, covering various situations that the Tribunal deems warrant winding up for reasons of fairness or other justifiable grounds.

Insolvency Proceedings for LLPs under the IBC, 2016

The Insolvency and Bankruptcy Code (IBC) of 2016 introduced a comprehensive legal framework for insolvency resolution and liquidation for corporate entities, including Limited Liability Partnerships (LLPs) in India. The IBC aims to consolidate and amend laws related to reorganization and insolvency resolution in a time-bound manner, with the goal of maximizing asset value, fostering entrepreneurship, and enhancing credit availability.