Company Limited by Shares Can Convert to Company Limited by Guarantee Without Share Capital: NCLT

In re Azim Premji Trust Services Private Limited (NCLT Bengaluru)

Summary: The NCLT Bengaluru Bench, on 4th September 2024, permitted the conversion of Azim Premji Trust Services Pvt. Ltd. from a company limited by shares to a company limited by guarantee without share capital. The petition, filed under Sections 230-232, 18, and 66 of the Companies Act, 2013, faced opposition from the Registrar of Companies (ROC) and the Regional Director (RD), who cited the absence of specific rules for such conversions. The petitioner argued that while the Act doesn’t provide explicit rules, it also doesn’t prohibit the conversion, relying on Section 18 for altering a company’s class and Section 230 for scheme arrangements. The Tribunal noted that Section 230 is a comprehensive code for reorganization and permits conversion, even in the absence of formal rules. It clarified that a company limited by guarantee does not require share capital, dismissing objections regarding the reduction of share capital to zero. The order highlighted the Tribunal’s broad powers under Section 230, setting a significant precedent for future conversions. The ROC was directed to issue a fresh certificate reflecting the company’s new status.

1. Introduction & Legal Framework

The NCLT Bengaluru Bench delivered an order on 4th September 2024, sanctioning the conversion of Azim Premji Trust Services Private Limited from a company limited by shares to a company limited by guarantee without share capital. The case was filed under Sections 230-232, 18, and 66 of the Companies Act, 2013.

This order addressed a crucial legal question “whether the conversion is permissible under the Companies Act, particularly when no specific rules or forms have been notified for such conversions.”

2. Key Legal Provisions

• Section 18 of the Companies Act, 2013: Permits conversion from one class of company to another, but no specific rules or forms have been provided for conversion from a company limited by shares to a company limited by guarantee.
• Section 230 of the Companies Act, 2013: Governs compromises, arrangements, and reorganization of a company, making it a comprehensive code. This section was crucial in this case as it allowed a scheme of arrangement for conversion.
• Section 66 of the Companies Act, 2013: Allows reduction of share capital, subject to confirmation by the Tribunal.

3. Argument by the Petitioner Company

The company proposed a scheme of arrangement involving the reduction of its share capital to NIL and conversion into a company limited by guarantee. Since the Companies Act does not explicitly prohibit such conversion, and Section 18 provides for the alteration of a company’s class, the petitioner argued that the scheme should be allowed under Section 230.

4. Objections by ROC and RD

The Registrar of Companies (ROC) and the Regional Director (RD) initially opposed the scheme, citing the absence of rules for such conversion. They relied on Section 4(e) of the Act, which mandates holding at least one share for companies with share capital, and argued that Section 66 does not permit reducing the capital to zero.

5. NCLT’s Observations

The Tribunal carefully examined the relevant legal provisions and concluded that:

• Section 230 is indeed a complete code for arrangements, and it allows for the reorganization of capital in any manner, including changing the nature of the company’s capital.
• Although no specific rules have been prescribed for conversion from a company limited by shares to a company limited by guarantee, Section 18 clearly allows for conversion, and the absence of rules does not imply prohibition.
• The objection regarding reducing the capital to zero was dismissed, as the Tribunal clarified that a company limited by guarantee does not require share capital under Section 4(1)(d) of the Act.

6. Key Precedents and Judgments

The Tribunal also referred to the NCLT Mumbai Bench decision in Protrans Supply Chain Management Private Limited, which held that “conversion from one class of shares to another is permissible even in the absence of explicit provisions.”

7. Final Decision

The NCLT allowed the conversion of Azim Premji Trust Services Pvt. Ltd. under Section 230, read with Sections 18 and 66 of the Companies Act, 2013.

The Tribunal emphasized that while specific rules are absent, the conversion is not prohibited by law, and Section 230 empowers the Tribunal to sanction such a scheme. The ROC was directed to issue a fresh certificate of incorporation to reflect the company’s new status.

8. Significance of the Order

This order is a landmark ruling, as it clarifies that the absence of specific rules for conversion does not prevent companies from being converted into another class under Section 18. It establishes that Section 230 provides a broad scope for reorganization and restructuring, and the Tribunal’s powers under this section are plenary. The decision will serve as a crucial precedent for future cases involving conversions that are not explicitly covered by the rules.

