All You Need to Know About Decriminalisation of the LLP Act

The Ministry of Corporate Affairs (MCA) announced its plans to decriminalise 12 offences and omit a provision entailing criminal liability under the Limited Liability Partnership (LLP) Act, 2008.

Decriminalisation is essentially the process of revoking criminal liability that was imposed for commission of certain acts or offences in the past. Meaning that these so-called “offences” will no longer be considered offences.

Now, the objective of this particular exercise is two fold: one, to exculpate acts which are likely irrelevant to the definition of criminal behaviour (for instance, Section 377 of IPC!). And two, to remove unnecessary compliance burdens so that people can carry on their businesses without the sword of criminality hanging above their heads.

At this point, you are probably wondering why decriminalise these offences now? They must have been clubbed into criminal acts for a reason by our lawmakers, right? Are we thus gradually sanctioning the commission of offences which were prohibited earlier for strong reasons?

Let’s try and resolve your queries, shall we?

Debunking Decriminalisation Exercises

What one must understand is that it is the relatively harmless offences which often make it into the decriminalisation list. Once the State removes the element of criminality from business laws where no malafide intentions are involved or where the violation of laws do not result in considerable injury to the public interest, it saves business owners a lot of time, effort and money that it takes to adhere to these laws.

The 12 offences and one omission in law which have fallen into this list were included in the recommendations forwarded by the Company Law Committee (CLC) in January 2021. The underlying idea behind such recommendations was to provide greater ease of doing business for law-abiding LLPs.

The exercise of decriminalisation is therefore considered crucial to unleashing the entrepreneurial spirits of our citizens and remove the deterring fear of criminal prosecution before starting any business.

What Are LLPs? And Why LLPs?

LLPs are an interesting hybrid of the corporate structure. In the Indian context, they are a fusion of limited liability companies and partnerships. An LLP comes with all the advantages of being a body corporate and at the same time enjoys autonomy over the operations and day-to-day management of its business. Its internal governance is regulated by the provisions of its partnership agreement and not by statutory provisions.

Since their enactment in 2008, LLPs have become popular business vehicles for professionals (especially in the MSME sector). Currently, there are an estimated 145,000 registered LLPs in India.

Typical examples of LLPs are law firms. The partners in the law firms usually have paid-up equity interest and consequently an executive voice over its affairs, unlike a company where management often has to play ball with the shareholders.

Last year, the MCA decriminalised 35 offences under the Companies Act, 2013. Prior to that, in 2019, 16 other offences were decriminalised through the Companies Amendment Act, 2019. Now, LLPs, being an extension of the corporate set-up, were the next crop of institutions in line to be exempted from unnecessary regulatory scrutiny. So, the decision to decriminalise penal provisions of the LLP Act, 2008 is a natural corollary of the Government’s earlier efforts at corporate decriminalisation.

Other Recent Amendments in the LLP Act, 2008

Let’s go through these one by one.

1. Proposal to establish “Small LLPs” — A new class of LLPs are to be set up in line with the concept of small companies, which will undergo lesser compliance requirements and lesser penalties for defaults or violations, thereby incentivising macro and small-scale partnerships to mushroom throughout the country.
2. Provision for LLPs to issue NCDs — Allowing LLPs to raise capital through the issue of fully secured Non-Convertible Debentures (as an alternative to equity participation by partners) is also to be enabled. Investors can obtain NCDs under the devised guidelines of SEBI or RBI to raise funds for the LLPs.
3. Amendment of Section 29 of the LLP Act, 2008 — There is a fine of ₹100 per day incurred by applicants currently for delayed filing of forms or documents with the regulatory bodies. This is to be done away with.

How to Look At These Amendments (including Decriminalisation)?

The justice system of this nation is founded on the idealistic notion of pardoning a hundred crimes in order to save one innocence. Although enterprising, the present amendments have a touch of judicial symbolism about them that is mirrored on the above idea.

Some of the changes are positively encouraging, such as: (a) curing procedural violations of criminality, (b) fixing bottlenecks to partnerships of non-resident Indians, (c)lifting criminal purview from offences like maintenance of books, accounts, (d) annual returns, (e) orders of courts and Tribunals and (f) replacement of criminal liability with contempt violation.

Although the objective of these penal provisions was to uphold practices of financial and regulatory discipline, it is arguable that after a certain point, it becomes necessary to relegate these offences into a class separate from “crimes”.

In the larger scheme of things, disavowing an act like late filing of registration forms with the courts from falling into the same class as more vindictive and perilous acts, becomes necessary to determine the exemplified matrix of citizen-building. Besides, when it comes to compoundable offences like fraud, intent to deceive, non-compliance with statutory etc. Status quo with penalty and punishment has been ensured, which is an indication that the deregulation efforts haven’t strayed far afield.

There is also an all-pervasive vision behind this exercise: de-clogging the judicial burden of criminal courts. All the 12 decriminalised offences will be shifted under the purview of IAM (In-House Adjudication Mechanism), which means many of them will receive a localised forum for resolution and avoiding the vigilance of courts.

Will it Ultimately Result in “Easing” Businesses?

Well, we can depend on regulations for the efforts, not for the results! ;)

The ease of doing businesses will depend on how well these remedies are enforced by the regulatory agencies. There are certainly chances that the changes will be abused by notorious entities who wish to evade culpability.

The NCDs could be a good idea. Since they can’t be converted into shares or equities, these instruments always remain as debts. As a result, they will cause no dilution in ownership of the LLPs, thus ensuring their autonomy. In addition, if LLPs are allowed to issue NCDs, not only will they be able to widen their avenues for raising funds, they can perhaps even explore a wider “cost of borrowing” spectrum whilst pledging varying levels of security. All this appears to bode well for even the investor community.

Also, when it comes to the administration and jurisdiction of IAMs, it remains unclear whether they have paramount powers of adjudication (like arbitration forums) or are they simply a body to address and conduct departmental enquiries. If it’s the latter, then the intention to avoid judicial scrutiny will be redundant because every aggrieved party who isn’t appeased with the IAM’s verdict will rush to the courts immediately thereafter, diluting the non-intervention strategy.

PLUS, there is the issue of double jeopardy, which states that one cannot approach the courts for the same matter twice. But that requires the IAM to act with the same authority as the courts, which is yet to be clarified.

All in all, if we wish to promote a culture of being a laissez faire economy, we must ensure deregulation, albeit with certified safeguards. Hence, the acts of carefully curated corporate decriminalisation are expected to open the doors to enterprising paradise in the future.

(Originally published February 5th 2021in transfin.in)