Limited Liability Partnership Part- XXXV - (Compromise, Arrangement or Reconstruction of LLP)

[Dr. Sanjiv Agarwal]

Sections 60 to 62 of LLP Act, 2008 deal with Compromise, Arrangement or Reconstruction of LLP. Section 60 provides that an LLP or any of its partners or creditors and also a liquidator of an LLP under winding up can propose for a compromise or arrangement through the Tribunal in the prescribed manner or as per the directions of the Tribunal. Section 61 provides that the Tribunal has powers to supervise the carrying out of compromise or arrangement ordered by it and if the Tribunal is satisfied that such compromise or arrangement cannot work properly, it can order for winding up of the LLP. Section 62 talks about the reconstruction or amalgamation of an LLP. It provides that in case the compromise or arrangement applied for under Section 60 is for the purpose of reconstruction or amalgamation of LLPs, the Tribunal may make provisions in relation to transfer of property between the two entities, dissolution of the transferor LLP, continuation of legal proceedings by or against the transferor LLP, etc. and may order for the transfer of any property or liabilities to the transferee LLP.  

Compromise, arrangement or reconstruction of limited liability partnerships (Section 60) 

Section 60 seeks to provide the manner in which compromise or arrangement of LLPs shall be proposed, agreed by members or creditors of a LLP and confirmed by the Tribunal. It also seeks to provide the time-limit within which the order made by Tribunal shall be filed with the Registrar and the effect of such filing. It also seeks to provide that if default is made in complying with provisions relating to filing of such order of Tribunal with the Registrar, the LLP and every designated partner of the LLP shall be punishable with fine which may extend to one lakh rupees. 

Section 60 contains provisions for compromise, arrangement or reconstruction of LLPs. It provides for - 

(a)    Compromise or arrangement can be made between LLP and it creditor AND LLP and its partners. [section 60(1)] 

(b)    On an application made by the LLP or of any creditor or partners of the LLP, or in the case of LLP which is being wound up, by the liquidator, the Tribunal may order a meeting of the creditors or of the partners as the case may be [section 60(1)].

(c)    A majority representing three-fourth in value of the creditors, or the partners as the case may be, agree to any compromise or arrangement  if sanctioned by the Tribunal by an order shall be binding on all creditors or the partners as the case may be  and also on the LLP and on liquidator, in the case of LLP which is being wound up. [section 60(2)].

(d)    The applicant has to satisfy the Tribunal that it has disclosed all the material facts to the Tribunal otherwise Tribunal shall not make any order of compromise or arrangement [(section 60(2)].

(e)    The order of the Tribunal shall be filed with the registrar within 30 days of making the order and shall have effect only after it is so filed. [section 60 (3)]. 

(f)     The Tribunal may after receiving the application stay the commencement or continuation of any suit or proceeding against the LLP [section 60(5)]. 

A compromise or arrangement of a LLP can be done only through Tribunal or as per the directions given by the Tribunal. 

Meaning of Arrangement, Compromise and Reconstruction

Neither the LLP Act, nor the Companies Act defines the terms- arrangement, compromise and reconstruction and these terms have no precise legal meaning. However, these indicate reorganization of a business entity and also scheme of any merger or amalgamation. 

Arrangement 

An arrangement implies any scheme, agreement or understanding, whether or not legally enforceable. It is a settlement of mutual relations, claims, right or disputes, It may involve giving and taking of some thing. 

An 'arrangement' involves meeting of minds and it also involves mutuality in that each party, assuming he is a reasonable and conscientious man, would  regard himself as being in some degree under a duty whether moral or legal to conduct himself in a particular way or not to conduct himself in a particular way, so long as the other party or parties conducted themselves in the way contemplated by the arrangement .[Re British Basic Slag Ltd.'s Agreements, (1963), 2 All ER 807, 819 (CA]. 

The term 'arrangement' contemplates all arrangements, including the reorganisation of share capital and the special rights attached with special classes of shareholders. A scheme of arrangement modifying the rights of members can be brought under section 390 of Companies Act. While considering the ramification of a scheme for conversion of preference shares with a low dividend to the debentures with a higher interest and considering the resolutions passed by the members, the court can pass an order dispensing with the procedure under section 101 for reduction of capital, depending on its fiscal health. [Investment Corporation of India Ltd., In Re, (1987) 61 Comp Cas. 92 (Bombay)]. 

