Requirement of transfer in case of conversion of a firm into a private limited company

Requirement of transfer in case of conversion of a firm into a private limited company under Part IX of the Companies Act, 1956

The question involved in L.K.S. Gold House (P) Ltd. Vs. L. K. S. Gold Palace - [2005] 57 SCL 88 (CLB - Chennai)  case was whether any transfer is involved in case of a firm being converted and incorporated under Part IX of the Companies Act.

In this case,  a suit was filed restraining defendants etc from infringing the copyright in the registered artistic work of the plaintiff’s logo “L.K.S”. The plaint proceeded on the basis that the copyright belong to the plaintiff, which is a private limited company as on date; prior to that, the predecessors in interest of the Directors of the Plaintiff company started the business with the said copyright thereafter it was used by a partnership firm started by MD of the plaintiff company in the name of LKS Gold House. The said partnership firm was converted into a private limited company under the provisions of the Companies Act and thereafter the proprietary right in the trade mark ‘LKS Gold House’ and its logo stood vested with plaintiff. The suit was resisted on the plea that the said copyright has been registered in the name of LKS Gold House which is partnership firm, the suit was filed by the private limited company which is a separate legal entity, therefore, it is not entitled to agitate any legal rights that accrued to the partnership firm. It was also contended that there was no valid assignment of the said copyright by the partnership firm in favor of the plaintiff as there was no assignment deed or record, as required under section 19 of the Copyrights Act. The present application was filed by the defendant in the suit seeking dismissal of the suit.

Dismissing the application, the court held that ‘there is no dispute that under part IX of the Companies Act, a partnership firm can be registered as a company. Joint Stock Company is defined under section 566 of the Act. Among the features of a joint stock company, it should have permanent paid up or nominal share capital; the said share capital must be a fixed amount, it should be divided into shares of fixed amount and it should have been formed on the principle of having the company only of its members, whether a shareholder or a stock holder and no-one else. The feature noted in the Memorandum and Articles of Association of this company earlier in this order definitely bring the plaintiff company into a joint stock company. It cannot be disputed that when the plaintiff company was incorporated, all the requirements of law as found in part IX of the Companies Act have been complied with. Merely because, in the future, the company is permitted to raise the share capital, especially when invitation to public stands ruled out, would not, in my opinion, alter the character of the company from joint stock company into any other company.

As regards the requirement of transfer of assets, the court observed that ‘the plaintiff company has come to be incorporated under part IX of the Companies Act, after complying with all the requirements in regard thereto and registered as such, there is a statutory vesting under section 575 of the Act of all the assets of the erstwhile partnership company into the private limited company. This means, no transfer is involved. In other words, there is neither transferor nor a transferee; the presence of both alone would mean that there is transfer.’ The Court also referred to Supreme Court judgment in the case of Vania Silk Mills (P) Ltd. Vs. CIT [1991] 191 ITR 647 (SC) where it was held that for the purpose of transfer, the existence of transferor and transferee at the same time is essential conditions.