Amendment in Incorporation Rules – conversion of unlimited company

Ministry of Corporate Affairs came out with 3^rd amendment of the year to the Companies (Incorporation) Rules, 2013. The Companies (Incorporation) 3^rd Amendment Rules, 2016 published in Official Gazette on 27^th July 2016 and came into force from that date, is available online now. In this third blog post of 3 post series, we will discuss newly inserted rules 37 inserted by these amendment rules.

Conversion of unlimited liability company into a limited liability company by shares or guarantee

Newly inserted rule 37 paves way for conversion of unlimited liability company into a limited liability company. We know a company may be limited by shares or limited by guarantee. A company so converted under these rules may by its choice be a company limited by shares or limited by guarantee.

Special Resolution for Conversion

According to sub – rule (1) of rule 37, an unlimited liability company shall pass a special resolution in a general meeting for its conversion. After passing special resolution in general meeting an application shall be filled in Form INC – 27. Sub – rule (1) read as under –

“Without prejudice to any other provision in the Companies Act, for effecting the conversion of an unlimited liability company with or without share capital into limited liability company by shares or guarantee, such a company shall pass a special resolution in a general meeting and thereafter, an application shall be filed in Form No. INC-27 in the manner provided in sub-rules (2) and (3).”

Notice in newspapers etc –

According to sub – rule (2), –

“the Company shall within seven days from the date of passing of the special resolution in a general meeting, publish a notice, in Form No. INC-27A of such proposed conversion in two newspapers (one in English and one in vernacular language) in the district in which the registered office of the company is situate and shall also place the same on the website of the Company, if any, indicating clearly the proposal of conversion of the company into a company limited by shares or guarantee, and seeking objections if any, from the persons interested in its affairs to such conversion and cause a copy of such notice to be dispatched to its creditors and debentures holders made as on the date of notice of the general meeting by registered post or by speed post or through courier with proof of dispatch. The notice shall also state that the objections, if any, may be intimated to the Registrar and to the company within twenty-one days of the date of publication of the notice, duly indicating nature of interest and grounds of opposition.”

The company within seven days of passing special resolution shall publish a notice in Form INC – 27A –

• In one English newspaper in the district in which registered office of company situated
• In one vernacular newspaper in the district in which registered office of company situated
• On website of company

Indicating –

• Proposal of conversion
• Seeking objections from the persons interested in the affairs to such conversion

The company shall also send a copy of this notice to its creditors and debenture – holders through registered post or speed post or courier. The list of creditors and debenture holders shall be prepared as on date of general meeting.

The notice shall also state that the objections, if any, may be intimated –

• to the Registrar, and
• to the company

within twenty-one days of the date of publication of the notice, duly indicating nature of interest and grounds of opposition.

Documents to be filed with INC – 27

According to sub – rules (3) of rule 37, the company shall file within forty five days of passing of special resolution form INC – 27 with documents –

• notice of the general meeting along with explanatory statement;
• copy of the resolution passed in the general meeting;
• copy of the newspaper publication;
• a certified copy of altered Memorandum of Association as well as Articles of Association
• declaration that such conversion shall not affect any debts, liabilities, obligations or contracts incurred or entered into by or on behalf of the Company before conversion
• a complete list of creditors and debenture holders, to whom individual notices have been sent under sub – rule (2) setting forth the following details, namely:-
  • the names and address of every creditor and debenture holder of the Company;
  • the nature and respective amounts due to them in respect of debts, claims or liabilities:
  • declaration by a Director of the Company that notice has been dispatched to all the creditors and debenture holders with proof of dispatch.
• a declaration signed to the effect that they have made a full enquiry into the affairs of the Company and, having done so, have formed an opinion that the list of creditors is correct, and that the estimated value as given in the list of the debts or claims payable on a contingency are proper estimates of the values of such debts and claims and that there are no other debts or claims against the company to their knowledge.
• a declaration of solvency signed by at least two Directors of the Company, one of whom shall be the Managing Director,
• a certificate from the Auditors that the company is solvent and that it is a going concern
• No Objection Certificate from sectoral regulator, if applicable.
• No Objection Certificate from all secured creditors, if any.

 Declaration of no complaint etc

According to sub – rule (4) of rule 37, Declaration signed by not less than two Directors including Managing Director, where there is one, that no complaints are pending against the company from the members or investors and no inquiry, inspection or investigation is pending against the company or its Directors or officers.

In my view this may not a separate sub – rule but clause of sub – rule (3). this document may be required to be filed with form INC – 27.

Approval of conversion

According to sub – rule (5) of rule 37,  the Registrar shall, after considering the application and objections if any, received by the Registrar and after ensuring that the company has satisfactorily addressed the objections received by the company, suitably decide whether the approval for conversion should or should not be granted.

Fresh Certificate of Incorporation

According to sub – rule (6) of rule 37, the certificate of incorporation consequent to conversion of unlimited liability company to into a company limited by shares or guarantee be in Form INC-11A issued to the company upon grant of approval for conversion.

Condition subsequent

According to sub – rule (7) of rule 37, Conditions to be complied with, subsequent to conversion –

(1) Company shall not change its name for a period of one year from the date of such conversion.

(2) The company shall not declare or distribute any dividend without satisfying past debts, liabilities, obligations or contracts incurred or entered into before conversion.

According to explanation to clause (ii) of sub – rule (7) past debts, liabilities, obligations or contracts does not include secured debts due to banks and financial institutions.

Company not eligible for conversion

According to sub – rule (8) of rule 37, an Unlimited Liability Company shall not be eligible for conversion into a company limited by shares or guarantee in case-

(a) its networth is negative, or

(b) an application is pending under the provisions of the Companies Act 1956 or the Companies Act, 2013 for striking off its name, or

(c) the company is in default of any of its Annual Returns or financial statements under the provisions of the Companies Act, 1956 or the Companies Act, 2013, or

(d) a petition for winding up is pending against the company, or

(e) the company has not received amount due on calls in arrears, from its directors, for a period of not less than six months from the due date; or

(f) an inquiry, inspection or investigation is pending against the company.

Decision on application

According to sub – rule (9) of rule 37, the Registrar of Companies shall take a decision on the application filed under these rules within thirty days from the date of receipt of application complete in all respects.

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.