MANUFACTURING ACTIVITIES IN LLPs


Presently on the website of Ministry of Corporate Affairs, in news and update section following update is displaying prominently –

Manufacturing & allied activities were restricted in LLPs vide OM No. CRC/LLP/e-Forms dated 06.03.2019. This OM invoking the restriction regarding manufacturing & allied activities has been withdrawn with immediate effect.

As this office memorandum is now withdrawn officially we will not refer the same in this post but we will surely discuss the law.

Governing Law today

According to Section 11(1)(a) of the Limited Liability Partnership Act, 2008 an LLP may be incorporated for a lawful business. It reads –

For a limited liability partnership to be incorporated two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their name to an incorporation documents.

In general terms business includes manufacturing. However, Section 2(e) of the Limited Liability Partnership Act, 2008 does not include manufacturing one of the meanings of business. According to this definition adopted by the Parliament for the purpose say –

Business includes every trade, profession, service and occupation.

This inclusive definition does not include manufacturing, in my views terms manufacturing could not be construed in all possible inclusions. However, in absence of any express exclusion, Ministry of Corporate Affairs in a complete decade permitted incorporation of LLPs with state objects of manufacturing. Few companies with manufacturing activities were permitted to be converted into LLPs.  This office memorandum certainly goes against earlier views of the ministry. In absence of any direction to existing LLPs with manufacturing activities, such office memorandum was bound to be withdrawn. However, a student of law, all is not yet over.

Statement of objects and reasons of the LLP Act

It is quite controversial for the parliament to drop manufacturing activities without any thought process and not included it by an amendment in this long decade under rule of different political parties.

The second line of Paragraph 2 of the Statement of Objects and Reasons of The Limited Liability Partnership Bill, 2008 read as under –

The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements.

This makes the intent of the parliament clear. Readers may please note that the Limited Liability Partnership Bill, 2008 was based on the recommendation of the Parliamentary committee given on the earlier version of the Bill – the Limited Liability Partnership Bill, 2006. The Parliament had the Bill for about two years to deliberate upon inclusion of the manufacturing activities.

Brief History of Definition of Business for LLPs

Naresh Chandra Committee Report

The Naresh Chandra Committee report on the regulation of private companies and partnerships is the original base for the Limited Liability Partnership Act, 2008. It introduces LLPs as the most suitable form of business for lawyers and accountants. It say –

“In other words, an LLP only protects a partner from liability arising from the incorrect decision or misconduct of other partners or any of its employees not under his control.” [Para 3.01]

This is clear in manufacturing activities such protection is not possible. The concept of limited liability of a partner is limited to the liability of or arises out of the vertical it controls not otherwise. In manufacturing, such vertical wise limits may not be possible in single object manufacturing.  Else, partners may control procurement, production, packaging, sales and supplies verticals independently.

The report further noted –

In order to encourage Indian professionals to participate in the international business community without apprehension of being subject to excessive liability, the need for having a legal structure like the LLP is self evident. [Para 3.07]

Paragraph 3.11 clearly suggests that the committee is not in favour of industrial units as LLP but only for professional firms.

Thirdly, there is no special advantage that small private companies or Small Scale Industrial (SSI) Units would derive from being an LLP.

We all know, LLP is preferred generally due to lesser compliance applicable to the companies. However, the committee recommended an experiment of LLP with professional and later with a suitable amendment with small scale manufacturing and/ or trading firms in the future. It recommends –

It was self that extending the LLP structure to professionals, in the first instance, would help evaluate its advantages and risks; and based on such evaluation and experience, the LLP form can be considered for extension to small scale manufacturing and/ or trading firms as well in the future.

Irani Committee report on the Company law

After Naresh Chandra Committee, Irani Committee also deliberated upon objects for an LLP. It may be noted that the Irani Committee report on the Company law noted further on LLP as under –

It would be a suitable vehicle for partnership among professionals who are already regulated such as Company Secretaries, Chartered Accountants, Cost Accountants, Lawyers, Architects, Engineers, and Doctors etc. However, it may also be considered for small enterprises not seeking access to capital markets through listing on the stoke exchange.

However, it does not talk about manufacturing.

Standing Committee on Finance – Indian Parliament

The committee deliberated upon the Limited Liabilities Partnership Bill, 2006. This report was the final basis for the Limited Liabilities Partnership Bill, 2008 which became the LLP Act, 2018. While deliberating upon the definition of business, it reports –

11. Clause 2(d) defines the term ‘business’ as follows:

2(d) ‘business’ includes every trade, profession and occupation;

12. Emphasizing on defining the term ‘business’ in clear and unambiguous terms, the Institute of Company Secretaries of India (ICSI), made the following suggestion before the Committee:

“To make the definition clear, inclusive and unambiguous, it is suggested to include the term ‘service’ within the definition of `business’. Accordingly, Clause 2(d) may be re-drafted as follows:

‘Business’ includes every trade, profession, service and occupation.”

Later in the report, it is mentioned –

22. In order to ensure unambiguous interpretation of terms, the Committee suggests that, as agreed to by the Ministry of Corporate Affairs, the following refinements be made in the ‘definitions’ in clause 2 of the Bill:

— Clause 2 (d): ‘business’

The Definition of the term ‘business’ be expanded to cover a wide range of activities such as services, as may be specified, so as to make it more inclusive.

The committee did not suggest the inclusion of the word ‘manufacturing’ deliberately. Wide range of business activities stops to provide services. It seems in its the wisdom, the committee expended the scope of business from professions and occupations to all kind of services. The definition is not inclusive enough to include production and manufacturing activities.

Conclusion

The parliament in its wisdom included trading as a permitted business for LLPs but not Manufacturing under Section 2(e). According to the recommendation, the Parliament may bring an amendment to include manufacturing as a permitted business for LLP.

I am open to correct myself for having personally a view that, LLP law as of now require urgent amendment. All LLPs having manufacturing should convert to private companies until such an amendment.

Any OM or withdrawal of such OM may not give LLPs permission to do the business of manufacturing without an amendment to the Act.

Post Scripts

Most of the professionals cried foul on said ‘now withdrawn’ office memorandum but unfortunately all these professionals mostly fail to achieve a stated major object of the LLP law – their own multidisciplinary professional firms –

  • of CA, CS, CMA, Lawyers and IPs at one hand and
  • all health professionals at another.

 

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