Research and Articles

Introduction:

The increasing adoption of Limited Liability Partnerships (“LLPs”) in India has transformed the LLP from a niche business vehicle into a widely used structure for professional services firms, investment platforms, joint ventures and emerging businesses. LLPs combine the operational flexibility of partnerships with the benefit of limited liability, making them an attractive alternative to traditional companies in several sectors.  As businesses evolve, the need for restructuring through mergers, demergers and internal reorganisations has become equally relevant for LLPs.

While corporate restructuring under the Companies Act, 2013 (“CA 2013”) has been extensively discussed and litigated, the framework governing compromise, arrangement and amalgamation of LLPs under Sections 60 to 62 of the Limited Liability Partnership Act, 2008 (“LLP Act, 2008”) remains comparatively under-explored. Nevertheless, the LLP Act, 2008 provides a statutory mechanism enabling reconstruction and amalgamation of LLPs under the supervision of the National Company Law Tribunal (“NCLT”), thereby offering LLPs a viable restructuring pathway akin to companies.

Statutory Framework Governing the LLP Restructuring: 

The provisions governing compromise, arrangement, reconstruction and amalgamation of LLPs are primarily contained in:

• Sections 60 to 62 of the LLP Act, 2008;

• Rule 35 of Limited Liability Partnership Rules, 2009; and

• applicable provisions and procedural rules of the NCLT.

These provisions broadly mirror the restructuring framework available to companies under Sections 230 to 232 of the CA 2013, albeit in a simplified form.

Section 60 of the LLP Act, 2008 read with rules made thereunder empowers the NCLT to sanction a compromise or arrangement between an LLP and its creditors or partners. Section 62 of LLP Act, 2008 specifically deals with reconstruction and amalgamation of LLPs and enables (a) transfer of assets and liabilities; (b) continuation of legal proceedings; (c) dissolution of transferor LLP without winding up; and (d) consequential matters necessary to implement the scheme.

Meaning of “Compromise” and “Arrangement”:

The expressions “compromise” and “arrangement” are not exhaustively defined under the LLP Act, 2008. Consequently, jurisprudence developed under CA 2013 assumes relevance while interpreting these terms.

Traditionally, Courts have interpreted the term “arrangement” very broadly to include:

• reorganisation of rights and liabilities;

• restructuring of business operations;

• transfer of undertakings;

• alteration of ownership or participation rights; and

• reconstruction or amalgamation.

Accordingly, the scope of an “arrangement” under the LLP Act is sufficiently wide to include several restructuring transactions involving LLPs. Similarly, the term “reconstruction” is generally understood as reorganisation of the business structure whereby substantially the same business continues in a modified form.

Merger or Amalgamation of LLPs: 

An amalgamation or merger of LLPs generally involves (a) transfer of the business, assets and liabilities of one or more LLPs (“Transferor LLP”) to another LLP (“Transferee LLP”); (b) continuation of business by the Transferee LLP; and (c) dissolution of the transferor LLP without winding up pursuant to the NCLT order.

Upon sanction of the scheme by the NCLT and filing of the order with the Registrar of LLPs, the assets and liabilities vest in the Transferee LLP in accordance with the scheme.

One of the practical advantages of statutory amalgamation is that it facilitates transfer of the business as a going concern without requiring separate execution of transfer documents for each asset or contract, subject to sector-specific regulatory requirements.

Is Demerger of LLPs permissible?

One of the most significant interpretational questions under the LLP Act, 2008 is whether LLPs can undertake demergers.

Unlike the provisions of CA 2013, the LLP Act, 2008 does not expressly refer to “demerger” or “demerged undertaking”. Similarly, the tax-neutral demerger provisions under the Income-Tax Act are principally designed around company structures.

However, the absence of express terminology may not necessarily preclude LLP demergers.

The expressions “arrangement” and “reconstruction” under Sections 60 and 62 of LLP Act, 2008 are sufficiently broad to include:

• transfer of a business undertaking;

• hive-off of business verticals;

• segregation of business divisions;

• transfer of identified assets and liabilities; and

• reorganisation of partner interests.

In practice, schemes involving transfer of a business undertaking from one LLP to another LLP may be structured and presented before the NCLT as a form of arrangement or reconstruction. Such restructuring assumes significance in a variety of commercial and strategic contexts, including where a particular business division is proposed to be segregated, investors require effective ring-fencing of liabilities, distinct business verticals necessitate independent ownership and governance structures, or succession planning and family settlement arrangements call for an orderly partitioning of businesses.

Nevertheless, since LLP demergers do not presently enjoy the same degree of statutory clarity as company demergers, several practical and tax uncertainties continue to exist.

Can an LLP merger with a company or vice-versa?

Section 230-232 of CA 2013 enables the NCLT to sanction schemes of compromises, arrangements or amalgamations on an application made to it by members, creditors, company or in the case of a company that is being wound up by the liquidator. The expression ‘foreign company’ under Section 234 of CA 2013 is defined to mean ‘any company or body corporate incorporated outside India whether having a place of business in India or not’. Resultantly, a body corporate registered in a foreign jurisdiction would invariably include an LLP. Consequently, the provision permits merger of a foreign LLP with an Indian company.

