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CMA Final · Corporate and Economic Laws · Company Formation and Conversion

Sagar Textiles Ltd converted into another class of company under Section 18. Before conversion, it had entered into a supply contract with Nair Fibres. After the new certificate was issued, Nair Fibres sued on the contract. Which statement is correct?

The contract remains enforceable against the company. 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. Closure of the former registration does not extinguish them.

  1. AThe contract is void because the former registration was closed
  2. BThe contract can be enforced as if the registration had not been done, since conversion does not affect pre-conversion contractsCorrect
  3. CThe contract can be enforced only after Nair Fibres obtains the Registrar's consent
  4. DThe contract is enforceable only against the promoters personally

Explanation

Section 18(3) provides that registration on conversion does not affect debts, liabilities, obligations or contracts incurred before conversion. They may be enforced as if the registration had not been done. Closing the former registration therefore does not extinguish the contract, and no consent is needed.

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