THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XXI — Part I

Companies Authorised to Register Under This Act

Sections 366–374

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Conversion • Partnership to Company • LLP to Company • Society to Company

— Enriched with landmark judgments and illustrative case law —

Chapter XXI Part I — Companies Authorised to Register Under This Act

Indian corporate law recognises that business enterprises take many forms. Not every enterprise begins life as a company — many start as partnership firms, societies, limited liability partnerships, or co-operative associations, and later wish to migrate to the corporate form for reasons of scale, fundraising, perpetual succession, or limited liability. Chapter XXI Part I of the Companies Act, 2013 (Sections 366 to 374) is the statutory bridge that permits such entities to be 'registered' as companies under the Act without having to be first dissolved and re-incorporated from scratch.

This is sometimes referred to as the process of 'conversion' or 'corporatisation'. The provisions mirror, in modernised form, Sections 565 to 581 of the Companies Act, 1956. They have been substantially updated by the Companies (Authorised to Register) Rules, 2014 and subsequent amendments (notably the 2018 reduction of the minimum member threshold from 7 to 2), making Part I a workable and frequently used route for LLPs and partnerships wishing to become companies.

Section 366 — Companies Capable of Being Registered

(1) Scope — Who Can Register

For the purposes of this Part, the word 'company' includes any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law for the time being in force which applies for registration under this Part. Thus the gate is open to —

• Partnership firms (under the Indian Partnership Act, 1932);
• Limited Liability Partnerships (under the LLP Act, 2008);
• Co-operative societies (under the respective State Co-operative Societies Acts or the Multi-State Co-operative Societies Act, 2002);
• Registered societies (under the Societies Registration Act, 1860);
• Any other business entity formed under any law for the time being in force.

(2) Conditions for Registration

With the exceptions and subject to the provisions contained in this section, any partnership firm, limited liability partnership, cooperative society, society, or any other business entity, whether having its registered office in India or not, may at any time register under this Part as an unlimited company, or as a company limited by shares, or as a company limited by guarantee, provided —

1. It has two or more members (threshold reduced from seven to two by the Companies (Amendment) Act, 2017, effective 15 August 2018);In the case of a company intended to be registered as a company limited by shares, it has a permanent paid-up or nominal share capital of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided and held partly in the one way and partly in the other;Such other conditions as may be prescribed in the Companies (Authorised to Register) Rules, 2014 (including assent of majority of members; publication of a notice of intent; no-objection from regulators; clearance of tax dues; declaration of solvency; and consents as prescribed).

(3) No Registration Without Following Consent Procedure

A company registered in pursuance of this section may be registered as an unlimited company, or as a company limited by shares, or as a company limited by guarantee. A co-operative society which has been registered under any enactment may be registered under this Part as an unlimited company or as a company limited by guarantee; but not as a company limited by shares.

Nothing in this section shall be construed as authorising the registration of a company as a company limited by guarantee with a share capital.

Procedural Safeguards Under Rule 3 of the 2014 Rules

The Companies (Authorised to Register) Rules, 2014, prescribe elaborate procedural safeguards to ensure that conversion is not used to defeat creditors or minority interests:

• The firm/LLP/society must, by majority of its members/partners, pass a resolution to register as a company;
• A notice of the proposed conversion must be published in two newspapers — one in English and one in the vernacular language — inviting objections within 21 days;
• A copy of the published notice must be served on the relevant registrar/authority under the original law;
• No-objection certificates must be obtained from secured creditors and from the Registrar of Firms/LLP/Co-operative Societies as applicable;
• An affidavit from all the members that the latest financial position has been disclosed correctly;
• Form URC-1 (Application for Registration of Existing Entity as Company) must be filed with the ROC with prescribed annexures — statement of assets and liabilities, list of directors/members, partnership deed/LLP agreement, copies of accounts, details of pending litigation, etc.

Section 367 — Certificate of Registration of Existing Companies

On compliance with the requirements of this Chapter with respect to registration and of matters precedent and incidental thereto, the Registrar shall certify under his hand that the company applying for registration is incorporated as a company under this Act, and in the case of a limited company also that it is limited, and thereupon the company shall be so incorporated.

Once this certificate is issued, the entity is deemed incorporated as a fresh company under the Companies Act, 2013 — but carrying forward its assets, liabilities, and legal personality from its pre-conversion form. The certificate is a fresh Certificate of Incorporation and is conclusive evidence of incorporation under Section 7 principles.

Section 368 — Vesting of Property on Registration

All property, movable and immovable (including actionable claims), belonging to or vested in a company at the date of its registration in pursuance of this Part, shall, on such registration, pass to and vest in the company as incorporated under this Act for all the estate and interest of the company therein.

This is the statutory vesting provision — no separate deed of conveyance is required to transfer assets from the firm/LLP/society to the new company. Vesting is automatic and operates by force of statute. This eliminates stamp duty complications that would otherwise apply to a piecemeal transfer of assets.

Section 369 — Saving of Existing Liabilities

The registration of a company in pursuance of this Part shall not affect its rights or liabilities in respect of any debt or obligation incurred, or any contract entered into, by, to, with or on behalf of the company before registration. In other words, creditors of the pre-conversion entity can enforce their rights against the post-conversion company — and directors/officers of the new company step into the obligations of the partners/members of the old entity, to the extent of those obligations.

This section is often misread as granting a 'clean slate' on conversion. It does the opposite — liabilities are transferred with the entity. The only thing that changes is the legal form of the debtor, not the quantum or enforceability of the debt.

