Comparison of Companies Acts

8/10/2019 Comparison of Companies Acts

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BACKGROUND

The Companies Act, 2013 (2013 Act) was assented by the President of India on 29 August 2013

and published in the Official Gazette on 30 August 2013.

The 2013 Act will set the tone for a more modern legislation which enables growth and greater

regulation of the corporate sector in India. The Companies Act, 1956 (1956 Act) has been under

review for some time in view of the rapidly changing economic and commercial environment

nationally as well as globally. The 2013 Act is expected to facilitate more business-friendly

corporate regulations, improve corporate governance norms, enhance accountability on the part of

corporates and auditors, raise levels of transparency and protect interests of investors, particularly

small investors.

The 2013 Act delinks the procedural aspects from the substantive law and provides greater

flexibility in rulemaking to enable adaptation to changing economic and technological

environments. There are several procedural aspects that would be prescribed by the Rules to be

framed by the CG.

GENERAL FRAMEWORK:

The 2013 Act is divided into 29 Chapters with 470 Clauses and 7 Schedules as against 658 sections

and 15 schedules under the 1956 Act. Unlike the 1956 Act, where the provisions pertaining to a

particular subject matter were scattered across the Act, an attempt has been made in the new act to

logically re-arrange and assimilate various provisions of law by categorizing all applicable

provisions under one particular section/ chapter.

New Definitions:

a) Control: The new definition of the term control has been brought in line with the

definition of control as prescribed under the Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeover) Regulations, 2011.1

12(1)(e) control includes the right to appoint majority of the directors or to control the management or policy

decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by

virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any

other manner:


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b) Financial Year: Under the provisions of the 1956 Act, companies were at a liberty to

determine their own financial year, however the 2013 Act seeks to curtail this liberty and

requires the companies to have financial year ending as on the 31st day of March every

year. The Financial Year has been defined under Section 2(41) of the Act. The

National Company Law Tribunal (NCLT)2 shall have the power to allow a different

financial year for companies which are either holding companies or subsidiaries of a

company incorporated outside India so as to enable consolidation of accounts of such

companies.

c) Listed Company: The term has been defined to include a company which has any of its

securities listed on any recognized stock exchange. This definition could have a far

reaching impact on the companies who hitherto have got their debentures etc. listed without

actually falling within the ambit of the definition of listed company.

d) Private company: The limit on maximum number of members3 constituting a private

company has been increased from 50 to 200. This would allow the private companies for

more funding avenues by offering securities to more than 50 members. However, Section

42 of the 2013 Act restricts the offer to not more than 50 people or such higher number as

may be prescribed.

Provided that a director or officer of a target company shall not be considered to be in control over such target

company, merely by virtue of holding such position2Section 2(90): Tribunal means the National Company Law Tribunal constituted under section 4083Section 2(55): member, in relation to a company, means

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of

the company, and on its registration, shall be entered as member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in

the register of members of the company;

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of

a depository


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e) Promoter: The term has been defined to mean

(1) A person who has been named as such in the prospectus or is identified as such in the

annual return; or

(2) Who has Control over the affairs of the company, other than in professional capacity,

as a shareholder or a director or otherwise; or

(3) In accordance with whose advice or directions the Board is accustomed to act.

f) Foreign Company: The term has been defined to include any company or body corporate

incorporated outside India which (a) has a place of business in India whether by itself or

through an agent, physically or through electronic mode; and (b) conducts any business

activity in India/ in any other manner.

g) One Person Company:The Bill introduced the concept of One PersonCompany for the

first time. Clause 2(62) defines an OPC as a company which has only one person as a

member. A One Person Company is required to be registered as a Private Limited

Company.However, the Memorandum of such a company should indicate the name of

the person who shall, in the event of the subscribers death, disability or otherwise becomes

the member of the company. It is also allowed an exemption from holding AGM.

PROVISIONS IN RELATION TO DIRECTORS:

With regards to the board composition as under Section 149 and 150 of the Act, there has to be a

minimum of 3 directors for a private company, 3 for a public company, and 1 for a one person

company, but a maximum of 15 for both public and private companies, and any increase requires

a special resolution. Thus the earlier privilege of a private company to have as many directors as

under the 1956 act has now been withdrawn.

