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Conversion of pvt co to LLP - query for withdrawal of funds

CA Vitrag Modi (9 Points)

31 May 2020  
Dear Sir,
There is one private company having capital and free reserves.
It is planning to convert its reserves into capital by issue of Bonus shares and then to convert the pvt company to LLP.

Now after conversion to LLP, is there any restriction on withdrawal of funds from LLP ?

Partners want to withdraw capital and then they may Dissolve the LLP.

(Accumulated reserves can't be withdrawn till 3 years. So bonus issue is planned)

 2 Replies

yasaswi gomes (My grammar is 💯 good I)   (6636 Points)
Replied 02 June 2020

Bonus shares doesn’t result in additional capital, but it will result in increased holdings. I have this bankruptcy codes here and the partners have to satisfy interests of creditors a.k.a, shareholders after the issue. Also, the company must be a going concern to raise additional capital. Is it issuing bonus shares to partners? If that is the case then, please go through this: https://ibbi.gov.in/uploads/publication/2019-10-11-191135-wv5q0-2456194a119394217a926e595b537437.pdf

The funny part is there is no malfeasance rules regarding voluntary insolvency by the directors of the company. That means they don’t have to give up on their shares in the company and it is not very well defined. But one section addresses that they cannot hide assets of the company during insolvency and not sure if their own share holdings rights are assets or not. This is because, INDAS prescribes share holders capital in the equity section, which means owners equity is entitled to dividends here and during the dissolution of the firm, the profit or loss realised will be their burden. 

yasaswi gomes (My grammar is 💯 good I)   (6636 Points)
Replied 02 June 2020

Sorry, forgot to comprehend, “the bankruptcy and insolvency code strips a director and its partners of their shareholding rights in the event of an voluntary insolvency”, if such a section exists in the law, then the above motive could be avoided. Insolvency can be declared with mutual consent and since they have a right to dissolve a company, nothing can be done. They can walk away, but what use is their shares when the company is dissolved? It is not such a big amount that they can take after clearing out new shareholders. Sometimes, they might not even realise a profit. 

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