Procedural Differences in LLP Insolvency Under the IBC

Vikrant D. Shetty

Oct 18

12 min read

Updated: Oct 21

Procedural Differences in LLP Insolvency Under the IBC

The insolvency of a Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 proceeds under Part II of the Insolvency and Bankruptcy Code, 2016 much as it does for a company, since Section 3(7) of the Code defines a corporate debtor to include an LLP as a corporate person. The principal procedural differences concern who exercises management control once a resolution professional is appointed, since an LLP has designated partners rather than a board, and how a resolution plan can restructure partner interests instead of shareholding. A partner's own insolvency remains separate, governed by Part III of the Code.

LLPs as Corporate Debtors: The Statutory Basis

Section 3(7) of the Insolvency and Bankruptcy Code, 2016 defines a corporate debtor as a corporate person who owes a debt. Section 3(7) in turn references the definition of corporate person in Section 3(8), which includes a company incorporated under the Companies Act, 2013, a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008, and any other person incorporated under any other law for the time being in force. LLPs are therefore squarely within the jurisdiction of the Code and subject to the Corporate Insolvency Resolution Process under Part II of the Code.

The insolvency of an LLP's partners is governed separately under Part III of the Code, which deals with insolvency resolution and bankruptcy for individuals and partnership firms. The distinction between LLP insolvency under Part II and partner insolvency under Part III is important. A CIRP initiated against an LLP does not automatically bring its designated partners within Part III proceedings, and vice versa. However, where a partner has given a personal guarantee for the LLP's debts, that guarantee may be invoked separately in personal insolvency proceedings.

Key Procedural Differences From a Company CIRP

Applicant and Filing Requirements

The threshold and eligibility conditions for filing a CIRP application against an LLP are the same as those applicable to companies. A financial creditor may file under Section 7 upon a default of at least rupees one crore. An operational creditor may file under Section 9 after following the demand notice procedure under Section 8 of the Code, again upon a default of at least rupees one crore. The LLP itself may file under Section 10, with the application authorised by the designated partners or, in the case of a dispute among them, as permitted by the LLP Agreement.

Who Exercises Management Control of an LLP During CIRP?

On admission of a CIRP application, the resolution professional takes over the management of the corporate debtor. In a company, this means the powers of the board of directors vest in the resolution professional under Section 17 of the Code. In an LLP, there is no board of directors. The resolution professional effectively takes over the functions that would otherwise be exercised by the designated partners in managing the day-to-day affairs of the LLP. The designated partners are obligated to extend full assistance and cooperation to the resolution professional under Section 19 of the Code. Failure to do so exposes them to consequences under the Code.

How Is the Committee of Creditors Constituted for an LLP?

The CoC in an LLP CIRP is constituted in the same manner as in a company CIRP, comprising the financial creditors of the LLP. Operational creditors are not CoC members but receive information about and the opportunity to comment on resolution plans. Where an LLP has no financial creditors, the Code provides that the CoC shall comprise eighteen creditors who are members of the class in the prescribed manner. In practice, many LLPs are financed primarily through partner capital contributions and operational borrowings rather than institutional debt, which can make the CoC constitution more complex in an LLP CIRP.

How Do Creditors File Claims Against an LLP in CIRP?

Creditors file their claims with the resolution professional in the same manner as in a company CIRP. The resolution professional verifies claims in accordance with the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. There is no separate claim verification framework for LLPs; the same Regulations apply. The information memorandum prepared by the resolution professional must include the same categories of information as in a company CIRP, including the financial position of the LLP, its assets and liabilities, and details of pending legal proceedings.

Resolution Plan Requirements for LLPs

A resolution plan for an LLP must comply with the same requirements under Section 30(2) of the Code as a resolution plan for a company. It must provide for payment of insolvency resolution process costs, dues to operational creditors at the prescribed minimum, and dues to financial creditors in accordance with the Section 53 waterfall. The plan must also address the future governance of the LLP. Unlike a company, where shares can be issued or transferred to a resolution applicant, an LLP has partners' capital accounts and profit-sharing rights. A resolution plan for an LLP may involve substitution of partners, acquisition of the LLP business as a going concern, or conversion of the LLP into another form of entity.

Partner Substitution in Resolution Plans

The LLP Act, 2008 provides that a person may become a partner in an LLP in the manner specified in the LLP Agreement. A resolution plan can provide for existing partners to exit and new partners to be introduced, effectively changing the ownership of the LLP. This mechanism is the closest equivalent to the share acquisition mechanism used in company resolution plans. The plan must address the regulatory requirements of the LLP Act, including filing of prescribed forms with the Registrar of Companies following any change in partners or designated partners.

