Introduction to Company Law – The Company Ninja

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Introduction to Company Law

Company law deals with the structure, management, administration, and conduct of affairs of companies. A company is given legal entity status by incorporating under the company law. To improve the status, rights, duties & obligations of companies, the law needs to be amended regularly.

The Companies Act, 2013 as well as 2017 the amendment to it and the ordinance that was promulgated on November 2nd, 2018 had some significant changes to the corporate legal framework of India. Some of the vast changes made have been further pointed out.

A company is a legal entity that is separate from the people who make it. This independent identity allows a company to live beyond its founders and into the hands of a successor. People may build a company but once registered, a company is its person.

The need for regulating and providing safety guidelines for the functioning of a company made the legislators enact the Companies Act, 1956. The said Act helps in regulating the basic aspects of company law, from its incorporation to its dissolution. An Act or a law provides a proper legal framework for the said functions. The companies Act, 2013 provides for all these.

Section 2(20) of the companies Act, 2013 defines a company as “a company incorporated under this Act or under any previous company law”. Hence, the law recognizes only those companies that have been authorized to function under the 2013 act or its predecessors. The law won’t recognize any other entity claiming to be a company.

There have been various amendments in the company law allowing for more liberal and stricter guidelines ranging from incorporation and auditing respectively.

Incorporation of Company (Section 3A):One of the most recent amendments to company law was the addition of a Section 3A. It is a smaller sub-section under Section 3 which provides for a minimum number of members to form a company. The new amendment adds a liability on the existing members of the company. Under the new amendment, in case the number of members falls below 2 in case of a private company and 7 in case of a public company, and such a company remains functional and continue to operate and carry out its business for 6 months or more, the members that run the company would not be liable for the debts that are incurred by the company and the defaults that the company makes. Reason- It will be acting as a strict compliance rule that every company will have to follow. The stricter requirements adding a liability will help deter the companies from having less than the minimum members and take the law seriously.
Registered Office(Section 6 of the amendment): This amendment eased the time constraints on companies to register their offices. Previously, the law stated fifteen days as the time required for a company to register its offices. The new amendment increases the time from fifteen to thirty days. This also allows the company more time to amend or change any details as per the legal requirements. Reason- The time given before the amendment (previously 15 days under section 12 of the Companies Act, 2013) was too short for companies to amend or make changes and accordingly get registered office within the prescribed time. The new amendment gives precious few days to the companies.
The Signing of Documents (Section 7 of the amendment): The documents/files/proceedings/contracts which requires some or the other authentication from the company can be authorized by not just officer or KMP but an employee (authorized by the Board of Directors) can also be authorized to sign and authenticate the documents on behalf of the corporation under the new amendments Act. (Amendment to section 21). The amendment provides an easy solution for documentation and authorization for documents.
Prospectus of the Company (Section 8of the amendment): Before the amendment, the prospectus of a company would contain information that was set out in the Companies Act. The new amendment brings out some changes and makes it mandatory to have information based on finances and specified by the Securities and Exchange Board.
Debentures and Issue of Shares (Section 12 of the amendment): The amendment replaced the words “Discounted words” with “Discount” further allowing the corporate companies to issue shares at a ‘discount’ to the creditors in case the debt of the company is converted into securities in furtherance of a ‘statutory resolution plan’ or debt scheme and accordance with“Reserve Bank of India under the Banking Regulation Act, 1949 or the Reserve Bank of India Act 1934”.
Declaration of Profits and Payment of Dividends (Section 32of the amendment): Under the new amendment when “computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded”.After the amendment, a company under the company law is exempted from declaring its unrealized and notional gains. The amendment also allows for a company to not disclose information relating to its assets, liabilities to those assets all the while the company may make a declaration of profit and pay the dividends.The declaration of profits under the new amendment can be made during any financial year or at any time that is before the next annual general meeting and after the closure of the financial year.
Reports of Subsidiary (Section 38of the amendment): Under the new amendment, the need for having separate audit reports have been done away with. Now a foreign subsidiary company can have its audit/unaudited reports in the same report as that of the holding company.
Granting Loans by Directors (Section 61of the amendment): Before the recent amendment, the directors of the company didn’t have the authority to grant or approve loans to a person. Now the directors have been given special discretion to grant and credit such loans through a special resolution that is passed in a general assembly meeting. The loans, however, have to be sanctioned only for “Principal Business Activity” (of the borrower).
Managerial Remuneration (Section 67of the amendment): Under the new amendment, the directors of the company receive a “managerial remunerations” upon receiving recommendations from the company’s shareholders. Before the amendment, only the central government had such authority and capped the remuneration to up to 11% of the net profits made by the company.
Annual General Meeting (Section 26 of the amendment & 96 of the 2013 Act): Section 96 of the Act states that “Every company other than a One Person Company shall in each year hold in addition to any other meetings, a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next” to ensure smooth functioning and decide on important matters AGMs are held in a company