In Real Image LLP v. Qube Cinema Technologies Pvt. Ltd.¹ the LLP intended to merge into the company by filing a joint petition before NCLT Chennai under Sections 230-232 of the CA 2013. Upon application of casus omissus, the NCLT Chennai Bench approved the merger of LLP into a company basis the contention that prohibiting Indian LLPs while allowing foreign LLPs would be unfair.

The Ministry of Corporate Affairs challenged the aforesaid order before the National Company Law Appellate Tribunal (“NCLAT”), which subsequently set aside the order of the NCLT and rejected the merger. The NCLAT reasoned that Section 232 of CA 2013 only covers companies and simultaneously Section 366 of CA 2013 allows an LLP to first register itself as a company, after which it can merge with another company under Section 232 of CA 2013. Since a pathway already exists, the need to invoke casus omissus did not arise out of necessity².

The legislature’s deliberate choice to provide a conversion route under Section 366 of CA 2013, rather than a direct merger route, leaves limited scope for judicial gap-filling. However, a glaring anomaly exists as a foreign LLP enjoys a more direct path to merging with an Indian company that a domestically registered LLP does. Until the asymmetry is duly amended the legal pathway for Indian LLPs are only through complying with the mandate of Section 366 of CA 2013.

Procedure for Merger or Amalgamation of LLPs: 

Although procedural requirements may vary depending on the facts and directions of the NCLT, the restructuring process generally involves the following stages:

The scheme generally becomes effective upon filing of the certified copy of the NCLT order with the Registrar of LLPs.

Practical Challenges in LLP Restructuring: 

Despite statutory recognition of restructuring mechanisms, LLP mergers and demergers continue to face several practical challenges:

1. Lack of Detailed Procedural Framework: Unlike the detailed restructuring provisions under the CA 2013, the LLP Act, 2008 contains comparatively limited procedural guidance for mergers and arrangements. Consequently, LLP restructurings often depend upon evolving NCLT practices and judicial interpretation, resulting in procedural uncertainty and inconsistent approaches across NCLT benches.

2. Ambiguity Regarding Demergers: LLP Act, 2008 does not expressly recognise “demerger” structures. Although demerger-type transactions may potentially be undertaken under the broad concepts of “arrangement” and “reconstruction”, the absence of explicit provisions creates interpretational and implementation challenges.

3. Tax Uncertainty: Unlike company amalgamations and demergers, LLP restructuring does not presently benefit from a comprehensive tax-neutral framework under the Income-Tax Act. This creates uncertainty regarding capital gains implications, carry forward of losses, stamp duty and taxation of partner consideration.

4. Valuation Complexity: Since LLPs do not have share capital or conventional shareholding structures, determining partner entitlement and restructuring consideration may become commercially complex. Valuation exercises often require assessment of partner contributions, profit-sharing ratios, goodwill and contractual rights.

5. Accounting Treatment: There is comparatively limited accounting guidance specifically addressing LLP mergers, reconstructions and business transfers. As a result, accounting treatment is often derived from general principles and analogous company law practices, leading to possible inconsistencies in implementation.

6. Absence of fast-track restructuring mechanism: A notable limitation of the LLP restructuring framework is the absence of a fast-track merger route comparable to Section 233 of the CA 2013, which permits certain classes of companies to undertake restructurings through a simplified approval process without undergoing a full NCLT sanction mechanism. In contrast, mergers and arrangements involving LLPs continue to require NCLT approval under Sections 60 to 62 of the LLP Act, 2008, irrespective of the size, ownership pattern or complexity of the transaction. This becomes particularly relevant in the case of group reorganisations, wholly owned structures or internal business consolidations where commercial substance may be limited and stakeholder interests are aligned. The absence of a simplified route may result in increased timelines, procedural costs and regulatory burden, potentially reducing the operational flexibility that LLPs are otherwise intended to offer as a business vehicle.

Comparison between Company and LLP Restructuring: 

Conclusion:

The LLP Act, 2008 provides a statutory framework for compromise, arrangement, reconstruction and amalgamation of LLPs under the supervision of the NCLT. Although the regime is comparatively less developed than the restructuring framework applicable to companies under the provisions of CA 2013, it nevertheless enables LLPs to undertake commercially significant reorganisations through a legally recognised process.

At the same time, the LLP restructuring framework continues to evolve through judicial interpretation and practical implementation. The absence of explicit provisions relating to demergers, lack of a fast-track restructuring mechanism, limited tax neutrality and procedural dependence on evolving NCLT practices continue to create interpretational and execution-related challenges. Similarly, the continuing restriction on direct mergers between Indian LLPs and companies reflects certain structural gaps within the present framework.

As LLPs increasingly emerge as preferred vehicles for startups, investment structures, professional firms and joint ventures, the need for a more comprehensive and commercially efficient restructuring regime is likely to grow. Greater legislative clarity, procedural streamlining and tax alignment may therefore become necessary to strengthen the LLP restructuring ecosystem and bring it closer to the sophistication of the corporate restructuring framework applicable to companies in India.

Maulin Salvi and Santosh Gangavati
You can direct your queries or comments to the authors.

¹NCLAT, Company Appeal (AT) No. 352 of 2018, Decided 4^th December 2019

²Union of India Vs Rajiv Kumar ((2003) 6 Supreme Court Cases 516) (2003)