Conversion and Winding Up

A resolution plan for an LLP may also provide for its conversion into a private limited company under the applicable provisions of the Companies Act, 2013 and the LLP Act, 2008, if that is commercially preferable for the resolution applicant. Alternatively, if no viable resolution plan is submitted or approved, the NCLT will order the winding up of the LLP under the Code, which proceeds similarly to liquidation of a company.

Limitations and Practical Constraints

An LLP that files for CIRP or faces a CIRP application by a creditor is subject to the automatic moratorium under Section 14 of the Code from the date of admission of the application. The moratorium bars institution or continuation of suits, execution of judgments, transfers of assets, and enforcement of security interests against the LLP. The moratorium does not protect the designated partners personally from proceedings against them in their individual capacity.

Practitioners advising creditors in LLP CIRPs must also be alert to the LLP Agreement, which governs the internal arrangements among partners. An LLP Agreement may contain provisions that are inconsistent with the resolution plan or that purport to restrict transfers of partner interests. Once a resolution plan is approved by the NCLT under Section 31 of the Code, such provisions in the LLP Agreement are superseded to the extent of any inconsistency with the plan.

LLPs as Corporate Persons Under the Code

The application of the insolvency framework to limited liability partnerships flows from the structure of the Code itself, which the Supreme Court comprehensively upheld in Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17]. The Court explained that the object of the Code is the revival of the corporate debtor and the maximisation of value for all stakeholders, with liquidation as a last resort, and that this regime applies to corporate persons as defined by the Code. A limited liability partnership falls within the definition of a corporate person, so the objects and machinery the Court described extend to LLPs, subject to the procedural adaptations the framework provides for that form of entity.

How LLP Insolvency Differs Procedurally

Although the core process mirrors that for companies, LLP insolvency carries procedural differences that reflect the distinct governance of a limited liability partnership. Management vests in designated partners rather than a board of directors, the constitutional document is the LLP agreement rather than a memorandum and articles, and the contributions and rights of partners are governed by that agreement. When an LLP enters insolvency, the resolution professional steps into the management, and the identification of financial and operational creditors, the constitution of the committee of creditors, and the treatment of partner contributions all have to be worked out against the LLP's own governance structure. These differences are matters of adaptation rather than of principle, but they must be handled correctly for the process to run smoothly.

The Framework and Practical Points

The provisions applying the Code to LLPs have been brought into force so that an LLP can be taken through insolvency in substantially the same way as a company, with the same emphasis on time-bound resolution and value maximisation. For creditors, the practical points are to confirm the entity's status as an LLP, to identify the designated partners and the terms of the LLP agreement, and to establish the nature of their claim as financial or operational just as they would for a company. For designated partners, the onset of insolvency brings the same displacement of management and the same duties of cooperation with the resolution professional. Approaching an LLP insolvency with these adaptations in mind avoids the missteps that come from treating it as identical to a company insolvency.

Frequently Asked Questions

Can a financial creditor initiate a CIRP against an LLP in the same way as against a company?

Yes. A financial creditor may file an application under Section 7 of the IBC against an LLP upon a default of at least rupees one crore. The filing procedure, threshold, and admission process are identical to those applicable to a company. The application is filed before the NCLT bench having jurisdiction over the registered office of the LLP.

Are the designated partners of an LLP personally liable in a CIRP?

The LLP structure limits the personal liability of partners for the LLP's debts. However, if a designated partner has given a personal guarantee for the LLP's debts, the creditor may invoke that guarantee separately in personal insolvency proceedings under Part III of the IBC. A CIRP against the LLP does not extinguish the rights of creditors against guarantors.

What happens to the LLP Agreement during a CIRP?

The LLP Agreement continues to govern the internal affairs of the LLP during the CIRP. However, the powers of the designated partners to manage the LLP are suspended and vest in the resolution professional from the date of admission. Following approval of a resolution plan under Section 31 of the IBC, any provisions of the LLP Agreement that are inconsistent with the plan are overridden by the plan.

Can a resolution plan convert an LLP into a company?

A resolution plan can provide for conversion of the LLP into a private limited company or other form of entity if that is the preferred route for the resolution applicant. The plan must address the procedural requirements of the Companies Act, 2013 and the LLP Act, 2008 for such conversion, and the NCLT's approval order can facilitate the process with the Registrar of Companies.

What is the minimum default threshold for an LLP CIRP application?

The minimum default threshold is rupees one crore for both financial creditors filing under Section 7 and operational creditors filing under Section 9. This threshold applies equally to companies and LLPs and was enhanced from rupees one lakh to rupees one crore by a government notification in March 2020 during the COVID-19 pandemic, and has remained at that level.

Can an operational creditor initiate a CIRP against an LLP, and what is the threshold?

