India: Rules for Conversion of Unlimited Liability Company Into A Limited Liability Company By Shares Or Guarantee

Last Updated: 13 September 2016
Article by Arpita Karmakar

The Ministry of Corporate Affairs (MCA) vide its Notification dated 27.07.2016, published the Companies (Incorporation) Third Amendment Rules, 2016. Among various amendments to the principal Rules i.e. Companies, (Incorporation) Rules, 2014, the government inserted a new rule as Rule 37, dealing with the provisions of conversion of an unlimited liability company into a limited company by shares or guarantee.

The frameworks of the provisions framed as sub-rules under the new Rule 37 are laid below:

  1. 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 will be filed in Form No. INC- 27 in the manner provided in sub-rules (2) and (3) of Rule 37.
  2. The Company shall within 7 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 off ice of the company is situated 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 21 days of the date of publication of the notice, duly indicating nature of interest and grounds of opposition.
  3. The Company shall within 45 days of passing of the special resolution file an application, as mentioned above, for its conversion into a company limited by shares or guarantee along with the fees as provided in the Companies (Registration off ices and Fees) Rules, 2014, by attaching the following documents, namely:
    1. Notice of the general meeting along with explanatory statement;
    2. Copy of the resolution passed in the general meeting;
    3. Copy of the newspaper publication;
    4. A copy of altered memorandum of association as well as articles of association duly certified by any one of the directors duly authorised in this behalf or company secretary of the company, if any.
    5. Declaration signed by not less than two directors of the company, including managing director, if any, 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 (except to the extent that the liability of the members shall become limited).
    6. 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 :
      1. The names and address of every creditor and debenture holder of the company;
      2. The nature and respective amounts due to them in respect of debts, claims or liabilities
      3. Declaration by a director of the company that notice as required under sub-rule (2) has been dispatched to all the creditors and debenture holders with proof of dispatch.
    1. A declaration signed by not less than two directors of the company, one of whom shall be a managing director where there is one, 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.
    2. A declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, where there is one to the effect that the board of directors of the company have made a full inquiry into the affairs of the company, as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration, through a resolution, passed in a duly convened meeting or by circulation.
    3. The company shall also obtain a certificate from the Auditors that the company is solvent and that it is a going concern as on the date of passing of resolution by the Board certifying solvency as per clause (h) above.
    4. No Objection Certificate from sectoral regulator, if applicable.
    5. No Objection Certificate from all secured creditors, if any.
  1. 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;
  2. 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.
  3. The certificate of incorporation consequent to conversion of unlimited liability company into a company limited by shares or guarantee will be in Form INC-llA issued to the company upon grant of approval for conversion.
  4. 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.

Explanation: For the purpose of this clause, past debts, liabilities, obligations or a contract does not include secured debts due to banks and financial institutions.

  1. An Unlimited Liability Company shall not be eligible for conversion into a company limited by shares or guarantee in case
    1. Its networth is negative, or
    2. An application is pending under the provisions of the Companies Act 1956 or the Companies Act, 2013 for striking off its name, Or
    3. The company is in def ault of any of its annual returns or financial statements under the provisions of the Companies Act, 1956 or the Companies Act, 2013, or
    4. A petition for winding up is pending against the company, or
    5. 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
    6. An inquiry, inspection or investigation is pending against the company.

The Registrar of Companies shall take a decision on the application filed under these rules within 30 days from the date of receipt of application and thereafter issue the certificate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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