COMPROMISE, ARRANGEMENT OR RECONSTRUCTION OF LIMITED LIABILITY PARTINERSHIP

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

                        Limited Liability Partnership ('LLP' for short) is the long awaited business type. The Central Government enacted the Limited Liability Partnership Act, 2008 ('Act' for short) to make provisions for the formation and regulation of limited liability partnerships. LLP is an alternative corporate business vehicle that provides the benefits of limited liability.   It allows the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The Government also made the Limited Liability Partnership Rules, 2009 ('Rules' for short).  288 LLPs were  registered with the Registrar of Companies as on 19.10.2009. This business is at the initial stage.  This concept will emerge soon in wider as expected. The Act and Rules provide for the compromise, arrangement or reconstruction of LLP. Though these provisions are not applicable to the LLPs registered at present it would be there in future. This article will discuss the provisions contained in the Act and the Rules in regard to compromise, arrangement or reconstruction of LLP.

COMPROMISE, ARRANGEMENT OR RECONSTRUCTION:

                        Chapter XII of the Act deals with the compromise, arrangement or reconstruction of LLPs through Sections 60 to 62.  Restructuring is common now a day in the corporate sector. Corporate Restructuring is concerned with arranging the business activities of the corporate as a whole so as to achieve certain pre determined objectives at corporate level. Such objectives include the orderly redirection of the firm's activities; deploying surplus cash from one business to finance profitable growth in another; exploiting inter-dependence among present or prospective businesses within the corporate portfolio; risk reduction and development of core competencies. Rule 35 deals with the compromise, arrangement or reconstruction.

COMPROMISE OR ARRANGEMENT - PROCEDURE:

Application to the CLB:

                        Sec.60 of the Act provides that where a compromise or arrangement is proposed-

Between a LLP and its creditors; or

Between a LLP and its partners

the LLP or any creditor or partner of LLP, or in the case of LLP which is being wound up, of the liquidator may file an application to the Company Law Tribunal for an order convening a meeting of creditors or partners or creditors and partners supported by an affidavit. A copy of the proposed compromise or arrangement shall be annexed to the affidavit.  The affidavit in support thereof shall be in Form 20.

                        The CLB, where the LLP is not the applicant shall serve a copy of the summons and of the affidavits on the LLP or, where the LLP is being wound up, on its liquidator, not less than 14 days before the date fixed for the hearing of the summons in Form 21.  Upon the hearing of the summons or any adjourned hearing thereof, the CLB shall, by order, unless it thinks fit for any reason to dismiss the summons, gives such directions as it may think necessary in respect of the following matters:

Determining the creditors and/or of partners whose meeting or meetings have to be held for considering the proposed compromise or arrangement;

Fixing the time and place of such meeting or meetings;

Appointing a Chairman for the meeting or chairmen for the meetings to be held;

Fixing the quorum and the procedure to be followed at the meeting or meetings, including voting by proxy;

Determining the values of the creditors and/or the partners, as the case may be, whose meetings have to be held;

Notice to be given of the meeting or meetings and the advertisement, if any, of such notice;

The time within which the Chairman of the meeting is to report to the CLB the result of the meeting; and

Such other matters as the Board may deem necessary

Conduct of Meeting:

                        The notice of the meeting to be given to the creditors and/or the partners shall be in accordance with the rule laid down in this behalf, and shall be sent to them individually by the Chairman appointed for the meeting, or, if the CLB so directs, by the LLP (or its liquidator), or any other person as the CLB may direct, by post under certificate of posting to their last known address not less than 21 clear days before the date fixed for the meeting. It shall be accompanied by a copy of the proposed compromise or arrangement along with the statement showing material interest of the designated partners, if any, and a form of proxy.

                        Voting by proxy shall be permitted, provided a proxy in Form 26 duly signed by the person entitled to attend and vote at the meeting is filed with the LLP at its registered Office not later than 48 hours before the meeting. Where a body corporate which is a partner or credit of LLP authorizes any person to act as its representative at the meeting of the partners or creditors of the LLP, as the case may be, a copy of the authorization of such person to act as its representative at the meeting, and certified to be a true copy by a designated partner or other authorized officer of such body corporate, shall be lodged with the LLP at its registered office not later than 48 hours before the meeting.

                        The notice of the meeting shall be advertised, if so decided by the CLB, in such newspapers and in such manner as the CLB may direct. Every creditor or partner entitled to attend the meeting shall be furnished by the LLP, free of charge and within 48 hours of a requisition made for the same with a copy of the proposed compromise or arrangement. 

                        The Chairman of the meeting shall file an affidavit not less than 7 days before the date fixed for the holding of the meeting or the holding of the first of the meetings, as the case may be, showing that the directions regarding the issue of notices and the advertisement have been duly complied with. In default thereof, the summons shall be posted before the CLB for such orders as it may think fit to make.

