Highlights of Companies Act, 2013

Introduction:

The Companies Act of 2013 is an Act of the Indian Parliament that governs the establishment, formation, and operation of companies in India. The Indian Companies Act of 1956 has been replaced with the Companies Act of 2013. On August 29, 2013, the President of India gave his approval to the Companies Act 2013, which was passed by Parliament. The Act unifies and reforms the law governing companies. On August 30, 2013, the Companies Act of 2013 was published in the Official Gazette.

The new law aims to make conducting business in India easier while also empowering shareholders and emphasising the need for corporate governance. Governance, e-management, compliance and enforcement, disclosure rules, auditors, mergers and acquisitions, class action cases, and registered valuers all see substantial changes as a result of the Act. In comparison to the Companies Act 1956, it comprises 29 chapters and 470 sections (658). It has seven different schedules.

Key Definitions and Concepts

Key Managerial Personnel

The term “key managerial personnel” refers to a group of persons who are in control of the company’s day-to-day operations. Key Managerial Personnel (KMP) are those who have authority and responsibility for planning, directing, and supervising the activities of the reporting enterprise, according to Accounting Standard 18 (AS-18). KMPs includes

(i) the Chief Executive Officer (CEO), managing director (MD), or manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer (CFO); and

(v) such other officer as may be prescribed.

KMPs are only required for Public Limited Companies with paid-up capital of more than 10 crores, and Private Limited Companies are exempt.

Class Action Suits

The 2013 Act establishes a new notion of class action lawsuits, which shareholders can file against the firm and its auditors. Section 245 of the Companies Act of 2013 (Act) deals with class action suits. A class-action suit is one in which a large number of persons who have a common interest in an issue can sue or be sued as a group. It’s a legal mechanism that allows one or more plaintiffs to file and prosecute a lawsuit on behalf of a larger group or class of people who share common interests and grievances.

Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) refers to a concept in which businesses voluntarily choose to contribute to a better society and a cleaner environment – a concept in which businesses voluntarily integrate social and other beneficial concerns into their business operations for the benefit of their stakeholders and society in general. An Indian company must form a CSR committee of the Board of Directors, and it must spend 2% of its average net income over the previous three financial years on CSR activities.

The provisions of CSR apply to the following:

i. Every Company

ii. It’s Capital Corporation

iii. It’s a subsidiary firm.

iv. Foreign Corporation

The National Company Law Tribunal (NCLT)

The NCLT, often known as the “Tribunal,” is a quasi-judicial body established under the Companies Act of 2013 to resolve corporate civil disputes. It is a legal entity with the same powers and procedures as a court of law or a judge. NCLT is required to examine facts objectively, decide cases in accordance with natural justice principles, and make conclusions in the form of orders. Such orders have the power to rectify a situation, correct a mistake, or impose legal penalties/costs, and they can change the legal rights, obligations, or privileges of the parties involved. The Tribunal is not constrained by the stringent norms of evidence and procedure that govern the courts.

Under the Companies Act, the National Company Law Tribunal has the authority to adjudicate the following cases:

i. Under the previous act (the Companies Act 1956), a complaint was filed with the Company Law Board.

ii. Those before the Board for Industrial and Financial Reconstruction, including those brought under the 1985 Sick Industrial Companies (Special Provisions) Act;

iii. Unresolved Cases before the Appellate Authority for Industrial and Financial Reconstruction;

iv. Concerning accusations of corporate oppression and mismanagement, company winding up, and any other powers granted by the Companies Act.

Vigil Mechanism

The term “vigil mechanism” or “whistle-blower policy” is well-known all throughout the world. A real whistleblower can assist a company and its stakeholders in preventing fraud or misconduct-related exposes. In India, the notion of a Vigil Mechanism was established by the Companies Act of 2013.

In extraordinary instances, the vigil mechanism shall provide reasonable safeguards against victimisation of employees and directors who use it, as well as direct access to the Chairperson of the Audit Committee or the director chosen to serve on the Audit Committee, as the case may be.

Companies in the following categories are required to establish a vigil mechanism:

i. Every company on the list;

ii. Every other business that takes deposits from the general public;

iii. Every company that has borrowed more than Rs. 50.00 (Fifty) crores from banks and public financial organisations.

