Conversion of Existing Companies to LTD / CLS
Company directors across the country will be wondering whether to take steps to become a CLS; whether their company will automatically become one; whether they should re-register as a Designated Activity Company (“DAC”) or whether a member or creditor can oblige them to re-register as a DAC.
The answers to those questions are set out succinctly in the following 11 points:
- Unless a company re-registers as a DAC or another company type it will automatically become a company limited by shares (“CLS”) once the transition period expires. The transition period lasts for 18 months after the Act is commenced. This is set out in Section 55.
- For private companies that are happy to be converted into a CLS, they need take no action. They will simply lose their objects clause and the remaining part of the memorandum and the articles will be deemed to be the company’s constitution. They will have a “deemed constitution” (Section 61).
- A DAC is essentially the same as the private limited company as we have known it. It must have a memorandum of association with an objects clause, and the limitations on capacity – the ultra vires rule, etc – will remain for DACs.
- If a company wishes to convert to a DAC, it should pass an ordinary resolution not later than 3 months before the expiry of the transition period (Section 56).
- If a member of an existing private company, who holds more than 25% of the total voting rights in the company, serves notice on the company that he wants it to re-register as a DAC, it must do so.
- Members who hold more than 15% of the company’s issued share capital and/or creditors who hold 15% of the company’s debentures may apply to court for an order requiring the company to re-register as a DAC (Section 57).
- Until the end of the transition period, the law applying to DACs shall apply to all existing private companies as if they were DACs, unless the company delivers a constitution to the Registrar, which takes the form set out in Section 19 of the new Act.
- If, once the new Act is commenced, an existing private company wishes to become a CLS immediately; it must pass a special resolution and may then adopt its new constitution (Section 59). When it does that, and sends on the documentation to the CRO, the CRO issues a new certificate of incorporation.
- It falls to the directors to prepare the new constitution, deliver the particulars to the CRO, and so on (Section 60).
- If any member or creditor feels that his rights have been prejudiced by the exercise or non-exercise of any powers under this part of the Act, he may apply to court for relief (Section 62). The relief is set out in Section 212 and practitioners will recognise it as the old Section 205 of 1963: “remedy in the case of oppression”.
- Finally, the procedural steps to be followed, where a company re-registers as a DAC, are set out in Section 63.