Compromise, arrangement or reconstruction of LLP

Introduction

The industrial scenario of present times and the international environment has undergone many reconstructions of the companies by means of merger, amalgamations, takeover etc. The role of Indian industries in the last two years is noteworthy. The terms 'compromise', 'arrangement' has not been defined in the LLP bill.  Sec.2(2) provides that “words and expressions used and not defined in this Act but defined in the Companies Act, 1956 shall have the meanings respectively assigned to them in that Act” [1],we have to take the meaning for them as provided in the Companies Act.

The Act does not define either the term "compromise" or the term "reconstruction". "Compromise" has, however, been judicially construed in consonance with its popular import as postulating a dispute relating to rights and as a scheme which seeks to be in the nature of a settlement of those disputes.[2] The term "re-construction" which has also not been defined by the Act has been judicially construed in England as “being applicable to a scheme under which a company transfers its assets to a new company, in consideration of the assignment of the new company's shares to the first company's members, and if the first company's debentures are not paid off, in further consideration of the new company issuing debentures to the first company's debenture holders.”[3] Any scheme which does not fall in the category of compromise or reconstruction and which in some way affects the rights of the creditors and the members of the company or any section of them, would fall within the third term used in the chapter heading, "arrangements". The term "arrangement" is defined in section 390(b) of the Companies Act as including a reorganization of share capital.

Procedure of Structural Changes of LLP

Structural changes of LLP’S entails compromise, arrangement or reconstruction –the procedures of which are prescribed in section 60, 61 and 62 of LLP act, 2008. The compromise or arrangement of LLP’S can be of two kinds – between LLP and its creditors or between LLP and its partners.[4]On receiving the applications (by LLP or its creditor or its partner or in the case of a LLP which is being wound up, the liquidator) to carry out such structural changes the tribunal (National company law tribunal) orders a meeting of the creditors or the partners.[5] The proceedings of the meeting have to be conducted in a way as is directed by the tribunal. The structural change will only be initiated if a majority representing three-fourths in value of the creditors or partners at the meeting agree to the proposal of compromise or arrangement.[6] If after attaining the majority, the compromise or arrangement is sanctioned by the Tribunal, it will be binding on all the creditors or all the partners, as the case may be. The tribunal does not sanction any compromise or arrangement, unless it is satisfied that the LLP or any other person by whom the application is made has disclosed all the material facts which include the latest financial situation of LLP and the pendency of any investigation proceedings in relation to it.[7] This disclosure can be made through an affidavit or some other way. In addition to this, the LLP has to specify the circumstances that necessitated the proposed compromise or arrangement, the objects sought to be achieved thereby, terms of compromise or arrangement, the effect of the changes on the trustees and the class of creditors with whom the compromise or arrangement is to be made.[8]

The order or sanction of compromise or arrangement made by the tribunal, after taking into account all the necessary requirements, has to be filed by the LLP with the registrar within thirty days after passing of it by the tribunal. [9]This order shall have the requisite effect only after it is so filed. If a default is made in filing of such an order on time, the LLP and each of its designated partners will be punishable with fine, the value of which may extend to 1 lakh rupees.[10] The tribunal has the right to stay the commencement or continuation of any suit or proceeding against the limited liability partnership, at any time after an application has been made to it.[11] This can be on terms which the tribunal thinks are suitable and may continue until the application is finally disposed off.

If it is shown to the tribunal in the application for sanction that compromise or arrangement has been proposed for the purposes of a scheme for the reconstruction of any LLP or the amalgamation of any two or more LLPs, the tribunal may by a subsequent order, make provisions for the same.[12]

The provisions made by the tribunal includes the transfer to the transferee LLP of the whole or any part of the undertaking etc. of any transferor LLP; the continuation by or against the transferee LLP of any legal proceedings pending by or against any transferor LLP; the dissolution, without winding up, of any transferor LLP and such matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out. Also a provision is made for a person who, within a specified time and manner as the tribunal had directed , does not adhere  to the compromise or arrangement.[13]

The tribunal will not sanction any compromise or arrangement unless and until it has received a report from the Registrar that the affairs of the LLP have not been conducted in a manner prejudicial to the interests of its partners or the public interest.[14] It shall also not pass any order for dissolution of any transferor LLP unless the same is assured on scrutiny of the books and papers of the LLP and a report is made to the tribunal regarding the reaffirmation of the same.[15]

If an order of reconstruction provides for the transfer of any property or liabilities, then, due to the order, that property or liability shall be transferred to and become the liabilities of the transferee LLP.[16] If the order directs that any property is freed from any charge in lieu of the compromise or arrangement, it will cease to have any effect. The LLP is required to file a certified copy of the order with the Registrar within thirty days for registration.[17] If there is any fail to pay in complying with it the LLP, every elected partner of the LLP will be punishable with fine which can extend to fifty thousand rupees.[18]

Powers of Tribunal

Section 61 of the LLP act, 2008 provides for the power of the tribunal to enforce compromise or arrangement. The tribunal with respect to compromise or arrangement of LLPs can supervise the carrying out of the structural changes.[19] The tribunal has the power to give directions in regard to any matter and make modifications in the compromise or arrangement which it thinks are integral to smooth and proper working of compromise or arrangement.[20] If the tribunal is satisfied that the compromise or arrangement cannot be carried our satisfactorily by LLP, it can by its own judgment or on the application of any person interested in the affairs of the limited liability partnership order for winding up the LLP and this order shall have the same effect as an order made under section 64 of the act.[21]