The 2013 Act also includes provisions regarding a Woman Director, a Resident Director and

Independent Directors under section 149 and 150 of the Act, while the 1956 Act has no provisions

for the same.


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Regarding Independent Directors, it says that:

Every listed public company to have at least one-third of the total number of directors as

independent directors.

The term Independent Directors has been defined with certain prescribed qualifications

and disqualifications.

Creation of mandatory nomination and remuneration committee to ensure independence in

selection of directors.

Apart from the sitting fee, directors are entitled to reimbursement of expenses for

participation in the board and profit related commission as prescribed by the members.

Independent Directors are not entitled to any remuneration in form of stock option.4

Such directors are insulated from liability unless the fraudulent act is done with consent,

knowledge and connivance of the independent director or where the independent director

has not acted diligently, thereby encouraging individuals to accept such posts sans any

fright of being hauled up unnecessarily in this age of corporate frauds and scams.

Incorporation of provisions relating to independent directors promotes independence in the board

and hence furthers the notion of effective corporate governance. It enhances the monitoring of the

management and promoters, and thereby protect the interests of the stakeholders.

4Section 2(37): employees stock option means the option given to the directors, officers or employees of a

company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers

or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a

pre-determined price


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APPOINTMENT OF KEY MANAGERIAL PERSONNEL5

The 1956 Act did not contain any specific provisions regarding KMP, however there was a

requirement of appointing a managing director, whole time director, manager and a company

secretary, by certain companies in certain companies.

But the new 2013 Act specifically defines a Key Managerial Personnel. Under Section 203, it

mentions that every prescribed class of company shall be required to appoint a chief executive

officer or managing director, company secretary, a whole time director and a chief financial

advisor. A KMP cannot be KMP of any company other than the subsidiary.

After this provision, the independent directors will not have any fear of not being re- elected in a

general meeting upon retirement by rotation.

Also, there are express provisions in the new act which expressly lay down the duties on part of

the directors of a company and the liability of a director in case of breach of such duty. Therefore

a sense of a higher degree of responsibility and liability is imposed on the directors.

5Section 2(51): key managerial personnel, in relation to a company, means

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

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed


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PROVISIONS REGARDING CORPORATE SOCIAL RESPONSIBILITY

The Companies Act 1956 has no provision regarding the corporate social responsibility while a

company is being functioned. However, Section 135 of the new act has express provisions for the

same. It says that:

Every company with a net worth of INR 500 crores or more or turnover of INR 1000 crores

or more or net profit of INR 5 crores or more during any financial year is required to

constitute a CSR Committee of the board.

The committee will consist of three or more directors of which at least one has to be an

independent director.

The committee is required to formulate and monitor the CSR policy and recommend the

expenditure to be incurred on such activities.

The CSR activities may comprise a number of activities listed in Schedule VII.

The boards report will require the disclosure of the CSR committee and the contents of

the policy.

Further, the board is required to make endeavours to ensure that the activities provided

under the CSR policy are undertaken and that the company spends at least 2% of the

average net profits made by the company in the preceding three financial years in

accordance with the policy. Where the board fails to spend such an amount, it is required to provide the reasons for the

same in the boards report.


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PROVISIONS REGARDING COMPROMISES, ARRANGEMENTS AND

AMALGAMATIONS

Section 230 of the Companies Act lays down the provision in relation to compromises,

arrangements and amalgamations6

6230. (1) Where a compromise or arrangement is proposed

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,

the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case

of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or

of the members or class of members, as the case may be, to be called, held and conducted in such manner as the

Tribunal directs.

Explanation.For the purposes of this sub-section, arrangement includes a re-organisation of the companys

share capital by the consolidation of shares of different classes or by the division of shares into shares of

different classes, or by both of those methods.

(2) The company or any other person, by whom an application is made under subsection (1), shall disclose to the

Tribunal by affidavit

(a) all material facts relating to the company, such as the latest financial position of the company, the latest

auditors report on the accounts of the company and the pendency of any investigation or proceedings against the

company;

(b) reduction of share capital of the company, if any, included in the compromise or arrangement;

(c) any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the secured

creditors in value, including

(i) a creditors responsibility statement in the prescribed form;

(ii) safeguards for the protection of other secured and unsecured creditors;

(iii) report by the auditor that the fund requirements of the company after the corporate debt restructuring as

approved shall conform to the liquidity test based upon the estimates provided to them by the Board;(iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve

Bank of India, a statement to that effect; and

(v) a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and

immovable, of the company by a registered valuer.