FULL TEXT OF THE NCLT JUDGMENT/ORDER

1. This is a second motion petition filed on 17/11/2022 by Azim Premji Trust Services Private Limited (for brevity, the “Petitioner Company / Transferor Company”), under Sections 230 read with Section 18 and Section 66 of the Companies Act, 2013 (for short to be referred hereinafter as the ‘Act’) and Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (for brevity, ‘Rules’) by inter alia seeking for the sanction of Scheme of Azim Premji Trust Services Private Limited and their respective Shareholders.

2. The Petitioner Companies filed first motion application bearing C.A.(CAA)No.34/BB/2022 (“First Motion Application”) before this Tribunal seeking to dispense with the meeting of Equity Shareholders, and since there are no Secured and Unsecured creditors in the Applicant Companies there was nothing to convene. Based on such application moved under section 230 and 232 of the Companies Act, 2013 necessary directions were issued vide orders dated 19/10/2022 wherein the following order was passed:

3. When the petition was listed on 03/01/2023, through video conferencing, the following directions were issued:-

“The Petition be listed for hearing on 15/02/2023. At least 10 days before the date fixed for final hearing, the Petitioner Companies shall publish the notice of final hearing of the Company Petition in two local newspapers viz. “The Hindu” in English Edition and translation thereof in ‘Udayavani’ in Kannada Edition, both having circulation in Bangalore as per Rule 16 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

Notice be also served upon the Objector(s) or their representative as contemplated under sub-section (4) of Section 230 of the Act who may have made representation and who have desired to be heard in their representation along with a copy of the Petition and the annexures filed therewith at least 15 days before the date fixed for hearing. It is to be specified in the notices that the objections, if any, to the Scheme may be filed within thirty days from the date of the receipt of the notice, failing which it will be considered that there is no objection to the approval of the Scheme on the part of the objectors.

In addition to the above public notice, The Petitioner Company shall individually and in compliance of Sub-Section (5) of Section 230 and Rule 8 fo the Companies (Compromise, Arrangement and Amalgamation) Rules 2016 send notices in Form No.CAA 3 along with a copy of the Scheme, the Explanatory statement and the disclosure mentioned in Rule 6 of the Rules to (a) Regional Director (South East Region) Hyderabad (b) Registrar of Companies, Karnataka, Bengaluru (c) The Principal Chief Commissioner of Income Tax, Karnataka and Goa (d) The Jurisidctional Deputy/Assistant Commissioner/Assessing Authority (PAN-AAICA7247G-Petitioner Company) Range 113, Ward 1(1) (1), No.82, BMTC Building, 80 feet Road, 6th Block, Koramangala, Bengaluru 560095 (e) The Official Liquidator and (g) The Reserve Bank of India along with the copy of this Petition by speed post immediately and to such other Sectoral Regulator(s) who may govern the working of the respective Companies involved in the Scheme as per Rule 8 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, with a direction that they may submit their representation, if any, within 30 (thirty) days from the date of receipt of such notice, failing which it will be presumed that the said authority has no representation to make to the Scheme.

4. In pursuant to the aforesaid notice, the Petitioner Companies filed a compliance affidavit of service Diary No. 627 dated 02/02/2023 along with copies of newspaper publication in “The Hindu” (English), and “Udayavani” (Kannada) dated 18/01/2023. Further, in another affidavit filed by the Authorised Signatories of the Petitioner Companies, vide Diary No.2188 dated 19/04/2023, it is stated that both the Petitioner Companies have not received any objections from any persons/stakeholders/creditors as on the date of the affidavit.

5. The main objects, dates of Incorporation, authorized, issued and paid-up share capital, rationale of the scheme and interest of employees have been discussed in detail in first motion order dated 19/10/2022.

6. The Board Resolution of the Petitioner Company approving the Scheme is annexed as Annexure- D of the Petition.

7. It is further submitted that the Certificate of Statutory Auditors of the Petitioner Company, confirming that the accounting treatment contained in Clause 5 of the Scheme and as reproduced in Annexure-J, is in compliance with Accounting Standards notified under Section 133 of the Companies Act, 2013 r/w rules made there under, and other Generally Accepted Accounting Principles, as applicable.