The word 'arrangement' is analogous to the word 'compromise'. The arrangement means any type of arrangement or agreement with shareholders and creditors including agreement which modifies the rights without any dispute or difference and which can be enforced without any difficulty. It includes any form of internal reorganisation of the affairs of company and the scheme of amalgamation of two or more companies. 

The Oxford Law Dictionary defines the expression 'scheme of arrangement' as follows - 

(a)    An agreement between a debtor and his creditors to arrange the debtor's affairs to satisfy the creditors. The debtor usually agrees to such an arrangement in order to avoid bankruptcy. If the arrangement is agreed when no bankruptcy order has been made, it is governed primarily by the ordinary law of contract.

(b)     An agreement between a company and its creditors or members when the company is in financial difficulties or to effect a takeover. 

The word 'arrangement' has a very wide meaning, and is wider than the word 'compromise'. There can be no compromise unless there is first a dispute but a scheme, which is not a compromise may nonetheless be an arrangement within section 391 (Companies Act). The aim of the section is to enable a scheme to be carried out which otherwise could not be effected because of the absence of provisions for varying rights attached to shares or because of the absence of the necessary consents. [Guardian Association Co Ltd., In Re (1917) 1 Ch 431 (CA)]. 

Compromise

According to Black Law Dictionary, 7th edition (1999), 'compromise' means an agreement between two or more persons to settle matters in dispute between them; a debtor's partial  payment coupled with the creditor's promise not to claim the rest of the amount due or claimed. 

Following meanings have also been assigned to the word, 'compromise'-

Where the parties to a dispute dispose of it by agreement between themselves, whether legal proceedings have been commenced or not. (Sweet L. Dictionary); An agreement between two or more persons who for preventing or putting an end to a law suit, adjust their differences by mutual consent, in the manner which they agree on and which every one of them prefers to the risk or danger of losing in the case. 

A compromise takes place when there is a question of doubt, and the parties agree not to try it out, but to settle it between themselves by a give and take agreement. Per KAY, L.J., in Huddersfield Banking Co. v. Lister, (1895) 2 Ch 273. " 'Compromise,' is a mutual promise of two or more parties that are at controversy." (Termes de la Ley). 

Compromise is the mutual act of the parties to the suit to settle the dispute between them concerned in the suit by agreement. [R.N. Bannak & Sons v. State Bank of India, AIR 1989 Kar 28, 29]. 

A compromise is always bilateral and means a mutual adjustment. According to New Standard Dictionary, a compromise means agreement or adjustment for the settlement of a controversy by mutual concessions, often involving partial surrender. [Kunjlal v. Nathmal, AIR 1957 MB 14, 15. (C.P.C. (5 of 1908), O. XXIII, R.3)]. 

Compromise is an expression which implies the existence of a dispute such as relating to rights, which it seeks to settle, but the word 'arrangement` is a term of very wide import, and its meaning is not. to be limited to something analogous to a compromise. All modes of reorganizing the share capital, takeover of shares of one company by another including interference with preferential and other special rights attached to shares can properly form part of an arrangement with members. [Hindustan Commercial Bank Ltd. v. Hindustan General Electric Corporation, AIR 1960 Cal 637]. 

Reconstruction

Literally, reconstruction means to construct or build again, to form again or renew. 

According to Oxford Law Dictionary, 5th edition (2003) "reconstruction of a company" (in the liquidation of a company) means the transfer of the property of a registered company in a voluntary winding-up to another company in exchange for shares in that company to be distributed among members of the company in liquidation. The liquidator effects the reconstruction with the authority of a special resolution (members' voluntary winding-up) or the consent of the court or liquidation committee (creditors' voluntary winding-up). A member who does not agree to the arrangement can require the liquidator to buy his shares." However, under section 394, reconstruction of a company which is also not in liquidation is also permissible. 

Reconstruction denotes the transfer of the undertaking or part of the undertaking of an existing company to a new company with substantially the same persons as members of the new company as were members of the old company [ Brooklands Selangor Holdings Ltd v I.R.C, (1970) 1 WLR 429 (1970) 2 All ER 76, 86(Ch.D)]. 

