The NCLT’s Bengaluru Bench has permitted the conversion of Azim Premji Trust Services, which carries out philanthropic activities, from a company limited by shares to a company limited by guarantee by share capital by way of scheme of arrangement.
The petition for such a conversion was opposed by the Registrar of Companies and the Regional Director, citing the absence of rules for such conversion.
The matter
In the proposed scheme, Premji Trust Services sought to reduce the paid-up capital of the company from Rs 1 lakh to zero.
Section 18 of the Companies Act 2013 provides for conversion of company from one class to any other class. However, there is no specific rules for conversion of a company limited by shares to a company limited by guarantee without capital.
The company said that such a scheme of arrangement was justified under Section 230 of Companies Act and the requirement of having a minimum of one share was not prescribed under the Act for the company limited by guarantee without capital. Further, as per Section 2 (68) of the Act, the private company need not have share capital at all.
“Merely because the rules have not yet been notified for the conversion of the company limited by shares into a company limited by guarantee, it does not mean that such conversion cannot be allowed when it is allowable under the provisions of Section 18 of Companies Act, 2013,” NCLT’s Bengaluru Bench observed in an order dated September 4.
Implications
According to Gaurav Pingle, a practicing Company Secretary, companies incorporated under Section 8 with share capital may consider converting into a guarantee company, if such companies have adequate funds and are not dependent upon shareholders’ funds. Such companies can also claim exemptions from compulsory demat requirement under the Companies Act.
“The NCLT order paves the way for innovative schemes and corporate strategies where there is no specific provision in the law but the shareholders and directors are on the same page. It may happen that, in future, the Ministry of Corporate Affairs would fill in the gaps by introducing rules for such cases,” Pingle said.
Binoy Parikh, Executive Director, Katalyst Advisors feels that the decision reinforces the principle that a Scheme of Arrangement between a company and its members is a single window clearance, and is permitted, subject to NCLT’s approval. “If there are substantive provisions under the Companies Act, 2013 but the procedures for which is not prescribed, then one could resort to a Scheme of Arrangement to effectuate the substantive provision through NCLT approval,” he said.
Companies limited by guarantee are mainly used if the company does not per se carry out any business activity but is a cost centre. In the present case, for example, the company carries out philanthropic activities and the cost would be guaranteed or backstopped by members.
A scheme of arrangement is commonly used for mergers or demergers or business transfer, and a composite scheme could provide for a single window clearance for various procedural aspects which would otherwise require separate approvals of the board, shareholders, etc.