Conversion of Firm into Pvt Ltd Company

This query is : Resolved

CA.Tarun Maheshwari (Querist)
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27 March 2009 Dear Friends

I have a query. One of my clients is a Partnership firm with 5 partners (A, B, C, D and E) in the ratio of 4:3:1:1:1. Now they want to convert this firm into private limited company. And in the new company, Mr. C, D and E want to enter through their one other Private Limited Company in which only three of them are shareholders as well as directors. They want to leave their share in the firm and want to enter through this company in the same ratio, i.e 4:3:3 now. But as per Section 47(xiii) there are certain conditions that must be satisfied to avoid capital gains. These are as follows:
(a) all the assets and liabilities of the firm 30[or of the association of persons or body of individuals] relating to the business immediately before the succession become the assets and liabilities of the company;
(b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;
(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and
(d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

We are satisfying all the conditions at the time of conversion. But after conversion, when we want to change Mr. C, D, and E by selling the shares to their PL Company, the clause (d) attracts immediately. It seems that we can not remove C, D and E for five years, and they has to be in company within the cap of 50% limit.
Now questions are:

1. is my interpretation correct?

2. Does clause (d) speaks about the 50% voting power with the old partners only or the persons also has to be same in the same ration. I mean if Mr. A and B are having 70% holding, then does it satisfies the clause (d) or C, D, and E also has to be there?

3. If above is not possible then whether there is any other option how can I remove them from converted company and bring their PLC in to the company.

Please remember that a Private Limited company can not be a partner so I can not bring their PLC in to firm first and then convert it. This option is not available.

Sanjay Soni

Sanjay Soni (Expert)
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28 March 2009 1. your interpretation is correct

2. it is Obvious that all partner should be the shareholders till 5 years so you can not leave C,D & E therefore they must be the shareholders

3. One way can be seen

Just convert Partnership in to the company with all partner become shareholder and then bring the PLC as new shareholder with fresh capital so as to partners voting right should be not less then 50%