Purchase of Minority Shareholding

Section 236 of the Companies Act, 2013 (‘Act, 2013′) establishes a process for squeezing out minority shareholders, in which any shareholder of the company holding 90% or more of the total issued equity share capital, acting alone or in concert, may acquire the remaining equity shares of the company by making an offer to the minority shareholders.

The goal is to facilitate a smooth takeover of a firm because minority shareholders will be unable to engage in the company’s management, seek restitution of their rights, or have a substantial role in the company’s operations due to their modest holdings. As a result, section 236 of the Act of 2013 was added to offer a fair departure for minority owners while allowing majority shareholders to exercise full control over the organisation.

Power of Company to Buyback its Own Securities

The power of a company to purchase its own securities is governed by Section 68 of the Companies Act 2013 and the Companies (Share Capital and Debentures) Rules, 2014. A company’s own shares or other specified securities may be purchased from;

i. its untapped reserves;

ii. the premium account for securities; or

iii. the proceeds of any shares or other specified securities that have been issued

Reduction of Share Capital

The “Reduction of Share Capital” and related methods are outlined in section 66 of the Companies Act of 2013. The process of reducing a company’s share capital is known as share capital reduction (apart from Redemption of preference shares and Buy-Back of shares which are governed by other provisions separately). The term “reduction of share capital” refers to a reduction in the company’s issued, subscribed, and paid-up share capital. In layman’s terms, it’s referred to as “Cancellation of Uncalled Capital,” or the cancellation of a portion of the subscribed share capital.

The need to reduce share capital can emerge in a variety of circumstances, some of which are described below:

i. Surplus money is returned to shareholders.

ii. Eliminating losses that may be preventing dividend payments;

iii. It could be as part of a compromise or arrangement approach.

iv. To make the capital structure easier;

Mergers and Amalgamations-

The Companies Act of 2013 (2013 Act) has taken effect, replacing the 1956 Act with a number of significant modifications, particularly those relating to mergers and acquisitions. The new Act strengthened disclosure requirements, protecting investors and minorities, and facilitating mergers and amalgamations. It facilitates domestic and cross-border mergers and acquisitions by assisting in the complete process of acquisitions, mergers, and restructuring.

Equity Shares and Differential Voting Rights

Differential voting rights (“DVR”) are equity shares that have varied dividend and/or voting rights. In India, a business limited by shares can issue DVRs as part of its share capital under section 43 (a) (ii) of the Companies Act, 2013. Under Section 43(2) of the Firms Act, 2013, read with the Companies (Share Capital and Debentures) Rules, 2014, companies can issue equity shares having differentiated rights, subject to the following conditions:

i. A company’s Articles of Association (AOA) should provide for the issuance of equity shares with differing voting rights;

ii. Bypassing an ordinary resolution in the general meeting, the company must acquire shareholder approval;

iii. There shall be no failure on the part of the corporation to file its financial accounts or annual reports for the three fiscal years before the year in which the DVRs are issued;

iv. The corporation should not have been late in paying declared dividends or maturing deposits to the shareholders;

v. The issue of differential shares should be approved by postal ballot if the company is publicly traded;

vi. The company should not fail on any instalment of a term loan acquired from a state-level or public financial institution or a scheduled bank;

vii. The corporation should not default on the redemption of its debentures or preference shares that are due to be redeemed, as well as the payment of any statutory dues owed to its employees.

Directors Broad Spectrum

According to section 2(10) of the Companies Act, 2013, “board of directors” or “board in relation to a company” refers to the collective body of the company’s directors, and “director” refers to a director nominated to the board of the company. The articles of a company may give its board of directors the authority to appoint any person, other than a person who fails to be elected as a director at a general meeting, as an additional director at any time, who will serve until the next annual general meeting or the last date on which the annual general meeting should have been held.

Composition and Residency Test of Director

Every company must have a minimum of three directors in the event of a public company, two directors in the case of a private company, and one director in the case of a One Person Company, according to Section 149 of the Companies Act, 2013. Each firm must have a director who has been in India for 182 days or longer, according to section 149(3) of the Companies Act, 2013.

Maximum Limit of no. of  Directors

A company can have a maximum of 15 directors. After passing a special resolution in a general meeting, a firm may select more than fifteen directors, and approval from the federal government is not required.