Meetings of the Board have been amended under Section 56 of the new amendment. The new amendment allows the directors of the company to participate in key managerial decisions through the use of videoconferences. Other technologies can also help in this but only as long as a major number of directors of the board are present physically.

The new amendment has allowed for the directors of the board to meet anywhere and not just in a room. The procedure has to be done with the consent of everyone on the board.Although for other companies the new amendments do not apply and old provisions govern the meeting meaning such a meeting has to be conducted in a headquarter or the registered office of the company or any registered office address. The new amendment applies only to the unlisted companies and provides a certain amount of freedom.

Rights to Auditors (Section 40 of the Amendment & 144 of the 2013 Act): The new amendment has allowed the companies to not have annual ratification of auditors that are appointed by the company for 5 years. The 2013 Act provides for Auditing service by an Auditing Firm or an independent auditor. The key take away from it is in section 144 of the Act which prohibits any auditor from performing any of the 9 non-auditing functions. The functions under the Act are: “(a) accounting and book keeping services; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial services; (e) investment advisory services; (f) investment banking services; (g) rendering of outsourced financial services; (h) management services; and (i) any other kind of services as may be prescribed”. This is to allow the individuality of work and to limit the malpractices involved in auditing. This also increases the accountability of both the company and the auditor.
Repealing restrictions on Insider Trading (Section 64, 65of the amendment): Under the new amendment, if the guidelines of The Securities Act, 1933 are followed properly, the directors of the company can deal with the securities of the company and engage in insider trading.
Issue of Sweat Equity (Section 13of the amendment): After the new amendment, a company can issue sweat equities within 1 year after the company begins functioning and has registered with the registrar of companies.
Commencement of the Business: Under the new amendment it is pertinent for a company to begin its business operation provided:
That the directors of the company declare that every subscriber to the company has paid their membership as stipulated in the memorandum within 180 days of subscription.
That the company has a registered office within 30 days from its commencement or incorporation
In case of a default in any of the above-mentioned provisions, the company would be liable to pay a hefty 50,000 Rs as a fine and the officer a sum of 1000 Rs a day. The registrar of the companies will have an option in case of the default to strike off the names of the companies liable.
De-clogging the National Company Law Tribunal (NCLT): One of the most important features for corporate law is that it provides for a dispute resolution authority in NCLT & NCLAT. Section 408 establishes the power given to the central government further qualifies the members of the tribunal. Section 410 provides for the constitution of an appellate tribunal and the subsequent section provides for the qualifications for its members. Section 422 makes it important for the above-mentioned authorities to deal with pending applications as fast as possible. Sections relating to NCLT & NCLAT showcase how these authorities can change their orders and within what period and when and in what conditions does the appeal to the Supreme Court lie. Section 423 provides for an aggrieved party file an appeal to the Supreme Court against an order of the tribunal within a stipulated time of 60 days from the day of order receipt being received from the tribunal.

