2024 (2) TMI 977 - HC - Companies Law

Rule 37(8) of Companies Amendment Rules 2016 upheld as constitutional, conversion from unlimited to limited liability company rejected

Reebok India Company Versus Union Of India Through The Secretary, Ministry Of Corporate Affairs & Anr.

Delhi HC upheld the constitutional validity of Rule 37(8) of the Companies (Incorporation) Third Amendment Rules, 2016, dismissing a petition challenging ... Constitutional Validity of Rule 37(8) of the Companies (Incorporation) Third Amendment Rules, 2016 - rejection of conversion of the Petitioner's company from an “Unlimited Liability Company” to a “Limited Liability Company” - HELD THAT:- This Court is of the opinion that the lacuna in the Companies (Incorporation) Rules, 2014 is being sought to be cured by the 2016 Amendment. Since the purpose of the amendment is to cure the defects which existed in the law by giving discretion to the RoC to satisfy himself that there are sufficient means in the company to answer their debts even after conversion, it cannot be said that it would operate only to applications filed after the 2016 amendment. Merely filing an undertaking as mandated under Section 18(3) would not take care of the interests of the creditors which is now sought to be protected under the 2016 amendment. The Division Bench of this Court in its [2020 (3) TMI 527 - DELHI HIGH COURT] had only directed the RoC to decide the application of the Petitioner afresh in accordance with law. As of today there is no challenge to the 2016 Regulations. This Court is of the opinion that since the 2016 Amendment was only curative in nature and only intended to protect the interests of the creditors, the amended rules, therefore, must apply to applications which are pending with the RoC, and the same must apply to the application of the petitioner/company. 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 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 registrar was also not provided with an NOC or undertaking from all the shareholders to support the conversion application and the petitioner did not even issue a public advertisement inviting objections from various creditors/stakeholders on the issue of conversion. The anxiety on the part of the Registrar of Companies that the creditors and stakeholder should not be left high and dry cannot be said to be completely unjustified. Petition dismissed. Issues Involved:1. Validity of Rule 37(8) of the Companies (Incorporation) Third Amendment Rules, 2016.2. Rejection of the Petitioner's application for conversion from an Unlimited Liability Company to a Limited Liability Company.Summary:Validity of Rule 37(8):The Petitioner initially challenged Rule 37(8) of the Companies (Incorporation) Third Amendment Rules, 2016, but later withdrew this challenge. Consequently, the Court did not address the validity of Rule 37(8).Rejection of Conversion Application:The Petitioner's application for conversion from an Unlimited Liability Company to a Limited Liability Company was rejected by the Registrar of Companies (RoC) on 07.08.2020. The reasons for rejection included:a. Pending prosecutions by the Serious Fraud Investigation Organization against the Petitioner for offences under the Companies Act and IPC.b. Non-compliance with Rule 37 of the 2016 Rules in the e-Form 27.c. Protection of creditors, stakeholders, and public interest due to the Petitioner's involvement in falsification of financial statements from 2008 to 2011.d. Failure to provide a list of creditors, suppliers, and stakeholders, and lack of NOC from them regarding the conversion.e. Adverse remarks from Auditors about financial statements, indicating substantial losses and negative net worth.f. Net deficit in current liabilities over assets amounting to over Rs. 2100 Crores, indicating the company's inability to pay its creditors.Court's Analysis:The Court held that the 2016 Amendment was curative in nature, intended to protect creditors' interests, and thus applicable to pending applications. The Registrar of Companies (RoC) was justified in rejecting the application based on the substantial financial losses and pending prosecutions. The Petitioner's failure to provide necessary documentation and public advertisement further supported the RoC's decision.Conclusion:The Writ Petition was dismissed, affirming the RoC's decision to reject the conversion application due to the Petitioner's financial instability and pending legal issues. Pending applications, if any, were also dismissed.