Winding Up - LLP

Winding Up of an LLP

Winding up a Limited Liability Partnership is the legal process of closing its operations, settling debts, liquidating assets, and distributing any remaining property to the partners.

The process may begin voluntarily through the partners or compulsorily through a Tribunal because of insolvency, inactivity, statutory violations, or other recognised grounds.

LegallensIndia guides LLPs through the legal, financial, and compliance requirements involved in winding up and dissolution.

What Is LLP Winding Up?

LLP winding up is the formal process through which the entity stops conducting business, disposes of assets, and settles liabilities.

The process prepares the LLP for dissolution while protecting creditors, partners, and other stakeholders.

Until dissolution is completed, the LLP continues to exist as a legal entity.

Law Governing LLP Winding Up

• Section 65 of the LLP Act, 2008: Authorises the Central Government to make LLP winding-up and dissolution rules.
• Section 67 of the LLP Act, 2008: Allows relevant Companies Act, 1956 provisions to be applied to LLPs with or without modification.
• GSR 6(E), dated 6 January 2010: Applies specified Companies Act provisions to LLP winding up.
• LLP (Winding Up and Dissolution) Rules, 2012: Prescribes the process, forms, and fees for winding up and dissolution.
• Insolvency and Bankruptcy Code, 2016: Provides the insolvency-resolution and liquidation framework applicable to LLPs.

Winding Up and Dissolution

Modes of LLP Winding Up

Voluntary Winding Up

The partners mutually decide to close the LLP for reasons agreed among them or stated in the LLP agreement.

Voluntary Liquidation under the IBC

A solvent LLP may initiate liquidation itself without external compulsion, including where it has achieved its objectives or the partners agree to stop operating.

Compulsory Winding Up by Tribunal

A Tribunal may order winding up because of statutory default, inability to pay debts, insufficient partners, activities against national interest, or other just and equitable grounds.

IBC Insolvency and Liquidation

The National Company Law Tribunal may supervise resolution and order liquidation when an LLP is insolvent and no viable resolution succeeds.

Prerequisites for Voluntary Liquidation

• Solvency: The LLP's assets must be sufficient to pay its debts in full.
• Designated Partner declaration: A majority of the Designated Partners must declare that debts can be paid from asset-sale proceeds.
• No intention to defraud: The liquidation must be conducted in good faith and not to avoid legal or financial obligations.

Voluntary Liquidation Procedure

Step 1: Declaration of Solvency

Obtain an affidavit-backed declaration from most Designated Partners confirming that the LLP can pay its debts. Attach audited financial statements for the previous two years or since incorporation and an asset-valuation report from a registered valuer.

Step 2: Resolution and Liquidator

Within four weeks of the declaration, pass a voluntary-liquidation resolution and appoint an eligible insolvency professional as liquidator. The appointment resolution must state the terms and remuneration, which form part of liquidation costs.

Step 3: Creditor Approval

Where the LLP has debts, creditors representing two-thirds of the debt value must approve the resolution within seven days.

Step 4: Notify the Authorities

Notify the Registrar and the Insolvency and Bankruptcy Board of India within seven days. Liquidation begins on the resolution date, subject to creditor approval.

Step 5: Cease Business

From commencement, the LLP stops business except for activities beneficial to winding up, while remaining legally in existence until dissolution.

Step 6: Reports and Public Announcement

The liquidator prepares the Preliminary Report, Annual Status Reports, stakeholder-consultation minutes, and Final Report. Within five days of appointment, the liquidator publishes an announcement inviting claims within 30 days.

Step 7: Verify Claims

The liquidator verifies claims within 30 days after the submission deadline and may admit or reject each claim wholly or partly.

Step 8: Realise Assets

The liquidator values and sells assets, recovers outstanding dues, and realises unpaid partner contributions using the approved process.

Step 9: Deposit and Distribute Proceeds

All receipts are deposited into a bank account opened in the LLP's name with the words 'in voluntary liquidation'. After deducting liquidation costs, proceeds are distributed to stakeholders within six months.

Grounds for Tribunal Winding Up

• The LLP consents to being wound up.
• The LLP has fewer than two partners for six months.
• The LLP cannot pay its debts.
• Its activities harm India's sovereignty or integrity, State security, or public order.
• It fails to file Statements of Account and Solvency or Annual Returns for five consecutive financial years.
• The Tribunal considers winding up just and equitable.

Tribunal Winding-Up Procedure

Step 1: File the Petition

The LLP, a creditor, a partner, the Registrar, or a person authorised by the Central Government may file a winding-up petition with the Tribunal.

Step 2: Tribunal Order

The Tribunal reviews the grounds and passes a winding-up order when the LLP Act requirements are satisfied.

Step 3: Appoint the Liquidator

The Tribunal appoints a liquidator to manage the proceedings and liquidation of assets.

Step 4: Public Announcement

The liquidator publicly announces the winding up, invites creditor claims, and directs debtors to settle amounts due.

Step 5: Settle Claims

Creditor claims are verified and paid in the order prescribed by law.

Step 6: Liquidate Assets

Property, machinery, intellectual property, and other LLP assets are sold to generate funds for paying debts.

Step 7: Distribute Remaining Assets

After debts are paid, remaining property is distributed to partners according to the LLP agreement or the LLP Act.

Step 8: Obtain Dissolution

The liquidator applies to the Tribunal after completing payments and distributions. The Tribunal then issues the dissolution order after confirming compliance.

Step 9: File the Order

The liquidator files the dissolution order with the Registrar within the prescribed period, after which the Registrar publishes notice that the LLP is dissolved.

Key Tribunal Process Considerations

• The LLP Act and every other applicable law must be followed.
• Creditor interests receive priority during winding up.
• The liquidator must act impartially and diligently and is central to completing the process efficiently.

IBC Insolvency Proceedings

Initiation

The LLP, its creditors, or partners may apply to the NCLT and demonstrate that the LLP cannot pay its debts.

Moratorium

After admitting the application, the NCLT orders a moratorium that pauses legal actions against the LLP during the resolution process.

Insolvency Resolution Professional

The NCLT appoints an IRP to take control of the LLP's operations and assets and prepare a resolution plan.

Committee of Creditors

The IRP forms a Committee of Creditors to review and approve the resolution plan or decide that the LLP should be liquidated.

Resolution Plan

The plan may restructure debts, sell assets to repay creditors, or combine measures and requires approval from the CoC and NCLT.

Liquidation

If no plan is approved within 180 days, extendable by 90 days, or the CoC chooses liquidation, assets are sold and proceeds distributed according to the IBC priority.

Dissolution

After liquidation and distribution are complete, the LLP is dissolved and the winding-up process ends.

LLP Winding Up with LegallensIndia

LegallensIndia provides support with winding-up documentation, declarations of solvency, partner resolutions, creditor approvals, liquidator appointment, regulatory notices, and dissolution filings.

The team guides LLPs throughout the closure process to help satisfy legal obligations and conclude business affairs efficiently..