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 of LLP firm, safeguarding the interests of all parties involved.

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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 of LLP 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 LLP dissolution Process.
• 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 LLP dissolution processes 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 LLP

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

In essence, LLP winding up process 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:

• 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.
• 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.
• 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

• 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.

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.

Realisation of Assets

The liquidator is responsible for valuing and selling the LLP’s assets in an approved manner and mode, recovering dues, and realising 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 realisation 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:

• Voluntary Winding Up: The LLP decides and consents to be wound up.
• Insufficient Number of Partners: The LLP has fewer than two partners for six months. An LLP requires at least two partners to operate legally.
• Inability to Pay Debts: The LLP is financially insolvent and cannot meet its debt obligations.
• Activities Against National Interest: The LLP engages in activities detrimental to the sovereignty, integrity of India, the state’s security, or public order.
• 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.
• 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.

Key Considerations

• The entire process must follow the rules and regulations outlined in the LLP Act and other relevant laws.
• The interests of the creditors are given priority in the winding-up process.
• The role of the Liquidator is central to the winding-up process, and they must act impartially and diligently to conclude the process efficiently.

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.