Corporate Regulations - Lesson 1

 

 

CORPORATE REGULATIONS

 

Module I

 

INTRODUCTION TO COMPANIES ACT 2013

 

The attempt to revise the 1956 Act was the Companies Bill, 2009 which was introduced in the Lok Sabha, one of the two Houses of Parliament of India, on 3 August 2009. This Companies Bill, 2009 was referred to the Parliamentary Standing Committee on Finance, which submitted its report on 31 August 2010 and was withdrawn after the introduction of the Companies Bill, 2011. The Companies Bill, 2011 was also considered by the Parliamentary Standing Committee on Finance which submitted its report on 26 June 2012. Subsequently, the Bill was considered and approved by the Lok Sabha on 18 December 2012 as the Companies Bill, 2012 (the Bill). The Bill was then considered and approved by the Rajya Sabha too on 8 August 2013. It received the President’s assent on 29 August 2013 and has now become the Companies Act, 2013.

 The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections in the Companies Act, 1956 and has 7 schedules. The Act came into force on 12 September 2013 with few changes like earlier private companies maximum number of member was 50 and now it will be 200. A new term of "one person company" is included in this act that will be a private company and with only 98 provisions of the Act notified. On 27 February 2014, the MCA stated that Section 135 of the Act which deals with corporate social responsibility will come into effect from 1 April 2014. On 26 March 2014, the MCA stated that another 183 sections will be notified from 1 April 2014. The Ministry of Company Affairs thereafter proposed a draft notification for exempting private companies from the ambit of various sections under the companies act.

 

Purpose/Objective of the Act

 

The Act broadly seeks to achieve the following objectives:

a)      To promote the development of the economy by encouraging entrepreneurship and enterprise efficiency and creating flexibility and simplicity in the formation and maintenance of companies;

b)     To encourage transparency, accountability and high standards of corporate governance;

c)      To recognize various new concepts and procedures facilitating ease of doing business while protecting the interests of all the stakeholders;

d)     To enforce stricter action against fraud and gross non-compliance with company law provisions;

e)      To set up an institutional structure in the form of various authorities, bodies and panels as well as by including recognition of various roles for professionals and other experts; and

f)       To cater to the need for more effective and time bound approvals and compliance requirements relevant in the present context.

Salient features of the Act

The Companies Bill 2013 contains 29 Chapters, 7 Schedules, 470 clauses as against the Companies Act, 1956 which consists of 658 sections under 13 Parts and 15 schedules. In so far as section numbers are concerned more than 200 sections have been deleted from the Companies Act, 1956. While this is on one side of it, number of provisions have been removed or discontinued or dispensed with in the existing but revised section/clause numbers. The clauses to the Companies Bill, 2013 have been categorized into Introduced, Amended sections for easy and quick reference.

Introduced

1.      For the first time introduced the concept of One Person Company [Clause 2(62)].

2.      Expert [Clause 2(38)]

3.      Inclusive definition of Financial Statement [Clause 2(40)]

4.      Entrenchment Provisions in Articles of Association (Clause 5)

5.      Public Offer and Private Placement deals with issue of securities by a public and a private company (Clause 23)

6.      Class Action Suits (Clause 37)

7.      E-governance in all company processes (Clause 120)

8.      Corporate Social Responsibility - 2% of average net profits of the previous three years (Clause 135)

9.      Mandatory Internal Audit for prescribed classes of companies (Clause 138)

10.  Mandatory Rotation of auditors for listed companies and other prescribed classes of companies after 1 term of 5 consecutive years in case of individual auditor and after 2 terms of 5 consecutive years for audit firm (Clause 139)

11.  5 year tenure for auditor appointed at AGM of a company (other than Government Company/ Government controlled Company) instead of annual appointment/ reappointment

12.  Limited Liability Partnership eligible to be appointed as Auditor of Company (Clause 141)

13.  Auditor not to render certain services (Clause 144)

14.  Independent Directors [Clause 149] 1/3rd of the total number of directors as independent directors - listed public companies

15.  Inclusion of at least one woman director on board (Clause 149)

16.  Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.(Clause149 (3))

17.  Nomination and Remuneration committee [Clause 178(1)]

18.  Stakeholders relationship committee [Clause 178(5)]

19.  Key Managerial Personnel [Clause 2(51) and Clause 203] Key managerial personnel (KMP) to include Manager or Managing Director (MD) or Chief Executive Officer (CEO), Whole-time director, Chief Financial Officer (CFO), and Company Secretary (CS).

