Delhi HC upholds ROC rejection of company conversion under Section 18 due to creditor NOC requirements

Delhi HC dismissed an appeal challenging ROC's rejection of conversion from unlimited to limited liability company under Section 18 of Companies Act, 2013. The court held that appellant acquired no vested right upon filing application in 2014, and the relevant law applicable would be at the time of approval, not filing. Subsequently inserted Rule 37 requiring creditor NOCs was validly applicable. The ROC's insistence on stakeholder notifications was statutory and not arbitrary, as appellant had not challenged Rule 37's validity.

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Issues Involved:
1. Application of newly inserted Rule 37 to pending applications under Section 18 of the Companies Act, 2013.
2. Requirement of No Objection Certificates (NOCs) from creditors, lenders, and stakeholders.
3. Compliance with the statutory scheme of Section 18 of the Companies Act, 2013.
4. Retrospective application of Rule 37.
5. Relevance of Section 366 of the Companies Act, 2013.

Issue-wise Summary:

1. Application of Newly Inserted Rule 37:
The court examined whether the Appellant's application filed on 21st October 2014 would be governed by the conditions in Section 18 of the Companies Act, 2013 as it existed on the said date or the additional criteria provided in Rule 37, which was inserted subsequently w.e.f. 27th July 2016. The court held that the relevant law for the grant of approval would be the date on which the approval is granted, as established by Supreme Court precedents. Therefore, the newly inserted Rule 37 would be applicable to the pending application.

2. Requirement of No Objection Certificates (NOCs):
The ROC rejected the Appellant's application on the grounds that it was not just and equitable to approve the conversion without NOCs from creditors, lenders, and other stakeholders. The ROC concluded that converting the company's status would be prejudicial to the interests of the creditors and stakeholders. The court upheld the ROC's decision, noting that the requirement of NOCs had been statutorily incorporated in Rule 37, which the Appellant did not challenge.

3. Compliance with the Statutory Scheme of Section 18:
The Appellant contended that it had a vested right for conversion under Section 18 of the Act as it existed on the date of the application and that the ROC's insistence on NOCs rendered Section 18(3) otiose. The court disagreed, stating that the Appellant did not acquire any vested right of conversion upon filing the application and was bound to comply with the extant law during the pendency of its application.

4. Retrospective Application of Rule 37:
The court held that applying Rule 37 to pending applications did not give it retrospective effect. It would be retrospective if an earlier approval granted for conversion was sought to be made void or voidable based on the criteria laid down in Rule 37. The court noted that Rule 37 was clarificatory and intended to fill a legislative omission, thus having retrospective operation.

5. Relevance of Section 366:
The Appellant argued that the ROC erred in referring to Section 366 of the Act and the Companies (Authorised to Register) Rules, 2014, which are not applicable to an application under Section 18. The court found that the ROC referred to these provisions as they embodied the same spirit of the statute and upheld the ROC's decision, noting that the conclusions drawn were based on Rule 37.

Conclusion:
The court dismissed the appeal, finding no merit in the Appellant's contentions and upholding the ROC's decision to reject the conversion application based on the criteria set out in Rule 37.

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