Government will allow cos with secured loans to transform into limited liability partnerships

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NEW DELHI: The government plans to allow businesses with outstanding secured loans to be converted into limited liability companies, a more flexible business structure introduced two years ago to boost business.

According to a circular being prepared by the Ministry of Corporate Affairs, while companies with guaranteed loans, or loans on assets, will not be prohibited from converting to LLP, companies with unsecured loans will no longer need of the written consent of the creditors to convert.

“The LLP Act needed clarification and we worked on the same. It will be released in a week, ”Naved Masood, secretary of the Department of Commercial Affairs, told ET. This will remove the barriers for many businesses that could not be converted to LLP, which combine the benefits of business ownership and partnership.

LLPs involve limited liability for owners, unlike unlimited partnership companies, and greater room for maneuver in housekeeping, simpler compliance standards, lower training cost, and easier exit options.

The circular will remove the requirement from the Third and Fourth Schedules of the LLP Act, which requires “the conversion of a private or unlisted public company into an LLP if and only if there is no security in in force at the time of the conversion request ”.

Businesses with outstanding secured loans will now only need to obtain the consent of the office holder to become eligible for conversion. “The regulations have been a great deterrent and this step will have a very positive impact on companies of all sizes,” said Akash Gupt, executive director of the audit firm Pricewaterhouse Coopers, “It is very difficult to find a company totally debt free.

In accordance with the circular which is to be published soon, companies with unsecured loans will no longer need the written consent of creditors for the conversion to LLP. Instead of seeking authorization from individual creditors, these companies will only have to issue a notification or advertisement.

“That way, if a particular creditor has a problem seeing the ad, they can contact the company individually and ask for clarification. Companies will not have to run to obtain certificates of no objection from various creditors, ”said a senior official involved in the changes.

In addition to imposing simpler standards for conversion, the circular will clarify that a minor cannot be a partner in an LLP because a person under the age of 18 has no contractual capacity. Industry experts say that while the changes to be announced are welcome, the government needs to do more to get companies to convert to LLP.

“We need more clarity on other regulatory aspects such as taxes, as there is a lot of ambiguity on the double taxation rules with regard to limited liability companies,” said Krishan Malhotra, partner at KPMG audit firm.

Banking guidelines also need to be defined more clearly, experts say, to determine whether an LLP will be treated as a corporation or a partnership in terms of asset classification.


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