The term "reconstruction" indicates the formation of a new company to take over properties of an old company. [Hooper v. Western Countries and South Wales Telephone Co., (1892) WN 148]. It indirectly means to pursue substantially the same business and business to be carried on substantially by the same persons. [South African Supply & Cold Storage Co., Re, (1904) 2 Ch. 268]. The reconstruction is aimed generally to re-organise share capital or to compound with creditors or to effect economies. In the past, the reconstruction has been made (a) to extend objects of company by incorporating a new company with larger objects desired; (b) to alter the rights attached to different classes of company's shares or debentures by the new company issuing shares or debentures with such different rights; and (c) to compel the members of a company to contribute further capital by taking shares in the new company on which a larger amount was unpaid than unpaid on the shares of the old company. However, the first object can be achieved by alteration of memorandum, the second object by recourse to section 106, and the third object being a pressure tactic which may be approved by the courts. [Hole v. Garnsey, (1930) AC 472 : (1930) All ER Rep. 568]. Reconstruction taking place these days pertain. to transfers of undertakings of wholly owned subsidiaries to their holding companies or to fellow subsidiaries. This may involve even winding up of a company and transfer of properties and liabilities to a newly formed company. As a result, the assets and shareholders of old company become part of new companies with some changes in its rights and liabilities. 

Power of Tribunal to order meeting [Sub-section (1)]

Sub-section (1) empowers a Tribunal to order for a meeting to be convened and held in the manner as prescribed or directed by Tribunal on an application made to it the. 

The Tribunal's order for meeting should be in relation to any compromise or arrangement between- 

(i) LLP and its creditors, or

(ii) LLP and its partners.

The application to the Tribunal may be made by-

(i) Concerned LLP, or

(ii) Any creditor of LLP, or

(iii) Any partner of LLP, or

(iv) Liquidator of LLP in winding up. 

The Tribunal's order shall-

(i) order a meeting of creditors or partners

(ii) calling, holding and conducting of meeting.

Rule 35 prescribes the manner of holding the meeting and matters related thereto. 

Majority Requirement [Sub-section (2)]

At the meeting being concerned under sub-section (1), decisions have to be taken by the requisite majority. Sub-section (2) provides that the proposals of compromise or arrangement are to be approved by three- fourth  (seventy five percent) in value of the creditors or partners, as the case may be. Such meeting's approved proposal, if sanctioned by the Tribunal by way of an order, shall be binding on all concerned, i.e., all the

(i) creditors of LLP

(ii) partners of LLP

(iii) LLP it self

(iv) Liquidator of LLP in winding up

(v) Contributories of LLP in winding up 

To arrive at the finality of the decision, it is important that court sanction comes by way of an order. While doing so, Tribunal has to satisfy himself that the application had disclosed all the material facts including the financial disclosures of the LLP in question and pending investigation proceedings, if any. Such satisfaction of the Tribunal is a pre-requisite for the Tribunal making an order under sub-section (2). The information required to be disclosed can be by way of an affidavit or otherwise. Rule 35(4) and 35(6) prescribe the manner for application, disclosure and affidavit. 

Order to file with Registrar [Sub-section (3)]

Once the order is issued by the Tribunal under sub-section (2), LLP is required to file the order with the Registrar within thirty days of the date of the order (making of the order). The order of Tribunal shall have effect only after it is filed with the Registrar. Rule 35(11) states that order has to be filed in Form 22 along with the prescribed fee. 

Non compliance of sub-section (3) would result in two fold consequences- order shall not be effective and penal provisions will be attracted as per sub-section (4) against LLP and its designated partners. 

Penalty [Sub-section (4)]

If the order of the Tribunal is not filed with the Registrar, as required in sub-section(3), LLP and every designated partner of the LLP (i.e., all designated partners) shall be punishable with fine which may extend upto rupees one lakh. The punishment is against all the designated partners. 

Powers of Tribunal to stay [[Sub-section (5)]

Sub-section (5) empowers the Tribunal to stay the commencement or continuation of any suit or proceeding against the LLP after an application has been made under section 60 as aforesaid in earlier sub-section (1). Such stay may be granted before the application is disposed off by the Tribunal. The stay may be granted  on such terms as the Tribunal thinks fit and such stay, if granted may be upto such time until the application is finally disposed off by sanction of compromise/ arrangement or otherwise.