CS Executive · Setting Up of Business, Industrial and Labour Laws

Conversion of Business Entities for CS Executive

Conversion of business entities means changing the legal form of a business without starting afresh. A company may change its class under Section 18 and its private or public status by altering articles under Section 14. A firm, LLP or society may register as a company under Sections 366 and 374. A company may also convert into an LLP.

What this chapter covers

This chapter covers how a business changes its legal form. It has three strands. First, a registered company changes its class or its status. Under Section 18 it changes class, for example from limited to unlimited, by altering its memorandum and articles. Under Section 14 it alters its articles to convert between private and public. Second, a non-company such as a partnership firm, LLP or society registers as a company. Third, a company converts into an LLP under the LLP Act, 2008.

You will work mainly with these provisions: Section 18 (conversion of companies already registered, that is, change of class), Section 14 (alteration of articles, including private-public conversion), Sections 366 and 374 of the Companies Act (registration of other entities as companies and the obligations they carry), and Sections 56, 57 and 58 of the LLP Act (conversion of private and unlisted public companies into LLPs and the effect of conversion).

The chapter links closely to the rest of Paper 3 Part I. It builds on the forms of business organisation, the LLP chapter and the incorporation of companies. If you know what a private company, a public company and an LLP can and cannot do, conversion becomes a matter of applying the right section to the right entity. Questions are usually written, so you must state the provision, apply it to the facts and give a clear conclusion.

This chapter is compact and rule-based, which makes it a good place to secure marks. Examiners like to test conditions, such as who must approve, which filing is due and within how many days, and what happens to existing debts and contracts. If you learn each section with its exact conditions, you can answer both short-note and case-based questions with confidence. A section that is mixed up, such as Section 18 and Section 14, costs marks quickly, so a clean map of the sections pays off.

Conversion of Business Entities: topics in the order to study them

1Conversion of Business Entities: Meaning and TypesStart here to get the map: which entities convert into which, and under which Act, before you read any section.
2Section 18: Conversion of Companies Already RegisteredIt is the core provision for change of class. Its short text covers alteration of memorandum and articles, the Registrar's new certificate and liabilities that stay unaffected.
3Conversion Between Private, Public and Unlimited CompaniesSection 14 governs private-public conversion by altering articles, while Section 18 governs change of class such as limited to unlimited. Study them side by side so you keep each one separate, and note the conditions for each type of conversion.
4Procedure, Filings and Registrar's Role in ConversionLearn the steps, forms and time limits only after you understand which conversion is being done, so the procedure has context.
5Conversion of Partnership Firm, LLP and Other Entities into CompanyThis topic brings in Sections 366 and 374, which let a partnership firm, LLP, cooperative society, society or other business entity register as a company. Study it after the company-to-company conversions, as it carries extra conditions and obligations.
6Conversion of Company into LLP (Sections 56 to 58 of the LLP Act)This runs in the opposite direction: a private or unlisted public company becomes an LLP. Study it separately so you do not mix it with registration of entities as companies.

How to prepare Conversion of Business Entities

Treat this chapter as a set of sections to be matched with entities. Aim to explain each conversion in the provision, facts, conclusion format.

Draw a one-page chart listing each entity (private company, public company, unlimited company, firm, LLP, society) against the conversion open to it and the section that governs it.
Read Section 18 line by line. Note its three parts: alteration of memorandum and articles, the Registrar closing the former registration and issuing a fresh certificate, and no effect on earlier debts, liabilities, obligations or contracts.
Read Section 14 and write down the special resolution requirement, the proviso that a private company loses that status if its articles drop the required restrictions, and the Central Government approval needed to convert a public company into a private one.
Study Sections 366 and 374 together. List the conditions for registering an existing entity as a company, such as the minimum members, the majority needed at the general meeting, and the creditor consent, newspaper notice and affidavit requirements.
Study Sections 56 to 58 of the LLP Act. Note that only a private company or an unlisted public company may convert into an LLP, and that on conversion the assets and liabilities vest in the LLP and the company is deemed dissolved.
Practise writing two or three short case answers. Open with the section, apply the facts, and close with a one-line conclusion.
Revise the filing time limits and the approvals as a list, and test yourself without looking at the notes.

