Procedure for Conversion of Unlimited Company to Company limited by Shares or Guarantee

Khushboo Sharma

Khushboo Sharma

Published on: Oct 13, 2022

Aakanksha Singhal

Updated on: Sep 28, 2023

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Introduction

An unlimited company refers to a company which does not have any limit on the liability of its members. Such liability of the member’s arises in case the company goes bankrupt, or incur losses, or is winding up or member’s liability to pay for the company’s debt and at times may even extend to the personal assets of the members

Applicable Provisions:

1. Section 12, 15, 18, 96, 100 & 173 of Companies Act, 2013
2. Rule 37 of the Companies (Incorporations) Rules, 2014
3. Regulation 30 and 46 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

A Limited Company on the other hand can be of two types as under:

1. Limited by shares: A company limited by shares refers to a company where the liability of its members is limited by the Memorandum of Association (MOA) up to the unpaid amount on the shares respectively held by them
2. Limited by guarantee: A company limited by guarantee refers to a company where the member’s liability is limited by the Memorandum of Association (MOA) to the amount that is guaranteed by the members to contribute towards the company’s assets in the event of the company being wound up.

The Ministry of Corporate Affairs (MCA) vide its Notification dated 27.7.2016, has notified the Companies (Incorporation) Third Amendment Rules, 2016 wherein the provisions of conversion of an Unlimited company into a Company limited by shares or guarantee were inserted

In terms of the provisions of Rule 37(8) of the Companies (Incorporation) Rules, 2014 an Unlimited company shall not be eligible for conversion into a company limited by shares or guarantee in the following cases

1. The net worth of the company is negative or
2. Any application of the company pertaining to striking off its name is pending under the statutory provisions of the Act or
3. Company is in default of any of its Annual Returns or financial statements under the statutory provisions of the Act or
4. A petition for winding up is pending against the company or
5. Company has not received amount due on calls in arrears from its directors for a period of not less than 06 months from the due date or
6. An inquiry, inspection or investigation is pending against the company

Mandatory Requirements

1. Company shall pass a Special resolution for conversion of Unlimited Company into a Company Limited by Shares or Guarantee in a duly convened general meeting
2. Company shall publish a notice in two newspapers for such proposed conversion
3. Unlimited Companies shall adhere to the below-stated conditions ensuing the conversion
   • Abstain from changing its name for a period of 01 year from the date of such conversion
   • Abstain from declaring or distributing of any dividend prior to the satisfaction of past debts, liabilities, obligations or contracts incurred or entered into before conversion

Procedure:

