Companies Act Section 378ZS

Companies Act, Section 378ZS: Re-conversion of a Producer Company into an Inter-State Co-operative Society

Section 378ZS of the Companies Act, 2013, deals with the process by which a Producer Company that was originally an inter-State co-operative society may revert to its prior status as a co-operative society. This provision outlines the legal pathway and procedural requirements for such re-conversion, ensuring due consideration of member and creditor interests and regulatory oversight. The provision is structured as follows:

1. Eligibility and Application for Re-conversion

Any Producer Company, which was earlier registered as an inter-State co-operative society and was later restructured and incorporated as a Producer Company under the relevant provisions of Chapter XXIA of the Companies Act, 2013, may apply for re-conversion back into its original form as an inter-State co-operative society.

Such a re-conversion can be initiated in the following two scenarios:

(a) By way of a resolution passed in a general meeting of the Producer Company. This resolution must be approved by not less than two-thirds of the Members present and voting at the meeting.

(b) On the request of the creditors of the Producer Company, where such request is made by creditors representing at least three-fourths of the total value of the company’s creditors.

In either case, an application must be made to the Tribunal (i.e., the National Company Law Tribunal or NCLT) for approval of the re-conversion.

2. Direction for Convening Meetings

Upon receipt of an application under sub-section (1), the Tribunal shall issue directions for convening meetings, as necessary. These may include:

A meeting of the company’s Members, or a meeting of the concerned creditors, depending on the nature of the application. The Tribunal will also prescribe the manner in which such meetings should be conducted to ensure transparency and fairness.

3. Approval and Binding Effect of the Resolution

At the meeting(s) conducted in accordance with the Tribunal's directions:

If a majority in number representing at least three-fourths in value of the creditors or Members (as applicable), vote in favour of the re-conversion.
If the Tribunal sanctions the re-conversion, then the decision shall become binding on:

All the Members of the Producer Company, all the creditors of the Producer Company, and the company itself.
However, before granting its approval, the Tribunal must be satisfied that the applicant (whether the company itself or any other party initiating the application) has fully disclosed all material facts relevant to the case. Such material facts may include but are not limited to:

The latest financial status of the company, the most recent auditor’s report on the company’s accounts, any ongoing investigative proceedings under Chapter XIV of the Companies Act, and any other relevant information or concerns.
This disclosure must be made to the Tribunal through an affidavit or other acceptable means.

4. Filing of Tribunal Order with the Registrar

An order passed by the Tribunal under sub-section (3) shall not take effect until a certified copy of the order is filed with the Registrar of Companies in accordance with applicable law.

5. Annexing Order to Memorandum or Constitution Documents

Once the certified order has been filed:

A copy of the Tribunal’s order must be annexed to every copy of the memorandum of the company issued thereafter.
In cases where the company does not have a memorandum, the order must be annexed to every copy of the instrument that constitutes or defines the company's constitution.
This ensures that all stakeholders and readers of the company's key governance documents are informed of the re-conversion.

6. Penalty for Non-Compliance with Filing Requirement

If the company fails to comply with the requirement to file the Tribunal’s order with the Registrar under sub-section (4), then the following parties may be penalised:

The Producer Company itself, and every officer of the company who is responsible for the default.
The punishment shall be a fine extending up to one hundred rupees for each copy of the memorandum or other constitution document in respect of which the default has been committed.

7. Stay of Legal Proceedings During Tribunal Consideration

At any time after the application for re-conversion has been filed with the Tribunal and before the application is finally disposed of, the Tribunal may, at its discretion:

Stay the commencement or continuation of any legal suit or proceeding against the Producer Company, on such terms and conditions as the Tribunal considers appropriate.
This provision ensures that the company is not unduly burdened by litigation while the re-conversion process is under judicial consideration.

8. Registration under the Relevant Co-operative Law Post Sanction

Once the Tribunal sanctions the re-conversion, the Producer Company shall be under a legal obligation to:

Apply for registration as a multi-State co-operative society under the Multi-State Co-operative Societies Act, 2002 (or any other relevant law in force at the time), or alternatively, register as a co-operative society under the respective state law, as applicable.
This application for registration must be made within six months of the Tribunal’s order sanctioning the re-conversion.

In addition, the company must submit a report of such registration to the following authorities:

The Tribunal that sanctioned the re-conversion, the Registrar of Companies, and the Registrar of Co-operative Societies under whose jurisdiction the company has now been registered.