Companies

Companies Act, 2013 has amended time and again to keep up with the dynamics of capital markets. This article discusses some of the major amendments and developments in the law.

2019 Amendment

The Ministry of Corporate Affairs (the MCA) in the month of January & February 2019 issued the following amendments notification under the Companies Act 2013 (the Act):

“a.       Changes in Companies (Significant Beneficial Owners) Rules 2018 to identify individuals/entities having significant control over the affairs of a company

b.         Companies (Incorporation) Rules, 2014 mandating all the companies incorporated prior to 31 December 2017 to upload all their particulars of various compliances including details of registered office in Form INC 22A Active.

c.         Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019, mandating all the companies who receives goods or services from MSME and the payment for which is not made within 45 days from the date of acceptance or the date of deemed acceptance of goods or services from MSME to report such transactions in MSME Form I.

d.         Changes in Companies (Acceptance of Deposits) Rules, 2014 mandating all companies to file a return of deposits in Form DPT 3 with the MCA, furnishing information about file the transactions that has not been considered as deposit or both under the Companies (Acceptance of Deposits) Rules 2014 (Deposit Rules).”

The Companies (Amendment) Act, 2020

On 20th September, the Lok Sabha passed a bill that seeks to decriminalise certain offences under the Companies Act, 2013, in case of defaults but not involving frauds.

Finance and Corporate Affairs Minister Nirmala Sitharaman states that there are currently around 124 penal provisions compare to 134 under the Companies Act, 2013. Stressing that there will be no relaxation for serious offences, including fraud and those that cause “injury to public interest or deceit”, the minister said the number of “non-compoundable” offences under the Act remains the same at 35.

The bill removes the penalty, imprisonment for certain offenses, and reduces the amount of fine payable in certain cases. However, Under the Act, one-person companies or small companies are only liable to pay up to 50% of the penalty for certain offences.

The Bill empowers the Centre in consultation with the SEBI, to exclude companies issuing specified classes of securities from the definition of a “listed company”. The Bill also exempts companies with a CSR liability of up to Rs 50 lakh a year from setting up CSR Committees.

The Act requires companies to file certain resolutions with the Registrar of Companies, which include resolutions of the Board of Directors of the company to borrow money, or grant loans. However, banking companies are exempt from filing resolutions pass to grant loans or to provide guarantees or security for a loan. This exemption has extended to registered nonbanking financial companies and housing nance companies.

The Bill seeks to establish benches of the National Company Law Appellate Tribunal in New Delhi and empower the central government to allow certain classes of public companies to list classes of securities in foreign jurisdictions.

Companies (Meetings of Board and its Powers) Second Amendments Rules, 2020

These rules were introduce by MCA Notification No. G.S.R. 395(E) dated 23th June, 2020 as a way to introduce amendment in Rule 4 (2) of Companies (Meetings of Board and its Powers) Rules, 2014.

Companies (Appointment and Qualification of Directors) Third Amendments Rules, 2020.

These rules were introduced by MCA Notification No. G.S.R. 396(E). dated 23rd June 2020 as a way to introduce amendment in Rule 6 of Companies (Appointment and Qualification of Directors), Rules, 2014.

“Every Individual-

a. Who has been appointed as an independent director in a company, on the date of commencement of the Companies (Appointment and Qualification of Directors) fifth Amendments Rules, 2019, shall within a period of “10 Months” from such commencement; or

b. who intends to get appointed as an Independent director in a Company after such commencement, shall before such appointment,

apply online to the institute for inclusion of his name in the data bank for a of one year, or five year, or for his life time and from time to time take steps as specified in sub-rule(2) till he continues to hold office of an independent director in any Company.”[1]

MCA General Circular No. 22/2020 Dated: 15.06.2020

The above circular was introduce for Extension in date of EGM through VC or OAVM from 30th June 2020 to 30th September, 2020.

As per this circular it has been decided to allow companies to conduct their EGMs through VC or OAVM or transact items through postal ballot in accordance with the framework provided in aforesaid Circulars up to 30th September 2020.

Extension in the period for name reservation and resubmission of forms

The above circular was introduced on 22nd June, 2020. Following are the highlights:

i. Names reserved for 20 days for new company incorporation. SPICe+ Part B needs to filed within 20 days of name reservation.

ii. Names reserved for 60 days for change of name of company. INC-24 needs to filed within 60 days of name reservation.

iii. Extension of RSUB validity for companies.

iv. Names reserved for 90 days for new LLP incorporation/change of name. FiLLiP/Form 5 needs to file within 90 days of name reservation.

v. RSUB validity extension for LLPs

vi. Extension for marking IEPF-5 SRNs to ‘Pending for Rejection u/r 7(3)’ and ‘Pending for Rejection u/r 7(7)’

Case Analysis

Shashi Prakash Khemka V. NEPC Micon & Others.

In Shashi Prakash Khemka V. NEPC Micon & Others, the Supreme Court of India, in deciding whether a question relating to the transfer of shares should be adjudicated by the Civil Courts or the Company Law Board, held that the jurisdiction of the Civil Courts is entirely exempt from the cases in which jurisdiction has been conferred on the National Company Law Tribunal.

In that case, the issue in question was claim to be the title of the shares. Thus, the Civil Courts should have jurisdiction to adjudicate the matter. Although, setting aside the Madras High Court’s judgement. The Court observed that, because Section 430 of the Companies Act 2013 is broadly word. Relegating the parties to a civil suit would not be an acceptable remedy.

For the reason that there is traditionally a conflict between the Civil Courts. The courts empowered under the Indian Companies Act. In terms of jurisdiction when it comes to adjudication of company law matters, this decision assumes significance.