1. Convene a Meeting of Board of Directors [As per section 173 & SS-1]
   Refer to the Procedure for Conducting Board Meeting for a detailed procedure.
2. Alteration of Memorandum and Articles of Association
   The memorandum and articles of the Unlimited Company shall be altered in accordance with the provisions of the Act to give effect to the conversion and make necessary changes incidental thereto.
3. Convene General Meeting [Section 96, 100, Secretarial Standard (SS-2) and Rule 37 (1) of the Companies (Incorporation) Rules, 2014]
   Refer to the Procedure for Conducting General Meeting for a detailed procedure.
4. File Form MGT-14 with ROC
   The company shall file Form MGT-14 with the Registrar of Companies (ROC) within 30 days of the Meeting along with fee as specified in the Companies (Registration offices and fees) Rules, 2014 and the requisite documents.
5. Publish Notice for Proposed Conversion [Rule 37(2) of the Companies (Incorporation) Rules, 2014]
   • The Company shall publish a notice in Form No. INC-27A w.r.t such proposed conversion in one English and in one vernacular language newspapers in the district where its registered office is situated within 07 days from the date of passing special resolution for the proposed conversion.
   • The Company shall also ensure the following
     • Place the notice so published in the newspapers on the website precisely specifying the proposal of conversion and probing objections if any from such persons who are interested in the affairs of the company w.r.t such conversion and
     • Copy of the notice so published in the newspapers to the creditors and debentures holders as on the date of general meeting’s notice by registered post or speed post or through courier along with proof of dispatch
   • The notice shall also indicate that objections, if any may be intimated to the Registrar and company specifying the nature of interest and grounds of opposition within 21 days of the publication date.
6. File Application for Conversion in Form INC-27 with the Registrar of Companies [Rule 37 (1), 37 (3) and 37 (4) of the Companies (Incorporation) Rules, 2014]
   Company shall file an application for conversion into a Company Limited by shares or guarantee in Form No. INC 27 within 45 days of passing of special resolution together with the stipulated fees and the following documents or declaration:
   • Notice of the general meeting along with explanatory statement
   • Copy of the resolution passed in general meeting
   • Copy of the newspaper publication
   • Altered e-Memorandum of Association as well as e-Articles of Association duly certified by any one of the Directors duly authorized in this behalf or Company Secretary of the Company if any
   • 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)
   • Complete list of creditors and debenture holders to whom individual notices have been sent setting forth the following details
     • Names and address of every creditor and debenture holder of the Company
     • Nature and respective amounts due to them in respect of debts, claims or liabilities
     • Declaration by Director of the Company that notice as required in terms of the provisions of the Act has been dispatched to all the creditors and debenture holders along with the proof of dispatch
   • Declaration signed by not less than two Directors of the Company one of whom shall be a Managing Director if any to the effect that
     • Full enquiry into the affairs of the Company has been made
     • Have formed an opinion that the list of creditors is correct
     • The estimated value as given in the list of debts or claims payable on a contingency are proper estimates of the values of such debts and claims and
     • There are no other debts or claims against the company to the best of their knowledge
   • Declaration of solvency signed by at least two Directors of the Company, one of whom being a Managing Director, to the effect that complete inquiry into the company’s affairs has been made and as a result they have formed an opinion that the company is capable of meeting its liabilities and will not be rendered insolvent within a period of one yearfrom the date of declaration, through a resolution passed in a duly convened meeting or by circulation
   • Obtaining a certificate from the Company’s Auditors that it is solvent and is a going concern as on the date of passing of Board resolution certifying solvency
   • No Objection Certificate from such applicable sectoral regulator as may apply
   • No Objection Certificate from all secured creditors, if any
   • A declaration signed by not less than two Directors including Managing Director, if any that no complaints are pending against the company from its members or investors and no inquiry, inspection or investigation is pending against the company or its directors or officers.
7. New Certificate of Incorporation [Rule 37 (5) & (6) of Companies (Incorporation) Rules, 2014]
   Registrar shall after due satisfaction about the conversion application issue a certificate of incorporation in Form No. INC- 11A
8. Post Conversion Compliances
   • Every Alteration made in the memorandum or articles of the company shall be noted in every copy of the memorandum or articles as the case may be [Section 15(1)]
   • Every Company shall:
     • Print the new Altered Memorandum and Articles of Association with new Certificate of Incorporation
     • Paint or affix its name, and the address of its registered office, and keep the same painted or affixed, on the outside of every office or place in which its business is carried on, in a conspicuous position, in legible letters, and if the characters employed therefor are not those of the language or of one of the languages in general use in that locality, also in the characters of that language or of one of those languages [Section 12(3)(a)]
     • Have its name engraved in legible characters on its seal, if any [Section 12(3)(b)]
     • Get its name, address of its registered office and the Corporate Identity Number along with telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its business letters, billheads, letter papers and in all its notices and other official publications [Section 12(3)(c)]
     • Have its name printed on hundies, promissory notes, bills of exchange and such other documents [Section 12(3)(d)]
     • Send the new address of registered office with all the Banks, authorities and other Basic Utility Service providers as applicable.
9. File Necessary Amendment Application under following Acts
   • Goods and Services Act
   • Shops & Establishment Act
   • Factories Act
   • Inter-State Migrant Workmen Act
   • Private Security Agency Act
   • EPF and ESIC
   • Other Labor Laws
   • Industry Specific Laws