Independent Directors

“Independent director” is defined in Section 2(47). Independent directors, as the name implies, are members of a company’s board of directors who are unaffiliated with the company and have no other business dealings with it. According to Rule 4 of the Corporations Rules 2013, the following types of companies must nominate at least two independent directors:

a.) Public companies with a turnover of at least Rs.10 crores

b.) Public companies with a revenue of at least Rs.100 crores

c) Public companies with total outstanding loans, debentures, and deposits of at least Rs. 50 crores.

Liability of Directors

Unlike a sole proprietorship or partnership organisation, the responsibility of shareholders in a corporation is limited. In most cases, the company’s obligation is not passed to the directors. However, under the Companies Act 2013, directors can be held personally accountable for their actions if there is a violation of fiduciary responsibility or fraud. According to the Companies Act, a director of a company is liable for any loss, damages, or costs incurred by the company as a result of the director:

• Acting in the name of the company, signing anything on behalf of the company, or purporting to bind the company or authorising the taking of any action by or on behalf of the company, despite knowing that he or she lacked authority to do so;
• Despite knowing that it amounted to reckless trading, he persisted and went along with any action or conclusion;
• Been a party to any action or failure to act knowing that the action or omission was intended to cheat a firm creditor, employee, or shareholder;
• Any financial statements that were false or misleading, or a prospectus that contained false or misleading information, were signed, consented to, or permitted for publication.

Duties of Directors

The Companies Act of 2013 is unquestionably a groundbreaking piece of legislation in terms of director roles and responsibilities. Several provisions of the Act have the effect of significantly increasing the duties and liabilities of directors. Directors are always in a fiduciary relationship with the company and other stakeholders, and they owe the company fiduciary duties. The following are the obligations of directors as outlined in Section 166 of the Act:

• To act in conformity with the Company’s Articles of Association, subject to the Act’s restrictions;
• To behave in good faith in order to promote the company’s objects for the benefit of all of its members, and in the company’s, its employees’, shareholders’, community’s, and environmental protection’s best interests;
• To carry out all of his responsibilities with due care, skill, and diligence, and to make independent decisions;
• Not to get involved in a scenario where a director’s direct or indirect interest conflicts, or could conflict, with the company’s interests;
• Not to obtain or attempt to obtain any undue benefit or advantage for himself, his relatives, partners, or acquaintances, and if a director is found guilty of obtaining an undue gain for the company, he will be obliged to pay an amount equal to the firm’s gain;
• He/she is not to delegate his office, and any such assignment is void.

Disqualification of Directors

Disqualification of Directors is dealt with in Section 164 of the Companies Act 2013. The following criteria, according to the Companies Act 2013, can lead to a director’s disqualification:

• The Director has been found to be mentally ill by a competent court.
• The Director is an insolvent who has not been discharged.
• The Director has filed an application to be declared insolvent, which is now pending.
• Any person who has been convicted of any offence, involving moral turpitude or otherwise, and sentenced to imprisonment for not less than six months and a period of five years has not elapsed from the date of sentence expiry, or any person who has been convicted of any offence and sentenced to imprisonment for a period of seven years or more will be ineligible to be appointed.
•  A court or tribunal has issued an order disqualifying the Director from being appointed as a director, and the order is in effect.
• The Director has not paid any calls on any of the company’s shares that he owns, whether alone or jointly with others, and six months have passed since the call’s previous payment date.
• A corporation in which the Director is a member of the Board of Directors has not filed financial statements or annual reports for three years in a row.
• The corporation has failed to return deposits accepted by it or pay interest on them, or to redeem any debentures on the due date or pay the interest due on them, or to pay any dividend declared, and this failure has lasted one year.

Vacation of Office

Section 167 of the Companies Act specifies when a Director’s position becomes vacant. A director’s office becomes vacant if:

• He commits any of the disqualifications listed in section 164;
• He fails to attend all Board of Directors meetings for a period of twelve months without seeking leave of absence from the Board;
• He acts in violation of section 184, which prohibits him from entering into contracts or arrangements in which he has a direct or indirect interest;
• He fails to disclose his interest in any contract or arrangement in which he has a direct or indirect interest, in violation of section 184;
• He is disqualified by a court or the Tribunal;
• He is found guilty by a court of any crime, whether or not including moral turpitude, and sentenced to a minimum of six months in prison.