(3) Where a meeting is proposed to be called in pursuance of an order of the Tribunal under sub-section (1), a

notice of such meeting shall be sent to all the creditors or class of creditors and to all the members or class of

members and the debenture-holders of the company, individually at the address registered with the company

which shall be accompanied by a statement disclosing the details of the compromise or arrangement, a copy of the

valuation report, if any, and explaining their effect on creditors, key managerial personnel, promoters and non-

promoter members, and the debenture-holders and the effect of the compromise or arrangement on any material

interests of the directors of the company or the debenture trustees, and such other matters as may be prescribed:

Provided that such notice and other documents shall also be placed on the website of the company, if any, and in

case of a listed company, these documents shall be sent to the Securities and Exchange Board and stock exchange

where the securities of the companies are listed, for placing on their website and shall also be published in

newspapers in such manner as may be prescribed:

Provided further that where the notice for the meeting is also issued by way of an advertisement, it shall indicate

the time within which copies of the compromise or arrangement shall be made available to the concerned persons

free of charge from the registered office of the company.

(4) A notice under sub-section (3) shall provide that the persons to whom the notice is sent may vote in the

meeting either themselves or through proxies or by postal ballot to the adoption of the compromise or

arrangement within one month from the date of receipt of such notice:


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Provided that any objection to the compromise or arrangement shall be made only by persons holding not less

than ten per cent. of the shareholding or having outstanding debt amounting to not less than five per cent. of the

total outstanding debt as per the latest audited financial statement.

(5) A notice under sub-section (3) along with all the documents in such form as may be prescribed shall also be

sent to the Central Government, the income-tax authorities, the Reserve Bank of India, the Securities andExchange Board, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition

Commission of India established under sub-section (1) of section 7 of the Competition Act, 2002, if necessary, and

such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement

and shall require that representations, if any, to be made by them shall be made within a period of thirty days

from the date of receipt of such notice, failing which, it shall be presumed that they have no representations to

make on the proposals.

(6) Where, at a meeting held in pursuance of sub-section (1), majority of persons representing three-fourths in

value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person

or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement

is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of

creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the

liquidator and the contributories of the company.

(7) An order made by the Tribunal under sub-section (6) shall provide for all or any of the

following matters, namely:

(a) where the compromise or arrangement provides for conversion of preference shares into equity shares, such

preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity

shares equal to the value of the dividend payable;

(b) the protection of any class of creditors;

(c) if the compromise or arrangement results in the variation of the shareholdersrights, it shall be given effect to

under the provisions of section 48;

(d) if the compromise or arrangement is agreed to by the creditors under sub-section (6), any proceedings pending

before the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial

Companies (Special Provisions) Act, 1985 shall abate;

(e) such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the Tribunal

necessary to effectively implement the terms of the compromise or arrangement:Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the

company's auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in

the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under

section 133.

(8) The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days of the

receipt of the order.

(9) The Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors or

class of creditors, having at least ninety per cent. value, agree and confirm, by way of affidavit, to the scheme of

compromise or arrangement.

(10) No compromise or arrangement in respect of any buy-back of securities under this section shall be sanctioned

by the Tribunal unless such buy-back is in accordance with the provisions of section 68.

(11) Any compromise or arrangement may include takeover offer made in such manner

as may be prescribed:

Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities

and Exchange Board.

(12) An aggrieved party may make an application to the Tribunal in the event of any grievances with respect to the

takeover offer of companies other than listed companies in such manner as may be prescribed and the Tribunal

may, on application, pass such order as it may deem fit.

Explanation.For the removal of doubts, it is hereby declared that the provisions of section 66 shall not apply to

the reduction of share capital effected in pursuance of the order of the Tribunal under this section.


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After the reading of the abovementioned provision, it can be implied that certain changes have

been made in the new act regarding 1) Disclosure 2) Meeting of shareholders 3) Penalties for

non-compliance 4) Powers and Order of the NCLT.

1)

Disclosure: In addition to the documents required as per the corresponding sections of the1956 Act, the new Act provides for the following additional disclosures to be made in

relation to the scheme of arrangement.

