The Companies Bill, 2012 was passed in Rajya Sabha on 8th August, 2013, and became Companies Act, 2013 finally replacing the decades old Companies Act, 1956 which was a very much outdated legislation guiding companies in India.
The statute contains 29 chapters, 470 sections and 7 schedules, which is comparatively more streamlined than the Companies Act, 1956 which contained 658 sections and 14 schedules.
The phrase “as may be prescribed” has been used around 336 times in the 2013 Act which gives the Central Government ample power to fine-tune the workings of the Act to the continuous economic changes that plague the present world.
However, probably the main aim of the Companies Act, 2013 has been to reduce the bureaucratic red tape and bring down the continuous hurdles that businesses and start-ups face when and after incorporating themselves into a company. The Companies Act, 2013 aims at lessening Government approvals and boosting self-regulations by companies so as to provide for speedy workings by companies and to enable them to be competitive players in the world economy.
However with rising concerns about scams and tax-fraud by company directors, the Company Act 2013 has redefined the term “financial year” and the Listing Agreement makes it mandatory for listed companies to publish its consolidated accounts which is neither required to be filed before the AGM or put before the Registrar of Companies.
Although these have been the golden aims of the Government, it can be said that the Companies Act, 2013 has brought in a mixed basket of results with some successes and some failures. The following pages shall traverse all the fundamental aspects of the two Acts so as to compare and analyse them in different respects.
Page Contents
Structure of Companies
The new Companies Act, 2013 has made some much-needed changes in the types of companies that can be incorporated. For example, the Companies Act, 1956 did not have any provisions relating to formation of One-Person Companies.
However Section 2(62) of Companies Act, 2013 Act provides for the one-person companies which mean a company having only one person as a member. Section 3(1)(c) provides for incorporating such a company by saying that a company may be formed for any lawful purpose by one person, where the company formed is to be one person company, that is to say, a private company.
One person companies are required to have at least one director according to Section 149, who shall have to comply with the provision laid out in Section 149(3) that a director must have had to stay in India for a period of not less than 182 days in the previous calendar year, but the 1956 Act is silent about resident directors.
There is no requirement for annual general meetings. Provision as to meetings shall be deemed to have been complied if at least one meeting of the board is conducted in half a calendar year and the gap between two meetings is not below 90 days. Provisions of Section 174 as to quorum of the meeting shall also not apply to one-person companies as per the Companies Act, 2013.
However, the memorandum of such companies must mention the name of a person, with his/her prior written consent who shall in the event that the subscriber to the memorandum dies or becomes incapacitate to contract, shall become the member of the company.
Further the new act has provided for changing the upper-limit of members of a private company from 50 to 200.
Board of Directors
It has been held in by Justice Marshall in Dartmouth College v. Woodward[1], that a corporation is an artificial being that exists only in contemplation of the law. Justice Haldane observed in Lennard’s Carrying Co. Ltd v. Asiatic Petroleum Co. Ltd[2] that a corporation does not have a mind of its own. Therefore Lord Reid stated in Tesco Supermarkets Ltd v. Nattrass[3] that a company must act through living persons. It is these living persons who guide the day to day business of companies that we call directors of a company. Section 2(34) provides that a director means a director appointed to the Board of a company.
In a public company, the minimum number of directors that has to be kept is 3 and the maximum is 15, as per Companies Act, 2013 as has been changed from 12 in the Companies Act, 1956. Further, in the old statute the upper limit could only be increased by taking Government permission whereas in the new statute, the upper limit can be increased by a resolution passed in the Annual General Meeting. This change allows for a company to quickly increase the number of its directors in times of contingencies and situations that require more hands on board.
Since directors are not servants of a company[4] even if they work as an employee in a different capacity[5], and that they are agents[6] and trustees[7] of a company, it is imperative that companies and members of companies are given more room to adapt during change in business conditions in the global environment, which the 2013 Act aims to do.
