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

Kaveri Traders Private Limited converted into a public company under the Companies Act, 2013. A supplier had a contract with the company before conversion and a payment under it is still outstanding. What is the legal effect of the conversion on this contract?

The contract remains enforceable. Under the Companies Act, conversion of a company into another class does not affect debts, liabilities, obligations or contracts made before conversion, and they can be enforced as though the new registration had not occurred.

  1. AThe contract lapses because a new certificate of incorporation was issued
  2. BThe supplier must file a fresh claim against the new company as a new creditor
  3. CThe contract is enforceable as if the registration had not been done, since conversion does not affect earlier debts, liabilities, obligations or contractsCorrect
  4. DThe contract is enforceable only after the Tribunal approves it

Explanation

Section 18(3) provides that registration on conversion does not affect any debts, liabilities, obligations or contracts incurred before conversion. They can be enforced as if the registration had not been done. A fresh certificate does not extinguish them.

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