Delhi High Court rejects plea by Reebok seeking conversion from Unlimited Liability Company to LLC

The Delhi High Court has upheld an order of the Registrar of Companies (RoC) rejecting a proposal to convert sporting goods company Reebok India from an Unlimited Liability Company (ULC) to a Limited Liability Company (LLC) [Reebok India Company v Union of India through Secretary, Ministry of Corporate Affairs & Anr]..Justice Subramonium Prasad rejected Reebok’s plea after noting that the reasons given by the RoC cannot be said to be perverse. .RoC had rejected Reebok's application on observing that the company has suffered substantial financial losses and has a net deficit in current liabilities over assets in excess of ₹2,100 crores.The Registrar further said that various prosecutions have been filed by the Serious Fraud Investigation Organization (SFIO) against Reebok for offences under the Companies Act and the Indian Penal Code (IPC).“The registrar was also not provided with an NOC or undertaking from all the shareholders to support the conversion application and the petitioner did not even issue a public advertisement inviting objections from various creditors/stakeholders on the issue of conversion. 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 Court observed.It, therefore, dismissed Reebok’s case against the decision of the RoC..Reebok had approached the High Court challenging the RoC’s decision on the ground that it was without any reasons or justification.Initially, the company also challenged Rule 37 of the Companies (Incorporation) Third Amendment Rules, 2016, although that plea was later given up.Rule 37 of the 2016 Rules deals with the conversion of an unlimited liability company into a company whose liability is limited by shares or guarantee. Rule 37(8) of the said Rules deals with when an unlimited liability company shall not be eligible for conversion into a company limited by shares or guarantee..After considering the case, Justice Prasad observed that since the validity of Rule 37 of the 2016 Rules is not under challenge anymore, the only question that remains for consideration is whether the RoC order rejecting Reebok’s application can be sustained or not.The Court ultimately held that the RoC order was not perverse and, therefore, refused to set it aside..Senior Advocate Rajshekhar Rao along with advocates Shantanu Tyagi, Aayush Kevlani, Purnima Mathru and Yamini Mookherjee appeared for Reebok.Union of India was represented through Central Government Standing Counsel Ravi Prakash as well as advocates Varun Aggarwal, Farman Ali, Astu Khandelwal, Aman Rewaria, Yasharth Shukla, Usha Jamnal, Abhishek Khanna..[Read Judgement]