Procedure of Conversion of Business Entities – Setting Up of Business Entities and Closure Important Questions

Procedure of Conversion of Business Entities – Setting Up of Business Entities and Closure Important Questions

Question 1.
State the provisions relating to the conversion of the company as contained in the Companies Act, 2013.
Answer:
Name Clause: Section 13: Approval of the Central Government is not necessary if the change relates to the addition or deletion of the word ‘Private’ to the name of the company consequent to the conversion of a private company into a public company and vice versa.

Section 14: Alteration of Articles for conversion of a private company to a public company and vice versa [Section 14]: Subject to the provisions of the 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) a private company into a public company; or
(b) a public company into a private company:

Where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under the Act, the company shall, as from the date of such alteration, cease to be a private company.

Central Government approval: 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.

Filing of altered copy: Every alteration of the articles and a copy of the order of the Central Government approving the alteration shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of 15 days in such manner as may be prescribed, who shall register the same.

Conversion of companies already registered [Section 18]:

  • MOA and AOA: A company of any class registered under the Act may convert itself as a company of other classes by alteration of MOA and AOA of the company.
  • Application to Registrar: Where the conversion is required, the Registrar shall on an application made by the company, after satisfying that the required provisions have been complied with, close the former registration of the company and after registering the documents, issue a certificate of incorporation in the same manner as its first registration.
  • Existing Debt, liabilities, Obligations and Contracts: The registration of a company shall not affect any debts, liabilities, obligations, or contracts incurred or entered into, by or on behalf of the company before conversion, and such debts, liabilities, obligations, and contracts may be enforced in the manner as if such registration had not been done.

Question 2.
Tuff Ltd. is a private limited company, which was registered in the year 2001. After 20 years of existence as a private company, the said company now wants to convert itself into a public limited company. Is it possible? If yes, explain the procedure to be adopted to give effect to the decision of the Board of directors of the company. [Dec. 2009 (6 Marks)]
Answer:
Procedure for conversion of private company into a public company:
The following procedure for conversion of a private company into a public company is applicable:
1. Board Meeting: Convene a Board Meeting to take necessary decisions to fix the time, place, and agenda for convening a General Meeting of members. Also, authorize the Company Secretary or Director of the company to issue a notice of the meeting.

2. Issue notice of general meeting: Issue Notice of the General Meeting to all Members, Directors, and the Auditors of the company in accordance with the provisions of Section 101.

3. Hold General Meeting: At the general meeting members will pass a special resolution to amend the Name Clause in the MOA by removing the word ‘Private’.

4. The general meeting must also pass a special resolution deleting from its articles the restricting clauses of a private company. Similarly, all other clauses in the articles which apply to a private company should be deleted and those which apply to public companies should be inserted such as increasing the number of shareholders to at least 7 and the number of directors to at least 3. These resolutions will be passed clause by clause.

5. Filing forms File Form No. MGT-14 with ROC for passing special resolution within 30 days. For effecting the conversion of a private company into a public company, the application shall be filed in Form No. INC-27 with fee.

6. Register: On receipt of the order, the documents will be filed with the ROC along with a copy of the revised Articles and the ROC will register the same.

7. On registration by the ROC the process will be complete.

Question 3.
BS & Co. Ltd. is registered as a public company. The shareholding pattern of the company is as under:

Category Nos.
Directors and their relatives 144
Employees 72
Ex-employees (shares were allotted when they were employees) 36
Twenty four couples holding shares jointly in the name of husband & wife (24 × 2) 48
Others 24
324

The Board of Directors of the Company proposes to convert it into a private company. Advise the Board of directors about the steps to be taken for conversion into a private company including a reduction in the number of members, if necessary, as per the Companies Act, 2013. [Dec. 1998 (10 Marks)]
Answer:
As per Section 2(68), a private company means a company, which has a minimum paid-up capital as may be prescribed, and by its articles:
(a) Restricts the right to transfer its shares;
(b) Limits the number of its members to 200 excluding past and present employee;
(c) Prohibits any invitation to the public to subscribe for any security. Note: Joint holders of shares should be treated as a single member. The words ‘Private Ltd.’ must be added at the end of its name by a private limited company.

In the given case, the existing members will be counted as follows for the purpose of converting into a private company.

