LIMITED LIABILITY PARTNERSHIP-PART-XXIX - (Conversion to Limited Liability Partnerships)

[Dr. Sanjiv Agarwal]

Sections 55 to 58 of the LLP Act, 2008 cover provisions relating to conversion to Limited Liability Partnership Section 55 provides that a partnership firm may convert into LLP as per the Second Schedule of the Act. Section 56 provides that a private company may convert into LLP as per the Third Schedule of the Act. Section 57 provides that an unlisted public company may convert into LLP as per the Fourth Schedule of the Act. Section 58 provides that after the conversion of above entities into LLP, these will stand registered as LLP and their all assets and liabilities shall vest into LLP. Also the firm of company so converted shall be deemed to be dissolved and removed from the records of the respective authorities.

Following three types of conversions can take place -

(A)   Conversion from firm into a LLP

(B)   Conversion from private company into a LLP.

(C)   Conversion from unlisted public company into a LLP.

Vide Notification No 1323(E) dated 22.5.2009, Central Government has notified the 31.5.2009 as the appointed date of enforcement of section 55 to 58 second schedule, third schedule and fourth schedule for the purpose of conversion into LLPs. Also, vide Notification No. 1324(E) dated 22.5.2009, Central Government has notified the 31.5.2009 as the appointed date of enforcement of rules 32, 33 and 38 to 40 of the LLP Rules.

Conversion from firm into limited liability partnership (Section 55)

A firm may convert into a limited liability partnership in accordance with the provisions of this section and the Second Schedule of the LLP Act. Section 55 seeks to provide that a firm may convert into a LLP in accordance with the provisions contained in Chapter X and the Second Schedule.

Section 55 allows the existing partnership firms to convert into limited liability partnerships Second schedule to LLP Act contains 17 clauses for provisions relating to conversion of firms into a LLP. While the conversion will have to be registered by the Registrar under section 58, conversion shall be done in accordance with the provisions of schedule II read with rule 38 of LLP Rules.

The first schedule provides for the provisions regarding matter relating to mutual rights and duties of partners and limited liability partnership and its partners applicable in the absence of any agreement on such matters.

Firm

'Firm' has been defined in section 4 of the Indian Partnership Act, 1932. Section 4 defines partnership, partners firms and firms name. Accordingly, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually, partners and collectively a firm and the name under which their business is carried on is called the firm name.

Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. The word 'firm' denotes the persons who constitute the partners. Under English law, a partnership or firm is not a person or legal entity although the firm may sue in the firm name [Halsbury, 4th edition Vol 35, para 1, p.4].

'Firm' is a collective noun, a compendious expression to designate an entity, not a person. In Income tax law, a firm is a unit of assessment, by special provisions, but is not a full person. [Commissioner of Income tax, Madras v R.M. Chidambaram Pillai, AIR 1977 SC 489].

Convert

Literarily, to convert means to change one thing into another. Conversion should produce a complete change of identity.

Clause 1 of Schedule II defines 'convert' as follows-

'Convert', in relation to a firm converting into a limited liability partnership, means a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the firm to the limited liability partnership in accordance with Second Schedule.

Thus, upon such conversion, the partners of the firm shall be bound and governed by the provisions of Second Schedule to LLP Act.

The conversion will imply transfer from the partnership firm to the LLP of the following-

(i)    property

(ii)   assets

(iii)   interests

(iv)   rights

(v)    privileges

(vi)   liabilities

(vii)  obligations, and

(viii)  undertaking of the firm

The conversion should be in accordance with the provisions of Second Schedule of the LLP Act.

Provisions of Second Schedule

Conversion from firm to LLP (Clause 2)

For conversion, firm shall comply with the provisions and requirements of Schedule II. Upon conversion, partners of the firm be bound by the Schedule II that is applicable to them.

Eligibility (Clause 3)

Conversion under Schedule II shall be done if and only if the LLP comprises of all the partners of the firm and no one else.

For example, if firm was having five partners, all such partners should also become partners of LLP. This eligibility criteria is very important and 'if and only if' is of significance. If some more partners are to be admitted, it could be done after the conversion has been completed. Similarly, if some partner of the firms wants to retire, he should exit from the firm before application for conversion or after the conversion is complete.

Statements to be filed (Clause 4)

A firm may apply for conversion into LLP. The application for conversion should be filed in prescribed form as per Rule 38 (Form No 17).

Following two documents are to be filed with the Registrar-

(a) a statement by all of its partners in such form and manner and accompanied by such fee as the Central Government may prescribe, containing the following particulars, namely:

(i) the name and registration number, if applicable, of the firm; and

(ii) the date on which the firm was registered under the Indian Partnership Act, 1932 or under any other law, if applicable, and

(b) incorporation document and statement referred to in section 11.

The statement as per (a) above should be signed by all the partners.

Registration of Conversion (Clause 5)

The conversion is required to be registered by the Registrar by registration of documents and issue of certificate of registration. The firm shall stand converted into LLP from the date specified in the registration certificate issued in prescribed Form No. 19 of LLP Rules.

The registration shall be complete on issue of certificate. The certificate states that the LLP is on the date specified in the certificate, registered under the LLP Act.

Clause 5 also requires that within 15 days of the registration of LLP by Registrar, LLP should inform the Registrar of Firms under the Indian Partnership Act about the conversion of firm into a LLP and particulars of LLP. Form No. 14 has been prescribed for this purpose. 

Effect of Registration (Clause 7)

Once the conversion has been registered by the Registrar, such conversion shall have the following effects on and from the date of registration specified in the certificate of registration -

(i)  The firm shall be deemed to be dissolved.

(ii)  If it is registered with the Registrar of Firms under the Indian partnership Act, 1932, the name shall be removed from the register of firms maintained by the Registrar of Firms.

(iii) All tangible as well as intangible property vested in the firm, all assets, interests, rights, privileges, liabilities, obligations relating to the firm and the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without any further assurance, act or deed.

(iv) On conversion of a firm into LLP, all properties, assets, interests, rights, privileges, liabilities, obligations of the firm is transferred to the LLP. In other words, the whole of the undertaking of the firm is transferred to LLP.

(v) The conversion does not affect the existing liabilities, obligations, agreements, contracts and continuation of employment.

(vi) The LLP shall be substituted for the firm in the cases of-

a) pending proceedings by or against the firm.

b) any conviction, ruling, judgment or order in favour of or against the firm.

c) any appointment, authority or power of the firm.

(vii) All deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements subsisting immediately before the date of registration relating to the firm or to which the firm is a party, shall continue in force on and after that date as if they relate to the LLP and shall be enforceable by or against the LLP as if the LLP were named therein or where a party thereto instead of the firm;

(viii) Any approval, permit or license issued under any law to the firm which is in force before the date of conversion shall not be transferred automatically to the firm. The partnership firm has to be careful and take appropriate action. For example, drug manufacturing license in the name of the partnership firm should be officially got transferred or endorsed in LLP's name .

(ix) Every contract of employment to which the agreements or contracts applies shall continue to be in force on or after the date of registration as if the LLP were the employer there under instead of the firm.

Thus, new LLP comes into existence and the firm gets dissolved and struck off from Register of Firms (in case of registered firm).

The consequences of registration is that on and from the date of registration as specified in the certificate, the named LLP comes into existence under the LLP Act. All the movable and immovable properties, interests, privileges, liabilities etc of the erstwhile partnership firm stand vested in the LLP without any further assurance, act or deed. The firm is deemed to have been dissolved and the same removed from the concerned enactment.

(To be continued)