20.  Insider Trading of Securities Prohibited (Clause 195)

21.  Statutory Status to the Serious Fraud Investigation Office (SFIO) (Clause 211)

22.  Specific framework for Merger and Acquisitions of companies. Single forum for approval of mergers and acquisitions (Clause 233)

23.  Merger or Amalgamation of a Company with Foreign Company (Clause 234)

24.  Protection to minority shareholders, Class Action Suits for prevention of oppression and mismanagement [Clause 245]

25.  Registered Valuers (Clause 247)

26.  Interim administrators or Company administrators [Clause 259]

27.  Mediation and Conciliation Panel (Clause 442)

28.  Punishment for Fraud (Clause 447)

 

Following are the important highlights of Companies Act, 2013:

·        New definitions have been introduced, some of which are auditing standards, associate company, CEO, CFO, control, employee stock option, financial statement, global depository receipt, Indian depository receipt, independent director, interested director, key managerial personnel, promoter, one person company, small company, turnover, voting right, etc.

·        Number of existing definitions have been modified, for example, definitions of abridged prospectus, body corporate, director, expert, managing director, officer in default, etc.

·        Definition of private company changed - the limit on maximum number of members increased from 50 to 200.

·        The concept of One Person Company introduced. It will be a private limited company.

·        The concept of Small Company introduced. It will be subject to a lesser stringent regulatory framework.

 

Meaning and definition of company

 

The term "Company" was originally derived from 2 Latin words

·        Com (means together)

·        Panis (means bread/meal)

Thus the term "Company" was originally used for that group of person who took their meal together.

According to Section 2(20) of Companies Act, 2013, company means a company incorporated (formed and registered) under this Act or under any of the previous companies laws.

Lord Justice Lindley has defined a company as “an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contributed in it or form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his “share”. The shares are always transferable although the right to transfer them may be restricted.”

 

Features

Following are the main characteristics of company form of business:

1)      Corporate personality: Being an artificial person, a company is a legal entity different and separate from its promoters, members, directors, and other stake holders. It has its own corporate name and work under that name. It

·     can hold its assets in its own name,

·     can sue or be sued in its own name,

·     can borrow/lend funds, open bank accounts, enter into contracts in its own name

Any of its shareholders or directors or other officers cannot be held liable for the acts of the company even if he/it holds the entire share capital. Further, the shareholders or individual directors are not the agents of the company and so they cannot bind company by their personal acts. Company means a company incorporated (formed and registered) under this Act or under any of the previous companies laws (like Companies Act, 1956).

2)      Limited liability: According to Section 3(2), a company may be

·     a company limited by shares

A company limited by shares means the liability of the members towards the company is limited to amount unpaid on their shares only.

·     a company limited guarantee

A company limited guarantee means the liability of the members towards the company is limited to the amount of guarantee prescribed in the MOA. Further, in such companies, the members can be made liable only in the event of winding up of the company.

·     an unlimited company

An unlimited company means here the liability of the members is unlimited towards company.

But, in none of the above cases, members can be made liable to anyone else except company for any act of the company or directors.

3)      Perpetual Succession: Perpetual Succession means existence forever. According to Section 9, from the date of incorporation mentioned in the certificate of incorporation, every company has perpetual succession. A company is an artificial person created by law; therefore it can be dissolved or wind up by law. In other words, members may come and go, but company can go forever.

4)      Separate Property: A company is separate legal entity having its own corporate name. It can hold properties in its own name. No member can claim himself to be the owner of the company’s property during its existence. In other words, the property of a company is not the property of the individual members.

5)      Transferability of Shares: According to Section 44 of Companies Act, 2013

·     the shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.

According to Section 2(68) (i) of the Companies Act, 2013, private company may restrict the right to transfer its shares through its AOA. But generally, a public company cannot restrict the transfer of its shares.

6)      Capacity to sue and be sued: A company is a separate legal entity having its own corporate name. Therefore, according to Section 9, company may sue or may be sued in its own name (not in the name of its directors or members).

7)      Contractual Rights: A company is an artificial person created by law. Therefore like natural person, it can enter into a contract in its own name through its agent (directors or other authorised persons).

8)      Demutualization (separation of management and ownership): Demutualization means separation of management and ownership. Under the company form of business, management (directors) is different from owners (members). Members of the company do not get engaged into the day-to-day business of the company. Members appoint directors who run a company on their behalf. Such directors may or may not be members of the company.

9)   Common Seal: On incorporation, a company may have a common seal. Since a company has no physical existence, therefore it has to act through its agents only. To put restrictions on the misuse of the powers of those agents, contracts entered into by anyone on behalf of the company may be under the common seal of the company. Thus common seal acts as official signature of the company. Now, after Companies (Amendment) Act, 2015, it is not compulsory for the company to have common seal. Thus a company may or may not have common seal.