SAS Hospitality Pvt Ltd v Surya Constructions Pvt Ltd.

The issue of jurisdiction as to whether a Civil Court or the National Company Law Tribunal (NCLT) under the Act came up for consideration before the Delhi High Court in SAS Hospitality Pvt Ltd v Surya Constructions Pvt Ltd[2].

In its order, the Court found that the NCLT had exclusive competence. Lawsuit, the defendant, SAS Hospitality, filed a lawsuit seeking to declare that the allocation of shares of Surya Constructions. To five investors is null and void. In the action, the defendants challenged the Civil Court’s authority. To, adjudicate the matter and claim instead that the NCLT was the proper venue.

Although the Court held that the NCLT was the appropriate venue for adjudicating the case. It made important observations with regard to the jurisdictional aspects.


References

[1] Rule 6(1), Companies (Appointment and Qualification of Directors), Rules, 2014.

[2] MANU/DE/3791/2018

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Frequent questions, quickly answered.

A company is legal entity firm by a group of individuals to engage in a commercial or business activity with a primary aim of earning profit. They can also be distinguished between private and public companies based upon their nature of incorporation. Both have different ownership structure, regulations, financial reporting and compliance requirements.

As per the Companies Act following can be highlighted as the characteristics of a company:-
  1. Incorporated association of persons
  2. Artificial legal person
  3. Separate legal entity
  4. Perpetual existence
  5. Common seal
  6. Limited liability
  7. Financial structure and reporting relationship.

It can be classified into various types depending upon the following requirements:-

  1. Classification mode of incorporation
    • Statutory company- e.g. RBI Act, 1934
    • Registered or incorporated companies.
  2. Classification based on the liabilities of the members.
    • Company is limited by share
    • Company is limited by guarantee
    • Unlimited company
  3. Classification based on the number of members
    • Public company
    • Private company
    • Section 24 company
    • One person company

A company is an entity which is formed and incorporated under Indian law for the furtherance of business activities. A company is a separate person or entity has independent existence from its members. It may be private or public limited company. The liability of its members may be limited by shares held, the members or guarantee. Any two person may form a private company. But recently one person company has also been allowed under Indian law.

Constitution of a company

The constitution of a company is contained in the memorandum of association which is registered with the registrar of companies. The internal regulations of the company are mentioned in the article of association.It is registered with the registrar of companies under the companies Act, 1956.

Management of the company

The management of the company is in the hence of the board of directors. A company may appoint a sole selling agent for any area for any term. Such appointment has to be approved in the general meeting of the company. A company is a legal person under Indian law which have all the rights similar to a private person.

An agreement is an internal document for a limited liability company. That provides the framework for how a limited liability company operates. So, it governs the relationship among members and officers of the company. Assignees, of membership interest in the company and the company itself and other internal affairs of the company are prescribed in detail in this document.

Following information mentioned below is covered in company agreement:-
  1. Ownership structure
  2. Management
  3. Members right and responsibility
  4. Allocation of profit and loss
  5. Distribution of profits
  6. Voting powers of members and shareholders
  7. Transfer of membership interest
  8. Dissolution or liquidation of the company.

It is the key agreement used by limited liability companies because it outlines the businesses financial and functional decision, rules, regulation and bylaws. Once the company member signed it acts as a binding contract between the members of the company.

The condition for its enforceability is that the shareholders agreement should not curtail statutory powers of the company. It should not bind future shareholders than they can be enforced against the company. Even if they are not incorporated in the article of association of the company.

Memorandum of association

A memorandum of association is a legal document prepared in the formation of a company to defined its relationships with shareholders. It’s primary area of business and the identification of the company itself in the eye of law. Memorandum of association is accessible to the general public. It describes the name its physical address and the distribution of the shares between the shareholders and promoters.

Section 399 of the companies Act, 2013

Section 399 of the companies Act, 2013 provides for memorandum of association. It is considered as a primary document for a companies identification. It  contains the object of the company the scope of operation and boundaries which it cannot cross in its entire life. 

Section 4 of the companies act states that a memorandum of association contained following:-

  • Name clause
  • Domicile state clause
  • Object clause
  • Liability clause
  • Capital clause

A Table — If shares limit a company.

B Table —  If company limited by guarantee.

C Table —  If a company limited by guarantee and share capital.

D Table —  Unlimited liability company

E Table —  Unlimited liability company having share capital.

Memorandum of association being charter of the company. It is the Supreme legal document prepared at the time of the incorporation of the company. It defines object of the companies formation, nature of business and the utmost possible scope of delivering. Its corporate responsibilities in social domain which it cannot debar.

section 2 (5) of the companies Act, 2013

As per section 2 (5) of the companies Act, 2013 “Article” , means the article of association of a company as altered from time to time for its convenient operations designed by7 the members of the company. It deals with the right of the members of the company inter se.

The documents lays out how tasks are to be accomplished within the organization. Including the process for appointing directors and officers and the handling of financial records. Article of association also prescribes the inter relationship governed inside the company.

It is the articles of association of a company or organization. It lays down all rules, provisions, powers, duties, rights. Moreover, responsibilities related with the overall governance and management of the company mutually decided by members and shareholders.

A company can alter its article of association in the way of addition, deletion, modification, substitution or any other way. If it wants to by the general majority of its shareholders in the general meeting by giving a notice of alteration of at least 7 days at the board meeting. The given resolution in respect of alteration in articles of association must be passed. 

An entrenched clause or entrenchment clause of a basic law or constitution is a provision which makes certain amendments either more difficult or impossible i.e. inadmissible in the company’s article of association. It may require a form of super majority of referendum submitted to the people or the consent of another party to such an article.