The court taking into the considering that India is a country with a large, ever-growing population and subsequently, with an ever-increasing number of corporations being incorporated year after year, there needs to be a special institutional platform for redressal.[1] Moreover, the shah committee also recommended changes in the system to reduce the overburdening of courts with corporate cases and establish a quicker and efficient justice dispensing body.[2]A step that has helped improve the corporate governance in India and increase the accountability in corporate legal cases. The legal framework of India was hugely impacted by the introduction of NCLT and NCLAT and since then Indian courts have faced a reduced pressure of cases in corporate matters.

Powers to Adjudicating Officers: The new amendment gives additional authority and power to adjudicating officers. These new powers include rectification in cases of defaults and also the imposition of penalties. This has ensured a greater level of transparency, governance, and administration inside the company.
Double Penalty for Defaults: Under the amendment when a member of a company defaults in the same manner or on the same subject matter, they would be liable to pay double the amount of fine, but only if the crime is committed in 3 years from the initial crime.New provisions of Punishment to Directors: The recent ordinance that was promulgated by the parliament included a penalty clause for the directors of a company. The penalty is imposed on the directors in case of fraud or other embezzlements for personal gains. Such acts are now considered compoundable and imprisonment with fine is the punishment for committing such offenses.
Declaration of Interest: Under the new amendment, a member of the company who has subscribed to more than 25% of the shares or has a beneficial interest that is around 25% has to mandatorily make a declaration. Failure to comply with these guidelines will lead to a fine. The fine can start from 1 lakh to 10 lakh rupees or imprisonment. In some cases, it could be both.
Remuneration of the Directors: The new ordinance has vitiated the provision of remuneration of independent directors. Instead, directors now receive commission or reimbursement or other such indemnities for the services they do towards the company, from the company.
Disqualification of Directorship: As per the new ordinance, there has been a limit regarding the number of companies, in which a director can constitute a part. The limit is 20 companies and defaulting such a provision will lead to the termination of their directorship under section 165(1). This has helped in increasing the accountability of companies to the registrar of companies.
Fulfilling Corporate Social Responsibility (CSR) Obligations: Section 135 states that “Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors”. This mandate requires big corporations to undertake basic mandatory activities promoting Social Responsibility. The board is constituted for the sole purpose of making sure that the activities are undertaken and everything is done properly.

As per the new ordinance, companies have an obligation towards corporate social responsibilities. They need to fulfill these responsibilities. Failure in compliance with the CSR provisions of the Act, the board will overhear the reasons for it. Each company must have an “Unspent CSR Tài khoản”. Companies will also have to use their undeposited and unutilized funds in a financial year to fulfill their CSR duties and obligation. In case of any defaults by the companies, the liability of such default would by monetary penalty of about 50,000 rupees which may extend up to 25 lakh rupees. Moreover, officers of the company would be liable to face imprisonment for up to 3 years and or with fine extending up to 5 lakh rupees but not less than 50,000 rupees, or both.

Conclusion

The Companies Act, 2013, has 470 sections and seven schedules, it is vast and a major piece of legislation that has governed the operation of companies in India for a long time. These are some of the very important sections and key takeaways from the companies Act. The recent changes in the corporate world has promoted these amendments and the standards of corporate governance are improving. Prima facie, these amendments don’t seem be a huge game changer, these amendments were needed and have had a significant impact on the corporate governance structure of India. With certain amendments allowing a more transparent and democratic structure in a company, few amendments have helped in a better outreach for companies to the public. Amendments such as the establishment of a mandatory corporate responsibility fund in a company, will lead to a positive impact of companies on the society and the corporate world in general.

The amendment and the ordinance are a big step towards a better legal framework for the corporate sector. These amendments further add to a model of company law that could be without its inefficiencies and uncertainties.Further amendments in company law would bolster India’s corporate structure and help improve corporate governance. The conformity of laws to other laws by other agencies has allowed for interlinked governance and transparency in the corporate structure.

[1] S.P. Sampath Kumar v. Union of India, (1987) 1 S.C.C. 12.

[2] Chaired by Justice A P Shah, Former Chief Justice, Delhi High Court, Report of the Group of Experts on Privacy, Law Commission of India.