Topic 59 Effects of Conversion

THE LEGAL BRIDGE

Judiciary Examination Study Material

Topic 59

Effects of Conversion

Universal Succession, Contracts, Property & Business Continuity

Pillar 7 — Conversion to LLP (Sections 55–59 + Schedules 2–4)

Module Overview

Conversion of a firm or company into an LLP is built on the principle of universal succession — the LLP steps into the shoes of the original entity completely, without any need for separate assignment or transfer of each asset and liability. This topic examines what automatic succession means in practice, how it differs from a business transfer, and key practical post-conversion actions required.

59.1 Universal Succession — The Core Principle

Feature	Conversion (Universal Succession)	Business Transfer (Slump Sale)
Assets	Vest automatically in LLP without deed	Must be separately transferred by conveyance/assignment
Liabilities	Automatically assumed by LLP	Must be separately novated — creditors' consent required
Contracts	Continue automatically as LLP's contracts	Must be novated — counterparty's consent required for each
Legal proceedings	Continue automatically with LLP substituted	Must be separately transferred; court application required
Stamp duty	Generally exempted (conversion)	Full stamp duty applicable on each transfer instrument
Capital gains	Exempted (if conditions met)	Capital gains tax on each asset at fair market value

59.2 Specific Effects Under All Three Schedules

All three Schedules (2, 3, 4) contain an "effects" clause providing: "All property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the firm/company shall vest in and be the property of the LLP." Specific practical effects:

Immovable property: Land and buildings vest automatically; revenue/municipal records should be updated to show LLP as owner.
Intellectual property: Trademarks, patents, copyrights vest in LLP; IP registries (TM Registry, Patent Office) should be updated.
Bank accounts: Continue; bank KYC must be updated with Certificate of Conversion.
Investments/demat accounts: Vest in LLP; NSDL/CDSL records must be updated.

59.3 Contracts — No Novation Required

Client contracts: Existing service/supply agreements continue as LLP obligations — no new signatures required.
Lease agreements: Continue automatically — landlord's consent is NOT required for legal effect (though good practice to notify).
Loan agreements: Continue as LLP obligations — banks typically require new KYC even though legal transfer is automatic.
Non-transfer restrictions: Contractual restrictions on transfer do NOT apply — there is no "transfer"; only universal succession.

⚖ Surya Lighting Industries v. TNEB Madras HC (2016)

Held: A government supply contract was awarded to a company which then converted to LLP. The government sought to terminate the contract arguing the LLP was a different entity and the contract was non-transferable. The court held that the LLP is the successor entity by virtue of Schedule 3 effects — the contract continues as if no conversion occurred. The non-transferability clause did not apply because there was no transfer, only universal succession.

Principle: Conversion creates universal succession — not a transfer. Contractual restrictions on transfer do not apply.

📌 EXAM TIP: Effects of conversion: (1) Universal succession — all assets, liabilities, contracts, proceedings vest automatically; (2) No separate deed needed — this is the key advantage over a slump sale; (3) Revenue records (land), IP registries, bank KYC, demat accounts need updating for PRACTICAL purposes (legal vesting is automatic); (4) Non-transfer restrictions don't apply (not a transfer — it's succession); (5) Key case: Surya Lighting.

Key Point	Core Content
Universal succession	Assets, liabilities, contracts, proceedings vest automatically in LLP
No deed required	Automatic vesting — no conveyance, assignment, or novation needed
Immovable property	Vests automatically; update revenue/municipal records for practical purposes
Contracts continue	No counterparty consent required; non-transfer restrictions inapplicable
Practical updates	Bank KYC, IP registries, demat accounts, PAN/GST all need updating
Key case	Surya Lighting — contract continuation; non-transfer restriction does not apply