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

Before converting under Section 18, Malabar Spices Limited had entered into a supply contract with a vendor and owed him ₹12 lakh. After the conversion certificate is issued, the vendor asks whether the debt still stands. What is the legal position?

The debt is unaffected. Section 18(3) provides that conversion does not affect debts, liabilities, obligations or contracts incurred before it, and they may be enforced as if the registration had not been done. Closing the former registration does not extinguish the vendor's claim.

  1. AThe debt lapses because the former registration has been closed
  2. BThe debt can be enforced only against the directors personally
  3. CThe debt is unaffected and can be enforced as if the registration had not been doneCorrect
  4. DThe debt can be enforced only after the vendor obtains Tribunal permission

Explanation

Section 18(3) says registration under the section does not affect any debts, liabilities, obligations or contracts incurred before conversion, and they may be enforced as if the registration had not been done. Closure of the former registration therefore does not extinguish the ₹12 lakh claim.

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