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Introduction to Section 18
Section 18 of Companies act, 2013 lays down the provision for conversion of companies already registered. This section enables conversion of one class of company into another class by way of amendment in Memorandum and Article of Association (AOA). It lays down the basic procedure of initiating a conversion of a company of one class to another. For the purpose of this section the term ‘class’ means the type of company. For example, for converting a public company into a private company, one has to rely on section 18 of the Companies Act of 2013, along with other incidental sections for amendment of memorandum and AOA. It is a common occurrence that a private company converts into a public company after success, to expand its business and this happens as per the procedure laid down under section 18 of the act, 2013.
Furthermore, OPC can also convert according to section 18 of the act, 2013 and there is also a provision for compulsory conversion of OPC, which again follows section 18. Section 18 of the Companies’ Act 2013 provides basic requirements to be fulfilled for conversion of one type of company into another. It is supplemented by Company (Incorporation) Rules, 2014. This analysis will briefly summarize the procedure for conversion and bring clarity on this concept of the Companies’ Act, which has high commercial value.
Purpose of Section 18
Section 18 of the act of 2013 provides the procedural requirement of conversion of already registered company. The brief description of the section is as follows:
- By the way of alteration of memorandum and AOA a company of one class can be converted into company of another class.
- When a conversion is sought under this section, the registrar will on an application made to him, after satisfaction of compliance of provisions of these sections, close the former registration of the converted company and issue new registration after registering the changes made in Memorandum and AOA.
- The new registration will in no way affect any debts, liabilities, obligation or contracts incurred by the formed company before conversion and such debts, liabilities, obligation or contracts will be enforceable on converted company as if registration is not done.
The Company (Incorporation) Rules, 2014 provide backdrop to section 18. The following rules lay down procedure and requirements of few conversions as envisioned by section 18:
- Rule 7: This rule provides procedure for conversion of a private company into an OPC. Except a private company registered under section 8 of the act, 2013 i.e. an NGO-type company, all other private companies can convert into an OPC by passing a special resolution in general meeting. The company should meet the criteria of having paid up share capital of fifty lakhs rupees or less and average annual turnover less than two crores rupees during relevant period. The following compliances are also required before the registrar issues the certificate:
- No objection in writing by creditors and members has to be obtained before passing a resolution.
- Within 30 days of passing the resolution, the copy of the same must be submitted to the registrar in a prescribed form (Form no. MGT-14).
- Form no. INC-6 have to filed by the company for conversion along with following documents-(1) Affidavit declaration of director of fulfilling the condition and no objection of members and creditors (2) list of members and creditors (3) audited balance sheet and profit and loss account (4) Copy of no objection letter.
- Rule 37: This rule provides procedure for conversion of an unlimited liability company into a company limited by shares or guarantee. The following points have to be adhered to:
- Special resolution has to be passed and Form no. INC- 27 have to be filled.
- Within seven days of passing resolution, the company shall send notice to members and also publish the intent to convert in newspaper (English and vernacular language) and the parties shall send their opposition to ROC within twenty-one days if any.
- Within 45 days of passing the resolution the company has to file the application for conversion along with prescribed fees and documents.
- Declaration by not less than two directions (including managing director) that there are no complaints against company by members or investors as well as no inquiry and investigation against company.
- Upon approval, the converted company will be issued a certificate.
- Within one year of conversion, the company cannot change its name and cannot distribute any dividend without fulfilling past liabilities and debts.
- Following unlimited companies are not eligible for conversion under rule 37:
- Companies with net worth as negative.
- Company with an application for striking off its name pending.
- Company with default of any of its annual returns or financial statements.
- Company with pending petition for its winding up.
- The company that has not received an amount due on calls in arrears, from its directors, for a period of not less than six months from the due date.
- An inquiry, inspection or investigation is pending against the company.
- Rule 39: This rule lays down the procedure for converting a company limited by guarantee into a company limited by shares. The following points have to be adhered to:
- Any company other than company registered under section 25 of company act of 1956 and section 8 of companies act. 2013 can file for above conversion.
- Share capital of the company to be converted should be equal to the amount of guarantee.
- Special resolution passed by members authorizing conversion and omitting the guarantee clause in its Memorandum of Association and altering the Articles of Association to provide for the articles as are applicable for a company limited by shares.
- Copy of resolution within thirty days to be filed with the registrar in Form no. MGT-14.