Category Reason Nos.
Directors & their relatives 144
Employees Present employees will be excluded
Ex-employees Past employees will be excluded
Twenty four couples Joint holders of shares should be treated as a single member. 24
Others 24
192

Since the numbers of members are below 200 there is no need to reduce the number of members.

Procedure for conversion of public company into a private company: The following procedure for conversion of a public company into a private company is applicable:
1. Board Meeting: Convene a Board Meeting to take necessary decision to fix the time, place, and agenda for convening a General Meeting of members. Also, authorize the Company Secretary or Director of the company to issue a notice of the meeting.

2. Hold General Meeting: At the general meeting members will pass a special resolution to amend the Name Clause in the MOA by removing the word ‘Private’.

3. Special Resolution: The general meeting must also pass a special resolution inserting in articles the restricting clauses of a private company. Similarly, all other clauses in the articles which do apply to a private company should be added such as limiting the number of shareholders to 200 and those which apply to public companies should be deleted. These resolutions will be passed clause by clause.

4. Filing with ROC: File Form No. MGT-14 with ROC for passing special resolution within 30 days.

5. Application to Central Government: Application will be made to the Central Government in Form No. INC-27 within 3 months for approval to the various resolutions passed converting the public company into a private company. [After the commencement of the Companies (.Amendment) Ordinance, 2019 application for such conversion shall be made to Central Government instead of Tribunal]

6. Filing order with ROC: On receipt of the order of the Central Government the documents will be filed with the Registrar along with a copy of the revised Articles and the Registrar will register the same.

7. Registration of Conversion: On registration by the Registrar the process will be complete.

Question 4.
An unlisted Public Ltd. The company is having 220 members, 5 directors and is having public deposits of ₹ 5 crores and shareholders deposits of ₹ 3 crores (paid-up capital is ₹ 1 crore and free reserves ₹ 1 crore, and Bank Loan ₹ 2 crores) is proposing to convert it into a Private Ltd. Company. Mention conditions to be satisfied before conversion of the Company into Private Ltd. Also list out important procedures to comply for such conversion. [Dec. 2019 (5 Marks)]
Answer:
Precondltjon for conversion of public company into a private company.

Pre-conditions to be examined for conversion of a public company into a private company are as under:

  1. members to be reduced below 200 (presently 220)
  2. public deposits-to be repaid in full (presently 5 crores)
  3. shareholders deposits/1oan should not exceed 100% of paid-up capital and free reserves and share premium (presently 3 crores) subject to fulfillment of conditions provided in MCA notification dated 13th June 2017.

In this case, the company has a paid-up capital of 1 crore and free reserves of 1 crore Le. total of 2 crores which is the maximum limit of exempted deposit from shareholders for private limited company. Hence, 1 crore needs to be repaid to shareholders before conversion.

According to sectións 13 and 14 of the Companies Act, 2013 read with rule 33 and rule 41 of the Companies (Incorporation) Rules, 2014, a public company can be converted into a private company only after obtaining its shareholders’ appàa1 by way of passing a special resolution in general meeting.

Apart from this, the Other important procedures to comply with are:

  • Calling of Board, meeting.
  • General meeting
  • Advertisement in Newspaper
  • Filing of copy of the special resolution with the ROC
  • Filing of application for conversion with RD
  • Order of RD approving the conversion
  • Filing of the order of RD with ROC
  • Certificate from ROC

Question 5.
QPR an association of persons registered as a non-profit company under section 8 of the Companies Act, 2013. The association is considering the possibility of converting itself into a private company or public company so that it can start commercial activities. Referring to the provisions of the Companies Act, 2013 advice whether it is possible to do so. Can such Section 8 company be converted into One Person Company? Explain in detail various provisions applicable for such conversion.
Answer:
Restriction of alteration of MOA and conversion into other companies [Section 8(4)]: A company registered u/s 8 shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. [These powers have been delegated to Regional Directors MCA Notification Dated 19th December 2016

A company registered u/s 8 may convert itself into the company of any other kind only after complying with prescribed conditions as may be prescribed.

Section 8 company cannot be converted to One Person Company (OPC). Conditions for conversion of a company registered u/s 8 company of any other kind [Rule 21 of the Companies (Incorporation) Rules, 2014]:
1. Special resolution at a general meeting: A company registered u/s 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion. The explanatory statement annexed to the notice convening the general meeting shall set out in detail the reasons for opting for such conversion.

