What to Consider when Winding up an LLP in India?

Limited Liability Partnership (or 'LLP') is amongst the most popular ways to operate business in India. The operation of your business via LLP gives a high degree of flexibility in terms of the adoption of the management decisions. The favorable legislation enhances the usage of LLP in India. It is comparatively easier to start and operate an LLP than winding up procedure. This guide will give you a general understanding of the benefits and procures for winding up an LLP.

LLP can be understood as a combination of a company and a partnership. It gives the benefits of limited liability of a company and flexibility of a partnership. The LLP Act, 2008 along with the LLP (Winding up and dissolution) Rules, 2012 contain the legal provisions relating to the winding of an LLP.

1. Reasons to wind up an LLP

Recurring legal compliances

Being a registered legal entity, an LLP has to undergo periodic legal compliance requirements. This has to be done even if the LLP is doing no business activities. By closing down your LLP, you can get away with the recurring legal compliances and filings.

Save cost

The penalty for non-compliance and failure to file recurring returns is huge. Hence, if the LLP has stopped doing business, it is better to wind up the LLP at the earliest to avoid any hefty fines.

2. Steps to be taken while winding up an LLP

The following are some major steps to be taken to wind up your LLP:

Passing of the special resolution by the partners. A template of Special Resolution of Partners to Wind up an LLP is available on this website.
Filing of no liability or no debt declaration.
Declaring asset value of the LLP. Assets are the properties owned by the LLP including buildings, stocks, intellectual property, etc.
Obtaining no objection from the creditors. The LLP planning to wind up is required to inform and get consent from its creditors before proceeding to wind up. The creditors shall respond to such requests within 30 days from the receipt of intimation. No objection means the creditors does not oppose the decision to wind up the LLP.
Preparing the LLP's final statement.

3. Documents required for winding up

The following documents are required while winding up an LLP:

A resolution stating the winding up of the LLP.
A statement of account certified by a Chartered Accountant showing that the LLP has zero liabilities and assets up until 30 days before the filing.
At the time of winding up, an LLP must not have an active bank account. Active bank accounts mean an open and running account in the name of the LLP. If your LLP has an active account, it must be closed, and you need to obtain a certificate or statement from the bank showing that the account is closed.
Consent of all the partners and the creditors for winding up.
A statement executed by all designated partners along with an indemnity bond stating to indemnify all liabilities that may come up after the Registrar strikes off the name from the Register.
If the LLP has done any business or has previously filed any income tax returns, then a copy of the latest IT returns needs to be submitted.
A confirmation letter showing that your LLP has no payment due or liability towards any creditors.
Copies of the PAN Card of all designated partners along with a scanned copy of the Aadhaar card of all the partners.
A true copy of the signed LLP Agreement.
Permanent address proof of all the partners and designated partners.

4. Procedure to wind up an LLP

If you want to shut down the business or have your LLP has gone without any business for more than a year, you need to apply to the registrar to declare your LLP as defunct and to strike off the name from the Register of the LLP's. The winding up procedure can be initiated online through the MCA Portal.

Also, If an LLP fails to begin its business operations or discontinues its operations for a specified period, then such an LLP can be classified as dormant and will be removed from the Register of LLP's.

Your LLP may also get dissolved under the following situations:

Bankruptcy or death of anyone or more of the partners.
Court order.
Expiry of the term of your LLP as per the LLP Agreement or otherwise.

The LLP could be closed down, either voluntarily by the stakeholders, or by the law through a tribunal or registrar.

I. Voluntary dissolution

Voluntary winding up is when the partners of your LLP decide to wind up or close down the LLP. To wind up an LLP, a resolution shall be passed with support of at least 75% of partners. The liquidation or winding up begins with the declaration by the designated partners that the LLP is free from any debts or that all the debts can be satisfied or paid off within a year.

Once the resolution has passed, the same shall be published in the regional newspaper within 14 days.

Also, the partners must make another declaration stating that the winding up is not happening due to any fraud or coercion. The declaration must be tagged along with a statement showing all the assets and liabilities of the LLP right before the winding up declaration.