                        The Chairman of the meeting shall within the time fixed by the CLB, or where no time has been fixed, within seven days after the conclusion of the meeting, report the result thereof to the CLB. The report shall state accurately the number of creditors or the partners as the case may be, who were present and who voted at the meeting either in person or by proxy, their individual values and the way they voted.

Confirmation by CLB:

                        Where the proposed compromise or arrangement is agreed to, with or without modification, the LLP, its Official Liquidator, as the case may be, shall within seven days of the filing of the report by the Chairman, present a petition to the CLB for conformation of the compromise or arrangement.  Where a compromise or arrangement is proposed for the purposes of, or in connection with, a scheme for the reconstruction of any LLP or the amalgamation of any two or more LLP, the petitioner shall pray for appropriate orders and directions under Sec.62.

                        Where the LLP fails to present the petition for confirmation, it shall be open to any creditor or partner, as the case may be, with the leave of CLB to present the petition for confirmation and the LLP shall be liable for the costs thereof.

                        Where no petition for the conformation is presented to, or where the compromise or arrangement has not been approved by the requisite majority and consequently no petition for confirmation could be presented, the report of the Chairman as to the result of the meeting shall be placed for consideration before the CLB for such orders as may be necessary.

                        The CLB may pass order sanctioning any compromise or arrangement unless it is satisfied that the LLP or any other person by whom an application has been made has disclosed to the CLB by an affidavit or otherwise, all material facts relating to the LLP including the latest financial position of the LLP and the pendency of any investigation proceedings in relation to the LLP.  If a majority representing three fourths in values of the creditors or partners, as the case may be, at the meeting, agree to any compromise or arrangement, the CLB may pass an order sanctioning the same. The order passed by the CLB is binding on all the creditors or all partners, as the case may be, and also on the LLP, or in the case of LLP which is being wound up, on the liquidator and contributories of LLP.

                        An order made by CLB shall be filed by the LLP with the Registrar within thirty days after making such an order in Form 22 along with the fee as detailed below:

LLP whose contribution does not exceed Rs. 1 lakh - Rs.50/-;

LLP whose contribution exceeds Rs. 1 lakh but does not exceed Rs. 5 lakhs - Rs.100/-;

LLP whose contribution exceeds Rs. 5 lakhs but does not exceed Rs.10  lakhs - Rs.150/-;

LLP whose contribution exceeds Rs.10 lakhs - Rs.200/-

 The order shall have effect only after it is so filed.  In computing the period of 30 days from the date of order, the requisite time for obtaining a certified copy of order shall be excluded. If default is made the LLP and every designated partner of the LLP shall be punishable with fine which may extend to one lakh rupees.

                        The CLB may, at any time after an application has been made to it, stay the commencement, continuation of any suit or proceedings against the LLP on such terms the CLB thinks fit, until the application is finally disposed of.

Power of CLB to enforce compromise or arrangement:

                        Where the CLB makes an order sanctioning a compromise or arrangement in respect of LLP, it shall have power to supervise the carrying out of the compromise or an arrangement and may at the time of making such order or at any time thereafter, give such directions in regard to any matter of make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement. If the CLB is satisfied that a compromise or an arrangement sanctioned cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the LLP, make an order winding up the LLP and such an order shall be an order deemed to be an order made under Sec. 64 of the Act which deals with the circumstances in which the LLP may be wound up by the CLB.

FACILITATING RECONSTRUCTION OR AMALAGAMATION OF LLP:

                        Where an application is made to the CLB for sanctioning of a compromise or arrangement proposed between a LLP and any such persons and it is shown to the CLB that-

Compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any LLP or LLPs, or the amalgamation of any two or more LLPs; and

Under the scheme the whole or any part of the undertaking, property or liabilities of any LLP ('transferor LLP') concerned in the scheme is to be transferred to another LLP ('transferee LLP')

the CLB may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provisions for all or any of the following matters, namely:-

The transfer to the transferee LLP of the whole or any part of the undertaking, property or liabilities of any transferor LLP;

The contribution by or against the transferee LLP of any legal proceedings pending by or against any transferor LLP;

The dissolution, without winding up, of any transferor LLP;

The provisions to be made for any person who, within such time and in such manner as the CLB directors, dissent from the compromise or arrangement; and

Such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

No compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a LLP, which is being would up, with any other LLP or LLPs, shall be sanctioned by the CLB unless the CLB has received a report from the Registrar that the affairs of the LLP have not been conducted in a manner prejudicial to the interests of its partners or the public interest. No order for the dissolution of any transfer LLP shall be made by the CLB unless the Official Liquidator has, on scrutiny of the books and papers of the LLP, made a report to the CLB that the affairs of the LLP have not been conducted in a manner prejudicial to the interests of its partners or to public interest.

                        Where an order provides for the transfer of any property or liabilities, then by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of the transferee LLP; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.

