200 LLPs under govt scanner, what does it mean?
Sending out a strong message to shell companies, the government decided to deregister 200 Limited Liability Partnership (LLPs).
While the government is behind tracking the black money floating in the country, now the Limited Liability partnership (LLP) firms are under the scanner.
Around 200 invactive LLPs firm are in the process of being struck off from the register for not carrying out any activities.
According to a report by PTI, "(These) LLPs have not been carrying on any business or operation for a period of two immediately preceding financial years," as per similarly-worded communications issued by various Registrar of Companies (RoCs).
What is Limited Liability Partnership (LLP)?
Limited Liability Partnership (LLPs) are a flexible legal and tax entities that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners, as explained by Investopedia.
According to Ministry of Corporate Affairs, LLP is a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.
Its main improvement over the General Partnership is that, as the name indicates, it limits the liabilities of its partners to their contributions to the business and also offers each partner protection from the negligence, misdeeds or incompetence of the other partners.
In India, LLP was introduced in April 2009, through innovative LLP Act of 2008. This is what the Act is:
"The LLP Act 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses."
What government will do now?
Inactive LLPs are same like shell companies. Prime Minister Narendra Modi in his Independence Day speech on Tuesday said that are more than 1.75 lakh shell companies have been deregistered.
Till July 12, over 1.62 lakh companies that were not carrying out business for long were deregistered, with Mumbai, Delhi and Hyderabad together accounting for nearly half of such firms.
Last week, Corporate Affairs Minister Arun Jaitley told the Lok Sabha that the term 'shell company' is not defined under the Companies Act, 2013 and that the Act requires that a company may be set up for any lawful purpose only.
"Subsequent to incorporation, if a company is found to be formed for fraudulent or unlawful purpose, it is liable for penal action, including for winding up under Section 271 of the Act," he had said.
Considering Jaitley's comment on "fraudulent or unlawful purpose", according to Section 30 of LLP Act 2008, the LLPs will be liable under this section.
The section states, "In the event of an act carried out by a limited liability partnership, or any of its partners, with intent to defraud creditors of the limited liability partnership or any other person, or for any fraudulent purpose, the liability of the limited liability partnership and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the limited liability partnership:
Provided that in case any such act is carried out by a partner, the limited liability partnership is liable to the same extent as the partner unless it is established by the limited liability partnership that such act was without the knowledge or the authority of the limited liability partnership."
However, there might be chances, that these LLPs are liable for penalties under Section 74 of LLP Act 2008.
Which says, "Any person guilty of an offence under this Act for which no punishment is expressly provided shall be liable to a fine which may extend to five lakh rupees but which shall not be less than five thousand rupees and with a further fine which may extend to fifty rupees for every day after the first day after which the default continues."