Analysis – Merger of LLPs – A Start

Section 60 and 62 of the Limited Liability Partnership Act, 2008 (The LLP Act) deals with the compromise, arrangement, and reconstruction of the Limited Liability Partnership. The terms compromise, arrangement and reconstruction are not defined under the LLP Act.

In a much-awaited transaction to set precedent for the merger of LLPs, Hon’ble National Company Law Tribunal (NCLT), Delhi bench has approved the scheme of merger of LLP in two cases in February 2021, whereby 4 LLPs got merged into the one LLP vide NCLT order. Though the LLP Act contains provision for the merger of LLPs vide section 60 to 62 and Rule 35 of the LLP Rules there are very few instances where LLPs have proposed the scheme of merger since the procedure for merger of LLPs is not yet streamlined.

As far as procedure for the arrangement/merger is concerned it is akin to the procedure applicable for the arrangement/merger of the Companies given under section 230-232 of the Companies Act, 2013 i.e.

• Filing of Application for getting direction of meeting of partners and/or creditors.

NCLT has discretionary power for dispensation of meeting of partners/creditors based on certain points like less no. of creditors/partners, high net-worth of the LLPs, consent of partners/creditors) – section 60(1)

• If the meeting is directed to be convened resolution is required to be passed with specific majority i.e., majority in number representing 3/4^th in value. – section 60(2)

LLP agreements can contain provisions for differential voting rights.

• Filing of petition for confirmation of scheme of merger within 7 days of submission of chairperson’s report – Rule 35(10)

• Obtaining report from the Registrar of Companies and Official Liquidator (Applicable in case of merger) – section 62(1)(a)

• Filing of order with ROC within 30 days of making of order.

Upon the filing of an application for reconstruction/amalgamation NCLT may make provision for the following – section 62(1)(b) –

1. Transfer of whole/part of undertaking, property/liability of Transferor LLP
2. Continuation of legal proceedings by/against Transferee LLP
3. Dissolution of Transferor LLP without winding up
4. Provision for dissenting partner/creditor
5. Make the property free of charge

LLP Act does not contain any provision for the Fast Track Merger as given for a certain class of companies like small companies, Holding and Wholly owned subsidiaries, start-up companies, etc. even though LLP Act contains concept for small LLP and those LLP which are registered as a start-up.

Recognition of merger of LLP under other Acts

Merger of LLP has not been explicitly recognised under the other Acts like Income Tax, Stamp Act, etc. For E.g., section 47 of the Income Tax Act which deals with transactions not regarded as transfer also provides relief for transaction of amalgamation involving companies and do not explicitly provides for LLP.

NCLT Order of Merger of LLP

In the case of stamp duty there is no Article under which order passed by NCLT can be charged to stamp duty or can be exempted from the stamp duty chargeability. So, in our opinion normal-stamp duty liability as applicable in case of conveyance under each state law may apply if the view is taken that this order of LLP merger is agreement to transfer properties or rights in any property, otherwise, it may not be liable to any stamp duty.

Even though LLP Act contains provisions for the arrangement, reconstruction of two LLP there might be some practical issues while executing the transaction –

• Consideration –
  • Computation of Consideration payable to the partners of the Transferor LLP if the LLP has Fixed and variable capital from the partners.
  • Computation of consideration if one of the undertakings is getting demerged.

• Supersession of LLP Agreement –

There are various sections under the LLP Act where provision contained under the LLP. Agreement will prevail over the LLP Act.

• Set-off of stamp duty already paid –

Unlike Companies Act there is no provision for the set-off of stamp duty already paid on Contribution by Transferor Company.

• Appointed Date –

There is no specific provision for the Appointed date in LLP Act. Instead of specific date, can the appointed date be linked to a specific event? As of now, MCA vide circular dated 21^st August 2019 allowed the companies to keep the appointed date linked to specific event.

• Since the management and ownership is most of the LLPs are the same, the scheme of merger/arrangement will not be exhaustive as it is in the case of Companies.

• No provision for the merger between LLPs incorporated in India and outside India.

Conclusion

Running a business in the form of the LLP is beneficial considering legal compliances, taxation aspect etc. Even after the provision for the merger of LLPs being present, better late than never, this transaction shall help further transactions for corporate restructuring involving only LLPs.

If the merger process is streamlined, recognised under the other Acts and practical issues are addressed, it will boost the inorganic growth of the LLPs.

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