2. Copy of resolution with ROC: A certified true copy of the special resolution along with a copy of the Notice convening the meeting including the explanatory statement shall be filed with the Registrar in Form No. MGT-14 along with the fee.

3. Application to Regional Director: The company shall file an application in Form No. INC-18 with the Regional Director with the fee along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for converting itself into a company of any other kind and the company shall also attach the proof of serving of the notice served to all the authorities mentioned in Rule 22(2).

4. Copy of RD to be filed with ROC: A copy of the application with annexure as filed with the Regional Director shall also be filed with the Registrar.

Question 6.
Explain the provisions for the conversion of Person Company (OPC) into a Public or Private Company.
Answer:
There are two ways by which OPC can be converted into a private company or a public company. OPC can convert itself voluntarily into a private company or public company as per section 18 of the Companies Act, 2013. However, in certain circumstances, it has to mandatorily convert itself into a private company or public company.

Provisions relating to the mandatory conversion are discussed below:
OPC to convert itself into a public or private company in certain cases [Rule 6 of Companies (Incorporation) Rules, 2014]:
1. Where the paid-up share capital of an OPC exceeds ₹ 50 lakh and its average annual turnover during the relevant period exceeds ? 2 Crore, it shall cease to be entitled to continue as OPC.

2. Such OPC shall be required to convert itself, within 6 months of the date of increase in its paid-up share capital or turnover.

3. The OPC shall alter its MOA & AOA by passing a resolution to give effect to the conversion and to make necessary changes incidental thereto.

The OPC shall within a period of 60 days from the date of conversion give notice to the ROC in Form No. INC-5 informing that it has ceased to be OPC and that it is now required to convert itself into a private or public company.

4. OPC can get itself converted into a private or public company after increasing the minimum number of members and directors to 2 or a minimum of 7 members and 2 or 3 directors and by maintaining the minimum paid-up capital as per requirements of the Act.

Question 7.
Mr. Ram who is the sole member and director of the Ram One Person Company Ltd. desires to convert OPC voluntarily into a private company limited. As a Practicing Company Secretary advise Mr. Ram In respect of the proposed conversion and procedure required to be followed in this regard under the Companies Act, 2013.
Answer:
The procedure of voluntary conversion of OPC into Private Company:
1. Board Meeting: Convene a meeting of Board Meeting. The main agenda for the board meeting would be

  • To discuss with directors that Company wants to convert OPC into a Private Limited Company.
  • Pass Board Resolution for an increase in No. of Directors. (Minimum 2 Directors)
  • Pass a board resolution to get in-principal approval of Directors for increase shareholder of the Company. (Minimum 2 Shareholders)
  • Pass Resolution to get shareholders’ approval for Alteration in MOA & AOA of Company.

2. Extraordinary General Meeting

  • There is no need to hold EGM by OPC, it shall be sufficient if, in case of OPC
  • The resolution is communicated by the member of the company and entered into the minutes books would be sufficient

3. Filing with ROC: File Form INC 6 and Form NorMGT-14 along with the following documents will be filed with ROC:

  • Altered copy of MOA & AOA.
  • Certified copy minutes of board and general meeting for the required board and shareholder resolution.
  • No objection certificate from the creditors of a company for con-version of OPC into a private company.
  • Latest Audited Balance Sheet and the Profit and Loss Account.
  • Other documents may be required for giving effect to the conversion process.

4. Certificate of Incorporation: On receipt of the documents if the Registrar gets satisfied regarding the compliance with the prescribed procedure he shall register the documents and issue the fresh Certificate of Incorporation.

Question 8.
Laksliya Pvt. Ltd. has two directors on its Board Ramdas and Parag. They are the only shareholders in the company. Due to a health problem, Parag wants to transfer his shares to the Ramdas and it was decided that Ramdas will continue the company as OPC. As a Practicing Company Secretary advise Ramdas regarding the procedure to be adopted for converting the private company into OPC keeping in view the provisions of the Companies Act, 2013 and the Rules made thereunder.
Answer:
The procedure for conversion of private company into OPC is as follows:
1. Notice of board meeting: Issue notice of board meeting for a transfer of shares of Parag to Ramdas and converting the private company into OPC.