8. The audited Financial Statement as on 31/03/2022 and unaudited Provisional Financial Statement of as on 30/09/2022 of the Petitioner Company is attached as Annexure- C1 of the Petition.

9. As per the Scheme, the “Appointed Date” means the date of issue of the fresh certificate of Incorporation by the Registrar of Companies upon the approval of the Scheme.

10. In pursuant to the notice, the Registrar of Companies and Regional Director have filed the Interim report under Diary No: 2704 dated 25/05/2023 by inter alia observing as under:

(i) The application filed, neither falls under a scheme of arrangement under Section 230-232 between the company and its shareholders nor is a case of reduction of share capital under Section 66 of the Companies Act, 2013.

(ii) It is a case of conversion under Section 18(2) of the Companies Act, 2013 of a company limited by shares to a company limited by guarantee without share capital.

iii) As the power under Section 18(2) of the Companies Act, 2013 lies with the Registrar of Companies, for the sake of clarity and clear Rules and forms, the matter is being taken up with the Ministry/ DGCoA for necessary guidance and instructions.

11. Moreover, time was sought for submission of further report. Pursuant to the said representation by the ROC/RD, repeated opportunities were granted by this Tribunal. Another common report was submitted vide diary No 219, dated 10/01/2024 interalia submitting as under:

(i) Present petition has been filed under section 230 for the purpose of conversion of the petitioner company from a company limited by shares into a company limited by guarantee without share capital since there are no rules and forms specified for such a proposed conversion. As per Section 18(2) of the Act, where the conversion is required to be done under this section, the Registrar shall on an application made by the Company, after satisfying himself that the provisions of this Chapter applicable for registration of companies have been complied with, close the former registration of the company and after registering the documents referred to in sub-section (1), issue of certificate of incorporation in the same manner as its first registration, Further, the Applicant Company has prayed for issue a fresh certificate of incorporation (COI) in Para 8 of the Petition and such a date of issue of fresh COI has been provided for as the appointed date in clause 1.3 of Part-A of the proposed scheme, since COI is generated online these days through MCA BO Portal.

(ii) Petitioner has filed a scheme under section 230 read section 18 and 66 of the Act proposing to convert the company into a company limited by guarantee without share capital and it is stated that scheme if sanctioned by Hon’ble Tribunal will take effect from the date of issue of the fresh certificate of incorporation by the Registrar of Companies.

(iii) Petitioner Company vide Para-1 of the General Clause has stated that the objectives of the company are to carry on the business to undertake the office of and act as trustee, judicial trustee, fiscal agent, represent fiduciary, intermediary, administrator, manager, registrar, paying agent, adviser, agent of attorney of or for any person or persons, company, corporation, Partnership, Limited Liability Partnerships, association, institution and all other natural and artificial person etc. The section 18 of the companies Act 2013 provides for conversion of company from one class to any other class. However, there is no specific rules and forms provided for conversion of a company limited by shares to a company limited by guarantee without capital for which they have brought this scheme.

(iv) In the proposed scheme it is sought to reduce the paidup capital of the company from Rs.1,00,000 to zero (as stated at clause 2.1 of Part-B of the proposed scheme). The company is incorporated as a company having capital.

(a) Section 4(e) of the Companies Act, 2013 in the case of a company having a share capital,

(i) the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and

(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;

(b) Section 66 of the Companies Act, 2013 permit 66 (1) Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner.

(c) In view of section 4(e) of the Companies Act, 2013 furnished above in respect of company having share capital each subscriber/shareholder should hold minimum of one share. Therefore, power to reduce the capital under section 66 of the Act cannot be exercised by the company to reduce the paid up equity capital of the company from Rs.1,00,000 to zero. Such proposal is contrary to the provisions of Section 66 of the Companies Act, 2013.

