Winding up of an LLP
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Winding up of an 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.
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
Declaration of Solvency (DOS): Obtain a declaration from most designated partners, verified by an affidavit, affirming the LLP's ability to pay off debts.
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.
Resolution: Pass a resolution for voluntary liquidation and appoint an insolvency professional as the liquidator within four weeks of obtaining the DOS.
Creditors' Approval: If the LLP has debts, creditors representing two-thirds of the debt value must approve the resolution within seven days.
Notification: Notify the Registrar and the Insolvency and Bankruptcy Board of India (IBBI) about the resolution within seven days.
Liquidation Proceedings: Liquidation is deemed to commence from the resolution date, subject to creditors' approval.
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 deem 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.
Procedure for winding up of an LLP by a Tribunal
The procedure for winding up an LLP by a Tribunal involves several steps to ensure an orderly and fair dissolution of the LLP. Here's an overview of the process:
Step 1: Petition for Winding Up
The process begins with filing a petition for winding up to the Tribunal. This petition can be filed by the LLP itself, creditors, partners, or, in certain cases, by the Registrar or by a person authorised by the Central Government.
Step 2: Tribunal's Decision to Wind Up
Upon receiving the petition, the Tribunal will consider the reasons for winding up. If the Tribunal finds sufficient grounds per the LLP Act's provisions, it will pass a winding-up order.
Step 3: Appointment of Liquidator
Once the winding-up order is passed, the Tribunal will appoint a Liquidator. The role of the Liquidator is crucial, as they are responsible for managing the entire winding-up process, including the liquidation of assets.
Step 4. Public Announcement:
The Liquidator must publicly announce the winding up, inviting claims from creditors and instructing debtors to settle their dues.
Step 5. Settlement of Claims:
The Liquidator will then proceed to settle the claims of creditors as prescribed by the law. This includes verifying the claims and deciding the order for the debts to be paid.
Step 6. Liquidation of Assets:
The Liquidator will liquidate the LLP's assets to generate funds to pay off the LLP's debts. This could involve selling off property, machinery, intellectual property, etc.
Step 7. Distribution of Assets
After paying off the debts. If there are any remaining assets, they are distributed among the partners of the LLP according to the agreement in the LLP deed or the LLP Act if the deed does not specify the distribution.
Step 8. Dissolution of LLP
Once all debts have been paid, and the remaining assets have been distributed, the Liquidator will apply to the Tribunal for the dissolution of LLP firm. After ensuring that all procedures have been correctly followed, the Tribunal will pass an order to dissolve the LLP.
Step 9. Filing of Order with Registrar
The order of dissolution issued by the Tribunal must be filed with the Registrar by the Liquidator within a specified period. The Registrar will then publish a notice declaring the LLP to be dissolved.
Insolvency Proceedings for LLPs under the IBC, 2016
The Insolvency and Bankruptcy Code (IBC), 2016 introduced a comprehensive legal framework for insolvency resolution and liquidation for corporate entities, including Limited Liability Partnerships (LLPs) in India. The IBC aims to consolidate and amend the laws relating to reorganisation and insolvency resolution in a time-bound manner to maximise the value of assets, promote entrepreneurship, and increase credit availability.
Under the IBC, the process of winding up an LLP due to insolvency involves several key steps:
Initiation: The process can be initiated by the LLP itself, its creditors, or partners by filing an application to the National Company Law Tribunal (NCLT) demonstrating that the LLP cannot pay its debts.
Moratorium: Upon acceptance of the application, the NCLT orders a moratorium period during which all legal actions against the LLP are halted. This provides a breathing space for the resolution process.
Insolvency Resolution Professional (IRP): The NCLT appoints an Insolvency Resolution Professional (IRP) to manage the affairs of the LLP during the insolvency process. The IRP takes control of the LLP's operations and assets and works to draft a resolution plan.
Committee of Creditors (CoC): The IRP constitutes a Committee of Creditors, which plays a crucial role in reviewing and approving the resolution plan or deciding on liquidating the LLP if the resolution plan is not feasible.
Resolution Plan: The resolution plan outlines the strategy for the insolvency resolution, which could involve restructuring the LLP's debts, selling assets to repay creditors, or a combination of measures. The plan needs the approval of the CoC and the NCLT.
Liquidation: If the resolution plan is not approved within the stipulated time frame (typically 180 days, extendable by another 90 days), or if the CoC decides on liquidation, the LLP is liquidated. The assets are sold, and the proceeds are distributed to the creditors following the priority established under the IBC.
Dissolution: Once the assets have been liquidated and the proceeds distributed, the LLP is dissolved, marking the end of the winding-up process.
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FAQs
Winding up an LLP can occur due to various reasons, such as completion of the LLPs objectives, financial difficulties, insolvency, or unanimous decision of the partners.
