Winding up of an LLP

Winding up a Limited Liability Partnership (LLP) involves legally dissolving the entity by settling its debts, liquidating its assets, and distributing the remaining assets to the partners. This process can be initiated voluntarily by the partners or compulsorily by a tribunal for various reasons such as insolvency, inactivity, or breach of laws. Navigating the complexities of winding up requires a thorough understanding of legal procedures, compliance requirements, and financial management. LLP members need to approach this process methodically to ensure a smooth dissolution, safeguarding the interests of all parties involved.

EYC International Private Limited can provide expert guidance and support throughout winding up your LLP, ensuring compliance with all legal requirements and minimizing potential complications. Contact us today to get started and ensure a seamless and compliant winding-up procedure for your LLP.

Winding up of an LLP

What is the Winding Up of LLP?

Winding up of a Limited Liability Partnership (LLP) refers to the formal process of closing down the LLP’s operations, disposing of its assets, and settling its liabilities. This process is undertaken when an LLP ceases its business activities and dissolves as a legal entity.

Law Governing – LLP Winding Up

The rules for winding up and dissolution of Limited Liability Partnerships (LLPs) in India are primarily governed by the following provisions and notifications:

• Section 65 of the LLP Act, 2008: This section empowers the Central Government to formulate rules regarding LLPs’ winding up and dissolution.
• Section 67 of the LLP Act, 2008: This section grants the Central Government the authority to apply, with or without modifications, any provisions of the Companies Act, 1956, to LLPs. This includes provisions related to winding up, enabling a more flexible and adaptable approach to regulate the dissolution processes of LLPs by borrowing relevant provisions from the Companies Act.
• Notification vide GSR 6(E), dated 6th January 2010: Following the authority granted under Section 67, the Central Government issued this notification to specifically direct that certain sections of the Companies Act, 1956 apply to the winding up of LLPs.
• Limited Liability Partnership (Winding up and Dissolution) Rules, 2012: Issued under notification No. [F.No. 1/7/2012-CL-V] dated 10th July 2012, these rules specifically address the procedures, forms, and fees associated with LLPs’ winding up and dissolution.

Comparison Between LLP Winding Up and Dissolution of an LLP

Winding up and dissolution are two distinct stages in ending the operations of a Limited Liability Partnership (LLP). Here’s a simplified comparison:

In essence, winding up is settling the LLP’s affairs, and dissolution is the official end of the LLP’s existence.

Modes of LLP Winding Up

An LLP can be wound up through various methods, each with its own set of procedures and legal implications.

Voluntary Winding Up

In this method, the partners of the LLP decide to wind up the affairs of the partnership voluntarily. This decision could be based on mutual agreement among the partners or for reasons specified in the LLP agreement.

Insolvency and Bankruptcy Code (IBC), 2016

While the IBC primarily focuses on restructuring and reviving entities like LLPs under specific conditions, the National Company Law Tribunal (NCLT) has the authority to order the liquidation of an LLP. This adds a unique dimension to the winding-up process, especially in insolvency cases.

Compulsory Winding Up by the Tribunal

This mode is initiated by an external order rather than the LLP’s partners. The tribunal may wind up the LLP for reasons such as non-compliance with statutory requirements, inability to pay debts, or other grounds deemed sufficient by the law.

Voluntary Liquidation

As mentioned above, voluntary liquidation of a Limited Liability Partnership (LLP) is a self-initiated process where the partners of the LLP decide to dissolve and wind up the LLP’s affairs without external compulsion, such as a court order. This decision can be based on various reasons, including but not limited to financial struggles, mutual agreement among partners to cease operations, or achieving the objectives for which the LLP was formed.