(v) Section 18 of the Act permit a company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter. This company has been registered as a company limited by shares. Therefore the company limited by shares can be converted into company limited by guarantee only in accordance with the chapter II of the Companies Act and Rules made there under. While the provisions of the Companies Act 1956 and earlier enactments contained the provisions regulating the companies and procedures, under the scheme of the companies Act, 2013 provisions regulating the companies and procedural matters have been separated chapter wise. While chapter II Rules ie, the Companies incorporation Rules, 2014 provide for (1) conversion of Unlimited Liability Company into a Limited Liability Company by Shares or Guarantee (2) for conversion of company limited by guarantee into company limited by shares through the Companies (Incorporation) third and fourth amendment Rules dated 27th July 2016 and 1st October 2016, did not provide for conversion of company limited by shares into company limited by guarantee. Therefore, a scheme under section 230 of the Act cannot propounded as short circuit mechanism substituting the power of Central Government to prescribe rules relating to conversion of company of Limited by Shares into Company Limited by Guarantee.

(vi) The matter was also taken up with the Ministry of Corporate Affairs, O/o Director General of Corporate Affairs (DGCOA) vide this Directorate’s letter dated 24.05.2023 and response in this matter has been received from Ministry vide dated 21.12.2023 stating that neither provisions of Section 66 nor Section 230 of the Companies Act, 2013 permits conversion of one class of company Into another and as such no Scheme seeking such conversion should be allowed under such provision. (copy of the Office of Director General of Corporate Affairs, Ministry of Corporate Affairs, New Delhi letter dated 21.12.2023 is enclosed for ready reference).

12. Subsequently, separate reply affidavits to the common report of ROC & RD has been filed by the Petitioner Companies vide diary No.341 dated 17/01/2024 inter alia stating as under:-

(i) Regarding the observation of the RD at II(4) a & b, it is submitted that the observations are correct and not required to be traversed. With regard to observation at II(4)(c), it is submitted that, the Scheme approved by the stakeholders envisage converting the company limited by shares to a company limited by guarantee without capital. Hence the requirement of holding minimum one share as provided in Section 4(1)(e) of the Companies Act, 2013 (Act) is not applicable after such conversion. Company limited by guarantee without capital is permitted under the Act and as per Section 4(1)(d) of the Act, and the members are only required to state the amount upto which each member agreed to contribute to the assets of the company in the event of its being wound up and to the cost, expense and charges of winding up.

Upon the approval of the Scheme, the Petitioner Company shall not have any shares hence the paid-up capital of the Petitioner Company will be zero. As per the scheme of arrangement between the Petitioner Company and its shareholders, the Petitioner Company is proposed to be converted into a company limited by guarantee without capital and to facilitate this result, clause (b) of Section 230(2) of the Act gets invoked, which clause states “reduction of share capital of the company, if any, included in the compromise or arrangement”. The purpose of the Scheme is only to sub- serve the object of discharging fiduciary responsibility as a trustee, being the primary and overarching objective, and which purpose can be better achieved through conversion of a company limited by shares to a company limited by guarantee, which conversion involves the company not having any shares. The purpose of the Scheme is not to confined to merely making Members with shares as Members without shares but extensively covers several other facets germane to the objective sought to be achieved. The requirement of maintaining minimum one shares is nowhere prescribed for a company limited by guarantee without capital and it is such character with which the Petitioner Company is conferred upon conversion as per the Scheme. Moreover, under sub section 68 of Section 2 of the Act, a Private Company need not have share capital at all vide amendment of 29th May 2015 to the said sub section. Table B to Schedule 1 of the Companies Act also permits Memorandum of Association of a Company Limited by Guarantee not to have any share capital at all. The Scheme does not result in the Petitioner Company being without Members, which alone is not permitted under the provisions of the Act.

(ii) Regarding the observation of the RD at II(5) it is submitted that under Section 230 of the Act, the Company and shareholders can enter into any kind of arrangement and the explanation to sub­section 1 of section 230 provides that an arrangement includes reorganization of the capital also. As provided under Section 230 of the Act, the Petitioner Company and the shareholders entered into a composite scheme of arrangement for reorganizing the shares of the Petitioner Company for converting the same into a company limited guarantee without capital. As the Petitioner Company acts as a Trustee of philanthropic trusts, a company limited by guarantee is more suitable as it will ensure that no property rights are created while discharging fiduciary responsibilities of a Trustee.

