LIMITED LIABILITY PARTNERSHIP PART- XXXVII (Compromise, Arrangement or Reconstruction of LLP)

[Dr. Sanjiv Agarwal]

Provision for facilitating reconstruction or amalgamation of limited liability partnership (Section 62)

Section 62 of the LLP Act, 2008 seeks to provide that where an application is made to the Tribunal for sanctioning of a compromise or arrangement which relates to reconstruction of any LLP or LLPs, or the amalgamation of any two or more LLPs and under a scheme the whole or any part of the undertaking, property or liabilities of any LLP concerned in the scheme is to be transferred to another LLP, the Tribunal may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provisions for matters like transfer to the transferee LLP of the whole or any part of the undertaking, property or liabilities of any transferor LLP, the continuation by or against the transferee LLP of any legal proceedings pending by or against any transferor LLP; the dissolution, without winding up, of any transferor LLP; the provision to be made for any person who, within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement; and such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out. It also seeks to provide that if default is made in complying with provisions relating to filing of such order of Tribunal with the Registrar, the LLP and every designated partner of the LLP shall be punishable with fine which may extend to fifty thousand rupees.

Section 62 contains provisions  for facilitating  reconstruction or amalgamation of limited liability partnerships. It provides for the following-

·         If under any scheme of compromise or arrangement or reconstruction, the whole or any of the undertaking property and liability of a LLP is to be transferred to another LLP, the Tribunal may make provision for such transfer of property and liability to the transferee LLP [section 62(1)].

·         No compromise or arrangement proposed shall be sanctioned by the Tribunal unless the Tribunal has received a report from the registrar that LLP have not been conducted in the manner prejudicial to the interest of its partners or public interest [section 62(1)].

·         The property and liabilities shall stand transferred to transferee LLP by virtue of order under section 62. In case of properties, if the order directs , such properties shall be freed from any charge which will cease to have effect by virtue of compromise or arrangement [section 62(2)] .

·         LLP shall file for registration certified copy of the order under section 62 to the Registrar within thirty days of the order [section 62(3)]

·         Default in complying with sub-section (3) shall make every designated partner liability for punishment up to Rs. 50000 (rupees fifty thousand ) [section 62(4)].

Amalgamation

According to section 394 of Companies Act 1956, any  compromise or arrangement may be for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies, which involves the transfer of the whole or any part of the undertaking, property or liabilities of one company (also called transferor-company) to another company (also called transferee-company). The terms 'reconstruction' and 'amalgamation' have been  referred to in section 394, which imply  that reconstruction or amalgamation is a kind of a compromise or arrangement proposed between a company and its members or creditors of any company or companies.

The word 'amalgamation' has no definite legal meaning. It contemplates a state of things under which two firms or  companies are  joined so as to form a third entity, or one company is absorbed into and blended with another company. Two companies can amalgamate in either of two ways.

According to the Accounting Standard AS-14 notified under Companies (Accounting Standards) Rules, 2006 amalgamation means an amalgamation pursuant to the provisions of the Companies Act or any other statute which may be applicable to companies. Two methods of amalgamation have been  contemplated: (a) amalgamation in the nature of merger, and  (b) amalgamation in the nature of purchase.

In Saraswati Industrial Syndicate Ltd v CIT (1991) 70 Comp Cas, 184 (SC), the Supreme Court held that 'amalgamation or reconstruction has no precise legal meaning. In amalgamation two or more companies are fused into one by merger or by taking over by another, when two companies are merged and are so joined as to form a third company or one is absorbed into one or blended with another, the amalgamating company loses its identity.

Amalgamation is meant whereby either two companies are joined to form a third entity or one is absorbed into or blended with another. The term 'amalgamation' not only contemplates joining of two companies to form a new company but also absorption of one company into the other company or blending of one into the other. '[. S. Somayajulu v. Hope Prudhomme and Company Ltd., (1963) 2 Comp LJ 61 : Walker's Settlement, (1935) 1 Ch. 567 : (1935) All ER Rep. 790 : 104 LJ Ch. 274]. Thus in a scheme of amalgamation two or more companies are merged de jure by consolidating their undertakings or de facto by acquiring the controlling interest in the share capital of one by the other or the capital of both by a new company. A scheme of amalgamation is an arrangement between the transferor company and its shareholders as well as the transferee company and its shareholders.

Property

Explanation to section 62 provides meaning of the term 'property' to include property, rights and powers of every description. Thus, it would include movable and immovable properties as also intangible properties including rights and powers in relation to such properties. It will also included securities, money etc.

The meaning of property given in the explanation is inclusive and not exhaustive . The words used are property, rights and powers which have a very vide connotation. In Income tax,  property includes any interest in property, movable or immovable, the proceeds of sale thereof any  money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method. Such other property .[Income tax Act (43 of 1961)., S.64(2) Expln.1].