 

Lifting or Piercing of corporate veil

A company is an artificial person different for its members and directors. In the eyes of law, it has a separate corporate personality. It has its own corporate name and works under that name. In normal circumstances company cannot be considered as agent or trustee of its members. Therefore members and directors of a company cannot be held liable for any act of that company.

Corporate Veil means only the company can be held liable for an act done in the name of the company. But, as per company laws, a company can be created for lawful purposes only. If a company is created for

·        dishonest use

·        fraudulent purpose

·        unlawful purpose

·        evading taxes

·        any other purpose which is against the public interest then law can identify the persons who   are    behind        it   and   are held responsible for any fraud/unlawful act.

·        Lifting the corporate veil means disregarding the corporate personality and looking behind the real person who are in the control of the company. In other words, where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. In this regards the court will break through the corporate veil. According to the definition of Black Law Dictionary, "the piercing the corporate veil is the judicial act of imposing liability on otherwise immune corporate officers, Directors and shareholders for the corporation's wrongful acts".

 

In the following circumstances different courts found it necessary to lift the corporate veil and punish the actual persons who did wrong or unlawful acts under the name of company:

1.    Protection of Revenue: The Court may ignore the Separate Legal Entity status of a Company, where it is used for tax invasion or circumventing tax obligation.

2.   Determination   of    enemy character of the Company: Company being an artificial person cannot be enemy or friend. But during war, it may become necessary to lift the corporate veil and see the persons behind it to determine whether they are friends or enemy. This is due to the reason that though a company enjoys Separate Legal Entity but its affairs are run by individuals.

3.  Prevention of fraud: Where a Company is used for committing frauds or improper conduct, Court may lift the corporate veil and look at the realities of the situation.

4.  Protection of public policy: The Court shall lift the Corporate Veil without any hesitation to protect the public policy and prevent transaction opposed to public policy.

5.   Company mere   sham or cloak: Where the Company is a mere sham and was really a ploy used for committing illegalities and to defraud people, the Court shall lift the Corporate Veil.

6.  Where a Company acts as an agent of its shareholders: If there is an arrangement between the shareholders and a Company to the effect that the Company will act as agent of shareholders for the purpose of carrying on the business, the business is essentially of that of the shareholders and will have unlimited liability.

 

 

Kinds of companies

 

The Companies Act, 2013 provides for the kinds of companies that can be promoted and registered under the Act. The three basic types of companies which may be registered under the Act are:

(a)  Private Companies;

(b)  Public Companies; and

(c)  One Person Company (to be formed as Private Limited).

Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful purpose by—

(a)  seven or more persons, where the company to be formed is to be a public company;

(b)  two or more persons, where the company to be formed is to be a private company; or

(c)  one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration

Section 3 (2) A company formed under sub-section (1) may be either—

(a) a company limited by shares; or (b) a company limited by guarantee; or (c) an unlimited company.

Types of Companies under the Companies Act, 2013

Public Company: Minimum paid-up share capital of INR 5,00,000. 7 or more persons can form a public company Any subsidiary of a public company shall be  treated as a public company even if such subsidiary, company has obtained the status of a private company in its Articles of Association.

Private Company: Minimum paid-up share capital of INR 1,00,000. 2 or more persons can form a private company subject to a limit of a maximum 200 members except in the case of one person company.  Right         to transfer its shares is restricted.

One Person Company: Only one person as member.

 

Classification of Companies

(i)   Classification on the basis of Incorporation: There are three ways in which companies may be incorporated.

(a)   Statutory Companies: These are constituted by a special Act of Parliament or State Legislature. The provisions of the Companies Act, 2013 do not apply to them. Examples of these types of companies are the Reserve Bank of India, Life Insurance Corporation of India, etc.

(b)  Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under any previous company law, with ROC fall under this category.

(ii)  Classification on the basis of Liability: Under this category there are three types of companies:

(a)   Unlimited Liability Companies: In this type of company, the members are liable for the company's debts in proportion to their respective interests in the company and their liability is unlimited. Such companies may or may not have share capital. They may be either a public company or a private company.

(b)  Companies limited by guarantee: A company that has the liability of its members limited to such amount as the members may respectively undertake, by the memorandum, to contribute to the assets of the company in the event of its being wound-up is known as a company limited by guarantee. The members of a guarantee company are, in effect, placed in the position of guarantors of the company's debts up to the agreed amount.