2. Board Meeting: In a Board Meeting necessary decision will be taken regarding time, place, and agenda for convening a General Meeting of members and issue of notice along with the explanatory statement.

3. NOC from creditors: No objection certificate will be obtained from members and creditors for converting the private company into OPC.

4. Hold General Meeting and Special resolution: On the appointed date General Meeting will be held and a special resolution will be passed considering the following matters:

  • Change of name by deleting words “Private Company” and adding the words “One Person Company”.
  • Altering the clauses of MOA and AOA relating to private company j and inserting the various clauses that are applicable to OPC.

5. Filing of Forms with ROC: Form No. MGT-14 along with the following documents will be filed with ROC:

  • Altered copy of MOA & AOA.
  • Certified copy minutes of board and general meeting for the required board and shareholder resolution.
  • No objection certificate from the creditors of a company for conversion OPC into a private company.
  • Latest Audited Balance Sheet and the Profit and Loss Account.
  • Certificate from CA that average annual turnover does not exceed ₹ 2 Crore or paid-up share capital does not exceed ₹ 50 lakh.
  • Other documents may be required for giving effect to the conversion process.

6. Application for conversion: File an application in Form No. INC-6 for conversion of private company into OPC along with the following documents, namely:
(a) A declaration from the director of the company by way of an affidavit confirming that all members and creditors of the company have given their consent for conversion, the paid-up share capital company is ₹ 50 lakhs or less or average annual turnover is less than ₹ 2 Crore, as the case may be.
(b) List of members and list of creditors.
(c) Latest Audited Balance Sheet and the Profit and Loss Account.
(d) Copy of No Objection letter of secured creditors.

7. Duty of ROC: On receipt of the documents if the Registrar gets satisfied regarding the compliance of prescribed procedure he shall register the documents and issue the fresh Certificate of Incorporation.

Question 9.
Is it possible to convert LLP or partnership firms into private or public companies? If yes, discuss the provisions relating to this in detail.
Answer:
Often a business is started as a Partnership Firm or LLP. If the business grows, partners may decide to convert it into Company.

As per Section 366 of the Companies Act, 2013 any partnership firm, limited liability partnership, co-operative society, society or any other business entity formed under any other law for the time being in force can convert itself into Company.

Certificate of Registration [Section 367]: On compliance with the requirements with respect to registration, and on payment of prescribed fees, the Registrar shall certify under his hand that the Firm, LLP, Society applying for registration is incorporated as a company under the Act, and in the case of a limited company that it is limited and thereupon the Company shall be so incorporated.

Vesting of property on registration [Section 368]: On conversion all property, movable and immovable, belonging to or vested in Firm, LLP, Society at the date of its registration, shall, on such registration, pass to and vest in the company as incorporated under the Act for all the estate and interest of the company therein.

Saving of existing liabilities [Section 369]: The registration of a company shall not affect its rights or liabilities in respect of any debt or obligation incurred, or any contract entered into, by, to, with, or on behalf of, the Firm, LLP, Society before registration.

Continuation of Pending Legal Proceedings [Section 370]: All suits and other legal proceedings were taken by or against the Firm, LLP, Society, which are pending at the time of the registration as a company, maybe continued in the same manner as if the registration had not taken place.

Obligations of Firm/LLP/Society Registering as Company [Section 374]: Every Firm/LLP/Society which is seeking registration as a Company shall:
1. Ensure that secured creditors of the company, prior to its registration, have either consented to or have given their no objection to converting Firm/LLP/Society into the company.

2. Publish in a newspaper, advertisement one in English and one in vernacular language in such form as may be prescribed giving notice about registration, seeking objections and address them suitably.

3. File an affidavit, duly notarized, from all the members or partners to provide that in the event of registration, necessary documents or papers shall be submitted to the registering or other authority with which the Firm /LLP/Society was earlier registered, for its dissolution as a partnership firm, LLP, co-operative society, society or any other business entity, as the case may be.

4. Comply with such other conditions as may be prescribed.
However, upon registration, as a company LLP incorporated under the Limited Liability Partnership Act, 2008 shall be deemed to have been dissolved under that Act without any further act or deed.

