[Opinion] Whether Consolidation of Limited Liability Partnership [‘LLP’] is Necessary?

CS Rutuja Umadikar – [2024] 166 taxmann.com 152 (Article)

1. Introduction

The very concept of Limited Liability Partnership (LLP) originated from the thought that, advantages of companies and partnership firms should be combined in one entity and drawbacks thereof should be eliminated. That is the reason, an LLP has multiple features which resembles that of company. Especially after Ministry of Corporate Affairs (‘MCA’) has made certain sections of Companies Act 2013 [‘the Act’] applicable to LLPs, the difference between the two has reduced further.

Since requirement of preparation of financial statements are present in both laws, we shall try to deliberate through this article, whether a LLP can become as an ‘associate’ of a company for the purpose of consolidation.

2. ‘Associate’ under Companies Act 2013

The term ‘associate company’ is defined in section 2 sub-section (6) of the Act1. But this clause defines an ‘associate company’ and not an ‘associate.’ That means, as per the Act, only a company can become an associate of other company. The term ‘Company’ is defined under section 2(20) of the Act. As per this definition only that entity which is registered under the Act can be termed as a Company. Since LLP is not registered under Companies Act, it cannot be called as a ‘company’ and hence cannot be termed as ‘associate.’ Therefore, an LLP cannot be considered as ‘associate’ from the point of view of provisions of companies Act. Associate under INDAS 28.

Other than Companies Act, there is one more place where we can check whether a LLP can become associate of a company or not and that is, INDAS-28? Talking about investments in associates, this INDAS-28 defines associate as an entity over which the investor has a significant influence. That means; to find out any entity is an associate as per INDAS-28 or not, existence of significant influence has to be determined.

The term ‘significant influence’ is defined under, both INDAS-28, and Companies Act. INDAS-28 defines significant influence as, power to participate in financial and policy decisions of the investee entity. Whereas, as per section 2(6) of the Companies Act, significant influence refers to control over 20% voting rights of the investee entity or control or participation in business decisions. Now there arises a question that which of the two definitions to apply?

The answer to this question can be found in Para 5 of INDAS-28. This Para of INDAS-28 in a way aligns both these definitions. It says that if an investor holds 20% or more voting power in an investee, then the investor is presumed to have significant influence over the investee and if he holds less than 20% voting rights, then he is presumed not to have significant influence over the investee. The Para further states that, if the investor holds less than 20% voting rights but still has significant influence or holds more than 20% voting rights but still does not have significant influence, then that fact must be proved with the help of parameters provided in Para 6.

Therefore, conjoint reading of definitions of ‘associate’ and ‘significant influence’ under INDAS-28 and Para 5 thereof along with definition of ‘significant influence’ under Companies Act, we can say that, if a company holds 20% or more voting rights in an LLP, then unless proved otherwise, that LLP is an associate of that company from the point of view of accounting standards.

Click Here To Read The Full Article