Reebok India's Plea Against Rejection Of Conversion To LLC Dismissed By High Court

The Delhi High Court has upheld the decision of the Registrar of Companies to deny the conversion of Reebok India Co. from an 'unlimited liability company' to a 'limited liability company'.

A single-judge bench of Justice Subramonium Prasad emphasised that the Registrar of Companies must ensure compliance with the applicable rules during the registration of companies.

The court said that as per the relevant provision of the Companies Act, the RoC had no discretion to reject the conversion if the company met the requirements on the day of the application.

However, a 2016 amendment, aimed to address the gaps in the Companies (Incorporation) Rules, granted the RoC discretion to assess whether the company could meet its debts post-conversion. The amended rules applied to pending applications, including the petitioner's case, according to an order dated Feb. 16.

The judge said the petitioner had no vested right for automatic conversion and the RoC now had additional criteria to consider, such as the company's net worth and ongoing investigations.

The bench supported the RoC's reasons for rejection, considering concerns about prosecutions by the Serious Fraud Investigation Organisation, non-compliance with filing rules, substantial financial losses and the absence of shareholder support.

An analysis of financial statements showed that the company had more current liabilities than assets, with net deficit standing at Rs 2,122.14 crore as of March 31, 2019. The deficit occurred due to financial losses suffered by the company in the past financial years. The company's net worth became negative.

If the company shuts down or cannot repay its debts, only the three shareholders would be responsible for bringing in money to settle the debts. In such a scenario, the company might not be able to pay its creditors in full, according to the RoC's reasons for rejecting the application.

"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," the high court said, while dismissing the writ petition.