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Conversion – Three Key Issues
All private limited companies must convert into one of the types of company available under the Companies Act 2014 within a transition period of 18 months. As this transition period comes to an end shortly, we would like to highlight three key issues to you as they may have an impact on your decision on whether to convert to a private company limited by shares (“LTD”), a designated activity company (“DAC”) or another type of company. For a detailed analysis of the conversion process, please read our Matheson Conversion Guide for Private Companies.
Watch the clock
- The Companies Registration Office (“CRO”) must process all of the documents relating to conversion including any new constitution of a company before any conversion can become effective. The CRO has advised that the conversion process should be started as soon as possible as it cannot guarantee that it will be able to process applications that are received towards the end of the transition period (namely 30 November 2016 for conversion to LTDs and 31 August 2016 for conversion to DACs). See the CRO ezine of 8 August 2016.
Watch out for “credit institutions”
- Under section 18(2) of the Companies Act 2014, LTDs are prohibited from carrying on the activity of a “credit institution”. The term “credit institution” has been widely defined in section 275 so as to include “a company or undertaking engaged in the business of accepting deposits or other repayable funds or granting credit for its own account”. Matheson has, in co-ordination with other law firms, raised this definition with the Department of Jobs, Enterprise, and Innovation to point out that many companies which would not traditionally have been thought of as “credit institutions” will be prevented from becoming an LTD without apparent reason as their activities may fall within the broad definition of “credit institution”.
- The current draft of the Companies (Accounting) Bill 2016 (the “Bill”) does not contain any provision to deal with this issue however amendments may be suggested as the Bill passes through the legislative process. As yet, there is no indication that the Bill will be passed before 30 November 2016.
Watch out if you do nothing
If your company has not taken any action, it will be automatically converted to an LTD after 30 November 2016. Is this a problem? Potentially yes, because:
- Your company’s current Memorandum and Articles of Association will be replaced by a ‘deemed constitution’ under section 61 of the Companies Act 2014. Although regulating the affairs of your company, this ‘deemed’ constitution will not exist as a physical document, leading to uncertainty as to the exact content of the constitution. Furthermore, it may not be in a form which suits your requirements.
- Failure to convert can in certain circumstances constitute grounds for a rebuttable presumption of oppression of minority shareholders by the directors in proceedings under section 212 of the Companies Act 2014. Following section 212 proceedings, a court can in extreme cases order the winding up of your company.
Any company that has been deemed to be LTD may re-register after 30 November 2016 using the re-registration process set out in Part 20 of the Companies Act 2014.
Matheson can assist with the conversion process and supply standard form constitutions which have been approved by the CRO and which can be tailored to suit your company.
For more general information please read our additional Matheson publications on the Companies Act 2014, Don’t hit the snooze button on compliance and on the Companies (Accounting) Bill 2016 - changes to filing obligations for unlimited companies.