Suggesting amendments to the rules, the Corporate Affairs Ministry has said that conversion proposals should be approved through a special resolution by the shareholders of the unlimited liability company.
However, unlimited liability companies having negative net worth or incurring losses continuously for three financial years would not be allowed to convert into limited liability entities.
In this regard, the ministry has come out with the draft Companies (Incorporation) Second Amendment Rules 2016. They pertain to conversion of unlimited liability company into limited liability firm.
The move also comes at a time when the government is working on improving the overall ease of doing business in the country.
According to the draft rules, after conversion, the company "shall not change its name for a period of one year from the date of such conversion".
Besides, such entities cannot declare or distribute any dividend without satisfying past debts, liabilities, obligations or contracts incurred or entered into before conversion.
As per the draft norms, within seven days of receiving approval at the general meeting, the proposed conversion should be publicised in the district in which the registered office of the company is situated. The proposal should also be put up on the company's website.
The approval should be through a special resolution, which requires the nod of at least 75 percent shareholders. While submitting the proposal to the ministry, the company concerned is required to attach various documents including a"declaration of solvency signed by at least two directors of the company".