Conversion of an LLP Into a Company: Section 366

Conversion of an LLP into a company is not a separate statutory process with its own chapter. It runs through section 366 of the Companies Act, 2013, the provision that lets a range of non-company entities register themselves as companies, and through the eight sections that follow it, ss. 367 to 374. Chapter XXI Part I is the route in; Part II, on unregistered companies, is the route by which the same kinds of entity get wound up instead.

What does conversion of an LLP into a company require?

Section 366(1) sets the class of entities that can use the Part. For its purposes 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 the Part. The last limb is open-ended, which is why the route is not confined to LLPs.

Section 366(2) then sets the substance. Any such entity, formed whether before or after the commencement of this Act, in pursuance of any Act of Parliament other than this Act or of any other law in force, or being otherwise duly constituted according to law, and consisting of two or more members, may at any time register under the Act in one of three forms:

• as an unlimited company;
• as a company limited by shares; or
• as a company limited by guarantee.

Registration is in such manner as may be prescribed, and the sub-section adds that it shall not be invalid by reason only that it has taken place with a view to the company's being wound up.

The seven provisos, and which of them bite

The proviso to section 366(2) has seven clauses. Four are prohibitions, two are voting thresholds, and one forces a form.

Clause (vii) is the one that changed the shape of this route. Once the floor in the sub-section fell from seven members to two, a large number of eligible entities came in below seven, and clause (vii) directs all of them into the private company form. The consolidation footnotes clause (vii) as inserted by Act 1 of 2018, section 75, with effect from 15 August 2018, the same section that made the seven-to-two change, and both footnote entries sit on the same printed page as their markers.

Sub-section (3) then adds an arithmetic rule: in computing any majority required for the purposes of sub-section (1), when a poll is demanded, regard is had to the number of votes each member is entitled to under the entity's regulations. The cross-reference is to sub-section (1), while the majorities themselves are in the provisos to sub-section (2). The point is noted here rather than resolved.

What registration carries across, and what it does not

Five short sections settle the consequences, and they are worth reading together because two of them cut in opposite directions.

• Section 367, the certificate. On compliance with the Chapter's requirements and on payment of such fees as are payable under section 403, the Registrar certifies that the applicant is incorporated as a company under this Act, and, in the case of a limited company, that it is limited.
• Section 368, property. All property, movable and immovable (including actionable claims), belonging to or vested in the entity at the date of registration passes to and vests in the company as incorporated under the Act, for all the estate and interest of the entity therein.
• Section 369, liabilities. Registration shall not affect the entity's rights or liabilities in respect of any debt or obligation incurred, or any contract entered into, before registration. Nothing is shed.
• Section 370, pending proceedings. All suits and legal proceedings pending at the time of registration may be continued as if the registration had not taken place. A proviso stops execution issuing against the property or persons of an individual member on a decree in such a suit, but allows a winding-up order to be obtained where the company's property is insufficient, in accordance with the provisions of this Act or of the Insolvency and Bankruptcy Code, 2016.
• Section 371, effect. The Act's provisions apply to the company, its members, contributories and creditors as if it had been formed under this Act, with four listed qualifications, including that Table F in Schedule I shall not apply unless and except in so far as it is adopted by special resolution.

Section 371(3) is the one that bears on the converted entity's filings. From registration onward the ordinary machinery of the Act applies to it: the registered office regime in section 12, the charge-registration regime in section 77, and the memorandum alteration rules in section 13. Section 371(7) also records that in that section the expression instrument includes a deed of settlement, a deed of partnership, or a limited liability partnership.

The four obligations in section 374, and the deemed dissolution

Section 374 sets out what an entity seeking registration under the Part must do.

1. Secured creditor consent. Ensure that secured creditors of the entity, prior to its registration, have either consented to or given their no objection to the registration.
2. Advertise it. Publish an advertisement in a newspaper, one in English and one in vernacular language, in the prescribed form, giving notice about the registration, seeking objections and address them suitably, in the words of the clause.
3. File a notarised affidavit from everyone. File an affidavit, duly not arised (the printed text, for "duly notarised"), from all the members or partners, providing that on registration the necessary documents or papers will be submitted to the authority with which the entity was earlier registered, for its dissolution as a partnership firm, LLP, co-operative society, society or other business entity.
4. Comply with such other conditions as may be prescribed.

A proviso then handles the LLP case specifically: upon registration as a company under this Part a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009) shall be deemed to have been dissolved under that Act without any further act or deed. So for an LLP, obligation 3 covers the paperwork while the dissolution itself happens by operation of the proviso. The consolidation footnotes that proviso as inserted by Act 1 of 2018, section 76, with effect from 15 August 2018, the same amending Act and the same commencement date as the seven-to-two change in section 366(2).

Two textual notes

The India Code consolidation prints obligation 3 as an affidavit "duly not arised", which is a typographical error for "duly notarised". It is quoted as printed in the numbered list above with the reading in brackets, rather than silently smoothed, so that the difference is visible.

One footnote entry in this Part is mislabelled at source. Page 199's entry reads "The proviso ins. by Act 31 of 2016, s. 255 and the Eleventh Schedule (w.e.f. 15-11-2016)", and the marker it belongs to, on the same page, is the insertion in section 372 of the words "or of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), as the case may be". Those words are not a proviso. The attribution is right and the description of what was inserted is wrong, which is a good reason to read a footnote against the text at its marker rather than against its own summary of itself.

The other direction: Part II

Part I registers an entity into the Act. Part II winds one up outside it. Both use the same list of entity types, which is why they are in the same chapter, and the definition of an unregistered company for Part II is set out on the unregistered company under section 375 page.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.