Common mistakes in Conversion of Business Entities

Treating Section 18 and Section 14 as the same thing.
Fix: Remember that Section 18 is the general power to convert class by altering memorandum and articles with a fresh certificate, while Section 14 deals with altering articles, including private-public conversion, by special resolution.
Forgetting that converting a public company into a private company needs Central Government approval.
Fix: Write both: special resolution and an approval order, and add that the alteration is not valid without it.
Mixing up the filing period, or omitting what must be filed.
Fix: Keep a list: the alteration and a printed copy of the altered articles, filed with the Registrar within fifteen days. Add a copy of the Central Government order where the alteration converts a public company into a private one.
Saying conversion wipes out the old company's liabilities.
Fix: State clearly that debts, liabilities, obligations and contracts continue and can be enforced as if no conversion had taken place.
Applying the LLP conversion route to any company.
Fix: Check the facts first: only a private company or an unlisted public company qualifies. A listed company cannot convert.
Writing long theory without a conclusion in case questions.
Fix: Use the provision, facts, conclusion pattern, and finish with a plain sentence that answers the question asked.

Last-day revision: Conversion of Business Entities

Section 18 lets a company of one class convert into another class by altering its memorandum and articles.
Under Section 18, the Registrar closes the former registration and issues a certificate of incorporation as on first registration.
Conversion under Section 18 does not affect earlier debts, liabilities, obligations or contracts, which remain enforceable.
Section 14 allows a private-public conversion by special resolution altering the articles.
A private company that drops the required restrictions from its articles ceases to be private from the date of alteration.
Converting a public company into a private company is not valid unless approved by an order of the Central Government.
Every alteration of articles, with a printed copy of the altered articles, must be filed with the Registrar within fifteen days. Where the alteration converts a public company into a private one, a copy of the Central Government order is filed too.
Under Section 366, a firm, LLP, society or other business entity can register as a company, but one registered under earlier Companies Acts cannot use that route.
A company with fewer than seven members must register under Section 366 as a private company.
Section 374 requires secured creditors' consent or no-objection, a newspaper notice in English and a vernacular language, and a notarised affidavit from all members or partners.
Only a private company or an unlisted public company can convert into an LLP (Sections 56 and 57 of the LLP Act).
On LLP conversion, property and liabilities vest in the LLP without further act or deed, and the company is deemed dissolved.

Conversion of Business Entities practice questions

Conversion of Business Entities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Conversion of Business Entities: frequently asked questions

What is the difference between conversion under Section 18 and under Section 14?

Section 18 gives a registered company the power to convert itself into another class by altering its memorandum and articles, with the Registrar issuing a new certificate. Section 14 deals with altering articles by special resolution, including converting a private company into a public company or the reverse. Cite the one that fits the facts.

Does a company's liability end after conversion?

No. Under Section 18, registration on conversion does not affect any debts, liabilities, obligations or contracts incurred before conversion. They can be enforced as if the conversion had not happened.

Can a partnership firm become a company?

Yes. Section 366 of the Companies Act treats a partnership firm, LLP, cooperative society, society or other business entity as eligible to register under that Part. It must also meet the conditions in Section 374, such as creditor consent, newspaper notices and an affidavit from members or partners.

Which companies can convert into an LLP?

A private company can convert under Section 56 of the LLP Act, and an unlisted public company under Section 57. Conversion follows the relevant Schedule, and the Registrar issues a certificate of registration under Section 58.

How should I answer a conversion question in the exam?

State the relevant section and its condition first. Then apply it to the facts given, and end with a clear conclusion. Mention approvals, filings and the effect on liabilities where they matter to the question.