- An application in Form No. INC-27 is to be filed with the Registrar within thirty days from date of the passing of the special resolution enclosing the altered Memorandum of Association and altered AOA and a list of members with the number of shares held aggregating to a minimum paid up capital which is equivalent to the amount of guarantee hither to provide by its members.
- The registrar will take decision within thirty days and a new incorporation certificate will be issued.
- An OPC can be converted into private or public company as well under section 18 read with Company (Incorporation Rules), 2014. This conversion can be voluntarily or compulsorily. According to rule 6 of above-mentioned rules, 2014 when an OPC exceeds paid up share capital of Rs. 50,00,000/- (Rupees Fifty Lakhs) or its average annual turnover during the relevant period exceeds Rs. 2,00,00,000/- (Rupees Two Cores) or if during financial year the balance sheet of an OPC exceeds one crore rupees in total, it would cease to continue as an OPC and would have 6 months to mandatorily convert into public or private company.
Situation Before the Enactment of Section 18
There are few changes that the new act envisages, and they are as follows:
- The New Act provides for registration of any class into another class, i.e., an unlimited company as limited or vice versa whereas the Old Act of 1956 only primarily envisaged conversion of an unlimited company as limited company.
- The corresponding section in 1956 act was section 32. This section laid down the procedure for conversion of an unlimited company as a limited company. The 1956 act was narrower in its scope of application when compared to 2013 act. The section was added for making the practice of business easy and flexible, which the act, 2013 envisages completely.
Application of Section 18
Whenever one type of company is converted into another, this procedure as laid by section 18 and supplemented by various rules, is to be followed, be it conversion between public and private or unlimited to limited or limited by share to limited by guarantee or vice versa. The application of this section is wide and is one section, which helps, makes business flexible and people friendly, so that the most beneficial decision on class of company can be taken by the management to safeguard the interest of company, shareholder and investors.
Cases at a Glance
The following cases are important for the purpose of this section:
- P.P. Jain Exports Ltd. In re: In this case the court held that when a conversion of public company into private company is done with a view to more efficiently concur with the provisions of companies act and such action was not prejudicial either to its members or the creditors, such types of conversion are to be allowed.
- M/s. Southern Mica Products Ltd. v. Mr. V. Nagarjan, PCS: In this case the petitioner company was an unlisted public limited company. The company had passed a resolution with requisite majority, to convert the company from public limited to private limited. According to section 18, they made amendments in their AOA and memorandum and filed the resolution with the concerned registar. They followed all the procedures as per section 18 and related rules. There were no objections to their application. They were granted approval by the board for the conversion. This case evidently shows that when the procedure provided by the companies act of 2013 is followed, the procedure is swift.
- Dark Horse Portfolio Investment Limited case: In this case the petitioner company started as a private limited company, but later converted into a public limited company by way of prescribed procedure. They had petitioned the board to convert back to private company. They are engaged in the business of dealing all types of stocks. The board allowed their petition because first, they had followed the prescribed procedure and second, this change of class will not cause prejudice either to the members or creditors of the company. This case is important as it showcases how for efficient functioning of business, companies can also convert back into original class.
- Green signal Bio Pharma Limited case: In this case, the petitioner company had passed a special resolution for converting the company from public ltd. to private ltd. company and they seek approval of the board. They initially were private ltd. company but then converted to public ltd. company to enable the company to list its shares in stock exchange. They followed the procedure as specified by section 18 of 2013 act. What is interesting to note are their averments for this conversion, which the court ultimately accepts. They contended that firstly their IPO was under-subscribed, and the issue was withdrawn, thus company shares could not be listed. Secondly it is now closely held unlisted company and there is no involvement of public in the shareholding or management of the company. Thirdly, this conversion will assist the company to carry its business activities in simpler and more effectively and they would be able to enjoy privileges of a private company. This case is a good example of how the contentions for conversion are to be drafted.
This section is a core section of companies act 2013, which permits a company of any class registered under this Act to convert itself in some other class of company by altering its memorandum and Articles of Association under section 14 and 15 of the acts, 2013. The conversion of the company according to this section does not affect any debts, liabilities, obligations or contracts entered into by the company before such conversion. This section corresponds to section 32 (Registration of unlimited company as limited) of the 1956 Act and is more flexible and wider than the section in 1956 act. It allows and covers all types of conversions. However, under the Companies (Incorporation) Rules, 2014, there are various formalities that need to be adhered to which protects and safeguards the interest of the company, its members and investors. Changing the class of company is a very big change, especially when it comes to new compliance that the converted company now has to fulfill and thus it is a decision to be taken after due deliberation and only if it’s for the prosperity of the business.
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