CONVERSION OF PUBLIC COMPANY INTO PRIVATE COMPANY


Law stated in this post is as on 20th December 2018.

With effect from 18th December 2018, conversion of a public company into a private company requires approval from the Central Government. Earlier such conversion requires approval from the National Company Law Tribunal. This change was made by the Company Amendment (Ordinance) 2018 with effect from 2nd November 2018 and the Companies (Incorporation) 4th Amendment Rules, 2018 with effect from 18th December 2018.

Basic of requirement

The conversion requires amendment of the Articles of Associations of the company.

According to the Definition of the Private Company under Section 2(68) –

A “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company.

(Note – this is a relevant part of the definition for reference only)

For conversion of a company from a public company to private company require amendment in the definition of the company in the Articles of Association of the company and place these restrictions therein.

Alteration of Articles

According to Section 14(1)(b) subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of a public company into a private company.

According to Second Proviso to Section 14(1) after the aforesaid amendment, any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government on an application made in such form and manner as may be prescribed.

Application in Form RD – 1

Newly inserted Rule 41 of the Companies (Incorporation) Rule, 2014 prescribed the form and manner for approval of the Central Government.

According to Rule 41(1), an application under the second proviso to sub-section (1) of section 14 for the conversion of a public company into a private company, shall, within sixty days from the date of passing of a special resolution, be filed with Regional Director in e-Form RD – 1.

Documentary Requirement

The application for the conversion of a public company into a private company shall be accompanied by the following documents –

(a) a draft copy of Memorandum of Association and Articles of Association, with proposed alterations including the alterations pursuant to sub-section (68) of section 2;

(b) a copy of the minutes of the general meeting at which the special resolution authorising such alteration was passed together with details of votes cast in favour and or against with names of dissenters;

(c) a copy of Board resolution or Power of Attorney dated not earlier than thirty days, as the case may be, authorising to file an application for such conversion;

(d) declaration by key managerial personnel that pursuant to the provisions of sub-section (68) of section 2, the company limits the number of its members to two hundred and also stating that no deposit has been accepted by the company in violation of the Act and rules made thereunder;

(e) declaration by key managerial personnel that there has been no non-compliance of sections 73 to 76A, 177, 178, 185,186 and 188 of the Act and rules made thereunder; and

(f) declaration by a key managerial personnel that no resolution is pending to be filed in terms of sub-section (3) of section 179 and also stating that the company was never listed in any of the Regional Stock Exchanges and if was so listed, all necessary procedures were complied with in full for complete delisting of the shares in accordance with the applicable rules and regulations laid down by Securities Exchange Board of India.

Key Managerial Personnel

According to the proviso to Rule 41(1), in case of such companies where no key managerial personnel are required to be appointed, the aforesaid declarations shall be filed any of the directors.

This is a very important condition. A company which is required to appoint key managerial personnel should have at least one key managerial person. Otherwise, this condition may not be satisfied.

Required Particulars

According to Rule 41(2), every such application shall set out the following particulars, namely:-

(a) the date of the Board meeting at which the proposal for alteration of Memorandum and Articles was approved;

(b) the date of the general meeting at which the proposed alteration was approved;

(c) reason for conversion into a private company, the effect of such conversion on shareholders, creditors, debenture holders, deposit holders and other related parties;

(d) details of any conversion made within the last five years and the outcome thereof along with a copy of order; and

(e) details as to whether the company is registered under section 8.

Attachments

According to Rule 41(3), there shall be attached to the application, a list of creditors and debenture holders drawn up to the latest practicable date preceding the date of filing of the application by not more than thirty days.

These lists should be set forth the following details, namely:-

(a) the names and address of every creditor and debenture holder of the company;

(b) the nature and respective amounts due to them in respect of debts, claims or liabilities; and

(c) in respect of any contingent or unascertained debt, the value, so far as can be justly estimated of such debt.

Affidavit

According to Proviso to Rule 41(3), the company shall file an affidavit to the effect –

  • that they have made a full enquiry into affairs of the company and, having done so, have formed an opinion that the list of creditors and debenture holders is correct, and
  • that the estimated value as given in the list of the debts or claims payable on contingency or not ascertained are proper estimates of the values of such debts and claims that there are no other debts, or claims against, the company to their knowledge.

