Closure of LLP – Procedure & Documents Required in India

In India, a partnership form of business is popularly known as Limited Liability Partnership (LLP), which combines the flexibility of a partnership and the limited liability of a company. However, partners can choose to dissolve the LLP due to factors such as inactivity, financial constraints, or restructuring of the business. The winding up of LLP process comes under the LLP Act, 2008 and the Limited Liability Partnership (Winding up and Dissolution) Rules, 2010.

This blog provides a step-by-step procedure, the necessary documents, and details on how an LLP can be closed in India.

Reasons for Closure of LLP

The reasons why the partners might choose to close LLP are two-fold:

1. Long-term, no transactions or business inactivity.
2. Loss of money renders the business unsustainable.
3. Disputes among partners.
4. Restructuring of the business or its conversion.
5. Partners at will.

Modes of Closure of LLP

As a company, the closure of LLP may be implemented in the following ways, based on circumstances:

• Voluntary Closure: In case the partners unanimously decide to stop the LLP, then they may apply to be voluntarily closed down.
• Viable LLP (Fast Track Exit) Closure (Defunct): Where the LLP has not undertaken any business since its incorporation or the LLP remains dormant and has not undertaken any business within a period of over 1 year, then the LLP may seek to be closed down as a defunct LLP by use of a simplified procedure.
• Compulsory Winding Up: The LLP can be forcibly wound up in case of fraud, illegal acts or at the behest of an order of the National Company Law Tribunal (NCLT).

Documents Required for Closing an LLP

Partners should ensure that they have the following documents ready before they start the LLP closure procedure:

1. Application in Form 24 (of defunct LLP).
2. Copy of LLP Agreement.
3. Consent of all partners.
4. Accounts with no liabilities (certified by a Chartered Accountant).
5. Partner affidavits and indemnity bonds stating that they do not have any pending liabilities.
6. Duplicate of the recognition of the recent Income Tax Return (when filed).
7. NOC by the creditors (where necessary).

Closure of LLP: Step-by-Step Procedure

Step 1: Consent of Partners

The initial process of winding up the business is to request that all the specific partners unanimously agree to do so.

Step 2: Settlement of Liabilities

The LLP should pay all its outstanding liabilities, which include payments to creditors, staff and statutory authorities, before seeking closure.

Step 3: Document Preparation

The partners will need to prepare affidavits, indemnity bonds, consent letters, and a statement of accounts that contains no assets or liabilities.

Step 4: Filing Form 24

In the case of inactive or defunct LLPs, Form 24 is submitted to the Registrar of Companies (ROC). The form must include:

1. Statement of accounts.
2. Consent of partners.
3. LLP agreement.
4. Indemnity bonds and affidavits.

Step 5: Verification by ROC

The Registrar checks the applications and forms. In case of satisfaction, the name of the LLP is removed from the register.

Step 6: Order of Dissolution

After the approval, an order is issued by the ROC to confirm closure of LLP. This is the end of the existence of the LLP as a legal person.

Closure of Defunct LLP (Fast Track Exit)

This is the most widespread way with inactive LLPs. It is a fast and inexpensive process. The main conditions are:

1. The LLP has not conducted its business activities since incorporation or has been non-functional for over one year.
2. There are no assets and liabilities of the LLP.
3. The partners have submitted the affidavits and indemnity bonds required.

Compulsory Winding Up of LLP

Compulsory winding up of LLP may be ordered by the NCLT in the following cases:

1. The LLP commits fraud or other illegal acts.
2. The LLP did not submit statements or annual returns in the previous five years.
3. The LLP can no longer afford its debts.
4. The Tribunal feels that it is fair to dissolve the LLP.

Timeframe for Closure of LLP

The process of the closure of LLP might take 3 to 6 months, according to:

1. On-time filing of documents.
2. Unpaid compliances or debts.
3. State ROC processing speed.

Penalties for Non-Closure of LLP

In case partners do not close an inactive LLP, they can be subjected to:

1. Punishments against failure to submit annual returns and financial statements.
2. Even when business is not running, there is constant compliance pressure.
3. Legal obligations to claim.

The Benefits of Proper LLP Closure

1. Reduced compliance and regulation.
2. Escapes of non-filing penalties.
3. Protection for partners post-closure.
4. Clean break and move on to new businesses.

Conclusion

The closing of LLP is a formal procedure which must have the consent of the partners, clearance of liabilities and the duly filed process with the Registrar of Companies. Regardless of whether it is a voluntary fast-tracking of defunct LLPs or compulsory winding up, adhering to the proper procedure ensures that legal requirements are met and penalties are avoided.

In the case of inactive LLPs, Form 24 closure represents the most straightforward and least expensive approach. Closure will not only help save money but also ensure that partners are not involved in any future legal hassles.