Introduction

The insolvency resolution process is a legal mechanism designed to help financially distressed business entities restructure or wind up their affairs in an orderly manner. For Limited Liability Partnerships (LLPs) in India, this process is governed by the Insolvency and Bankruptcy Code (IBC), 2016, which was extended to cover LLPs through a notification by the Ministry of Corporate Affairs in 2019. The code provides a structured framework for resolving insolvency either by reviving the LLP or liquidating it. This article defines the insolvency resolution process applicable to LLPs and explains the key steps involved.

Applicability of IBC to LLPs

The IBC applies to LLPs when they default in payment of debt exceeding ₹1 crore. This includes operational debts (to vendors or service providers) or financial debts (to banks or financial institutions). The objective is to resolve the insolvency in a time-bound manner—either through a Corporate Insolvency Resolution Process (CIRP) or, if revival is not viable, through liquidation.

Initiation of Insolvency Proceedings

The insolvency process can be initiated by:

• Financial creditors (e.g., banks, NBFCs)
  
• Operational creditors (e.g., suppliers, service providers)
  
• The LLP itself (voluntary resolution due to financial distress)
  

The initiating party files an application before the National Company Law Tribunal (NCLT) under Section 7, 9, or 10 of the IBC, depending on the type of creditor or applicant.

Admission by NCLT and Moratorium

Once the application is admitted, the NCLT declares a moratorium on all legal proceedings and debt recovery actions against the LLP. This allows the LLP a breathing space to explore revival without external pressure. The NCLT also appoints an Interim Resolution Professional (IRP) to take control of the LLP’s management and assets.

Formation of Committee of Creditors (CoC)

The IRP constitutes a Committee of Creditors (CoC) comprising all financial creditors. This committee holds decision-making power on the future of the LLP. All major decisions, including approval of resolution plans or liquidation, are made by the CoC with at least 66% majority voting.

Preparation and Submission of Resolution Plan

During the CIRP, the IRP (or Resolution Professional, RP) invites resolution plans from potential investors, existing management, or third-party bidders. These plans propose methods for repayment, restructuring, or revival of the LLP. The CoC evaluates and approves the most suitable plan.

Approval by NCLT

Once the CoC approves a resolution plan, it is submitted to the NCLT for final approval. Upon approval, the plan becomes binding on all stakeholders, including the LLP, creditors, partners, and employees. If no resolution plan is approved within 180 to 330 days, the LLP proceeds to liquidation.

Liquidation of LLP

If revival is not possible, the LLP enters the liquidation phase. A liquidator is appointed to:

• Sell off assets
  
• Settle liabilities
  
• Distribute proceeds as per the priority under IBC
  Secured creditors, unpaid workmen, government dues, and other creditors are paid in a waterfall arrangement. The LLP is then struck off from the records.
  

Protection of Limited Liability

Throughout the process, the limited liability status of partners is protected, unless fraud or misrepresentation is proven. The personal assets of partners are not attached for the LLP’s debts, maintaining one of the core benefits of the LLP structure.

Conclusion

The insolvency resolution process under IBC provides LLPs with a structured opportunity to either resolve financial distress or undergo liquidation in a time-bound and transparent manner. It ensures fair treatment of creditors, maintains business discipline, and promotes confidence in the LLP model. By following the legal framework, LLPs can manage insolvency without disrupting the broader economic ecosystem or unfairly burdening stakeholders.

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