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Explained: How decriminalisation of offences under LLP Act could help unclog judicial system

The report notes that there is a risk of a convicted person being disqualified or becoming ineligible for various posts in the case of fines imposed by courts, which would not be the case for penalties imposed by an appropriate authority.

Written by Karunjit Singh | New Delhi |
Updated: January 27, 2021 6:57:30 pm
Union Finance Minister Nirmala Sitharaman chairs a pre-budget meeting in New Delhi pm December 17, 2020. (PTI Photo)

The Company Law Committee (CLC), headed by the Corporate Affairs Secretary Rajesh Verma, has recommended that 12 offences under the LLP Act be decriminalised and that LLPs be allowed to issue NCDs to raise funds with the aim of improving ease of doing business for limited liability partnership (LLP) firms.

Which offences under the LLP Act has the committee recommended for decriminalisiation?

A number of offences related to timely filings, including annual reports and filings on changes in partnership status of the LLP, which are unrelated to fraud have been recommended for decriminalisation. The move is in line with decriminalisation of the Companies Act through an amendment in 2020 in which offences which do not involve fraud or impact public interest were decriminalised.

While none of these provisions recommended for decriminalisation in the CLC report currently have prison terms as a possible punishment, the panel has recommended that companies be required to pay penalties for non-compliance, instead of fines which are imposed after a partner or the LLP is found guilty of misconduct by a court.

The report notes that there is a risk of a convicted person being disqualified or becoming ineligible for various posts and designations in the case of fines imposed by courts, which would not be the case for penalties imposed by an appropriate authority. The Registrar of Companies would have the authority to levy penalties with prescribed minimum and maximum penalties for any contravention of provisions of the LLP Act.

Neeraj Dubey, partner at law firm Singh and Associates, noted that the move to impose penalties would reduce the time taken for LLPs to resolve non-compliance and moving to penalties would help unclog the judicial system from complaints not related to fraud or public interest. He added that firms would take care to not violate the amended provisions as despite decriminalisation the committee had recommended higher monetary penalties for violations in a number of provisions.

Who benefits from the permission for LLPs to issue NCDs?

The CLC has also recommended that LLPs which are currently not allowed to issue debt securities be permitted to issue non-convertible debentures (NCDs) to facilitate raising of capital and financing operations. The move is likely to benefit startups and small firms in sectors which require heavy capital investment.

“This would help startups and firms in the real estate and infrastructure sector which need a lot of capital investment,” said Dubey, noting that it would give more flexibility to alternative investment funds (AIFs) seeking to invest in such firms. He added that the Reserve Bank of India and Securities and Exchange Board of India would also have to make changes to current regulations to allow LLPs to issue NCDs for the implementation of the committee’s recommendation.

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