The petitioner company disclosed in the Scheme (general clause – 1) and Petition (clause 8) that, a company can be converted into any other class of company under section 18 but there is no specific rule or forms which have been provided under the Act for such conversion. It is also pertinent to note that the Act permits registration of a new guarantee company without capital as pointed out in earlier paras. It may also be noted that, conversion of company limited by shares into company limited by guarantee without capital is not barred by any provision of the law and it is expressly permitted under section 18 of the Act.

A Scheme of Compromise or Arrangement may involve increase, consolidation, or sub-division of shares or reduction of share capital or reorganization of the capital in any manner. Therefore, changing the characteristic of the capital from equity shares to guarantee and consequent change in the character of the company into a company limited by guarantee without capital as sought by the Petitioner Company under the Scheme cannot be deemed to be impermissible under Section 230 of the Act. The proposed Scheme cannot be considered as a short circuit mechanism as alleged and the Petitioner Company and its shareholders shall not be deprived of their right to convert the same into a company limited by guarantee. Moreover, while there is a restriction to the Tribunal permitting a scheme under sub section 10 of Section 230 in case of Buy back of shares unless such buy back is in accordance with Section 68 of the Act, there are no such restrictions on the Tribunal’s powers for sanctioning the scheme under any other Section.

(iii) Regarding the observation of the RD at II(6) it is submitted that the said submissions only state that the Regional Director or the Registrar do not have such powers, it does implicitly concede that the Tribunal is empowered to permit the Scheme. It is a settled position that Section 230 of the Act is a complete code in itself and sanctioning the Scheme of the Petitioner Company is well within the plenary powers conferred upon the Tribunal. Therefore, such general observation of Director General of Corporate Affairs (DGCoA) is dehors the provisions of Section 230 of the Act, which provisions rest the powers entirely and exclusively with the Tribunal. It is pertinent note that, there is no prohibition under Section 230 to reorganizing the capital of the Petitioner Company as part of the scheme.

13. Subsequently, Memo regarding Judgement have been filed by the petitioner company vide diary No. 950 dated 12/02/2024, inter alia stating as under: –

“The NCLT, Mumbai Bench Court II in the judgment in Protrans supply chain management private limited and Ag-Vet Genetics Private Limited and Others, C.P.(CAA) 996/MB-II/2020 (Order dated 20.09.2021), Para-9(f) (i) of the judgement states about the objection from ROC, Pune against the conversion and para-10(f) states about the reply filed by Petitioner in response to the objection of ROC, Pune. After hearing both parties the Hon’ble Tribunal held that the conversion of equity shares into preference share can be permissible, even though there is no express provision for the conversion, the Hon’ble Tribunal allowed the Petition. In the present case it is submitted that there is a express provision under section 18 of The Companies Act 2013, for the conversion of one class of company to another as follows:

“Section 18 of Companies Act, 2013 – Conversion of Companies Already Registered. (1) A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter”.

14. On 18.01.2024, this Adjudicating Authority passed the following orders:

“3. It is noticed that in the ROC report, they have enclosed the clarification from Ministry in Para 6 explaining that the provision of Section 66 & or Section 230 of the Companies Act, 2013 do not permit conversion of one class of Company into another and as such no scheme seeking such conversion should be allowed under such provisions.

4. However, the Petitioner’s Counsel explained that Section 2 (21) defines a Company limited by Guarantee, whereas Section 2 (22) defines a company limited by Shares; and such conversion of one type into the other type has been duly permitted under Section 18 of the Companies Act. Therefore, the same is required to be considered under provisions of the Act.

5. It is noticed that for Conversion of a company limited by guarantee into a company limited by shares, Rule 39 and Form Nos. INC 11B and INC 27 of Company (Incorporation) Rule 2014 have been prescribed for allowing such conversion under the provisions of the Companies Act. It appears that similar Rules and Forms have not been prescribed for conversion of a Company limited by shares into a Company limited by Guarantee. Therefore, we hereby grant an opportunity to ROC to consider this aspect as well as the response submitted by the Petitioner Company on 17.01.2024 of which a copy is also provided to them and submit their counter comments within a period of two weeks’. The RoC may seek requisite response from the Ministry of Corporate Affairs on the above specific point in this regard, for submission of the above.