The revival or rehabilitation of LLP has been provided as an arrangement under sec. 60 and 61 of the act under circumstances  “where on a demand by the creditors of the LLP representing fifty per cent or more of its outstanding amount of debt the LLP has failed to pay the debt, within thirty days of the service of the notice of demand or to secure or compound it to the reasonable satisfaction of the creditors; or where a petition for winding up of a LLP is pending before the Tribunal, in terms of the directions given by the Tribunal on the winding up petition; or  where the liquidator has filed his report before the Tribunal, in terms of directions given by the Tribunal on the report of the Liquidator.” [22]

The tribunal is required to hear all the parties within 60 days of presentation of the application of revival or rehabilitation and either admit or dismiss the application. In conditions where the admission is admitted the tribunal has the power to make orders which may pertain to the meeting of creditors or partners to approve the scheme of arrangement, the procedures to be followed by the LLP administrator in regard to such meeting and other directions which it considers to be necessary.[23]

The LLP administrator is to submit his preliminary report which includes the decisions representing three-fourth in value of the amount outstanding at the creditors meeting within 60 days of tribunal’s order. The tribunal with respect to this report can order either to wind up or continue winding up if the creditors resolved that revival and rehabilitation of LLP cannot be carried out or can sanction the scheme when such is decided by majority in the meeting.[24] The tribunal’s order covers matters like powers and functions of LLP administrator, time frame for completion of scheme which shall not exceed 80 days, necessary directions to officers, creditors or any others person and other orders the tribunal considers necessary.[25] Thus the tribunal has great powers to carry our revival and rehabilitation of LLP. The tribunal also has the powers to appoint a LLP administrator from the panel kept by the central government and fix its fee. It can also change the incumbent from time to time on any reasonable cause.

During the interim period until the constitution of CLT etc, the high court is conferred with jurisdiction under sec 81(b) of the act which is limited to sections 60 to 64 and some other appeals.[26]

Connotation of Terms In Companies Act

Sections 60, 61 and 62 thus provide adopting the very language of  section 391, 392 and 394 of Companies act with some omissions and alterations.

The terms compromise and arrangement are not defined in the act and the concept of the terms as understood in company law may not hold good for llps for want of corporate democracy by way of free transfer of shares and the requirement of maintenance of capital in LLP, besides structural differences between the companies and LLPs in their very nature.[27]

A compromise is an agreed scheme of accommodation or sacrifice between the parties reached on some reasonable basis in the resolution of an existing dispute to the benefit of the class as a whole in common, but not a one sided surrender of rights or a proposal  confiscatory in character which the court will not sanction, particularly with the company’s creditors, though it may involve the shareholders also in case like agreement of the members of company in winding up either to seek or not to seek or to oppose a stay of the winding up , thereby foregoing their statutory right to receive terminal dividend in favor of some other consideration like shares of some other company which is a contractual right under the articles.[28]

Arrangement includes: one made with a) the shareholders in respect of any reorganization of company’s share capital as it existing or by division of existing shares thereof into shares of different classes of lower or higher face value, or by both; or b) with the debenture holders, for change of the term or re-issue or a swap to convertibles, or change of interest rates or variation of other rights like nomination of director or exchange against shares of a company or of its subsidiary or group company or settlement in cash at a discount to the face value or giving up the security created in part or c)with preference shareholders.[29] In all these proposals what is central is some give and take forming mutual accord and satisfaction without there being any dispute as such in existence between the parties to the proposals as in the case of compromise. In this respect it is said that an arrangement is wider in connotation than a compromise in the sense that an arrangement may include a re arrangement or readjustment of the rights and liabilities as a better choice without there being any dispute over it in existence.[30]

In reconstruction there is no involvement of any other company and the existing company gets transformed into a new company and yet the business, the undertaking and the shareholders remain substantially the same as of the old company; it is opted for achieving change in the rights of one or more of the existing classes of shareholders and creditors.[31] This exactly is what forms the crux in the conversions into the LLP business from a firm/private/unlisted company. In an amalgamation two or more of existing companies get blended into a third company which is newly created.[32]It means that a combination comes into being that may attract the curbs on combinations provided under competition act, 2002.

Conclusion

The present industrial scenario in the international environment witnesses many a reconstruction of the companies by means of merger, amalgamations, takeover etc. The task done by the  Indian industries in the last two years is creditable.  As Limited Liability Partnership is an alternative to the corporate sector, the Government felt it essential to integrate the provisions in the LLP bill in regard to structural changes of LLP. 

The terms 'compromise', 'arrangement' has not been defined in the LLP bill and hence their meanings have been taken from companies act. The connotation of the terms has been thus contrasted in both the statutes and subsequent judicial precedents. The application of these terms in both statutes comes out to be one or the same.

The procedure followed in carrying out the Compromises, Arrangements and Reconstructions has been given in section 60 and 62 of the act and explained in the project. The tribunal can exercise wide powers to carry out such procedures as given in section 61 of the act and hence explained.