Set back to Reebok: Delhi HC upholds rejection of Conversion to Limited Liability Company [Read Order]

In a major setback to Reebok Company, the Delhi High Court upheld the rejection of conversion to limited liability company.

After consideration of the changing conditions in the external environment in which the Petitioner/Company operated and on evaluating its organizational structure and further considering the changes in its strategy and key management of the Company, the shareholders and the Board of Directors of the Petitioner passed a resolution to convert the Petitioner/Company from an unlimited liability company to a private limited company under Section 18 of the Companies Act, 2013.

It was stated that the Petitioner filed an application for conversion of the company into a limited liability company along with all the relevant and necessary eforms INC-1, GNL-1, and MGT-14 and that on 31.10.2014 the Petitioner was informed by Respondent No.1 that its e-form INC-1 has been marked as “pending user clarification” as the Petitioner had not complied with Section 18 of Companies Act.

The application of the Petitioner was rejected vide communication without any reasons and justification and that the Petitioner wrote letters seeking reasons for the rejection and since no reason was forthcoming, the Petitioner approached the Court challenging the communication and the Court directed the Respondent No.2 to decide the application of the Petitioner afresh.

The Senior Counsel appearing for the Petitioner argued that Section 18(3) of the Companies Act provides for conversion of companies which are already registered and it provides that 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.

The Senior counsel also stated that any pending prosecutions initiated by the SFIO cannot be an impediment for converting the company from an unlimited liability company to a limited liability company inasmuch as the continuation of such prosecutions which have been initiated prior to the conversion of the company will have no effect on the liability of the company.

A Single Bench of Justice Subramonium Prasad observed that “The right of the Petitioner for conversion from unlimited company to limited company has not been taken away. In fact, the petitioner/company had no vested right to be granted a certification of conversion to a limited liability company. The rules have only become more stringent inasmuch as the RoC has additional criteria to satisfy himself regarding the networth of the company and as to whether any investigation/inspection is pending against the company or not and only on being satisfied, the permission for conversion can be granted.”

“Viewed in this light, the reasons given by the RoC for rejecting the application of the Petitioner on the ground that various prosecutions have been filed by the Serious Fraud Investigation Organization against the Petitioner for offences under the Companies Act and the IPC and that the e-Form 27 which was to be filed with the Registrar of Companies was not in compliance with Rule 37 of the 2016 Rules cannot be said to be so perverse especially keeping in mind the interest of the shareholders and the interest of the creditors. The RoC has also observed that the petitioner/company has suffered substantial financial losses and has a net deficit in current liabilities over the assets in excess of Rs. 2100 Crores” the Bench noted.

To Read the full text of the Order CLICK HERE

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