Resignation of Directors

According to section 168(1) of the Companies Act 2013, a director may resign from his position by giving the company written notice, which the Board shall take note of, and the company shall notify the Registrar within the time and in the form, as may be prescribed, and shall also include the fact of such resignation in the directors’ report laid in the immediately following general meeting. Provided, however, that a director may also send a copy of his resignation to the Registrar, along with specific reasons for his resignation, within thirty days after his resignation, in the manner prescribed.

Audit

The Audit Committee is governed by Section 177 of the Companies Act, 2013, and Rules 6 and 7 of the Companies (Meetings of Board and its Powers) Rules, 2014. An Audit Committee is formed by the Board of Directors of a company, as stipulated by Rule 6 of the Companies Rules, 2014:

(i) all public firms with a paid-up capital of Rs.10 crores or more;

(ii) all public companies with a turnover of Rs.100 crores or more; and

(iii) all public companies with outstanding loans, borrowings, debentures, or deposits totalling more than Rs.50 crores.

Composition of Auditors

The Audit Committee must include at least three directors, with independent directors constituting the majority. The majority of the members of the Audit Committee, including the Chairperson, must be able to read and comprehend financial statements.

Appointment of Auditors

The requirement for the employment of an auditor in a company has been altered under the new Companies Act 2013. The provisions relating to the appointment of a Statutory Auditor have undergone a paradigm shift. The auditors are in charge of determining the correctness and dependability of financial statements. It entails a thorough examination of a company’s books of account, with reference to documents, vouchers, and other pertinent records, to verify that the entries made therein present a clean and unambiguous picture of the company’s operations.

Removal of Auditors

When management is dissatisfied with the auditor’s services, the auditor’s removal is considered. The Companies Act of 2013, Section 140(1), Only a special resolution of the firm, after getting the prior consent of the Central Government in a specified manner, may remove the auditor appointed under section 139 from his position before the expiration of his term.

National Financing Reporting Authority (NFRA)

The Government of India established the National Financial Reporting Authority (NFRA) on October 1, 2018 under Subsection (1) of Section 132 of the Companies Act, 2013. The NFRA’s responsibilities, according to Subsection (2) of Section 132 of the Firms Act, 2013, are to:

• Recommend accounting and auditing policies and standards for adoption by companies to the Central Government for approval;
• Compliance with accounting and auditing standards is monitored and enforced;
• Oversee the quality of service provided by the professions involved in assuring compliance with such standards, and provide recommendations for ways to improve service quality;
• Perform any additional tasks or responsibilities that are required or ancillary to the aforementioned functions and duties.

Rotation of Auditors

Section 139 of the Companies Act of 2013 addresses the manner in which statutory auditors are rotated. A 5-year break in term will be regarded as sufficient to meet the need for auditor rotation. If a partner of an audit firm who was in command of it and who also certifies the financial statements of the company leaves from the firm and joins another firm, that other firm will be ineligible to be appointed for a period of five years.

Annual General Meeting

The purpose of an Annual General Meeting (AGM) is for the company’s management and shareholders to engage. The Companies Act of 2013 mandates the holding of an annual general meeting to examine the financial performance, the appointment of an auditor, and other matters. To have an AGM, a corporation must follow the processes outlined in the Companies Act of 2013.

Circular Resolution

The term “resolution-by-circulation” refers to a resolution that is passed by a vote of the directors or members of the Board of Directors. When there is a pressing need, the resolution was suggested to be passed, and occasionally a resolution by circulation is preferable to circumvent the procedural constraints of holding a physical Board Meeting.

Loans to Directors

The existing Section 185 of the Companies Act, 2013 (‘the Act’) dealing with Loan to Directors was amended by the Companies (Amendment) Act, 2017 (“Amendment Act”). The replaced Section 185 addresses the limitations on companies’ ability to advance loans, give guarantees, or offer security, as well as those to whom a company can provide such a loan, guarantee, or security subject to conformity with the Act.

Related Party Transactions

RPTs (Related Party Transactions) are transactions that a corporation conducts with parties that are related to it. An RPT is a contract between two parties who already have a commercial connection. As a result, if Company ABC purchases products or services from its director XYZ, the transaction is considered an RPT. Similarly, if Company ABC rents space from XYZ, a relative of one of its directors, it is an RPT.