(c)  Companies limited by shares: A company that has the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares. For example, a shareholder who has paid Rs. 75 on a share of face value ` 100 can be called upon to pay the balance of Rs. 25 only. Companies limited by shares are by far the most common and may be either public or private.

(iii)  Other Forms of Companies

(a)   Associations not for profit having a license under Section 8 of the Companies Act, 2013 or under any previous company law;

(b)  Government Companies;

(c)  Foreign Companies;

(d)  Holding and Subsidiary Companies;

(e)  Associate Companies/Joint Venture Companies

(f)  Investment Companies

(g)  Producer Companies.

(h)  Dormant Companies

 

Private Company

According to Section 2(68) of the Companies Act, 2013 “Private Company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles, –

a)     restricts the right to transfer its shares;

b)    except in the case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that –

a)  persons who are in the employment of the company; and

b)  persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

c)  prohibits any invitation to the public to subscribe for any securities of the company;

 

 

Public Company

According to Section 2(71) of the Companies Act, 2013 “public company” means a company which –

a)     is not a private company;

b)    has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purpose of this Act even where such the subsidiary company continues to be a private company in its articles.

As per section 3 (1) (a), a public company may be formed for any lawful purpose by seven or more persons, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration.

 

Associate Company

As per Section 2(6), “Associate Company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Explanation to section 2(6) provides that “significant influence” means control of at least twenty per cent of total share capital, or of business decisions under an agreement.

 

Dormant Company

The Companies Act, 2013 has recognized a new set of companies called as dormant companies. As per section 455 (1) where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

 

Ø Explanation appended to section 455(1) says that for the purposes of this section,—

(i)    “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;

(ii)  “significant accounting transaction” means any transaction other than—

(a)   payment of fees by a company to the Registrar;

(b)   payments made by it to fulfil the requirements of this Act or any other law;

(c)   allotment of shares to fulfil the requirements of this Act; and

(d)   payments for maintenance of its office and records.

Ø  As per section 455(2), the Registrar on consideration of the application shall allow the status of a dormant company to the applicant and issue a certificate in such form as may be prescribed to that effect.

Ø  Section 455(3) provides that the Registrar shall maintain a register of dormant companies in such form as may be prescribed.

Ø  According to section 455(4), in case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies.

Ø  Further a dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed. [Section 455(5)]

Ø  The Registrar shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section. [Section 455(6)]

 

One Person Company

The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC means a company with only one person as its member [section 3(1) of 2013 Act]. The draft rules state that only a natural person who is an Indian citizen and resident in India can incorporate an OPC or be a nominee for the sole member of an OPC.

 

Small Company

A small company has been defined as a company, other than a public company.

1)    Paid-up share capital of which does not exceed 50 lakh INR or such higher amount as may be prescribed which shall not be more than five crore INR

2)    Turnover of which as per its last profit-and-loss account does not exceed two crore INR or such higher amount as may be prescribed which shall not be more than 20 crore INR:

As set out in the 2013 Act, this section will not be applicable to the following:

·      A holding company or a subsidiary company

·      A company registered under section 8

·      A company or body corporate governed by any special Act

 

Government Company

Section 2(45) defines a “Government Company” as any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

 

Producer Company

 

Producer Company means a body corporate having objects or activities specified in section 581B and registered as Producer Company under the lCompanies Act, 2013 with limited Liability and the liability of the members will be limited to the amount, if any, unpaid on the shares. A Producer Company is thus a body corporate having an object that is one or all of the following: production, harvesting, procurement, grading, pooling, handling, marketing, selling, the export of primary produce of the Members or import of goods or services for their benefit.

Associations  Not-for-profit

Not-for-Profit Organisations are the establishments that are for utilised for the welfare of the community and are set up as charitable associations which operate without any motive for profit. Their primary objective is to provide service to a specific class or the public at the larger picture. Usually, they do not produce, buy or sell commodities and may not have credit transactions. Therefore, they need not manage many books of account (as the trading entities do) and Trading and Profit & Loss Account. The funds raised by such establishments are credited to the general fund or capital fund. The major sources of their income usually are subscriptions from their member’s donations, income from investments, grants-in-aid etc.

Illegal associations

Section 464 of the Companies Act, 2013, states that any association or partnership formed exceeding fifty members for a profit gaining business, without registering it as a company under Companies Act, 2013, is said to be known as Illegal Association. Every member of such an association is personally liable for all liabilities incurred in the business. The third-party can take action against the members. Fine: Every member of such an association will be punishable with a fine that may extend to one lakh.