It is obvious that when one thinks of business, they get certain common ideas about the things related to a business such as series of transactions, incorporation of company and how the supply of goods and services is met by the company owners. But starting a business is not merely a transaction and bunch of deeds and contracts but it is way more than that. One needs to have a separate entity in form of a Company wherein all the transactions related to the business are taken place. Usually when a big firm or company is started, it might require huge number of investors who believe in the process of incorporating the company and even avail the products and services of their Company.
In order to ensure the proper operation and functioning of the corporate world there are certain legislations framed so that the transparency and accountability towards the consumers, shareholders is maintained and no unlawful benefits are obtained by the investors or directors of the Company. Thus, the Company Laws were introduced with the aim that they will device a n uniform method regarding how a company is incorporated and how a company can function as a separate legal entity post its incorporation and other related procedures regarding its shares and shareholders, debts, debentures etc.
The Companies Act was first enacted in the year 1956 to bring out an even set of laws for the business enterprises where it ensured that a separate entity was given to every company formed and registered under the Companies Act which would be totally independent from its members, investors and directors. It also assured that in case one of the members or directors had to leave or were removed from the agreement, it will not lead to end of the Company as the Act ensured perennial existence of the company formed under this Act until it was officially dissolved or wound up by the Court or members themselves. A company had its own unique feature and one of them was the right to sue and be sued by any other entity which would not affect the directors or board members of the Company individually.
Landmark Judgments of Companies Act, 1956 –
- In the case of State Trading Corporation of India Ltd v. The Commercial Tax Officer, Vishakhapatnam & Ors, 1963, the petitioner had approached the Apex Court under the special writ issued against the agencies of the State government over the sale tax that was levied on the state corporation. The petition was made in the favour to know whether Article 32 permits the Supreme Court to issue special order for the protecting the rights of its citizens. It was further questioned that the petitioner being registered under the Companies Act 1956 can be regarded as organ of the government and request to issue the special order against the State for protecting the right of citizen. The Supreme Court dismissed the plea of the petitioner and stated that all citizens are persons but all persons are not citizen and the company/corporation loses to be a person from the date of its incorporation and the activities carried out by the company are completely commercial in nature so they cannot be regarded as organ of the government.
- In the case of Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. 1963, there was question risen on the word “allotment” as mentioned in Section 75(1) of the Act 1956 and the plaintiff had registered a complaint that the company had failed to file return of allotment of his shares with registrar as a requisite by the law. So the court stated in its order that the re-issue of forfeitured shares cannot be considered as same as the allotment of share as mentioned in Section 75(1) as the term allotment means acceptance granted by the company for the offer of the shares whereas here there was no such offer.
- In case of Re South of England Natural Gas and Petroleum Co. Ltd, 1911, it was stated to the shareholders of the specified company got the copies of the Prospectus where in the title it was stated clearly that the prospectus given to them was for private circulation and not advertised in the public. But the Court held that the main purpose of prospectus is to advertise and it is public offer of shares even if the indication describes it as for private circulation only.
Enactment of Companies Act, 2013 –
The Companies Act, 1956 had to be upgraded since a long time as with the changing times the concept of company was also changing there were new concepts like “One person Company” were coming up which had no mention in the previous Act and the provisions were easy to fool around with of the 1956 Act, thus there was need of better upgraded version of the Companies Act, that was according to the needs of the present corporate enterprises.
So, the parliament decided to finally approve the long-awaited refurbishment of the Companies Act which was governing the rules and regulations of the Indian companies on 9th August 2013. The objective of the 2013 Act was to enable easy procedure of doing business in India and be more vigilant towards the corporate administration to make them more responsible as well as accountable. There were plenty of new concepts and definitions added to the Act of 2013 such as One-Person Company, Small Company, dormant company and introduction of the concept of Corporate Social Responsibility (CSR) and much more.
The Act further announced amendments in the provisions related to governance, inspection and supervision of the Companies, brought in e-management, compliance and enforcement, mergers and acquisition, auditors and auditing process, disclosure norms, class action suits and registered valuers.