Additionally, all the assets of the LLP must have a valuation statement prepared and submitted.

II. Obligatory dissolution

a. Winding up on an LLP by the tribunal

Sometimes, an order to wind up the LLP can be initiated by a tribunal. Tribunal means the National Company Law Tribunal constituted under the Companies Act 2013. This is made under the following circumstances:

The LLP cannot repay its debts.
The LLP doesn't have a minimum of two partners for 6 months or more.
The LLP has acted against interests of sovereignty and integrity of India, the security of the state and public order.
The LLP has failed to comply with statutory obligations such as filing statements of solvency and account or filing of annual returns.
If the tribunal concludes that the winding up of the LLP is necessary.

b. Declaration of dissolution of the LLP by the Registrar

A declaration of dissolution of an LLP can be made by the Registrar in writing under the following circumstances:

Creditors and partners of the LLP have no objection. Under the LLP rules,
A preliminary objection was withdrawn subsequently by the concerned parties.
If the registrar thinks that the preliminary objection was without merits.

III. Adhering formalities

a. Appointment of LLP liquidator

An LLP shall appoint an LLP liquidator within 30 days. A liquidator is an individual who is being authorized to held the whole process of winding up the LLP. The liquidator should be appointed under the following circumstances:

A resolution for a voluntary winding up has been passed.
If creditors are present, then the notice of resolution passed with the creditor's consent.

The appointment and remuneration of the liquidator is determined with the support of more than 50% of partners with voting power.

If the LLP has creditors, such an appointment shall be with the approval of at least two thirds of total creditors.

b. FORM 24

Finally, the LLP has to file Form 24 to wind up. The following are some steps to be taken before filing Form 24:

I. Cease all commercial activities

Before filing LLP Form 24, the LLP must cease all the business/commercial activities. Form 24 can only be used by an LLP which has not commenced business, or which has gone dormant.

II. Closing of bank accounts

Only an LLP with no open bank account and existing creditors can file Form 24. Therefore, to file LLP Form 24, all open bank accounts must be closed and a closure letter evidencing the same in the name of the LLP must be obtained from the bank concerned.

III. Preparing declarations and affidavits

All designated partners must either separately or jointly declare the fact of the LLP ceasing its commercial operations from the date or that it has not started any business operations. A template of Affidavit of Designated Partners to Wind up an LLP is available on this website.

Additionally, the partners must declare that there is no existing liability and indemnify any future liability that may arise after striking off its name.

IV. Preparing necessary documents

While filing LLP Form 24, the LLP Agreement and statement of income tax must also be attached. If the LLP has not commenced business, then the statement of income tax return is not required.

V. Filing and updating all pending documents

If the LLP agreement was not filed with the concerned Registrar within 30 days of incorporation, the first copy of the agreement along with all the amendments must be duly filed.

Additionally, all the overdue Form 11 ('Annual return of LLP'), and Form 8 ('Statement of Account & Solvency') must be filed before or during filing of Form 24.

The date of cessation is when the business stops carrying on its business, and any payment or transactions after that won't be a part of the money-making business.

VI. Get necessary certificates from the Chartered Accountant

After preparing all the documents for filing along with LLP Form 24, an authorized statement from a Chartered Accountant stating that the LLP has zero assets and liabilities must be obtained.

VII. File LLP Form 24

The final step is to file the Form 24 along with all the aforementioned documents. If all the documents and forms are filed properly, the Registrar will publish the notice of the name removal on the MCA website for the information of the public for one month.

Conclusion

An LLP can no longer do business after the winding up procedure has started, except for completing the division of its assets and liquidation. The LLP will be effectively dissolved at the conclusion of the procedure.

With digitalization of the closure process, you can do the closure of procedure of an LLP online on the MCA Portal. It is important to note that, to wind up an LLP, you must have all the necessary documents mentioned under this guide, including the LLP Agreement, ready with you.

If you find the preceding steps complicated, it is always better to approach a consultant who will help you close down your LLP without any hassle.