Know the Modes of Winding Up a Limited Liability Partnership (LLP) in India
Winding up or liquidation of a corporate entity leads to the dissolution of that corporate entity. For all corporate entities, including, Limited Liability Partnerships (LLP), winding up process can begin through any of these modes:
- Voluntary winding up (which involves voluntary liquidation)
- Compulsory winding up by the Tribunal
- Winding up pursuant to the Insolvency and Bankruptcy Code (IBC), 2016
Compulsory winding up is usually forced on a corporate entity that has become insolvent. Voluntary winding up, on the other hand, is a deliberate move made by the decision makers of a corporate entity. And in the case of an LLP, the decision makers are the partners, and where applicable, creditors.
We shall be examining the process involved in the voluntary liquidation/winding up of an LLP.
Insolvency and Bankruptcy Code (IBC), 2016
IBC, 2016 makes provisions which stipulate the steps to be taken in restructuring and reviving a corporate debtor. But, in some circumstances, the National Company Law Tribunal (NCLT) has the power to pass an order for liquidation of a corporate debtor, including an LLP.
Other than this kind of liquidation, (which we have termed winding up pursuant to the Insolvency and Bankruptcy Code), the Code also makes general provisions on liquidation of corporate entities that have opted for voluntary liquidation. These provisions are specifically found under Chapter III, IV, and V of the Code.
We shall proceed to examine the process of voluntary liquidation of an LLP that opts for Voluntary Winding Up under the Code.
- Voluntary Liquidation of an LLP under the Code
Section 59(1) of the Insolvency and Bankruptcy Code (IBC), 2016 provides that a corporate entity which intends to voluntarily liquidate itself, and has met all the conditions and procedural requirements prescribed by Insolvency and Bankruptcy Board of India (IBBI), may proceed to initiate voluntary liquidation under Chapter V of Part II of the Code (this chapter contains provisions that govern liquidation of corporate entities).
The Insolvency and Bankruptcy Board of India (IBBI) was established in 2016, in accordance with the provisions of the IBC, 2016. This authority was established as the most important institution for the new insolvency and bankruptcy regime in India.
Section 59 further provides that the provisions of section 35 – 53 of Chapter III and Chapter IV of the Code, shall also apply to voluntary proceedings of corporate entities. In applying these provisions, necessary modifications may be made as the circumstances of the case may require.
Procedure for Commencing Voluntary Liquidation
The relevant provisions of the Code have stipulated the conditions to be met, and the process to be followed by a corporate entity that wishes to begin a voluntary winding up.
According to the Code, a corporate entity that wishes to opt for a voluntary liquidation must be solvent. This means that a Limited Liability Partnership that wishes to begin a voluntary winding up must be able to pay off all its debts from the proceeds of its assets.
Thus, where the partners are sure of the solvency of the LLP, the chances of a successful winding up process is certain. But this is subject to the Partners adhering to the following conditions:
- The Partners must obtain a declaration of solvency, accompanied with a verifying affidavit. The declaration must contain the following:
- A statement that the corporate entity is solvent.
- An affirmation by a majority of the designated partners that the corporate entity is solvent and is in a position to pay off all its debts in full from the proceeds of the assets to be sold in liquidation.
- A statement that the voluntary liquidation is not undertaken to defraud any person.
- The declaration must be accompanied by relevant documents, which include the following:
- Audited Financial Statements of the LLP.
- Record of business operations of the LLP for the previous two years or for the period since the incorporation of the LLP, whichever is later.
- Report of the Valuation of Assets of the LLP, if any, prepared by a registered Valuer.
- A resolution must be passed by a majority of the Partners of the LLP consenting to the voluntary liquidation of the partnership, and appointing an insolvency professional to act as a liquidator within 4 weeks of obtaining the declaration.
- If the LLP has creditors, then, within 7 days from the date the Partners pass a resolution for the voluntary liquidation of the LLP, the Partners must also obtain an approval from two-third (2/3) of the LLP’s Creditors, approving the resolution for voluntary winding up.