The old law was silent about woman directors, whereas the new Act provides that every listed company with paid-up capital of more than Rs 100 crores or more or with turnover of Rs 300 crores or more shall have at least one woman director. Similarly, the 1956 Act had no provisions for appointment of independent directors, but Section 149(4) of the Companies Act, 2013 provides for the appointment of at least one-third of the total number of directors as independent directors, subject to the Central Government prescribing the minimum number of independent directors in any class of public companies. The independent director shall not be entitled to any stock options and he shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. In the case of Brij Gopal Daga v. State of Kerala[8], which concerned liability under Section 141 of the Negotiable Instruments Act for dishonour of cheque, it was held that a vivid case against the independent director has to be spelled out in the complaint and the conditions have to be strictly proved. Section 150 of the Companies Act, 2013 provides for the manner of election of independent directors from data-banks to be maintained by the Government.
Corporate Social Responsibility
Companies are expected to be more socially responsible in their business dealings. While this, in no way affects the competitiveness or the business operation of the company, it paves the way for social justice and welfare mechanisms to reach the downtrodden.
An example of socially responsible activities pursued by companies in foreign countries is that Facebook during the plague of Corona virus pledged to give out $100 million dollars to small businesses affected by coronavirus[9]. The Companies Act, 2013 also ushered in similar socially beneficial activities by companies having net worth of Rs 500 crores or more or turnover of Rs 1000 crores or more or profit of Rs 5 crores or more under the name of Corporate Social Responsibility (CSR) through the Section 135 of Companies Act, 2013. Schedule VII of the Act provides activities that can be included by companies in their CSR policies. As per MCA clarification issued on 18th June, 2014, one-off events such as marathons, awards, charitable contribution or expenditure for fulfilment of Any Act/Statute of regulations do not qualify as CSR expenditure[10]. Any surplus that arises out of the CSR activities shall not be considered as business profits by the spending company.
Allotment of Securities and Prospectus of a Company
While the Companies Act, 1956 restricted private placement of securities to only public companies, the 2013 Act has provided conditions to be followed for private placement of securities for both private and public companies.
A prospectus can only be issued by a public company. However the provisions relating to the prospectus in a public company apply only when a prospectus is issued. In the case of South of England Natural Gas and Petroleum Ltd, re[11], it was held that when 3000 copies of a prospectus were distributed to members of certain gas companies, that it was the act of offering shares to the public.
While the Companies Act, 1956 provided that the report by auditors on the assets and liabilities shall not be before 120 days of issuing prospectus by a company, the 2013 Act increased the time gap to 180 days. Further, while the old statute provided that for change in the objects and contract after issuing prospectus and/or shares, a general meeting had to be conducted, the 2013 Act holds that a special resolution needs to be passed and the dissenting shareholders need to be provided an exit.
The meaning and provisions for a shelf prospectus is provided for, under Section 31 of the Companies Act, 2013. While the old statute limited the operation of shelf-prospectus to only PFI, public and scheduled banks, the new Act gives the SEBI leeway to prescribe shelf-prospectus to any classes of companies. This is a welcome change that will give the Central Government much more room to adapt to the changing economic conditions wherein the company needs to rapidly issue shares at certain time intervals not exceeding one year.
In Sri Gopal Jalan & Co v. Calcutta Stock Exchange Association Ltd[12], it was held that offers for shares are made on application forms, given out by a company and when the application forms are accepted, it is considered that an allotment is made. Justice Chitty held in Florence Land & Public Works Ltd, re[13], that the term “allotment” is basically an acceptance by the company of the offer to take shares and this decision was adopted by the Supreme Court in the aforementioned Gopal Jalan case[14].
In the 2013 Act, the distinction in voting rights has been removed. Further, in the old statute there was no provision for the variation in shareholders’ rights. However the new statute provides that if the variation of one class of shareholders’ rights affects another class then the consent of three-fourths of the other class of shareholders has to be obtained.
The new statute has also prohibited issuing shares at a discount apart from “sweat equity”. The company still retains the power to buy back its securities after passing a special resolution in a general meeting; however it can not buy back its securities from odd lots. In the Companies Act, 2013, the limit of two years before a company can further issue shares has been dispensed with.