Reduction of share capital, if any, included in the scheme of arrangement.

Any scheme of corporate debt restructuring consented to by not less than 75% in value of

the secured creditors.

Every notice of meeting sent to shareholder/ creditor/ debenture holder of a company shall

also disclose the valuation report, if any, explaining its effect on creditors, KMP,

promoters and non-promoter members and the debenture holders and the consequent effect

of compromise or arrangement on any material interests of the directors of the company or

the debenture trustees.

The notice of meeting as aforesaid is required to be served on the Central Government, the

income tax authorities, Reserve Bank of India (RBI), Securities and Exchange Board of

India (SEBI), RoC, respective stock exchanges, the official liquidator, the Competition

Commission of India (CCI) and such other authorities which are likely to be affected by

the scheme of arrangement. Such notice, when served, shall require the concerned

authorities to make their respective representations (if any) within a period of 30 days from

the date of the receipt of such notice, failing which it shall be presumed that they have no

representations to make on the scheme.

2) Meetings of Shareholders: The shareholders have been given a power to raise any

objection towards the scheme of arrangement or compromise, provided they meet a certain

eligibility criteria, i.e. he holds not less than 10% of the shares or have an outstanding debt

as per the latest audited financials.

A following exception has also been added that NCLT may only dispense with the

requirement of holding a meeting of creditors, where such creditors, having at least 90%

value, agree by way of an affidavit, to the scheme of arrangement.


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Also, as per the provision, resolution for compromise or arrangement can now also be

passed through postal ballot.

Under the 1956 Act, it was possible to seek approval of dispensation of the meeting of

creditors, from the high court, based upon consent letters received from the creditors. The

2013 now imposes a strict obligation on the companies seeking such dispensation and

provides that the NCLT may only dispense with the requirement of holding a meeting of

creditors of class of creditors, where such creditors or class of creditors, having at least

90% value, agree and confirm, by way of an affidavit, to the scheme of compromise or

arrangement. With the introduction of this new provision, it may now be difficult for

companies to seek dispensation of the meeting of creditors if 90% in value of the

creditors do not collectively agree on the filing of an affidavit.

3) Order of the tribunal regarding Merger and Amalgamation: In case of a merger of a

listed company and an unlisted company, the NCLT can order that the unlisted transferee

company shall continue to be unlisted. This will hamper reverse listing transactions which

worked as an effective alternative for backdoor listing in comparison to listing of a

company through an initial public offering.

Also, two simplistic definitions of merger by absorption and merger by formation of new

company have been introduced. Furthermore, any scheme of arrangement shall specify

only one appointed date from which date the scheme shall be effective.

Merger or Amalgamation of Company with Foreign Company

The new act permits a merger between an Indian and a foreign company. New provision

for cross border mergers or amalgamations between Indian companies and companies


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incorporated in the jurisdictions of such countries as may be notified from time to time by

the Central Government.

The power of the Central Government to make rules under this Clause has been made

subject to consultations with the RBI.

Prior approval of the RBI requiredbefore any foreign company merges with an Indian

company or vice versa. As per the existing exchange control regulations, shares can be

issued under automatic route to non-residents subject to satisfaction of certain conditions.

Hence, it is a good step on the part of the legislature that the new Act specifically provides for

arrangements between foreign companies and Indian companies and a separate process for

arrangement between group companies. Hence, one can witness more group restructurings with

boosted offshore participation, which route was otherwise not accessible.


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REVIVAL AND REHABILITATION OF SICK COMPANIES

The manner of declaring a company sick and process of its revival and rehabilitation has been

completely rationalized. It is mentioned under Chapter XIX of the 2013 Act. Under this provision,

new authorities namely administrator, interim administrator and committee of creditorshave beeninvolved in the process. Instead of the operating agency as provided under the 1956 Act, the

company administrator shall prepare the f inal scheme of revival and rehabil itati on after

consideration of the draft scheme fi led along with the application and shal l perform such other

functions as may be prescribed by NCLT f rom time to time.