Property in legal sense means an aggregate of rights which are guaranteed and protected by law. It extends to every species of valuable right and interest, more particularly, ownership and exclusive right to a thing, the right to dispose of the thing in every legal way, to possess it, to use it, and to exclude everyone else from interfering with it. The dominion or indefinite right of use or disposition which one may lawfully exercise over particular things or subjects is called property. (The exclusive right of possessing, enjoying, and disposing of a thing is property in legal parameters). Therefore, the word 'property' connotes everything which is subject of ownership, corporeal or incorporeal, tangible or intangible, visible or invisible, real or personal; everything that has an exchangeable value or which goes to make up wealth or estate or status. Property, therefore, within the constitutional protection, denotes group of rights inhering citizen's relation to physical thing, as right to possess, use and dispose of it in accordance with law. The property is the most comprehensive of all terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have. The term property has a most extensive signification, and according to its legal definition, consists in free use, enjoyment, and disposition by a person of all his acquisitions, without any control or diminution, save only by the laws of the land. [itubhai Nanbhai Khachar v. State of Gujarat. AIR 1995 SC 142].

Liability

Explanation to section 62 defines 'liability' for the purpose of section 62 to include duties of every description.

In accounting, liability is understood as the financial obligation of an enterprise other then the 'owners' funds Liabilities are defined as the claims of outsiders against the firm and represents the amount that the firm owes to outsiders (not owners). The assets of the firm have to be financed. This financing can be done either by way of equity or by borrowings (short-term or long-term and secured or unsecured). The long term borrowings can be from financial institutions or banks or through issued of bonds or debentures. The short term borrowings may be supplier's credit, bills payable fixed deposits etc. Liabilities are, on the basis of their period, categorized as short term or current liabilities and long term liabilities.

Powers of Tribunal  [Sub-section (1)]

Sub-section (a) provides certain powers to the Tribunal in relation to facilitate the compromise, arrangement, reconstruction or amalgamation of LLPs.

Accordingly, Tribunal's order may provided for all or any of the following matters -

(i) the transfer to the transferee LLP of the whole or any part of the undertaking property or liabilities of any transferor LLP.

(ii) the continuation by or against the transferee LLP of any legal proceedings pending by  or against any transferor LLP.

(iii) the dissolution without winding up, of any transferor  LLP

(iv) the provision to be made for any person who, within such time and in such manner as the Tribunal directs, dissent from the compromise arrangement; and

(v) such incidental, consequential and supplemental matters as are

necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

The order should contain specific order or direction on the aforesaid matters and these may be either in the same order which sanctions the compromise or arrangement or any subsequent order for this purpose.

The order in respect of (i) to (v) above shall be made by the Tribunal subject to the following-

(a) application is made to the Tribunal u/s 60 for sanction of compromise or arrangement proposed between a LLP and partners or LLP and creditors.

(b)  It is shown to the Tribunal that such compromise or arrangement is in connection with or for the reconstruction of LLP or amalgamation of two or more LLPs.

(c)  scheme envisages whole or any part of the undertaking, properties or liabilities of LLP covered in the scheme to be transferred from one LLP (transferor LLP) to another LLP (transferee LLP).

The aforesaid three conditions must exist in order to obtain Tribunal's order providing for any of the five matters indicated above.

Tribunal's orders shall however, be subject to following two conditions, as provided for in the provisos to sub-section (1)-

(a)        no compromise or arrangement or scheme of amalgamation shall be sanctioned by the Tribunal unless it receives a report from the Registrar to the effect that the affairs of LLP have not been conducted in a manner prejudicial to the interest of -

(i)         its partners, or

(ii)        to public interest

Tribunal may not sanction the scheme if affairs of LLP are not being conducted in the public interest or are prejudicial to the interests of partners .

(b)       no order for dissolution of any transferor LLP shall be made by the Tribunal unless Official Liquidator has scrutinized the books and papers of LLP and submited a report to the Tribunal to  the effect that the affairs of LLP have not been conducted in a manner prejudicial to the interest of -

(i)         its partners, or

(ii)        to public interest

Transfer of Liabilities / Properties [Sub-section (2)]

The order under section (62) may provide for transfer of liabilities and / or properties in which event the properties shall stand transferred to the transferee LLP and the liabilities will become the liabilities of transfer LLP. If any property of the transferor LLP were charged and encumbered against any loan or liability etc, Tribunal's order may direct that such property be freed from any change and that by virtue of the compromise or arrangement, such charge shall  cease to have any effect. As a result, the properties being transferred shall be transferred to the transferee LLP free from any charge. It is important that the cessation of charge shall be effective only if ordered by the Tribunal in the order. There is no requirement of informing to the Registrar separately except as provided in sub-section (3).

Filing with Registrar [Sub-section (3)]

Under sub-section (3), LLP is required file a certified copy of order of the Tribunal with the Registrar within thirty days of the signing (making) of the order by the Tribunal. It is the duty cast upon the LLP to cause the filing of order with the Registrar.

Rule 35(11) prescribes Form No 22 for this purpose. Accordingly, Tribunal's order shall be filed with prescribed fees.

Penalty [Sub-section(4)]

If the LLP does not file with the Registrar the certified copy of the Tribunal's order as required in sub-section (3) within the required period of thirty days, the LLP and every designated partner of the LLP shall be liable for being punished with fine which may extend to rupees fifty thousand. This fine shall be imposed upon the LLP and all designated partners individually .