The new statute also provides for issue of bonus shares out of its free reserves subject to compliance with certain conditions such as approval in general meeting.
Amalgamation of a Company with a Foreign Company
The word “amalgamation” has not been defined in the Companies Act, 2013.
In Somayajula v. Hope Prudhomme & Co. Ltd[15], the Court held that amalgamation occurs when two or more companies join together to form another entity or when one or more company is absorbed or merged into another.
However, in case of amalgamation of an Indian company, the Central Government may frame rules in this regard after consulting the Reserve Bank of India. Subject to the provisions of any other law for the time being in force, a foreign company may with the approval of RBI merge into an Indian company or vice-versa. However, it is to be noted that the Companies Act, 1956 had no such provisions. The Companies Act, 1956 allowed a foreign company to merge with an Indian company but did not allow an Indian company to merge with a foreign company.
Acceptance of Deposits
Under the Companies Act, 1956 provisions relating to issue of deposits was far less stringent than that in the 2013 Act. In the 1956 Act, the Central Government had the power to prescribe the limits and manner in which deposits could be invited by the company either from the public or from its members.
However, subsequent amendments to the 2013 Act has provided for some leniency in accepting deposits, the most crucial exemptions being given to private companies.[16]
The term “Deposit” has been defined under Section 2(31) of the Companies Act, 2013 and has been more comprehensively provided for under the Deposit Rules, 2014. Section 2(31) of the Companies Act, 2013 provides that “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules, 2014, excludes the several types of amounts received by a Company from the ambit of Deposit which shall not be considered as deposits.
Conclusion
While we touched at several key factors that have marked a great change between the 2013 Act and the 1956 one, we need to understand that the main aim behind the overhaul in the Company Law was fundamentally to provide against several lacunas that existed in the previous law. Simple and repeated amendments failed to address the issue in the way that was expected. The new Act was aimed at ushering in corporate democracy wherein the companies concerned would be given much more leeway in managing their own affairs without Government approval or permissions. However, with this several unforeseen circumstances arose such as corporate fraud, one example being the famous INX Media case.
Corporations also cry out that they do not have the requisite freedom to operate competitively in a globalised environment and require substantial changes, one of them being the removal of the objects’ clause requirement in the memorandum of association.
The Government on its passed has had passed several amendments and a new 2020 Companies Amendment Bill is on the corner. On these issues, it can be said that the Companies Act, 2013 has been a mixed bag of success and failure as compared to the Companies Act, 2013. After the privatisation drive, the Indian Government felt that corporate liberalisation is the need of the day and undertook the initiative by introducing the new statute.
Finally, it has been passing numerous amendments to make operation of companies smoother with lesser Government interference while making companies more accountable for their actions.
[1] 4 L Ed 629
[2] 1915 AC 705
[3] 1972 AC 153
[4] Moriarty v. Regent’s Garage Co, (1921) 1 KB 423
[5] Lee v. Lee’s Air Farming Ltd, 1961 AC 12
[6] Ferguson v. Wilson (1866) LR 2 Ch App 77
[7] Ramaswamy Iyer v. Brahamayya & Co, (1966) 1 Comp LJ 107
[8] (2013) 181 Comp Cas 320 (Ker)
[9] Lauren Feiner, Facebook announces $100 million program for small businesses impacted by coronavirus, CNBC (Mar 17 2020, 9:05 AM), https://www.cnbc.com/2020/03/17/facebook-announces-program-for-small-businesses-impacted-by-covid-19.html
[10] ICSI, Company Law 236 (ICSI, 2019)
[11] (1911) 1 Ch 573
[12] AIR 1964 SC 250
[13] (1885) 29 LR Ch D 421
[14] Id at 12
[15] (1963) 2 Comp LJ 61
[16] Siddarth Agarwal, Deposit Provisions under the Companies Act 2013, TaxGuru (16.03.2020, 23:15), https://taxguru.in/company-law/deposit-provisions-companies-act-2013.html
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