                        Within 30 days after the making of an order every LLP in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration.  If default is made the LLP, every designated partner of the LLP shall be punishable with fine which may extend to fifty thousand rupees. 

REVIVAL AND REHABILITATION OF LLP:

                        The Rule provides for revival and rehabilitation of LLP. Rule 12 (1) provides that an arrangement for revival and rehabilitation of any LLP may be proposed-

Where on a demand by the creditors of the LLP representing 50%  or more of its outstanding amount of debt of the LLP has failed to pay the debt within thirty days of the service of the notice of demand or to secure or compound it to the reasonable satisfaction of the creditors; or

Where a petition for winding up of a LLP is pending before the CLB, in terms of the directions given by the CLB on the winding up petition; or

Where the liquidator has filed his report before the CLB, in terms of directions given by the CLB on the report of the liquidator.

The liquidator may also make an application for sanction of the arrangement for revival or rehabilitation before the CLB. 

                        Such application shall be accompanied by-

A statement of account and solvency of LLP for the immediately preceding financial year, in case the application is made by LLP;

Particulars and documents relevant to the scheme including commitments whether financial or otherwise expected from various parties or, proposed restructuring or rescheduling of the debts, or any undertaking or understanding, in case from bank or financial institution through a letter or in any other case through an affidavit of concerned party or parties, or in any other form as may be directed by the CLB; and

Proposed scheme of revival and rehabilitation of the LLP including proposal for appointment of an LLP Administrator.

Such application shall be made to the CLB within 90 days from the date of expiry of demand notice or from the date of the direction of the CLB.

                        Within 60 days of receipt of the said application, the CLB shall hear all the parties concerned and admit or dismiss the application. Where the CLB admits the application, it may make an order to that effect and make provisions in such order, for all or any of the following matters:

Holding of meetings of the creditors for approval of scheme proposed for revival and rehabilitation of LLP;

Procedure to be followed by the LLP Administrator proposed in the scheme in connection with holding of the meeting including the appointment of chairman for such meeting;

Any other direction(s) or order (s) as may be considered necessary.

                        The LLP Administrator shall submit the preliminary report including the decision of the meeting to the tribunal within 60 days of the order made by CLB.  On consideration of the report of the LLP Administrator and other materials available, if the CLB is satisfied that the creditors representing three fourths in value of the amount outstanding that LLP have, with or without modification of the scheme resolved that it is not possible to revive and rehabilitate the LLP, the CLB ,may within 60 days of the receipt of such report order that the proceedings for the winding up of the LLP be initiated or the LLP be wound up or the liquidator to continue; or sanction the arrangement for revival and rehabilitation of LLP as approved by such creditors with such modifications as may be considered necessary by the CLB and make orders for continuation of the LLP Administrator or appointment of a new Administrator.

                        The CLB may consider for its approval, the arrangement for revival and rehabilitation including the proposal for appointment of any other LLP Administrator moved by the LLP in the meeting of the creditors, in place of arrangement proposed by the creditors or the Liquidator, provided the arrangement is approved by the three fourth majority in value, of creditors. Where the arrangement of revival and rehabilitation relates to amalgamation of the LLP with any other LLP, no such scheme shall be sanctioned by the CLB unless the said scheme is approved with, or without modification by three fourth majority of respective partners of transferor and transferee LLPs.

                        The order of sanction of the arrangement by the CLB may make provisions, for all or any of the following matters:

Powers and functions of the LLP Administrator;

The time period within which various actions proposed in the arrangement to be completed;

Any such direction to the LLP or its officers or to the creditors, or to the LLP Administrator or to any other person, as may be considered necessary, for the purpose of implementation of the arrangement of revival and rehabilitation, and

Any other order or orders as may be considered necessary.

The LLP Administrator shall complete all the actions relating to implementation of the revival and rehabilitation arrangement and submit his final report before the CLB with such time directed by the CLB but not exceeding 180 days of the order.

LLP ADMINISTRATOR:

                        The LLP Administrator shall be appointed from a panel maintained by the Central Government for winding up and dissolution of LLPs. The terms and conditions of the appointment including fee of LLP Administrator shall be such as may be ordered by the CLB. The CLB on a reasonable cause being shown and for reasons to be recorded in writing, remove the LLP Administrator and may appoint another LLP Administrator. In case of removal, death or incapacity of the LLP Administrator, the CLB may appoint another LLP. The LLP Administrator within 30 days of the making of the order or orders cause certified copy thereof to be filed with the Registrar concerned in Form 22 along with the prescribed fee. In computing the period of 30 days from the date of order, the requisite time for obtaining a certified copy of order shall be excluded.

CONCLUSION:

                        LLP is an emerging business concept.  It gives areas for practicing Company Secretaries, Chartered Accountants, Cost Accountants and Advocates in all aspects such as incorporation of LLPs, appearing before tribunal etc., Even it is possible to appoint practicing professionals as LLP Administrator.