Section 18 Of Companies Act 2013: Conversion Of Private And Public Companies

Section 18 of the Companies act, 2013 lays down the provision for conversion of companies already registered. This section enables the conversion of one class of company into another class by an amendment in Memorandum of Association (MOA) and Article of Association (AOA). It lays down the basic procedure of initiating conversion of a company of one class to another. For 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 and other incidental units for amendment of memorandum and AOA. It is expected 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 to convert 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 to this concept of the Companies’ Act, which has high commercial value.

OPC: As per Section 2(62) of the Company’s Act 2013, One Person Company (OPC) is incorporated by a single natural person.

What is Section 18 of the Companies Act 2013?

1. Deals with the conversion of existing companies from one class to another
2. Consist of 3 Rules (COMPANIES INCORPORATION RULES 2014)

• RULE 7: This rule provides a procedure for the conversion of a private company into an OPC
• RULE 37: This rule provides a method for converting an unlimited liability company into a company limited by shares or guarantees.
• RULE 39: This rule lays down the procedure for converting a company limited by guarantee into one limited by shares.

3. Provides the procedural requirement of conversion of an already registered company.

Section 18 of the Act of 2013 provides the procedural requirement of conversion of an already registered company. A brief description of the section is as follows:

• By altering the memorandum of association and AOA, a company of one class can be converted into a 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 the Memorandum of association and AOA.
• The new registration will in no way affect any debts, liabilities, obligations, or contracts incurred by the formed company before conversion, and such debts, liabilities, obligations, or contracts will be enforceable on the converted company as if registration is not done.

Rules for Conversion of a Private and Public Company

The Company (Incorporation) Rules, 2014 provide a backdrop to section 18. The following rules lay down the procedure and requirements of a few conversions as envisioned by section

Rule 7: This rule provides a procedure for the conversion of a private company into public company

• Except for 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 a general meeting. The company should meet the criteria of having paid-up share capital of fifty lakhs rupees or less and an average annual turnover of fewer than two crores rupees during the 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 file by the company for conversion along with the 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 a procedure for the conversion of an unlimited liability company into a company limited by shares or guarantees. The following points have to be adhered to:

• A special resolution has to be passed, and Form no. INC- 27 have to be filled.
• Within seven days of the passing resolution, the company shall send notice to members and also publish the intent to convert in a 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 apply conversion and prescribed fees and documents.
• Declaration by not less than two directions (including the managing director) that there are no complaints against the company by members or investors and no inquiry and investigation against the 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 a default of any of its annual returns or financial statements.
• Company with a pending petition for its winding up.
• The company has not received an amount due on calls in arrears, from its directors, for 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 one limited by shares. The following points have to be adhered to:

• Any company is other than a company registered under section 25 of the company act of 1956 and section 8 of the companies act. 2013 can file for the above conversion.
• The share capital of the company to be converted should be equal to the amount of guarantee.
• The 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 is 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 the 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 hitherto provide by its members.
• The Registrar will decide within thirty days, and a new incorporation certificate will be issued.
• An OPC can be converted into a private or public company under section 18 read with Company (Incorporation Rules), 2014. This conversion can be voluntary or compulsorily. According to rule 6 of the rules as mentioned above, 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 the balance sheet of an OPC during the financial year exceeds one crore rupees in total, it will cease to continue as an OPC. It would have six months to convert into a public or private company mandatorily.

UTILITY

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 broad and is one section, which helps make business flexible and people-friendly so that the management can make the most beneficial decision on a class of company to safeguard the interest of the company, shareholders, and investors.

SECTION 18 IN A NUTSHELL

This section is a vital section of the companies act 2013, which permits a company of any class registered under this Act to convert itself into another category of a company by altering its memorandum of association and Articles of Association under sections 14 and 15 of the acts, 2013. According to this section, the conversion of the company does not affect any debts, liabilities, obligations, or contracts entered into by the company before such modification. This section corresponds to section 32 (Registration of an unlimited company as limited) of the 1956 Act and is more flexible and broader than the section in the 1956 act. It allows and covers all types of conversions. However, under the Companies (Incorporation) Rules, 2014, various formalities need to be adhered to, protecting and safeguarding the interest of the company, its members, and investors. Changing the class of the company is a huge change, especially when it comes to new compliance that the converted company now has to fulfill. Thus it is a decision to be taken after due deliberation and only if it’s for the prosperity of the business.