Topic 56 Conversion PrivateCo to LLP Schedule3

THE LEGAL BRIDGE

Judiciary Examination Study Material

Topic 56

Conversion from Private Limited Company to LLP

Schedule 3 & Section 56 — Conditions, 5-Year Lock-in & Effects

Pillar 7 — Conversion to LLP (Sections 55–59 + Schedules 2–4)

Module Overview

Section 56 read with Schedule 3 enables a private limited company to convert into an LLP — the most commonly used conversion route, particularly for professional services firms. This topic covers the five eligibility conditions, the turnover threshold for tax exemption, the critical 5-year lock-in period, the step-by-step procedure, and the effects of conversion.

56.1 Section 56 + Schedule 3

Section 56

Subject to the provisions of this Chapter, a private company may convert into a limited liability partnership in accordance with the provisions of Schedule 3.

56.2 Five Eligibility Conditions (Schedule 3, Para 2)

No security interest: Company has no subsisting charge, mortgage, or security interest on its assets at the time of conversion application.
All shareholders consent: All shareholders must consent to the conversion — no dissenting shareholder can be left out.
All shareholders become partners: All persons who are shareholders immediately before conversion must become partners of the LLP.
No pending prosecution: The company and its directors must have no pending prosecution for any offence under the Companies Act or other law.
Annual filings up to date: The company must have filed all annual returns and financial statements up to date with the ROC.

56.3 The 5-Year Tax Lock-In & Turnover Threshold

Section 47(xiiib) IT Act — Conditions for Capital Gains Exemption

Turnover threshold: The company's total sales, turnover, or gross receipts in any of the three preceding financial years must NOT have exceeded Rs. 60 lakhs. This applies specifically to company-to-LLP conversions.

5-year lock-in: The LLP must NOT convert back into any other form within FIVE years from the date of conversion. Breach disqualifies the exemption — capital gains tax becomes immediately payable.

56.4 Step-by-Step Conversion Procedure

Step-by-Step Procedure

Step 1: Board resolution to convert; all shareholders sign consent (Form 18 declaration of solvency).

Step 2: Verify eligibility: no subsisting charge; no pending prosecution; annual filings current.

Step 3: File Form 18 (Statement of Solvency) with the Registrar, signed by all designated partners-to-be.

Step 4: File conversion application with required documents (company's audited accounts, shareholder/director list, all consents).

Step 5: Registrar issues Certificate of Registration of LLP (Certificate of Conversion).

Step 6: Publish notice of conversion in vernacular + English newspaper.

Step 7: Intimate ROC under Companies Act of company's conversion — ROC deregisters the company.

56.5 Effects of Conversion (Schedule 3 — Effects)

Effect	Details
Assets vest	Company's property vests in the LLP automatically — no separate conveyance deed
Liabilities transfer	LLP liable for all company debts — creditors retain full rights
Share capital abolished	Company's share capital ceases; shareholders' interests become LLP partnership interests
Contracts continue	All contracts continue as LLP obligations — no counterparty consent required
Pending proceedings	Legal proceedings continue with LLP as substituted party

⚖ In re M/s. Consult India LLP ROC Mumbai (2017)

Held: The Registrar refused conversion because the private company had a pending bank loan secured against its assets (a charge subsisted). Schedule 3's condition — no subsisting security interest — was not met. Conversion was rejected until the charge was fully satisfied and removed from the Register of Charges.

Principle: A subsisting charge on company assets is an absolute bar to Schedule 3 conversion — the charge must be discharged BEFORE filing the conversion application.

📌 EXAM TIP: Private company-to-LLP: (1) Section 56 + Schedule 3; (2) Five conditions — NO subsisting charge (most important); all shareholders consent; all become partners; no pending prosecution; filings current; (3) Turnover threshold for IT exemption: Rs. 60 lakhs in any of three preceding years; (4) 5-year lock-in — no reconversion within 5 years; (5) Form 18 is the prescribed form.

Key Point	Core Content
Section 56 + Schedule 3	Conversion of private limited company to LLP
Condition 1 — most critical	No subsisting charge/security interest on company assets
All shareholders	Must consent and must become LLP partners
Turnover threshold	≤ Rs. 60 lakhs in any of three preceding years (for IT capital gains exemption)
5-year lock-in	No reconversion within 5 years — breach = loss of capital gains exemption
Key case	Consult India — pending bank charge = refusal of conversion