There are around more than 470 Sections in the current Companies Act, 2013 with 7 schedules and 29 chapters and the Act speaks majorly regarding the incorporation of company, appointment of directors, board of directors, shares and shareholders, auditors, different kinds of winding up of the Company etc. This act of 2013 replaced the companies act o 1956. Let’s have a look into the essential features of a company.
Features of Company –
As per the Company laws, some of the significant features of a company which should be understood by all are as follows-
- Company shall always have a perpetual and everlasting existence irrespective of the factor whether there is decrease in the number of members or not. This means that the company shall exist till the company decides to wind up officially. Thus, in case any of the members of the company pass away or leave the company it will still be in existence and not get affected by this at all. Even if a company goes through bankruptcy or becomes insolvent or becomes inactive and not performing any sort of business transactions then also it will retain its existence as separate entity until the order of winding up is passed by the Court.
- Every company has its own unique and separate legal entity which is completely discrete from its members and directors. In this feature, the company derives the right to sue any other company or person and even be sued by the same. The company can be sued for any of civil wrong committed by the Company. This may include many activities like breach of any contract, improper conduct of business etc. Thus, civil suit can be filed against the company and if found guilty then the company has to pay the penalized amount and damages accordingly. However, the Act forbids filing of any criminal suit against the Company as no mens rea can be proven on part of Company, to prove any criminal offence. As the company has its own legal entity is also responsible for paying the taxes levied on its name. There are some perks of separate entity too, like assets can be bought in the name of company for their commercial purposes.
- Liability of company is limited to certain extent with regard to its business with the directors and members as no one person should be levied with the unlimited liabilities of the company as it can affect the perpetual existence of the company in case of unfortunate times. And power in the hands of one person often leads to tyrannical situation, but with limited liability every member and director have a say in their commercial decisions.
- One of the major features of Company is their right to market its shares in the share market. Shares is one of the means to have control over the company and any person who invests his money by buying the shares of the company, owns that part of the company and as stated a private shareholder cannot have more than 50 shareholders as restriction is posed in the transferability of shares whereas a public company can freely trade its shares in the market as it is free from transferability of shares.
One person Company and Small Company –
- One Person Company
The concept of one-person company was added in the Companies Act 2013 where a private company can be incorporated by having just one member and atleast one director. This idea of one-person company originated from developed countries like USA, England, China Singapore. This idea was first proposed by an expert committee headed by Dr. JJ Irani in the year 2005. There is one basic requirement to incorporate one person company that only the naturally born citizens of India who are into small businesses, entrepreneurs, weavers, artisans, or traders can take the benefit of this “One Person Company” (OPC) notion as framed in the Companies Act, 2013. The OPC shall have the paid-up capital of upto Rs 1 lakh and there is no such mandatory rule stating that Annual General Meeting has to be held every year.
- Small Company
Section 2(85) of the Act 2013 defines “small company” as a private company where the paid-up capital shall not be more than Rs 50 lakh or the turnover of that enterprise should exceed the profit of Rs 2 crore in the previous financial year. There are certain relaxations granted to small company as compared to the private and public companies with respect to the provision of board meetings, presentation of cash flow statement and regarding certain merger processes.
Chief Highlights of Companies Act, 2013 –
The Companies act 2013 is a huge act and there are various provisions with regard to the promoters, kinds of company, several definitions, kinds of shares, prospectus, auditors, etc. Some of the key highlights of the Act are as follows-
1. Financial Year
In the previous act, the companies were given the liberty to choose their own financial year but with the enactment of 2013 Act, it eliminated this flexibility given to the companies and resorted to one date that was 31st March would be the end of financial year for all the companies with certain exceptions which were authorized by the National Company Law Tribunal and the companies were instructed to align their financial records to 31st March in two years from 1st April 2014.
2. Number of directorships held by an individual
Section 165 of the Act states that person cannot have directorships in more than 20 companies including ten public companies within it. The Act is providing the transition period of one year to comply with the recent norms from 1st April 2014 to all the directors.