Yes. An operational creditor can file an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 against an LLP on the same terms as against a company, once the LLP has failed to pay an undisputed operational debt of at least one crore rupees, the current minimum default threshold under Section 4 of the Code, within ten days of a demand notice issued under Section 8. The application is filed before the National Company Law Tribunal bench having jurisdiction over the LLP's registered office, following the same procedural sequence of demand notice, reply or payment window, and application that applies to a corporate debtor.

Who is responsible for the LLP's statutory filings, such as annual returns, once an RP is appointed?

Once a resolution professional takes over management under Section 17 of the Insolvency and Bankruptcy Code, 2016, the powers that would otherwise rest with the designated partners vest in the RP, including responsibility for the LLP's ongoing statutory compliance under the Limited Liability Partnership Act, 2008 to the extent it concerns the LLP's operations during CIRP. Designated partners retain their formal status under the LLP Act, but their power to act for the LLP without RP approval is suspended for the duration of the process, so compliance obligations are discharged by or through the RP rather than by the partners independently.

Can an LLP itself apply for voluntary insolvency resolution under Section 10?

Yes. An LLP, acting through its designated partners in accordance with the LLP Agreement, can file a voluntary application under Section 10 of the Insolvency and Bankruptcy Code, 2016 on the same basis as a company, provided the LLP has committed a default meeting the prescribed threshold and the application is accompanied by the information the section requires, including the LLP's books of account and a special resolution or the consent of the requisite proportion of partners as the LLP Agreement specifies for such a decision. The Adjudicating Authority applies the same admission standard used for company applications under Section 10.

What happens to a partner's capital contribution or current account during the LLP's CIRP?

A partner's capital contribution and current account balance with the LLP are internal partner-level entitlements governed by the LLP Agreement, and they rank behind the claims of the LLP's external creditors, consistent with the general principle that partners' interests are subordinate to creditor claims in insolvency. During CIRP, the resolution professional does not settle partner capital accounts, since the process is directed at resolving the LLP's debts to its creditors, and partner-level adjustments, including any partner exit or introduction, are addressed only through the resolution plan itself once creditor claims have been dealt with.

Is an LLP eligible for the pre-packaged insolvency resolution process?

Yes, subject to conditions. An LLP classified as a micro, small or medium enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 is eligible for the pre-packaged insolvency resolution process under Section 54A of the Insolvency and Bankruptcy Code, 2016, provided it has committed a default of at least ten lakh rupees but not more than one crore rupees, has not undergone CIRP or PPIRP in the preceding three years, is not already under CIRP or liquidation, and secures the approval of its partners together with unrelated financial creditors holding at least sixty-six per cent of the financial debt.

Can a partner of the LLP be appointed as its resolution professional?

No. The resolution professional must be an independent insolvency professional registered with the Insolvency and Bankruptcy Board of India and free of the disqualifications the IBBI Regulations attach to independence, which exclude a person who is or has been a partner, employee, or otherwise connected to the corporate debtor from acting as its RP. A partner of the LLP under CIRP therefore cannot also serve as the RP administering that same process, since the role requires independence from the very entity and stakeholders whose competing interests the RP is meant to balance impartially.

What happens if an LLP has no assets to meet the costs of its own CIRP?

Where an LLP's realisable assets cannot cover the insolvency resolution process costs, including the resolution professional's fee and the expense of running the process, the CIRP faces early difficulty, since these costs are meant to be paid in full ahead of other claims under Section 30(2)(a) of the Insolvency and Bankruptcy Code, 2016. In practice, a financial creditor pursuing the application may need to fund the process costs to keep it moving, and if no funding is forthcoming and the process cannot proceed, the Adjudicating Authority can order the LLP's liquidation for want of a viable resolution path.

How does liquidation of an LLP differ procedurally from liquidation of a company under the Code?

The liquidation process for an LLP that fails to achieve a resolution plan follows the same framework set out in Chapter III of Part II of the Insolvency and Bankruptcy Code, 2016 that applies to a company, including appointment of a liquidator, formation of the liquidation estate, and distribution under the Section 53 waterfall. The practical difference lies in the LLP's constitutional documents: the liquidator deals with designated partners rather than a board, and the LLP's dissolution on completion of liquidation is recorded against its registration under the Limited Liability Partnership Act, 2008 rather than under the Companies Act, 2013.

Can a secured creditor of an LLP enforce its security interest during the CIRP moratorium?

No, not while the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 is in force. The moratorium bars the enforcement of any security interest created by the LLP over its property, including action a secured creditor might otherwise take under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, for the duration of the CIRP, on the same terms as it applies to a company. The secured creditor's claim is instead addressed through the CIRP process itself, whether by participation in the Committee of Creditors or through the resolution plan or eventual liquidation waterfall.