Once these requirements are met, the LLP is further required to notify the IBBI and the Registrar about the resolution to liquidate itself. This notification is to be given within 7 days from the date the resolution is made, or where Creditors approval is needed, within 7 days from the date the creditors’ approval is obtained.
According to the provisions of the Code, the liquidation process of the LLP begins when the Partners pass the resolution for winding up, subject to the creditors’ approval.
Appointment of Liquidator for LLP’s Liquidation.
Generally, the liquidator is an essential person in the process of winding up. The liquidator manages and sells the assets of a corporate entity, and distributes the proceeds to pay off the corporate entity’s debts and take care of interests of stakeholders.
As stated earlier, when Partners pass a resolution for the Voluntary Winding Up of the LLP, they are also are expected to appoint a liquidator who will oversee the liquidation of the LLP. According to section 59(3) (c) of the Code and Regulation 3(2)(c), the resolution shall contain the following:
- Terms and conditions of the appointment of the liquidator; and
- Remuneration payable to the liquidator (NB: the remuneration forms part of the liquidation cost).
Apart from the requirement of appointing an insolvent professional as a liquidator, the law also stipulates that the Partners should appoint a liquidator who satisfies the eligibility requirements laid down under Regulation 6.
Duties of Liquidator
In furtherance of the voluntary winding up, and for the purpose of discharging his duties, the liquidator is expected to carry out certain duties that will facilitate the liquidation of the LLP.
The liquidator is expected to do the following:
- Prepare and submit the following documents:
- Preliminary Report
- Annual Status Report
- Minutes of consultations with stakeholders
- Final Report, as stipulated by the Regulations of the Code.
- Publish a Public Announcement of the Voluntary Liquidation, pursuant to Regulation 14 of the Voluntary Liquidation Regulation.
Within 5 days from the date he is appointed, the liquidator is expected to issue a public announcement of the voluntary liquidation. The public announcement is to intimate the general public of the fact that the LLP is voluntarily winding up and will be dissolved.
To successfully issue a public announcement, the following stipulations are to be complied with:
- The liquidator must make the public announcement in Form A of Schedule I.
- The announcement must be published in one English and one regional language newspaper that enjoy wide circulation within the location of the registered office and principal office, if any, of the LLP.
The announcement must also be published on the website of the LLP, if any, and on the website designated by the IBBI, if any.
- The announcement must contain a statement inviting stake holders to submit the claims due to them from the LLP, within 30 days from the liquidation commencement date.
- Verify Claims as required by section 40 of the IBC, 2016
Claims submitted against the LLP within 30 days before the last date for receipt of claims, shall be considered and verified by the liquidator. The liquidator can wholly or partially admit or reject a claim.
These claims range from secured creditors’ claims, unsecured creditors’ claims, employees and workmen claims.
- Open an account for the purpose of depositing the proceeds from the sale of assets, and all monies recovered/realized for the LLP. The account should be in the name of the LLP and should contain the words ‘in voluntary liquidation’.
- Make efforts to realize all assets belonging to the LLP, and recover all monies due to the LLP.
- Sell LLP’s assets: This involves valuation of the assets (usually by an independent valuer) and sale of the assets in the manner and mode approved by the LLP.
- Realize the amount of unpaid capital contribution from partners who have not fully paid their capital contribution to the LLP.
- Distribute the proceeds of Liquidation in accordance with Regulation 35 of the Liquidation Regulation. The liquidation cost shall be deducted first, and the remaining proceeds is to be distributed to the creditors and other stakeholders. The distribution is to be done within 6 months from when the realization is made.
Effect of Liquidation
Generally, once the liquidation process has been set in motion, the LLP ceases to carry on business. This general rule will not apply in circumstances where carrying on the business will be beneficial for the winding up of the LLP.
The liquidation process does not affect the existence of the LLP. The LLP continues to exist as a corporate person until it is formally dissolved by the adjudicatory authority.
Procedure after Liquidation
Once the assets of the LLP have been completely liquidated, and the winding up of the LLP has been completed, the liquidator is required to make a written application to the NCLT to dissolve the LLP.
The NCLT is the adjudicatory authority vested with the power to declare the dissolution of an LLP or any other corporate entity.