Pre-requisites for Voluntary Liquidation

To initiate a voluntary liquidation under the Insolvency and Bankruptcy Code (IBC), 2016, a corporate entity, such as a Limited Liability Partnership (LLP), must meet the following pre-requisites:

1. Solvency: The LLP must be solvent, meaning it should be able to pay its debts in full. Solvency indicates that the assets of the LLP exceed its liabilities, ensuring that all creditors can be paid.
2. Declaration by Designated Partners: A declaration must be made by the majority of the designated partners. This declaration should affirm that the LLP can pay all its debts in full from the proceeds obtained from selling its assets during the liquidation process. This declaration is a formal statement ensuring the liquidation process is conducted with financial responsibility.
3. No Intent to Defraud: The voluntary liquidation process must not be undertaken with the intention to defraud any person. This condition ensures the liquidation process is carried out in good faith and for legitimate reasons rather than to escape financial responsibilities or legal obligations.

Procedure for Voluntary Liquidation of LLP

The process of voluntary liquidation for a Limited Liability Partnership (LLP) involves several critical steps as outlined below:

Commencement of Liquidation

1. Declaration of Solvency (DOS): Obtain a declaration from most designated partners, verified by an affidavit, affirming the LLP’s ability to pay off debts.
2. Accompanying Documents: The DOS should be accompanied by audited financial statements for the last two years or since incorporation and a valuation report of assets by a registered valuer.
3. Resolution: Pass a resolution for voluntary liquidation and appoint an insolvency professional as the liquidator within four weeks of obtaining the DOS.
4. Creditors’ Approval: If the LLP has debts, creditors representing two-thirds of the debt value must approve the resolution within seven days.
5. Notification: Notify the Registrar and the Insolvency and Bankruptcy Board of India (IBBI) about the resolution within seven days.
6. Liquidation Proceedings: Liquidation is deemed to commence from the resolution date, subject to creditors’ approval.

Effect of Liquidation

• The LLP must cease business operations from the liquidation commencement date except for actions beneficial to the winding-up process.
• The LLP continues to exist until it is dissolved.

Appointment and Remuneration of Liquidator

• Appoint an insolvency professional as a liquidator who meets specific eligibility conditions.
• The resolution for appointment should include terms and conditions and remuneration, which is part of the liquidation cost.

Reporting

The liquidator must prepare and submit various reports, including a Preliminary Report, Annual Status Report, minutes of consultations with stakeholders, and a Final Report as specified.

Public Announcement by the Liquidator

• Make a public announcement within five days of the appointment, inviting stakeholders to submit their claims within 30 days.
• The announcement should be published in newspapers with wide circulation and on relevant websites.

Verification of Claims

The liquidator verifies submitted claims within 30 days from the last date of receipt and may admit or reject them wholly or partially.

Realization of Assets

The liquidator is responsible for valuing and selling the LLP’s assets in an approved manner and mode, recovering dues, and realizing unpaid capital contributions from partners.

Deposit and Distribution of Proceeds

• Open a bank account in the name of the LLP ‘in voluntary liquidation’ to deposit all received monies.
• Distribute the proceeds from the realization to stakeholders within six months after deducting the liquidation cost.

These steps are structured to ensure a systematic and transparent process for dissolving the LLP while safeguarding the interests of creditors and stakeholders.

Winding Up of LLP by Tribunal

Winding up of a Limited Liability Partnership (LLP) by a Tribunal can be initiated for several reasons:

1. Voluntary Winding Up: The LLP decides and consents to be wound up.
2. Insufficient Number of Partners: The LLP has fewer than two partners for six months. An LLP requires at least two partners to operate legally.
3. Inability to Pay Debts: The LLP is financially insolvent and cannot meet its debt obligations.
4. Activities Against National Interest: The LLP engages in activities detrimental to the sovereignty, integrity of India, the state’s security, or public order.
5. Non-compliance with Statutory Filings: The LLP fails to file the Statement of Accounts and Solvency or Annual Returns with the Registrar for five consecutive financial years, indicating a lack of operational transparency and regulatory compliance.
6. Just and Equitable Grounds: The Tribunal determines that it is just and equitable for the LLP to be wound up. This broad and subjective criterion can encompass various situations the Tribunal deems as warranting winding up for fairness or other reasons.

When a Tribunal initiates the winding-up process for an LLP based on these grounds, it marks the beginning of a formal procedure to dissolve the LLP.