Key Managerial Personnel

Key Managerial Personnel in a company, according to Section 2(51) of the Companies Act 2013 are:

i. Chairman of the Board of Directors

ii. Director -Officer

iii. Director who works full-time;

iv. The Chief Executive Officer (CEO) OR the Managing Director

Acceptance of Deposits

Sections 73 to 76 of the Companies Act of 2013 (hereafter referred to as “the Act”) Companies Act (also known as the Act) (Acceptance of Deposits) states The solicitation and acceptance of deposits are governed by the Rules, 2014, promulgated under Chapter V of the Act (hereinafter referred to as “the Rules”). It forbids the admission of deposits saves from members by ordinary resolution or by a ‘’eligible company,” which must be a public corporation, subject to the regulations’ criteria.

Dormant Companies

A Dormant Company, as defined by section 455 of the Companies Act of 2013, is an inactive company that has not carried on any activity or made any substantial accounting transaction in the previous two financial years. Such businesses might apply to the Registrar to be designated as a defunct businesses. At the same time, the Registrar may direct such a company to be designated as a dormant company Suo Motu. The Registrar has the authority to strike off the name of a Dormant Company if it fails to comply with the provisions of Section 455 of the Companies Act, 2013.

One Person Companies (OPC)

In the Company Act of 2013, a new concept known as the One Person Company was introduced (OPC). A minimum of two directors and two members are necessary for a private company, whereas a minimum of three directors and seven members are required in a public company. Previously, a single person could not form a corporation. A one-person corporation (OPC) is a business formed by a single individual. A single person could not form a business prior to the implementation of the Companies Act of 2013. If a person wished to start a business, he or she could only do so as a sole proprietorship because forming a company required a minimum of two directors and two members.

According to the Companies Act of 2013, an individual can start a business with just one member and one director. It is possible for the director and member to be the same individual. As a result, a one-person company means that a single individual, whether a resident or an NRI, can form a business that combines the qualities of a corporation with the advantages of a sole proprietorship.

Small Companies

The Companies Act of 2013 was the first to create the notion of a “small company.” The Act categorises some businesses as small businesses based on their capital and turnover for the purpose of giving relief and exemptions to these businesses. The majority of the exemptions available to a small business are the same as those available to a one-person business. The Act also allows for a streamlined scheme of arrangement between two small businesses that do not require Tribunal approval but does require Central Government approval (Regional Director).

Subsidiary Companies

The Subsidiary Company is defined in Section 2(87) of the Companies Act, 2013. The subsidiary firm is the one that the holding or parent company controls. It is described as a corporation/body corporate whose Board of Directors is controlled by the holding company. According to Section 2(87)(ii) of the Companies Amendment Act of 2017, if a holding company controls more than one-half of the voting power of another company, that firm is referred to as a subsidiary company. If a holding company holds 100% of a subsidiary’s equity, the subsidiary is known as a wholly-owned subsidiary of the holding company.

Powers of Official Liquidator

A Liquidator is a person appointed by a court, shareholders, and creditors to sell the assets of a company that is being wound up. A person should be qualified to serve as the Company’s liquidator. The Liquidator will assume control of the firm and disperse the company’s assets. The functions of the official liquidator are as follows:

i.The Official Liquidator will have the authority and fulfil the responsibilities that the Central Government specifies;

ii. Without prejudice to sub-section (1), the Official Liquidator may:

   a. exercise all or any of the functions that a Company Liquidator may exercise under the provisions of this Act;

   b. conduct inquiries or investigations, if required by the Tribunal or the Central Government.

Conclusion

The New Act envisions a corporate governance regime that is effective and based on greater self-regulation and corporate democracy. New notions of Corporate Social Responsibility and e-governance are promoted by the framework. The New Act aims to ensure stronger enforcement and better protection for investors and creditors. The Companies Act of 2013 introduces new measures that are both tough and progressive, as well as investor-friendly regulation while keeping the old rules in place. Apart from existing requirements, the 2013 Act adds to the current provisions in the area of mergers and acquisitions by simplifying and rationalising the procedures involved and providing more accountability for the corporation.

References:

1. https://www.ukessays.com/essays/politics/company-act-2013-analysis-5182.php

2. https://corpbiz.io/learning/powers-and-duties-of-company-liquidator-in-voluntary-winding-up/

3. https://taxguru.in/company-law/small-company-companies-act-2013.html#:~:text=The%20concept%20of%20%E2%80%9CSmall%20Company,by%20the%20Companies%20Act%2C%202013.&text=For%20qualifying%20as%20a%20small,less%20than%20rupees%20twenty%20crores.