Compromise, arrangement or reconstruction provisions relating to Limited Liability Partnership (LLP)

[2021] 133 taxmann.com 47 (Article)

1. Meaning of compromise, arrangement and reconstruction

Before going through the provisions and procedure on the compromise, arrangement and reconstruction, let us understand the meaning of the same. The corporate have been undergoing many reconstructions by way of merger, amalgamations takeovers etc. However, in the Limited Liability Partnership Act 2008, the term compromise / arrangement has not been defined. The sub-section (2) of section 2 provides that “words and expressions used and not defined in the Limited Liability Partnership Act 2009, but defined in the Companies Act, 2013 shall have the meanings respectively assigned to them in the Companies Act. Hence we may have to refer the Companies Act in order get the meaning of these words.

1.1. Compromise

We look into the meaning for these words as provided in the Companies Act. The Companies Act also does not define either the term “compromise” or the term “reconstruction”. However, the word “Compromise” has been judicially construed in consonance with its popular import as postulating a dispute relating to rights and as a scheme which seeks to be in the nature of a settlement of those disputes between the parties. Compromise can said to be an amicable agreement between the parties in which they make mutual concessions in order to solve the differences between them.

1.2. Re-construction

Similarly the term “re-construction” also not defined in the Companies Act. By going through the judicially construed judgments, one can come to an conclusion that the word re-construction would mean as “being applicable to a scheme under which a company transfers its assets to a new company, in consideration of the assignment of the new company’s shares to the first company’s members, and if the first company’s debentures are not paid off, in further consideration of the new company issuing debentures to the first company’s debenture holders.” Reorganization is the process by which a company restructures itself, in order to adapt to the new environment of business.

1.3. Arrangements

It may also be noted that any scheme which does not fall in the category of compromise or reconstruction and which in some way affects the rights of the creditors and the members of the company or any section of them, would fall within the third term used in the chapter heading, “arrangements”. By going through the section 230 of the Companies Act 2013, one can notice that the term “arrangement” is defined as including a reorganization of share capital. We could conclude in saying that an arrangement is the process by which the share capital of the company is reorganized either by consolidation or division of the shares, or doing both.

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