The much-awaited guidelines for the conversion of existing chartered accountancy (CA) firms to LLPs have now been released by the ICAI. These guidelines were eagerly awaited by practising chartered accountants and CA firms, particularly large firms, since April 2009, when the LLP Act, 2008 was notified in the official gazette.
LIABILITY AND FLEXIBILITY
LLP is an alternative business vehicle that combines the limited liability of a company and the flexibility of a partnership. Partners' liability in an LLP will be limited to their contribution and no partner is liable on account of the independent or unwarranted acts of the other partners.
However, in the event of an act carried out by an LLP, or any of its partners, with intent to defraud creditors of the LLP or any other person, or for any fraudulent purpose, the liability of the limited partnership and partners who acted with intent to defraud creditors or for any for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the limited liability partnership.
As the partnership has a separate legal identity, distinct from its partners, it is primarily useful for small scale industries and service sector enterprises, such as law firms , CA firms , etc, which at present, are mainly constituted as partnership firms. This is because the liability of the partners in a CA firm is unlimited, which makes them jointly and separately liable for the firm's debt.
Owing to its potential of shielding the various partners who do not wish to be personally liable for the conduct of another partner, and ability to combine the benefits of limited liability while retaining the tax benefits of a traditional partnership, this flexible business structure has gained immense popularity in several countries, such as the UK, the US, Gulf countries, Australia and Singapore, as well as in myriad sectors.
To provide an opportunity to Indian companies to form LLP entities and capitalise on the advantages of LLPs, the LLP Act, 2008 was brought into effect by way of notification dated March 31, 2009.
This Act, which is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005, permits the association of any two or more persons for carrying on a lawful business with a view to generate profit by setting up an LLP.
NEW REGULATIONS
The new set of formulated rules for the conversion of CA firms to LLPs will set a trend for consolidation in the space dotted with several small entities, thereby enabling CA firms to grow bigger and increase their capacity. As a first step, for LLP to be considered as partnership under Chartered Accountants Act, 1949, the Cost and Works Accountants Act, 1959 and the Company Secretaries Act, 1980, it was clarified by Ministry of Company Affairs (MCA) in April 2011 that the words “partnership” wherever occurring in the Chartered Accountants Act, 1949, the Cost and Works Accountants Act, 1959 and the Company Secretaries Act, 1980 shall mutatis mutandis be construed as including those Limited Liability Partnerships where all the other partners are natural persons (individuals).
The guidelines state that in order to convert themselves into LLPs, all existing CA firms need to adhere to the provisions of Chapter-X and the Second Schedule of the LLP Act, 2008, along with the provisions of LLP Rules, 2009. An important clause of the guidelines states that for the purpose of registration of the LLP and conversion of existing Firm into LLP, the partners of the firm shall apply to ICAI in Form No. ‘117' and the Form No. ‘18'.
These forms, containing the details of the officers and other particulars, including the signatures of all partners or authorised partner of the proposed LLP, need to be submitted with the concerned Regional office of the ICAI. The guidelines also provide clarity in case of a situation when the proposed name of LLP of CA firm resembles any other non-CA entity according to the naming Guidelines under LLP Act, 2008 and its rules.
THE WAY FORWARD
Although the Guidelines provide ample clarity on all the major requisites for the conversion of CA firms into LLPs and constitution of separate LLPs by the practising CAs, which are applicable for conversion of CA firms into LLPs or formation of new LLPs by the members in practice of ICAI, subject to the provisions of the LLP Act, 2008, a host of issues still wait to be addressed.
The major ones are the existing regulations of ICAI regarding the minimum number of audits which can be done by practicing CAs and CA firms, eligibility to register Articles and other similar regulations that prescribe rules based on number of partners in the firm, etc. In addition to these, clarity on the limit to the maximum number of partners under LLP Act from regulators is another major issue that needs to be dealt with.
With conversion of CA Firms into LLPs, the size of firms will increase drastically and to maintain the credibility, firms will be required to put in place more robust quality control measures to cope up with the increased size.
The regulator's monitoring regarding enforcement of its regulations will also be a challenge at the other end.
It is expected that ICAI will come up with more clarity on these matters soon, thereby making the entire process of conversion of a CA firm into an LLP relatively straightforward.
The guidelines were set to come into force with effect from November 4, 2011.Have these guidelines come into force?
(The author is Associate Director, Walker Chandiok & Co.)