Question 10.
Briefly discuss the provisions relating to the conversion of a Private Company into LLP.
Answer:
A Private Company may convert itself into LLP by complying with the provisions of Section 56 read with Schedule III of the LLP Act, 2008.

These provisions are discussed below:
Conversion from private company Into limited liability partnership [Section 56]: A private company may convert into LLP in accordance with the provisions of Chapter X of the LiP Act and the Third Schedule.

Provisions of the Third Schedule:
Eligibility for conversion of private companies into limited liability partnership:

  1. A company may convert into LLP by complying with the requirements as to the conversion set out in the Schedule.
  2. A company may apply to convert into LLP in accordance with the Schedule if and only if:
    (a) there. is no security interest in its assets subsisting or in force at the time of application.
    (b) the partners of the LLP to which it converts comprise all the shareholders of the company and no one else; and
    (c) upon such conversion, the company, its shareholders, the LLP into which the company has converted and the partners of that LLP shall be bound by the provisions of the Schedule that are applicable to them.

Statements to be filed: A company may apply to convert into LLP by filing with the Registrar:
1. A statement by all its shareholders in such form and manner to be accompanied by such fees as the Central Government may prescribe, containing the following particulars, namely:
(a) the name and registration number of the company; and
(b) the date on which the company was incorporated.

2. Incorporation document and statement referred to in Section 11.
Registration of conversion: On receiving the documents for conversion, the Registrar shall, register the documents and issue a certificate of registration in such form as the Registrar may determine stating that the LLP is, on and from the date specified in the certificate, registered under the Act. The LLP shall, within 15 days of the date of registration, inform the concerned Registrar of Companies with which it was registered about the conversion and of the particulars of the LLP in such form and manner as the Central Government may prescribe.

Registrar may refuse to register: If the Registrar is not satisfied with the particulars or other information furnished for conversion of Company into LLP he may refuse to register the same. However, an appeal may be made before the Tribunal in case of refusal of registration by the Registrar.

Effect of registration: On and from the date of registration specified in the certificate of registration:
(a) there shall be a limited liability partnership by the name specified in the certificate of registration registered under the Act;

(b) all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company, and the whole of the undertaking of the company shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed; and

(c) the company shall be deemed to be dissolved and removed from the records of the Registrar of Companies.

Question 11.
Parachute Coconut Oil Manufacturing Ltd. an unlisted public company desires to convert itself into a Limited Liability Partnership. You are working as Company Secretary in the company. The Board of Directors of the company has requested you to submit a detailed note showing the procedure to be adopted for the conversion of the company into LLP. Also, state whether it is possible to convert Listed Company into LLP?
Answer:
Univ Private Company and Unlisted Public Company can be directly converted into LLP by complying with the provisions of the LLP Act, 2008.

Procedure for conversion of Company into LLP:
1. Board meeting: Convene a Board Meeting to take necessary decisions to fix the time, place, and agenda for convening a General Meeting of members. Also, authorize the Company Secretary or Director of the company to issue a notice of the meeting.

2. Name Availability: Confirm availability of proposed name of LLP by using Form RUN-LLP (Reserve Unique Name) on the MCA site.

3. Draft LLP Agreement: Draft of limited liability partnership agreement considering provisions of the Schedule of the LLP Act, 2008. It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same can be filed in Form No. 3 within 30 days of incorporation/conversion.

4. E-Filing of Incorporation Documents: File Form No. FiLLiP with ROC along with the following attachments:

  • Proof of Address of Registered office of LLP.
  • Subscription sheet signed by the promoters. (Notice of Consent & Appointment of Designated Partners with their personal details).
  • Detail of partner/designated partner of LLP.

5. Application for Conversion: File application for conversion in Form No. 18 with the following attachments:

  • Statement of shareholders.
  • Incorporation Documents & Subscribers Statements in Form No.
  • Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor.
  • NOC from Income Tax authorities and Copy of acknowledgment of latest income tax return.
  • Approval from any other body/authority as may be required.
  • Particulars of pending proceedings from any Court/Tribunal etc.

6. Certificate of Incorporation: If all documents filed and information provided is in order and the Registrar is satisfied that all procedural compliance is duly effected he will issue a certificate of registration. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP.

Setting Up of Business Entities and Closure Questions and Answers

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