Various difficulties may arise for a buyer when he tries to obtain a mortgage bond for paying the purchase price. According to section 38 of the Companies Act, no company is allowed to offer any financial help for the purpose of acquisition of shares of a company.
This justifies that if a company owns a particular property, the buyer cannot raise money based on this property to pay the purchase price.
● For avoiding this limitation, a company has to be converted into a close corporation.
● No such limitation is invoked in the Close Companies Act.
● For a company to become a close corporation, the number of shareholders of the company must be limited to 10.
● The shareholders must also qualify the terms, conditions and set of qualifications as aforesaid by the Close Companies Act.
● A registration number will be allotted to the company by the registrar upon such conversion.
● According to the Companies Act, in the context of such a conversion, the existing shareholders become the only existing members of the company and no more shareholders are allowed after the conversion is performed.
● The new found close corporation hence adopts the name of the private company from which it is derived.
● A certificate on the basis of the foundation of the close corporation is issued.
● A CCI (Close Corporation founding Statement) is also registered.
● In case the members desire to change the name of the close corporation during the conversion, the registrar’s consent is required.