A company can be determined to be sick as under Section 253(1)of the Companies Act 2013. It

lays down that: Where on a demand by the secured creditors of a company representing fifty

percent or more of its outstanding amount of debt, the company has failed to pay the debt withina period of thirty days of the service of the notice of demand or to secure or compound it to the

reasonable satisfaction of the creditors, any secured creditor may file an application to the

Tribunal in the prescribed manner along with the relevant evidence for such default, non-

repayment or failure to offer security or compound it, for a determination that the company be

declared as a sick company.

The sanction of the scheme of revival and rehabilitation is mentioned under Section 262 of the

Companies Act, 2013. According to this provision, the scheme has to be prepared by the companyadministrator and approved by the unsecured creditors representing 1/4 thin value of the amount

and the secured creditors representing 3/4thof the amount and thereafter shall be submitted to the

National Company Law Tribunal for its sanction.

Bar on Jurisdiction: Section 268 of the Companies Act 2013 puts a bar on the jurisdiction of

various courts in regards to the matters falling under the ambit of this chapter. It lays down that:

No appeal shall lie in any court or other authority and no civil court shall have any jurisdiction in

respect of any matter in respect of which the Tribunal or the Appellate Tribunal is empowered byor under this Chapter and no injunction shall be granted by any court or other authority in respect

of any action taken or proposed to be taken in pursuance of any power conferred by or under this

Chapter.7

7Section 268 of the Companies Act 2013


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However, it does not bar the jurisdiction of the Supreme Court under Article 136 or the jurisdiction

of the High Court under Articles 226 and 227 of the Indian Constitution.

Winding Up:

A company can be wound up by the NCLT or on a voluntary application made by the company

under this chapter.

Section 271 deals with the circumstances wherein the company can be wound up by the NCLT,

which are mentioned hereinafter:

Company is unable to pay its debts.

Company has, by special resolution, resolved that the company be wound up by the NCLT.

Company has acted against the interests of the sovereignty and integrity of India. If the NCLT has ordered the winding up of the company under the provision relating to the

revival and rehabilitation of sick companies.

If on an application made by the RoC or any other person authorized by the central

government by notification under the Act, the NCLT is of the opinion that the affairs of

the company have been conducted in a fraudulent manner or the company was formed for

fraudulent and unlawful purpose.

If the company has made a default in filing with the RoC its financial statements or annual

returns for immediately preceding five consecutive financial years.

If the NCLT is of the opinion that it is just and equitable that the company should be wound

up.

The 2013 Act includes fraud as one of the grounds for winding up of a company . The NCLT

may wind up a company, if the NCLT, on an application by the Central Government or the RoC,

is of the opinion that the business and the affairs of the company are being carried out in a

fraudulent manner or else, the company was set up for an unlawful or a fraudulent purpose, or if

the people managing the company are engaged in fraudulent misconduct.

The provisions such as non-commencement of business within one year of its incorporation,

default in delivering statutory report, reduction in the number of the members of the company

below the prescribed limit, which provisions found place under the 1956 Act, have not been

included under the new Act of 2013.


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The new Act also provides a definite time frame within which the NCLT, liquidator and other

concerned will be required to discharge their obligation in relation to the winding up of the

company.


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CLASS ACTION SUITS

The concept of class-action suits has been introduced in the 2013 Act, under section 245. It says

that members, depositors or any class of them, are of the opinion that the management of the affairs

of the company are being conducted in a manner prejudicial to the interests of the company, its

members or the depositors, may, file an application before the tribunal on behalf of the members

to seek any of the following orders:

to restrain the company from committing an act which is ultra vires the articles or

memorandum of the company;

to restrain the company from committing breach of any provision of the companys

memorandum or articles;

to declare a resolution altering the memorandum or articles of the company as void if the

resolution was passed by suppression of material facts or obtained by mis-statement to the

members or depositors;

to restrain the company and its directors from acting on such resolution;

to restrain the company from doing an act which is contrary to the provisions of this Act

or any other law for the time being in force;

to restrain the company from taking action contrary to any resolution passed by the

members;

to claim damages or compensation or demand any other suitable action from or against

(i) The company or its directors for any fraudulent, unlawful or wrongful act or omission or

conduct or any likely act or omission or conduct on its or their part;

(ii) The auditor including audit firm of the company for any improper or misleading statement

of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or

conduct; or

(iii) Any expert or advisor or consultant or any other person for any incorrect or misleading

statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or

any likely act or conduct on his part;


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Documents

Comparison of Companies Acts