Once a company has been incorporated, the incorporators may be desirous of changing the company from one type to another. As already discussed, there are two types of companies regulated under the Companies Act. These are public limited companies and three forms of private companies, i.e. private company limited by shares, private company limited by guarantee and unlimited private company.
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The provisions dealing with such conversions are to be found in sections 30 to 36 of the Companies Act.
(i) Conversion of a Private Company Limited by Shares to a Private Company Limited by Guarantee
Section 30 of the Act sets out the condition of converting a private company limited by shares to a private company limited by guarantee and the conditions are that:
a) there is no unpaid liability on any of its shares;
b) all its members agree in writing to such a conversion;
c) a special resolution amending the articles to satisfy section 19 is passed, if the articles do not satisfy that section; and
d) each member makes a declaration of guarantee specifying the amount that he undertakes to contribute to the assets of the company in the event of the company being wound-up
Section 19 is the section that sets out the nature and manner of a company limited by guarantee. The amendment of the articles in this manner is necessary because the conversion of a private company limited by shares to one limited by guarantee fundamentally alters the legal character of the company. The basic character of a company limited by guarantee is that it has got no share capital nor is such a company expected to carry on business for purposes of profit to its members or those managing it.
By contrast, a private company limited by share capital and is in business to make profit to its members.
Note that while section 30(b) of the Act requires that all members must agree or resolve to convert, the requirement to alter or amend articles is by special resolution which in accordance with section 156(3) entail majority vote of not less than three-quarters of the votes cast by such members.
Since the company has resolved and amended the articles accordingly, section 158(1) of the Act provides that, “a certified copy of every special resolution made by a company, or by a class of members of a company, shall, within 15 days after the making thereof, be lodged with the Registrar.” Further section 158(2) states that, “subject to this section, every copy of the articles of a company issued by it shall have embodied in it or attached to it a copy of every special resolution of the company in force at the time of issue.”
(iii) Conversion of Private Company Limited by Shares to an Unlimited Company (section 31)
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Section 31 provides that a private company limited by shares may be converted into an unlimited company if all its members agree in writing to its conversion.
Of all types of conversions, this type of conversion presents the greatest danger to the members as converting to an unlimited company entails that the company will lose the advantages associated with being a limited company. In accordance with section 36(4) of the Act the power to convert the company must be preceded by the amendment of the articles.
(iv) Conversion of a Private Company Limited by Guarantee to a Limited by Shares and Unlimited Company (section 32 of the Act)
Section 32 of the Act provides that, “a company limited by guarantee may be converted into a company limited by shares or unlimited company if:-
a) All the members agree in writing;
b) to convert the company into such a company;
c) to a share capital for the company and the division thereof into shares of fixed amounts; and
d) each member agrees in writing to take up a specified number of shares.
(v) Conversion of an Unlimited Company to a Private Limited by Shares (section 33 of the Act)
The conversion here is to a private company limited by shares or a private company limited by guarantee.
(vi) Conversion of Public Company to a Private Company Limited by Shares (section 34)
Section 34 provides that, “a public company may be converted into a private company limited by shares if a special resolution is passed that: -
a) approves the conversion; and
b) amends the articles to satisfy sections 16 and 17, if the company’s articles do not satisfy those sections.”
(vii) Conversion of a Private Company Limited by Shares to a Public Company (section 35)
This is provided under section 35 of the Act. Note that it is only a private company limited by shares that can be converted into a public limited company.
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Therefore, a private company limited by guarantee or unlimited company cannot be converted into a public limited company.
(a) Method of Conversion
Section 36(1) of the Act provides that, “if the requirements of section 30, 31, 32, 33, 34 and 35 (in this section call “the conversion sections”) are satisfied with respect to a company, the company shall, within 21 days after the conversion section’s becoming satisfied, lodge with the Registrar an application in the prescribed from for conversion of the company in accordance with the resolution or agreement, together with the documents referred to in subsection (4).
Companies Form 14 is issued for the application to convert a company from one form to another. The replacement certificate of incorporation will indicate the date of conversion. The Registrar will then make appropriate changes in the Register to show the changed status of the company.
In terms of section 36(2) of the Act, with effect from the date of conversion as stated in the replacement certificate of incorporation , the company will stand converted to the status which was sought in the application. The articles of the company will stand amended and the company will assume the amended abbreviations, e.g. Plc or Ltd after their name. If you are converting to a company limited by guarantee, then the company shares will stand surrendered and cancelled in accordance with section 76(1) of the Act. Under section 16(6) of the Act, the Registrar of Companies is empowered to make an application to the High Court to secure the conversion of a private company limited by shares to a public company.
(b) Legal Effect of Conversion
Section 36(5) of the Act provides that, “the conversion of the company under this section shall not alter the identity of the company, nor affect any rights or obligations of the company except as mentioned in this section, nor render defective any legal proceedings by or against the company.” This means one cannot use the medium of conversion to run away from liabilities incurred under the old type of company. It is therefore, provided under section 36(6) that,
“where an unlimited company is converted to a limited company and is wound-up within three years after the conversion, a member of the company who was a member immediately before the conversion shall not be entitled to a limitation of liability under section 266.” This is in the event that the company is unable to meet its debts.