6. List the case on 15.02.2024.”

15. On 15.02.2024 further time was allowed to the ROC and the matter was listed on 07.03.2024. Another Interim report was filed by the ROC/RD vide Dy.No1504 dated 06.03.2024 stating as under:

1. Para – 2: I submit that this office filed Interim report dated 25.05.2023 and Common report dated 08.01.2024 before the Hon’ble Tribunal. On the hearing dated 15.02.2024 before the Hon’ble Tribunal, the Counsel on behalf of the Regional Director, South East Region, Ministry of Corporate Affairs, Hyderabad and the Registrar of Companies, Karnataka submitted and reiterated the view of the Ministry that “neither the provisions of Section 66 nor Section 230 of the Companies Act, 2013 permits conversion of one class of company into another and as such no Scheme seeking such conversion should be allowed under Such provisions”. But, the Advocate appearing for the Petitioner relied one judgement dated 20.09.2021 passed by the Hon’ble NCLT, Mumbai Bench in CP(CAA) No.996/MB-II/2020 and submitted the same before the Hon’ble Tribunal. The Hon’ble Tribunal directed that the Ministry needs to re-examine the matter in reference to the order passed by the Mumbai Bench and submit views and listed the case on 07.03.2024.

2. Para -3: This office communicated the directions of the Hon’ble Tribunal to the Directorate/Ministry along with copy of order dated 20.09.2021 passed by the Hon’ble NCLT, Mumbai Bench for re­examining the matter.

3. Para-4: Directorate vide letter F.No.3/RD (SER)/Karnataka/Amal/04/2023/7132 dated 04.03.2024 communicated this office that the matter is being referred to the Ministry for seeking further instructions and to seek time for submitting Ministry’s views in the matter.

16. On 07.03.2024 and 05.04.2024, further time was granted as requested by ROC; and again on 21.05.2024 the case was finally adjourned to 19.06.2024. Inspite of availing sufficient time, the ROC has not filed any further response till date.

17. The reports of the ROC, RD, are taken on record. Similarly, reply filed by the Petitioner Companies to the above-mentioned reports are also taken on record.

18. We have considered the submissions of the Petitioner and the material available on record. This application has been filed by the M/s. Azim Premji Trust Service s Private Limited for approval of the scheme of Arrangement under the provisions of Section 230 r/w Section 18 and Section 66 of the Companies Act, 2013; for a Conversion of the Petitioner Company from a Company limited by shares to a company limited by guarantee without share capital. The Company limited by guarantee and company limited by shares have been defined under Section 2 (21) and 2 (22) of the Companies Act. It is stated that such conversion is permissible under Section 18 of the Companies Act, 2013.

19. For the purpose of examining the matter further, Section 2 (21), 2 (22), Section 4 (1) (d) & (e) and Section 18 of the Companies Act, 2013, are reproduced here for the sake of convenience:

“Section 2 (21) – Company Limited by Guarantee

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;

Section 2 (22) – Company limited by shares.

Company limited by shares means 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;

4. Memorandum.— (1) The memorandum of a company shall state—

(d) the liability of members of the company, whether limited or unlimited, and also state,—

(i) in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; and 25

(ii) in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute—

(A) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and

(B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves;

(e) in the case of a company having a share capital,—

(i) the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and

(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;

18. Conversion of companies already registered.—

(1) A company of any class registered under this Act may convert itself as a company of other class under this Act by alteration of memorandum and articles of the company in accordance with the provisions of this Chapter.

(2) Where the conversion is required to be done under this section, the Registrar shall on an application made by the company, after satisfying himself that the provisions of this Chapter applicable for registration of companies have been complied with, close the former registration of the company and after registering the documents referred to in sub-section (1), issue a certificate of incorporation in the same manner as its first registration.

(3) The registration of a company under this section 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.”

20. Hence, under Section 18, ROC is vested with the power of Registration of Conversion of one company to another as per the Company (incorporation) Rules, 2014. However, it is the contention of the ROC that the corresponding Chapter II of the Companies (Incorporation) Rules, 2014, provide only for:

(i) Conversion of unlimited liability company into limited liability company by shares or guarantee (Rule-37)

(ii) Conversion of company limited by guarantee into company limited by shares (Rule-39).

