In a sweeping circular by MCA, LLPs have been defined as Body Corporate for the limited purpose of clause (a) of sub- section 3) of section 226 of the Companies Act, 1956.
Section 226 of the Companies specifies Qualifications and disqualifications of auditors. As per Sec 226, a person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (48 of 1949). Provided that a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm.
Sub section (3) (a) of Section 226 provides that a body corporate shall not be qualified for appointment as auditor of a company.
By virtue of the MCA circular, LLP firms of Chartered Accountants will not be able to be appointed as Statutory Auditors. The rationale of this move seems to be that statutory auditors need to assume professional liabilities for misrepresentation or negligence in certifying the financial statements and in case of LLP’s, it might be difficult to book the errant CAs as the liability of the partners is limited.
Intelligent move by MCA, but will hamper the growth of LLPs in India which has anyways failed to take off.
Read the Circular by following the link below:
CLR Note: Please note that post publishing of the above article and upon being notified by ICAI of the grevious implications, MCA has corrected the situation by issuing General Circular No.30/2011 GOI MCA Dated: 26:05:2011 clarifying that LLP will not be considered as Body Corporate for the limited purpose of Section 226(3)(a), meaning thereby that LLP firms can now be statutory auditors.