LLP
Topic 44 Decriminalisation 2021 Amendment
THE LEGAL BRIDGE
Judiciary Examination Study Material
Topic 44
Decriminalisation of Defaults
LLP Amendment Act, 2021 — From Criminal Offences to Civil Penalties
Pillar 5 — Accounts, Audit & Annual Compliance (Sections 34–36)
Module Overview The LLP (Amendment) Act, 2021 undertook the most significant restructuring of the LLP compliance regime since the Act's enactment — converting numerous criminal offences to civil penalties. This topic examines the policy rationale for decriminalisation, which defaults were decriminalised, which remain criminal, the compoundable vs non-compoundable distinction, and the broader impact on the LLP's attractiveness as a business vehicle. |
44.1 The Policy Rationale — Why Decriminalise?
The decision to decriminalise routine compliance defaults under the LLP Act was driven by the same policy impetus as the Companies (Amendment) Act, 2020, which similarly decriminalised routine company law defaults. The key arguments were:
- Disproportionality: Using criminal courts for minor administrative defaults (e.g., delayed annual return filing) was grossly disproportionate — the same courts handle murders and dacoities.
- Ease of Doing Business: India's poor Doing Business ranking (particularly on "Starting a Business" and "Protecting Minority Investors" metrics) was partly attributable to the criminalisation of routine compliance failures.
- Deterrence: Professionals (CAs, advocates, architects) were reluctant to form LLPs because designated partner criminal liability for filing defaults was seen as disproportionate and career-threatening.
- Judicial efficiency: Criminal courts were clogged with trivial corporate compliance cases — decriminalisation frees judicial capacity for genuine criminal matters.
44.2 Defaults Decriminalised — Converted from Criminal to Civil Penalty
Default | Section | Pre-2021 (Criminal) | Post-2021 (Civil Penalty) |
Non-filing of Form 8 (SoAS) | Section 34(5) | Prosecution in criminal court | Rs. 100/day; max Rs. 1 lakh (LLP) + Rs. 50,000 (each DP) |
Non-filing of Form 11 (Annual Return) | Section 35(2) | Prosecution in criminal court | Rs. 100/day; max Rs. 1 lakh (LLP) + Rs. 50,000 (each DP) |
Non-maintenance of registered office | Section 13 | Criminal prosecution | Civil penalty by Registrar |
Failure to state LLP name in correspondence | Section 21 | Criminal prosecution | Civil penalty: Rs. 10,000 |
Non-filing of Form 4 (partner changes) | Rule 22 | Criminal prosecution | Civil penalty: Rs. 100/day; max Rs. 1 lakh (LLP) + Rs. 50,000 (each DP) |
Non-filing of Form 3 (LLP Agreement) | Rule 21 | Criminal prosecution | Civil penalty: Rs. 100/day; max Rs. 1 lakh (LLP) + Rs. 50,000 (each DP) |
44.3 Defaults Remaining Criminal — NOT Decriminalised
Not all defaults were decriminalised. The following remain criminal offences under the post-2021 regime:
Criminal Default | Section | Punishment |
Fraudulent business conduct | Section 30(2) | Imprisonment up to 2 years + fine Rs. 50,000–5 lakhs |
False statement to Registrar | Section 36 | Imprisonment up to 2 years + fine |
Obstruction of inspector | Section 53 | Imprisonment + fine |
Operating as "LLP" without registration | Section 22 | Fine Rs. 50,000–5 lakhs (not imprisonment, but criminal in nature) |
Carrying on restricted business by LLP | Section 55 | Fine |
The Decriminalisation Philosophy — Drawing the Line Decriminalised: Administrative/procedural defaults — late filings, non-disclosure, registration technicalities. These involve no dishonesty or harm to any party. Remains criminal: Conduct involving dishonesty, fraud, obstruction of justice, false statements, or misuse of the LLP registration. The LLP Act's decriminalisation line mirrors that of the Companies Amendment Act, 2020. |
44.4 Compoundable vs Non-Compoundable Offences — Post-2021
The 2021 Amendment introduced the concept of "compoundable offences" under the LLP Act — by analogy with the Companies Act framework. A compoundable offence is one that can be settled (compounded) by paying a sum to the government without going through a full trial:
Category | Description | Examples | Compoundable? |
Civil penalty defaults | Routine filings, registrations, disclosures | Form 8, Form 11, Form 3, Form 4 | Civil process — no compounding; simply pay penalty |
Compoundable criminal offences | Less serious criminal offences where compounding is permitted | Section 36 (false statement) — some procedural offences | Yes — with NCLT/Special Court approval |
Non-compoundable criminal offences | Serious offences where public interest demands trial | Section 30 (fraud), obstruction of inspector | No — must go to trial |
44.5 Impact on LLP Popularity and Ease of Doing Business
The decriminalisation had a measurable positive impact on LLP formation:
- LLP incorporations increased significantly post-2022 — MCA data shows a sharp rise in new LLP registrations in FY 2022–23 and FY 2023–24 compared to pre-amendment years.
- Professional firms (especially smaller CA, legal, and consulting practices) that had been hesitant to form LLPs due to criminal liability concerns began converting from traditional partnerships.
- Reduced compliance anxiety encouraged more NRIs and foreign professionals (as nominated designated partners) given that minor delays would not create criminal records in India.
⚖ Vivek Kumar Jain v. Union of India Delhi HC (2022) Held: An LLP challenged the retrospective application of penalty proceedings under Section 34(5) in the post-2021 amendment regime. The court held that the decriminalisation provisions apply prospectively from April 1, 2022 — defaults occurring before that date are governed by the pre-amendment criminal regime. The civil penalty regime only covers defaults occurring after April 1, 2022. Principle: Decriminalisation under the 2021 Amendment is prospective — defaults before April 1, 2022 remain subject to the pre-amendment criminal regime. |
📌 EXAM TIP: Decriminalisation is tested as: (1) "The 2021 Amendment converted non-filing penalties from ___ to ___." Answer: criminal offences to civil penalties. (2) "Which defaults remain criminal after the 2021 Amendment?" Fraud (Section 30), false statements (Section 36), obstruction of inspectors. (3) "From which date did the 2021 decriminalisation take effect?" April 1, 2022. (4) "Pre-amendment defaults are governed by ___." The pre-2021 criminal regime. |
Quick Revision — Topic 44
Key Point | Core Content |
Policy rationale | Proportionality; Ease of Doing Business; professional deterrence; judicial efficiency |
What was decriminalised | Non-filing of Form 8, Form 11, Form 3, Form 4; non-maintenance of registered office; name disclosure failures |
What remains criminal | Fraud (S.30); false statements (S.36); obstruction of inspectors; operating as LLP without registration |
Effective date | April 1, 2022 (prospective — not retrospective) |
Compoundability | Civil penalty: simple payment; Some criminal offences: compoundable with court approval; Fraud/obstruction: non-compoundable |
Impact | Increased LLP formations post-2022; reduced professional deterrence |