However, no rules have been provided for conversion of a company limited by shares into company limited by guarantee. Therefore, the ROC has objected to taking recourse to provisions of Section 230 of the Act for such conversion by way of a ‘Scheme of Arrangement’.

21. In reply, the Petitioner Company has explained the definition of company limited by guarantee under Section 2(21) read with Section 4 (1) (d) of the Companies Act and had given justification for approval of this Scheme of Arrangement under Section 230 of Companies Act. It is clarified that the requirement of having a minimum of one share is nowhere prescribed under the Act for the company limited by guarantee without capital. Further, they have referred to Section 2 (68) of the Companies Act explaining that under this section, the private company need not have share capital at all, vide amendment of 29th May 2015 to the said sub-section. The Petitioner has also referred to Table B of Schedule-I of the Companies Act which prescribes the format of “Memorandum of Association of Company Limited by guarantee and not having share capital”. Another objection of the ROC is that under Section 66 (1) of the Companies Act, 2013 a company limited by shares or limited by Guarantee and having a share capital may by a special resolution, reduce it in any manner. Further, in view of Section 4 (1) (e) of the Companies Act, a company having share capital should hold a minimum of one share; and thus the power under Section 66 of the Act can’t be exercised to reduce the paid up equity capital from Rs. 1,00,000/- to zero, as has been proposed here for conversion into a Company limited by Guarantee without having any capital. However, it is noted that the ROC has conveniently ignored the provision of Section 4(1) (d) read with Section 2 (21) of the Act, in which the definition of a company limited by guarantee is given and it has been provided as to what will be stated in the Memorandum of such company. Thus, the restrictions cited by the ROC in the report is relying on the Section 4 (1) (e) and Section 66 of the Act are not in respect of a company limited by guarantee without capital; whereas considering the provision of Section 4 (1) (d) read with Section 2(21) of the Act, there is no such requirement that the Company should hold at least a minimum of one share if it is a Company limited by guarantee. Thus, this objection is not legally tenable.

22. It is argued by the Petitioner Company that since such conversion is not prohibited under the Act and no rules have been prescribed for such conversion (whereas for conversion in the reverse direction, there exists Rules- 39); the Petitioner have preferred this petition for approval as a composite scheme of arrangement under Section 230 of the Act, since this conversion is expressly permitted under Section 18 of the Companies Act. The Petitioner further submits that the ROC and RD don’t have such powers because of the absence of the corresponding Rules and Forms for such conversion. Accordingly, the Petitioner has approached this Tribunal with the contention that it can permit the scheme under Section 230 of the Companies Act, it being a complete code in itself, and sanctioning of the scheme is within the plenary powers conferred upon the Tribunal.

23. It has been explained by the Petitioner that the Scheme of Compromise or Arrangement with the Creditors and Members under Section 230 of the Companies Act, 2013 may involve increase, consolidation or sub­division of shares or reduction of share capital or reorganization of capital in any manner. Therefore, the change in the characteristic of the capital from equity shares to guarantee and the consequential change of the company into a company limited by guarantee without capital cannot be stated to be impermissible under Section 230 of the Act. It is further stated that while there is a restriction in permitting a scheme under sub-section 10 of Section 230 of the Act for compromise or arrangement involving any buyback of shares unless such buyback is in accordance with Section 68 of the Act, there are no such restriction on the Tribunal’s power for sanctioning the arrangement by allowing the conversion of the Company limited by shares into a company limited by guarantee; as has been envisaged in the proposed scheme by this petition.

24. It is further stated by the Petitioner Company that in the common report submitted by the ROC/RD, it has been admitted that the RD or the Registrar do not have such powers, therefore the Petitioners have resorted to the provisions of Section 230 of the Companies Act, which confers upon the Tribunal the power to approve any compromise or arrangement made by the Company with its creditors or members. It is a fact that such a conversion as requested by the Petitioner have been duly incorporated under Section 18 of the Companies Act, 2013 which expressly allows such conversion.