The affidavit shall be signed by

  • the Company Secretary of the company, if any, and
  • not less than two directors of the company, one of whom shall be managing director, where there is one.

Inspection of the list of creditors

According to Rule 41(4), a duly authenticated copy of the list of creditors and debenture holders shall be kept at the registered office of the company. Any person desirous of inspecting the same may, at any time during the ordinary hours of business, inspect, and take extracts from the same on payment of ten rupees per page to the company.

Advertisement of Application

The company shall, at least twenty-one days before the date of filing of the application

(a) advertise in the Form INC – 25A, in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper, widely circulated in the State in which the registered office of the company is situated;

  1. b) serve, by registered post with acknowledgement due, individual notice on each debenture holder and creditor of the company; and

(c) serve, by registered post with acknowledgement due, a notice to the Regional Director and Registrar and to the regulatory body, if the company is regulated under any law for the time being in force.

Resubmission of application

According to Rule 41(6)(b),

Where the Regional Director on examining the application finds it necessary to call for further information or finds such application to be defective or incomplete in any respect give intimation of such information called for or defects or incompleteness.

The Regional Director shall give such intimation within thirty days from the date of receipt of the application. The intimation shall be given on the last intimated e-mail address of the person or the company, which has filed such application.

The intimation shall direct the person or the company –

  • to furnish such information;
  • to rectify defects or incompleteness;
  • to re-submit such application within a period of fifteen days in e-Form No. RD-GNL-5.

In any case, a maximum of two re-submissions shall be allowed.

Order without Hearing

According to Rule 41(6)(a), Where no objection has been received from any person in response to the advertisement or notice and the application is complete in all respects, the same may be put up for orders without hearing and the concerned Regional Director shall pass an order approving the application within thirty days from the date of receipt of the application.

General Rejection of Application

According to Rule 41(6)(c), in cases where such further information called for has not been provided or the defects or incompleteness has not been rectified to the satisfaction of the Regional Director within the period allowed under sub-rule (6), the Regional Director shall reject the application with reasons within thirty days from the date of filing application or within thirty days from the date of last re-submission made, as the case may be.

Automatic Approval

Where no order for approval or re-submission or rejection has been explicitly made by the Regional Director within the stipulated period of thirty days, it shall be deemed that the application stands approved and an approval order shall be automatically issued to the applicant.

Hearing by Regional Director

According to Rule 41(9)(i), where an objection has been received or Regional Director on examining the application has specific objection under the provisions of Act, the same shall be recorded in writing and the Regional Director shall hold a hearing or hearings within a period thirty days, as required.

The regional director may try to bring consensus between the company and the person making an objection. {Implied from Rule 41(9)(i)}

In the hearing, Regional Director shall direct the company to file an affidavit to record the consensus reached the hearing.

Upon executing of the affidavit, the Regional Director shall pass an order either approving or rejecting the application along with reasons within thirty days from the date of hearing.

Where Regional Director fails to pass an order, it shall be deemed that application has been approved and approval order shall be automatically issued to the applicant.

Rejection after Hearing

According to rule 41(9)(ii), in a case where no consensus is received for conversion within sixty days of filing the application while hearing or otherwise, the Regional Director shall reject the application within the stipulated period of sixty days.

No conversion pending Inquiry, Inspection or Investigation

According to Proviso to Rule 41(9)(ii), the conversion shall not be allowed if any inquiry, inspection or investigation has been initiated against the company or any prosecution is pending against the company under the Act.

According to Rule 41(10), On completion of such inquiry, inspection or investigation as a consequence of which no prosecution is envisaged or no prosecution is pending, conversion shall be allowed.

Filing of Order

According to Section 14(2) Every alteration of the articles under this section and a copy of the order of the Central Government approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed who shall register the same.

According to Rule 41(11), the order conveyed by the Regional Director shall be filed by the company with the Registrar in Form No.INC 28 within fifteen days from the date of receipt of approval along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.

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