Conceptually, the Limited Liability Partnership (LLP) law was introduced in India in 2008 to create a platform where business can be carried out as a partnership, but with the limited liability of partners. While, originally, it was perceived to be meant more for professionals to organise their practices as LLPs, over the last decade, with the way various laws, such as income tax, exchange control provisions and insolvency laws have been amended or drafted, LLPs have increasingly emerged as an alternate to a company format to even carrying on various operating businesses.
Recently, the National Company Law Tribunal (NCLT), Chennai bench, in the case of Real Image LLP and Qube Cinema Technologies Private Limited, approved a scheme of amalgamation, involving the merger of an LLP into a company—it is quite a landmark judgment considering that LLPs and companies are governed through separate specific laws. The NCLT judgement signifies a harmonious assimilation of both the laws, wherein LLPs are brought on a par with companies.
The readers would recall that, under the old Indian company law (i.e., Companies Act 1956), merger of an LLP into a company was permitted as Section 394(4)(b)gave a wider definition to a ‘transferor company’ to include a body corporate. The definition of ‘body corporate’ under the said Act was in the form of a negative list. Since an LLP was not part of the negative list, it was interpreted that an LLP could be merged into a company. Further, in terms of Section 390(a), even a partnership firm could merge into a company in case such a firm was categorised as an ‘unregistered company’ under Section 582(b), and hence was covered within the meaning of a company liable to be wound up under the said Act.
However, under the Companies Act 2013, though a merger of a foreign body corporate, including a foreign LLP, with an Indian company is specifically permitted, there is no specific provision for merger of an Indian LLP into an Indian company. In the aforesaid matter, the Chennai bench of the NCLT observed that, where a foreign LLP is allowed to be merged into an Indian company, the legislative intention cannot be such as to prohibit the merger of an Indian LLP into an Indian company, more so since there is no express restriction on such schemes—thus, it is a simple case of ‘casus omissus’ and the scheme was sanctioned. The aforesaid decision brings greater parity in the treatment of an LLP vis a vis a company, and enables a higher ability to structure business operations in an LLP format.
Interestingly, in 2017, another bench of NCLT had rejected a scheme involving the merger of a partnership firm into a company. While the bench agreed that a partnership firm is a body corporate, it limited its decision to the letter of the law, rather than its spirit, and held that, if the legislative intention was to allow the merger of an Indian body corporate into an Indian company, the same should have been expressly provided under the law.
On such mergers, while the legal position seems to have more clarity now, it also becomes important to evaluate the other aspects of such mergers, most important being tax neutrality. The Indian income tax law provides for tax neutral mergers where the parties to the merger are companies. Shareholders of the amalgamating company receive shares of the amalgamated company pursuant to such a merger. Given that the said exemption does not cover an amalgamating LLP, the benefit of a tax neutral merger may not be available. Another possibility is to argue that the merger of an LLP into a company is akin to the succession of a LLP by a company and hence the benefit of Section 47(xiii) for tax neutral succession should be available subject to compliance with the conditions stated therein. However, taxability in the hands of partners of the LLP receiving shares of the transferee company should be duly considered.
The other important element to consider is the treatment of any tax losses which the LLP may have at the time of the merger. Clearly, under the income tax law, the benefit of continuity of tax losses on amalgamation is available only to companies and hence, one can contend that the tax losses of the LLP may not be available to the company post merger.
While there are some tax benefits such as no incremental taxes on profit distribution, that are available to an LLP, being in the nature of a partnership with limited liability, there are a number of aspects which still await attention, particularly to ensure that businesses running as LLPs have the right and fair opportunities to consolidate, raise
capital and expand.
In the recent years, the Indian exchange control and foreign direct investment norms have also been relaxed time and again to permit a greater degree of foreign participation in LLPs. FDI is now permitted in LLPs engaged in all sectors which fall under the automatic route for 100% foreign investment, without any performance linked conditions. Norms for downstream foreign investment for LLPs have also been relaxed over the past few years. Further, various sectoral regulators and statutory bodies have also amended their eligibility norms and rules to include LLPs for the purpose of bidding for contracts and tenders. The Insolvency and Bankruptcy Code also recognises an LLP within the meaning of a corporate debtor and seeks to cover resolutions relating to defaulting LLPs. Given that LLPs are now being considered as bidders and with them taking operating roles, one expects that the banking sector will also become more amenable to LLPs, for granting financial assistance at par with companies, in order to ensure that the capital required for business is available to the LLPs.
There is no denial that the LLP model has gained constant strength since inception and developments like these augur well for the structure to become more widely used. There are still some nuances which need to evolve, especially from the banking, corporate governance and taxation perspective. However, with far lesser compliance hassles, benefits of limited liability and efficient profit distribution possibilities, the utility of LLP as a structure arguably merits greater consideration as one of the steps towards improving the country’s rank on the ease of doing business in the country.
Gupta is partner and Acharyya is principal at Dhruva Advisors LLP. Views are personal