25. Rule 39 of the Companies (Incorporation) Rules, 2014 has been notified for “Conversion of a Company Limited by guarantee into a company limited by shares”, and this Rule specifically confers powers on the Registrar of Companies, prescribed the relevant Form for filing the application within a time limit of 30 days before the ROC, and a further time limit of 30 days to the ROC to take a decision and accordingly issue necessary incorporation certificate. However, no rules have been prescribed so far for allowing the conversion in the reverse direction, from the Company limited by shares into a company limited by guarantee. Merely because the rules have not yet been notified for the conversion of the company limited by shares into a company limited by guarantee, it does not mean that such conversion cannot be allowed when it is allowable under the provisions of Section 18 of Companies Act, 2013. This is essentially covered within the scope of ‘arrangement’ between the company and its members, and under Section 2(21) of the Act, such company limited by guarantee prescribed for an undertaking to be given by the members to contribute to the assets of the Company in the event of its being wound up. Section 4 (1) (d) (ii) of the Act also prescribes as to what was to be mentioned in the Memorandum of the company related to the guarantee undertaken by the members in respect of the company limited by guarantee.

26. In view of the facts and circumstances of the case, we are of the considered opinion that the conversion as requested by the Company is liable to be allowed under the provisions of Section 230 of the Companies Act, read with Section 18 and Section 66 of the Companies Act, 2013 and read with Rule 11 of the NCLT Rules, 2016.

27. The Learned Counsel for the Petitioner Company submitted that the Affidavits of the Authorized Representatives of the Petitioner Company have been filed in the Petition in Annexure-F stating that no inspection, enquiry or investigation has been ordered or taken up or carried out against the company and no prosecution has been initiated and pending against the company under any law for the time being in force.

28. It is also submitted that the Affidavit of the Authorized Representatives of the Petitioner Company has been filed in the First Motion Application in Annexure-H stating that both the Petitioner Company are not regulated by any Sectoral Regulators to whom the Application and the Scheme needs to intimated.

29. Accordingly, the Scheme of Arrangement in question as annexed at Annexure – A is approved and from the Appointed Date, the Petitioner Company will be a company limited by guarantee without share capital. While approving the Scheme, it is clarified that this order should not be construed as an order in anyway granting exemption from payment of any stamp duty, taxes, or any other charges, if any, and payment in accordance with law or in respect of any permission/compliance with any other requirement which may be specifically required under any law.

AND THIS TRIBUNAL DOES FURTHER ORDER:

(i) The Petitioner Company shall, within 30 days of date of receipt of this order, cause a certified copy of this order to be delivered to the Registrar of Companies, Karnataka along with the necessary details, copy of special resolution passed by the Company along with requisite fee, if any, enclosing the altered Memorandum of Association and Articles of Association for the proposed conversion into a Company limited by guarantee.

(ii) As requested by the Petitioner Company, the following directions are issued:

a. With effect from appointed date, the Memorandum of Association of the company henceforth shall be in the form of Table-B of Schedule I of the Companies Act, 2013 or such other form as may be applicable.

b. With effect from the appointed date the Articles of Association of the company henceforth shall be in the form of Table-H of Schedule I of the Companies Act, 2013 or such other form as may be applicable.

(iii) The ROC is accordingly directed to issue fresh Certificate of Incorporation and update the Master Data within 30 days of receiving all the requisite details as above.

(iv) That the Petitioner Company shall deposit an amount of Rs.75,000/- in favour of “Pay and Accounts Officer, Chennai in respect of the Regional Director, South East Region, Ministry of Corporate Affairs, Hyderabad” and Rs.25,000/-in favour of ‘The Prime Minister’s National Relief Fund’, within a period of four weeks from the date of receipt of certified copy of this Order; and

(v) That any person interested shall be at liberty to apply to this Tribunal in the above matter for any directions that may be necessary;

30. The learned Counsel for the Petitioner Company is directed to serve a copy of this Order to all the Statutory Authorities within ten days from the date of receipt of copy of this order.

31. Accordingly, C.P. (CAA) No.52/BB/2022 is disposed of. Copy of this Order be communicated to the Counsel for the Petitioner Company.