Navigating the Regulatory Framework for LLP Closure in India

A Limited Liability Partnership (LLP) is a famous business structure that provides its partners with a blend of operational flexibility and limited liability protection. However, due to various reasons, such as unprofitability, changes in business plans, or any other reason, partners might want to close an LLP. Closing an LLP involves legal procedures that ensure the business is officially dissolved and ceases to exist in the eyes of the law.

Methods of Closing an LLP

There are two primary ways to close an LLP in India:

1. Voluntary Closure (Strike Off)
2. Compulsory Closure

1. Voluntary Closure (Strike Off)

In a voluntary closure, the partners of the LLP decide to close the business due to reasons like non-operation, no future business plans, or any other reason. This method is generally applicable when the LLP has no liabilities or pending debts. The closure is done by applying for striking off the LLP's name from the register of companies maintained by the Registrar of Companies (RoC).

Critical Steps in Voluntary Closure:

1. Consent of Partners:

• All partners must pass a resolution for voluntary closure.
• In the case of a pending liability, the LLP must settle all debts or provide security for them before applying for closure.

1. Filing Form 24:

• The LLP must file Form 24 with the RoC to initiate the closure process. The form includes details about the LLP, the reason for closure, and a declaration of non-operation for at least one year (if applicable).

1. Affidavit & Indemnity Bond:

• All designated partners need to submit an affidavit declaring that the LLP has no liabilities.
• An indemnity bond must be filed to assure that the partners will bear any future claims or liabilities.

1. Submission of Documents:

• Statement of accounts (not older than 30 days)
• LLP agreement
• Consent letters from all partners

1. Approval from RoC:

• The Registrar will review the documents and, if satisfied, approve the striking off of the LLP’s name. Once the name is removed from the register, the LLP is officially dissolved.

2. Compulsory Closure

In some cases, the closure of an LLP is enforced by law or by an order from the court. This method is referred to as compulsory closure and usually occurs when:

• The LLP is unable to pay its debts.
• The LLP is involved in fraudulent activities.
• The LLP only does business for two years or more after filing annual returns.

In such cases, the National Company Law Tribunal (NCLT) or the court may order the LLP's winding up, following which the LLP's assets are liquidated and the creditors are paid off.

Process of Compulsory Winding Up:

1. Filing Petition:

• A petition for compulsory winding up can be filed by the LLP, creditors, or the RoC.

1. Appointment of Liquidator:

• Upon the order of the NCLT, a liquidator is appointed to oversee the winding-up process, including liquidating assets and settlement of liabilities.

1. Settlement of Debts:

• The liquidator settles all outstanding debts, sells off assets, and distributes any remaining funds among partners, if applicable.

1. Final Report and Dissolution:

• The liquidator submits a final report to the tribunal, which, upon satisfaction, passes a dissolution order. The LLP ceases to exist after the order is passed.

Critical Considerations for LLP Closure

1. Pending Compliances:

• Before closing the LLP, ensure that all statutory filings, such as annual returns, income tax returns, and GST returns (if applicable), are completed.

1. No Liabilities:

• For voluntary closure, the LLP must not have any outstanding liabilities or debts. If any exist, they must be settled before filing for closure.

1. Non-Operative LLP:

• The LLP should be non-operational for at least one year before applying for voluntary closure, or it should not have commenced business at all.

1. Tax Clearance:

• Obtain tax clearance from the Income Tax Department before initiating closure, especially if the LLP has been operational.

1. Costs Involved:

• Although the cost of voluntary closure is minimal, there are still administrative costs and fees associated with filing forms and professional fees (if required).

Conclusion

Closing an LLP is a formal legal process that requires careful attention to detail, especially in ensuring that all liabilities are cleared and statutory compliances are met. For partners looking to shut down their LLP, opting for a voluntary closure is a smoother process if the LLP is debt-free and has been non-operational. However, compulsory winding up is a court-supervised process that generally involves asset liquidation and settling of creditors.