Section 370 — Continuation of Pending Legal Proceedings

All suits and other legal proceedings taken by or against the company, or any public officer or member thereof, which are pending at the time of the registration of a company in pursuance of this Part, may be continued in the same manner as if the registration had not taken place.

Proviso: Execution shall not issue against the property or persons of any individual member of the company on any decree or order obtained in any such suit or proceeding; but, in the event of the property of the company being insufficient to satisfy the decree or order, an order may be obtained for winding up the company.

The section is a valuable protection for members in their individual capacity. Once the firm/LLP has become a company, members are shielded from personal enforcement of decrees passed against the pre-conversion entity — though the company as a whole remains liable, and if it cannot satisfy the decree, a winding-up order may be obtained.

Section 371 — Effect of Registration Under This Part

When a company is registered in pursuance of this Part, sub-sections (2) to (7) shall apply. These provide, substantially, that —

• All provisions contained in any Act of Parliament, or any other Indian law, or any deed or other instrument constituting or regulating the company, and not being inconsistent with this Act or the terms of registration, shall be deemed to be conditions and regulations of the company in the same manner and with the same incidents as if so much thereof as would, if the company had been formed under this Act, have been required to be inserted in the memorandum, were contained in a registered memorandum, and the residue thereof were contained in registered articles;
• Until and subject to the issue of shares, the shares held by any member of the company shall be deemed to be shares held by each such member in the capital of the company as registered under this Act;
• All provisions contained in any such Act of Parliament, Indian law, deed, or instrument, or in any other law, which relate to the amount of the capital of the company, the shares of which it is divided, the number of shares, and the amount of each share, shall be deemed to be substituted by such provisions as would have been contained if the company had been formed under this Act;
• The company shall not have power to alter any provision contained in any Act of Parliament relating to the company without the sanction of the Central Government or Tribunal, as the case may be.

Section 372 — Power of Court to Stay or Restrain Proceedings

The provisions of this Act with respect to staying and restraining suits and other legal proceedings against a company at any time after the presentation of a petition for winding up and before the making of a winding up order, shall, in the case of a company registered under this Part, where the application to stay or restrain is by a creditor, extend to suits and other legal proceedings against any contributory of the company.

Section 373 — Suits Stayed on Winding Up Order

Where an order has been made for winding up, or a provisional liquidator has been appointed for, a company registered in pursuance of this Part, no suit or other legal proceeding shall be proceeded with or commenced against the company or any contributory of the company in respect of any debt of the company, except by leave of the Tribunal, and subject to such terms as the Tribunal may impose.

Section 374 — Obligations of Companies Registering Under This Part

Every company seeking registration under this Part shall, before such registration —

1. Ensure that secured creditors of the company, either, have given their assent or have been duly notified of the proposed registration;Publish in a newspaper, advertisement giving notice about registration under this Part, seeking objections and address them suitably;File an affidavit, duly notarised, from all the members or partners to provide that in the event of registration under this Part, necessary documents or papers shall be submitted to the registering or other authority with which the company was earlier registered, for its dissolution as partnership firm, limited liability partnership, cooperative society, society or any other business entity, as the case may be;Comply with such other conditions as may be prescribed.

The filing of an affidavit committing to dissolve the pre-conversion entity (clause (c)) is crucial — it ensures that after conversion, the old firm/LLP/society is formally wound up under its parent law. Failure to do so can create a double-counting problem where both the company and the original entity claim existence.

Effect and Consequences of Registration — A Summary

Practical Illustrations

(a) Partnership Firm Converting to a Company

A chartered accountancy firm practising under the Indian Partnership Act, 1932, may choose to corporatise — say, to raise capital, attract investors, or offer equity to employees. The partners pass a resolution, publish the newspaper notice, obtain NOCs from banks, file Form URC-1, and — upon issuance of the Certificate of Registration — the firm is reborn as a company. The firm must thereafter file for dissolution with the Registrar of Firms.

(b) LLP Converting to a Company

An LLP seeking to go public or to raise PE/VC capital often needs to convert to a company (since LLPs cannot issue 'shares' in the Companies Act sense). The LLP passes a resolution of partners, publishes notice, obtains consent of secured creditors, files Form URC-1 and — on registration — becomes a company. The LLP is thereafter dissolved under the LLP Act, 2008.

(c) Society Converting to a Section 8 Company

A charitable society registered under the Societies Registration Act, 1860 may wish to convert to a Section 8 Company under the Companies Act for stronger governance, NGO-sector compliance, or CSR-recipient eligibility. The society passes a special resolution, files Form URC-1, and registers as a Section 8 Company limited by guarantee. Thereafter, it is dissolved under the Societies Act.

Common Pitfalls and Cautionary Points

• Dissolution of the parent entity — failure to dissolve the firm/LLP/society after conversion can lead to regulatory confusion and double audit/tax obligations.
• Stamp duty implications — although Section 368 vests property in the company by statute, State stamp acts may still levy stamp duty on conveyance-type transfers; legal advice is essential.
• Treatment of reserves and surpluses — pre-conversion reserves must be mapped into the new company's reserves as permitted under the 2014 Rules; tax implications may arise under Section 47 of the Income-tax Act, 1961.
• Minimum number of members — post the 2017 amendment, only 2 members are required, making OPC-route conversions simpler; earlier the minimum was 7.
• Minority consent — where a member/partner is opposed to conversion, their dissent must be addressed; forcing through conversion over genuine dissent may invite Section 241 oppression proceedings post-conversion.
• Pending litigation — Section 370 preserves pending proceedings; but procedural amendment of cause-titles (substituting the company for the firm) may be required.

Relation to Other Conversion Regimes