Recently, the Company Law Committee (CLC) proposed that 12 offences under the Limited Liability Partnership (LLP) Act 2008 should be decriminalised. The proposal also includes permitting LLPs to issue Non-Convertible Debentures (NCDs) as a method of raising funds. These recommendations aim to improve ease of doing business for LLP firms.
The Company Law Committee was established by the Ministry of Corporate Affairs in September 2019. It aims to offer Ease of Living to citizens through the provision of Ease of Doing Business for corporates, while encouraging better corporate compliance for stakeholders.
Company Law Committee’s Recommendations
The CLC’s suggestions revolve around two main points: decriminalising certain offences and permitting the issuance of NCDs by LLPs.
Regarding the decriminalisation of offences, several violations relating to timely filings are recommended for this change. While none of these provisions currently carry prison terms, failure to comply would result in penalties rather than court-imposed fines.
Risks Involved in Imposing Fines and Authority to Levy Penalties
The Committee highlighted the risks connected with imposing fines. One significant risk is that convicted individuals could become disqualified or ineligible for certain positions if fines are imposed by courts. However, this wouldn’t be the situation if penalties were imparted by an appropriate authority.
This responsibility would fall on the Registrar of Companies (ROC), who would have the power to levy penalties for any violation of the LLP Act. The ROC, assigned under Section 609 of the Companies Act, has the principal duty of registering companies and LLPs in their respective states and Union Territories.
Permission to Issue NCDs
The Committee also suggested that LLPs, which currently face restrictions on issuing debt securities, should be granted permission to issue NCDs. This move would help raise capital and finance operations. Small firms and startups, especially those requiring heavy capital investment, are expected to benefit from this change.
Limited Liability Partnership (LLP)
An LLP is a form of partnership where each partner’s responsibilities are limited. The partners are not liable for another’s misconduct or negligence, and the LLP can maintain its existence despite changes in partners.
Unlike a traditional partnership, where every partner is jointly liable for all actions of the firm, in an LLP, each partner’s liability is restricted to their agreed contribution. Hence, individual partners are protected from joint liability arising from another partner’s wrongful acts.
LLP vs Company
The internal governance structure of a company is regulated by the Companies Act, 2013, while an LLP operates on an agreement between partners. An LLP is more flexible than a company and has fewer compliance requirements.
Non-Convertible Debentures
Debentures are instruments that companies use to borrow money. Some debentures can be converted into shares at the discretion of the debenture holder. However, debentures that cannot be converted into shares are termed as Non-Convertible Debentures (NCDs). These come in two types, secured and unsecured. Secured NCDs are backed by the assets of the company, while unsecured NCDs have no such backing.
