Winding up of LLPs | Accounting for CA Foundation PDF Download

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a form of general partnership in which each partner enjoys limited personal liability concerning the partnership's debts. Partners are shielded from being held accountable for the wrongful actions of their fellow partners, although their liability for contractual debts may vary by state. LLPs are particularly favored for larger partnerships and, notably, for professional entities. Some states exclusively permit professionals to adopt the LLP structure.

Similar to general partnerships, an LLP necessitates a minimum of two partners. However, LLPs provide flexibility in determining each partner's level of control and share of profits. Almost all decision-making authority within an LLP can be delegated to specific partners, except for those decisions that involve modifications to the partnership agreement, which require unanimous approval from all partners.

In contrast to limited partnerships, LLPs extend limited liability protection even when partners actively participate in managing the business. Nevertheless, if a court determines that partners have attempted to undermine creditors through improper distributions, it may lift the veil of limited liability to recover funds for creditors. The specific actions triggering such treatment require a case-by-case analysis in accordance with relevant state laws. A comparison with limited partnerships and limited liability companies (LLCs) reveals distinct characteristics and considerations.

LLP Winding up Overview

The dissolution of an LLP can be instigated either voluntarily or by a Tribunal. In the case of voluntary winding up, the LLP must adopt a resolution to that effect, securing the approval of at least three-fourths of the total number of Partners. If the LLP has lenders, whether secured or unsecured, their consent is also essential for the winding-up process.

Winding up of LLP by Tribunal

The initiation of the winding-up process for an LLP by a Tribunal may occur for the following reasons:

• The LLP expresses a desire to undergo winding up.
• The LLP has fewer than two Partners for a continuous period exceeding six months.
• The LLP is unable to meet its financial obligations.
• The LLP has engaged in actions contrary to the interests of the sovereignty and integrity of India, the security of the State, or public order.
• The LLP has failed to submit Statements of Accounts and Solvency or Annual Returns to the Registrar for five consecutive financial years.
• The Tribunal deems it just and equitable to wind up the LLP.

Winding Up of LLP Procedure

To initiate the winding-up process of an LLP, a resolution for winding up must be passed and submitted to the Registrar within 30 days of the resolution's approval. The voluntary winding-up is deemed to commence on the date of passing the resolution.

Upon filing the resolution with the Registrar, a declaration verified by an Affidavit must be made by the majority of Partners (not less than two). This declaration states that the LLP either has no debts or will be able to settle its debts in full within a specified period, as mentioned in the declaration, not exceeding one year from the commencement of the winding-up of the LLP. Within 15 days of passing the resolution for winding up, the Registrar must receive the following documents, accompanied by the Affidavit signed by the majority of Partners:

• A Statement of assets and liabilities covering the period from the last accounts closure to the date of winding up of the LLP, attested by at least two Partners.
• A report on the valuation of the LLP's assets, prepared by a valuer if there are any assets within the LLP.

Winding up of LLP with Creditors

In the event that an LLP undergoing winding up has secured or unsecured creditors, prior to initiating any winding-up proceedings, approval for the winding up of the LLP must be sought from the creditors. Creditors are obligated to express their stance on the winding up of the LLP within 30 days of receiving the request for approval. If it is determined to be in the best interest of both partners and creditors that the LLP undergo winding up, the LLP can proceed with the voluntary winding-up procedure.

Appointment of LLP Liquidator

An LLP Liquidator must be designated within thirty days of the passage of a resolution for voluntary winding up, accomplished through a resolution. If there are any creditors, the appointment of the LLP Liquidator is deemed valid only if it secures the approval of two-thirds of the creditors in value of the LLP.

Subsequently, it becomes the responsibility of the LLP Liquidator to execute the functions and duties related to the winding-up process of the LLP. This includes settling the creditors' claims and adjusting the rights of the partners, as applicable. While fulfilling these responsibilities, the LLP Liquidator is mandated to maintain accurate books of accounts pertaining to the winding up of the LLP.

Filing of Winding Up Report by LLP Liquidator

Upon the complete winding up of the LLP's affairs, the LLP Liquidator will compile a report detailing the procedures followed in the winding-up process and the disposal of the LLP's assets. If two-thirds of both the Partners and the Creditors in value express satisfaction with the winding-up report prepared by the LLP Liquidator, the Partners must pass a resolution for the winding up of accounts and provide an explanation for the dissolution.

Following this, the LLP Liquidator is required to submit the winding-up report and the resolution to the Registrar and simultaneously file an application with the Tribunal.

Dissolution of the LLP

Should the Tribunal determine that the prescribed procedures have been duly adhered to in the winding-up process of the LLP, it will issue an order declaring the dissolution of the LLP. Subsequently, the LLP Liquidator is mandated to submit a copy of the Tribunal's dissolution order to the Registrar for the winding up of the LLP.

Upon receipt of the Tribunal's order, the Registrar will publish a notice in the Official Gazette, officially declaring the dissolution of the LLP.