‘No Vested Right To Be Granted A Certification Of Conversion To An LLC’: Delhi HC Upholds Rejection Of Reebok’s Application For Conversion To An LLC
The Delhi High Court upheld the decision of the RoC which rejected Reebok’s plea to convert to an LLC holding that the “stringent” 2016 Companies Amendment Rules would be applicable to the company.
The Registrar of Companies (RoC) had rejected the conversion proposal since Reebok India had suffered substantial financial losses and had a net deficit in current liabilities over assets in excess of Rs. 2100 Crores.
The reasons given by the RoC for rejecting the application of Reebok India were on the ground that various prosecutions had been filed by the Serious Fraud Investigation Organization (SFIO) against the company for offences under the Companies Act and the IPC.
The shareholders and the Board of Directors of Reebok India had passed a resolution to convert the Company from an unlimited liability company to a private limited company under Section 18 of the Companies Act, 2013. In 2014, Reebok India filed an application for the conversion, which was subsequently rejected.
The Court had to ascertain whether the Companies (Incorporation) Third Amendment Rules, 2016, (2016 Amendment) would be applicable to the pending applications.
A Single Bench of Justice Subramonium Prasad observed, “The lacuna in the Companies (Incorporation) Rules, 2014 is being sought to be cured by the 2016 Amendment. Since the purpose of the amendment is to cure the defects which existed in the law by giving discretion to the RoC to satisfy himself that there are sufficient means in the company to answer their debts even after conversion, it cannot be said that it would operate only to applications filed after the 2016 amendment.”
Senior Advocate Raj Shekhar Rao represented the petitioner, while CGSC Ravi Prakash appeared for the respondents.
Reebok India had argued that “any debts, liabilities, obligations or contracts incurred or entered by or on behalf of the company with unlimited liability will continue to be enforceable against the company with limited liability as if the liability of the company and its members was unlimited.”
Meanwhile, Reebok India was directed to file an undertaking in terms of Section 18(3) of the Companies Act disclosing the management and shareholding pattern as on the date of the application and post-conversion being granted.
The Delhi High Court in an earlier decision regarding the same matter had also directed the RoC to decide the application of the Petitioner afresh in accordance with law which meant that there was no challenge to the 2016 Regulations.
The High Court remarked that since the 2016 Amendment was only curative in nature and only intended to protect the interests of the creditors, the amended rules, therefore, must apply to applications which are pending with the RoC, and the same must apply to the application of the Reebok India.
Consequently, the Court held, “The anxiety on the part of the Registrar of Companies that the creditors and stakeholder should not be left high and dry cannot be said to be completely unjustified.”
Accordingly, the High Court dismissed the petition.
Cause Title: Reebok India Company v. Union Of India & Anr. (Neutral Citation: 2024-DHC-1283)
Appearance:
Petitioner: Senior Advocate Raj Shekhar Rao; Advocates Shantanu Tyagi, Aayush Kevlani, Purnima Mathru and Yamini Mookherjee
Respondents: CGSC Ravi Prakash; Advocates Varun Aggarwal, Farman Ali, Astu Khandelwal, Aman Rewaria, Yasharth Shukla, Usha Jamnal and Abhishek Khanna