Even the eligibility age to become Managing Director or full time Director has been changed to 21 years as against the existing condition of 25 years.
3. Commencement of Business
All the companies including the public and private companies registered under the Companies Act 2013 have to submit the following with the Registrar of the Company to initiate their business transactions-
- A declaration by the director in prescribed form stating that the subscribers or the promoters of the memorandum have to pay the decided value of shares as agreed to be taken by them.
- A confirmation stating that the verification of the registered office has been filed with the Registrar of the Companies.
- In certain case, if the company requires any registration from any of sectoral regulators like the RBI, SEBI then a further approval from these regulators will also be required before commencing the business.
- Board of Director and Disqualification for appointment of Director
As per the Act 2013, there shall be maximum 15 directors in the board now (before it was 12) and in case more than 15 directors are to be appointed then special resolution has to be passed by the shareholders. Further, the act also mandates that atleast one woman director should be there in the Board for prescribed class of companies. Further, it states that the company shall also have atleast 1 resident director (person who has stayed in India for not less than 182 days in the previous year.)
All the prevailing Directors should be assigned a Director Identification Number (DIN) allotted by the central government and the directors who already hold a DIN don’t have to take any further action. Directors who don’t have the DIN should initiate their process for allotment of DIN and inform the companies where he is the Director. Even the company has the duty to keep the registrar of companies updated regarding the DIN of his present set of directors.
4. Attending Board Meetings
Section 167 of the Act 2013, states that the Director shall vacate his office if he fails to attend all the meeting held by the Board of Directors during a period of 12 months i.e. one year. It doesn’t matter whether the absence was with or without seeking leave from the Board, in short, the director must attend atleast one meeting held by the Board in a year or else he has to leave his office.
Before conducting a board meeting, a seven days’ notice has to be given to the Directors and the board needs to conduct a meet atleast four times in a year and there should be not be break of more than 120 days between the 2 consecutive meetings.
5. Appointment of Statutory Auditor
Section 139 of the Act states, every company that is listed in stock market, can appoint an individual auditor for a period of 5 years and in case there is firm of auditors, then it can be appointed for a period of 10 years. Their tenure of 5 or 10 years starts from the date of their appointment. The auditor can be re-appointed but only once, in case the re-appointed auditor has finished his respective tenure then a fresh auditor has to be appointed in the Annual General Meeting by passing a resolution.
6. Appointment of Managing Director, whole time Director or Manager
Managerial personnel can be appointed for a term of 5 years and the age bar posed by the previous Act was also uplifted in the new Act and hence any individual above the age of 70 years can also be appointed as key managerial personnel by passing a special resolution of the members.
Section 196 of the Act states that re-appointment of a managerial person cannot be made before one year of the expiry of the term which was changed as earlier it was two years before the expiry of the term in the 1956 Act.
7. Corporate Social Responsibility (CSR)
The Company is required to constitute a CSR Committee of the Board and 2% of the average net profits of the last three financial years are to be compulsorily be spent on the corporate social responsibility activities by the Indian companies if any of the following conditions are met with-
- Company’s net worth is Rs. 500 crores or
- The turnover of the company is of Rs 1000 crores
- The net profit of a company is Rs 5 crore or more
Even the incubators notified by the government of India also come under the category to spend over their CSR.
The Companies Act 2013 is humungous Act and to know it all, it would require a lot of time as the Act is full of new additions made with respect to shares, meetings, directors and much more, and one also has to be in consonance with the Companies Rules where the entire procedures regarding the incorporation and different forms that need to be filled are mentioned. Both the Act and Rules need to be read together, if the person wants to be clear with the whole company law. From above, we got a basic idea of what company is and what are its significant features, then we even got a brief of the Companies Act 1956 and the present Act of 2013 and why it was necessary to bring about changes in the company law. Thus, to incorporate a business there are plenty of legal implications which should be taken care off or it will bring in punitive actions for the specific company.
Refer – Companies Act, 2013
Read – Overview of the National Food Security Act
This Article is authored by Rhea Banerjee, pursuing B.A.LL.B from Indore Institute of Law.