Company Registration

Conversion of Unlimited Liability Company into a Limited Liability Company by Shares or Guarantee

The Ministry of Corporate Affairs (MCA) vide Notification dated 27.7.2016, The Companies (Incorporation) Third Amendment Rules, 2016. Among all the amendments done, one of the principal changes was made to the Rules. The government inserted Rule 37, which talks about the provisions of conversion of unlimited liability company into a limited liability company by shares or guarantee.

Now in this article, we’ll be discussing the basics starting from the differences between Unlimited Liability Company and Limited Liability Company by shares and guarantee and later on, we’ll go into the procedural details about the conversion of Unlimited Liability Company into Limited Liability Company by shares or guarantees.

Differences between an Unlimited Liability Company and Limited Liability Company by shares/ guarantee

The Companies Act, 2013 in section 2(20) state any company which is incorporated under this act is called a company. It does not explicitly define a company by giving proper meaning.

A company can be incorporated either as a Limited Liability Company by shares/guarantee or as an Unlimited Liability Company.

Section 2(21) of the Companies Act, 2013 states, “Company Limited By Guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.”

And a Limited Liability Company by shares, according to sec.2 (22) is, “a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.”

An Unlimited liability Company is a registered company having no limited liability. It has an AOA, directors, members, etc., but unlike the other companies, in this type of company, the shareholders are liable to add to the company’s assets without any limits. They have one major advantage over Limited Liability Company i.e. they are not required to register its accounts but, then also these companies are not that common.

S.N.	Unlimited Liability Company	Limited Liability Company by guarantee	Limited Liability Company by Shares
1	It has unlimited liability and it is made for profit making	It is into nonprofit making business and is generally into providing specific service to the public.	These companies are into profit making and have general objectives.
2	The liability of each of the members is restricted to the total amount of debt of the company and the liabilities.	The members have a limited liability which extends to the amount for which they have agreed to guarantee.	The members have limited liability which extends to the amount unpaid on the shares held by the members, themselves. The liability is never restricted.
3	The share capital is not necessary. And therefore they may or may not have shareholders.	The share capital is not necessary. The company consists of members and not shareholders.	Share capital must be there. The owners of the shares are known as shareholders of the company.
4	The Profits are distributed as dividends to the shareholders.	The whole profit is retained by the company or used for other purpose and not given to the shareholders.	The shareholders are given profits as dividends.

Rules for Conversion of Unlimited Liability Company into a Limited Liability Company by Shares/Guarantee Provision as per amended rules

The newly inserted Rule 37 of The Companies (Incorporation) Third Amendment Rules, 2016 talks about the conversion of Unlimited Liability Company into Limited Liability Company by share/guarantee.

Following are the relevant provisions under Rule 37-

• A special resolution in the general meeting is needed for the conversion and an application needs to be filed in Form No. INC- 27 in the manner provided in sub-rules (2) and (3) of Rule 37.
• After the special resolution, within 7 days the company has to publish a notice in Form No. INC-27A in two newspapers at the registered office, discussing the proposed conversion and it is also supposed to put the same on the company website stating the proposal of conversion and seeking for objections.
• And if anyone has any objections, they can intimate the registrar and the company within 21 days of publication.  Such a notice needs to be given to creditors and debenture holders also.

Documents required for conversion

As per The Companies (Registration offices and Fees) Rules, 2014^[1], an application for conversion needs to be filed within 45 days of passing the special resolution along with fees and the following documents-

• Notice of general meeting accompanied by a descriptive statement
• Copy of the general meeting resolution and newspaper publications.
• The duly certified and altered MOA and AOA
• A declaration by not less than two directors is needed specifying that the conversion will not affect the debts and liabilities of the company which happened before the conversion.
• A declaration attached with a proof of dispatch by the director stating that the notice has been dispatched to all the creditors and debenture holders. The list of creditors and debenture holders who have been given individual notices of the conversion specifying their name, address, nature, and amount due to them with respect to the debts and liabilities.
• A declaration of solvency by the Managing Director and one more director needs to be given stating that a full inquiry is done to check the affairs of the company, list of creditors, the value of debts and claims.
• The company has to obtain a certificate from the Auditors mentioning that the company is solvent and
• A no objection certificate from the sectoral regulator and the secured creditors is needed in some cases.

Declaration by the Directors

A declaration is signed by not less than two directors including the Managing Director declaring that there are no complaints which are pending against the company from the members or the investors and no inquiry, inspection or investigation is pending against the company or its members.

Registrar’s approval for conversion

The Registrar after receiving the application and objections has to make sure that they are satisfactory and then he has to decide whether to grant approval to convert from an Unlimited Liability Company to a Limited Liability Company by share/guarantee or not.

The new certificate of incorporation

The new certificate of incorporation will be issued upon the grant of approval of conversion in Form INC-all.

Conditions after conversion

• The company cannot change its name for one year from the date of conversion
• The company cannot declare or distribute dividends without fulfilling past debts and liabilities. But these debts don’t include secured debts to banks and financial institutions.

Not eligible for conversion

Under the following conditions, an unlimited liability company shall not be eligible for conversion into a company limited by shares/ guarantee if-

• The net worth is negative
• There is an application for striking off its name or a petition for winding up is pending under the Companies Act.
• The company has defaulted in annual returns filling or financial statements.
• The company has not yet received arrears from its directors for a period of six months from the due date.
• There is an inquiry or investigation pending against the company.

Final Authority with the Registrar

The registrar has to give a decision with respect to the application within 30 days from the date of receipt of the application and after that issue a certificate.

Conclusion

The new rules inserted under Companies (Incorporation) Third Amendment Rules, 2016, are a welcome move. These rules will significantly reduce the burden on the unlimited liability companies who are planning to convert into limited liability companies by shares or guarantee, by giving them a transparent and easy step by step procedure for conversion.

For more information on company registration, you can contact our team of experts at Enterslice.