Section 65 of the Companies Act 2013 is significant for companies that intend to shift from an unlimited liability to that of limited liability. This section allows an unlimited company to form reserve share capital: a set amount of undischarged capital that becomes available only on the date of liquidation. The company will be able to increase nominal share capital or reserve undischarged shares in order to protect its financial stability and secure creditor interests. Understanding Section 65 is vital for unlimited companies planning for limited liability conversion and ensures compliance with the Act’s provisions on capital management.
Objective of Section 65
This section applies to unlimited companies with share capital who apply for registration as limited companies. It provides a mechanism whereby such companies adjust their share capital to reflect the limited liability status.
The main objective would be to create a reserve capital structure that may only be used as the last resort when the company is in the process of winding up, as the creditors will have all the more reason to be assured of their security.
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Detail breakdown of Section 65 of the Companies Act 2013
Section 65 of the Companies Act 2013 makes provision for an unlimited company proposing to convert itself into a limited company. The arrangements that may be made with regard to its share capital by such companies after their conversion are dealt with in this particular section. Here's a detailed breakdown:
Requirement of a resolution:
An unlimited company shall make a resolution to adopt the limited liability status. It may, through the same resolution, opt for any or both of the options available under Section 65 to alter its share capital.
(a) Increase in Nominal Amount of Share Capital
Increase Share Capital: The company may choose to increase the nominal amount of its share capital. This can be done by raising the nominal value of each of its shares.
Limitation on Increased Capital: The increased portion of the share capital is specifically designated as reserve capital. It means that this portion of capital cannot be called up by the company unless the company is winding up.
Purpose: This reserve serves as a financial safeguard for creditors, as it remains untouched until liquidation, thus offering protection against unforeseen liabilities.
(b) Specified Uncalled Capital as Reserve
Designation of Uncalled Capital: The company can also designate a specific part of its uncalled share capital as reserve capital, which similarly can only be called up if the company is being wound up.
Purpose: By specifying a portion of the uncalled capital, the company ensures that this capital is reserved as a contingency fund, further strengthening the company's commitment to securing creditor interests during insolvency.
Important Key Terms Explained
Unlimited Company: A company where members have no limit on their liability, meaning they are fully liable for company debts.
Limited Company: A company where members’ liability is limited to their shareholding or guarantee amount.
Nominal Share Capital: The face value of a company's issued shares.
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Illustration on Section 65 of the Companies Act 2013
Suppose an unlimited company with a nominal share capital of ₹10,00,000 decides to convert to a limited company. It can increase the nominal value of its shares from ₹10 per share to ₹15, but the additional ₹5 per share (totaling ₹5,00,000) can only be called up during winding up, protecting this portion as reserve capital. Alternatively, it can designate ₹2,00,000 of its existing uncalled capital as reserve capital for the same purpose.
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In Conclusion
Section 65 provides a clear direction on how unlimited companies should set reserve capital and safeguard it as they transition to limited liability. This provision ensures a balance between flexibility in share capital management and creditor security, reinforcing the credibility of the company’s capital structure.
FAQ's on Section 65 of the Companies Act, 2013
1. What is the purpose of Section 65 of the Companies Act, 2013?
Section 65 provides a way for unlimited companies with share capital to set aside a reserve capital when converting to a limited company. This reserve is protected and can only be used if the company winds up, adding a layer of security for creditors.
2. How can an unlimited company create reserve capital under Section 65?
An unlimited company can either increase the nominal amount of its shares or specify a portion of its uncalled capital as reserve capital. Both options ensure these funds are only accessible during winding up.
3. Why is reserve capital important in the conversion of an unlimited company to a limited company?
Reserve capital assures creditors that there will be funds set aside in the event of the company winding up, thus enhancing trust and security in the company's financial structure.
4. Does Section 65 require any specific resolution for conversion?
Yes, the company must pass a resolution for conversion to a limited company. This resolution authorizes the creation of reserve capital, ensuring the company aligns with the requirements of a limited liability structure.
5. What are the benefits of Section 65 for an unlimited company?
Section 65 allows an unlimited company to transition smoothly to limited liability while providing creditor protection through reserve capital. This balance helps maintain financial integrity and legal compliance.
