Key Amendments in Companies Act , 2014

KEY AMENDMENTS IN COMPANIES ACT, 2014 BY THE COMPANIES (AMENDMENT) BILL, 2014

Companies Act, 2013 was notified after a long period on 29th August, 2013. The Companies Act inbounds the strength of business. The Companies are base of financial structure of country. So, it is very important to enact such an intact and important legislation for the country. The Companies Act, 2013 was a complete enactment but there were some difficulties in enforcement of some provisions. To overcome these difficulties and for removal of doubts various notifications, circulars and orders were issued by the Ministry of Corporate Affairs from time to time. But some issues which were not redressed till now were raised day and time again by the industry to government. To overcome these practical difficulties the Companies Amendment Act, 2014 was passed by the Parliament of India. The important provisions has been discussed in details herein below:

1. Minimum Paid Up Capital Limit Removed:

(a) In Case of Private Limited Companies

Amended Section 2(68) of the companies Act, 2013 provides that:

“private company” means a company having a minimum paid-up sharecapital [2]as may be prescribed,and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of itsmembers to two hundred:

Provided that where two or more persons hold one or more shares in acompany jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company,were members of the company while in that employment and have continued tobe members after the employment ceased,shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities ofthe company.

(b) In Case of Public Companies

Amended Section 2(71) of the companies Act, 2013 provides that:

“public company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital[3]as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a privatecompany, shall be deemed to be public company for the purposes of this Act evenwhere such subsidiary company continues to be a private company in its articles.

Amended Section 11 sub-section 1 of the companies Act, 2013 provides that:

(1) A company having a share capital shall not commence any business or exerciseany borrowing powers unless—

(a) a declaration is filed by a director in such form and verified in such manner asmay be prescribed, with the Registrar that every subscriber to the memorandum haspaid the value of the shares agreed to be taken by him[4]on the date of making of thisdeclaration; and

(b) the company has filed with the Registrar a verification of its registered officeas provided in sub-section (2) of section 12.

COMMENTARY:

The new amendment has removed the minimum paid-up share capital barrier for the companies. This step in initiated by the government to promote the formation of companies and establishment of the business units. Now the businesses can set up without own funds of the promoters. The promoters can establish companies under various schemes of the central government for establishing new industrial units. It will bring out the new entrapneurs for establishing and setting up business unites.

As the government of India has introduced a new concept of “Make in India” which can only be secured if the new businesses can be setup. It will help in promotion of this dream scheme of the government.

But on the other hand, it cannot be denied that the Former Companies Act, 1956 was having no restriction on formation of the companies. In 2000, the amendment was made to the Companies Act, 1956 by which the companies were required to maintain the minimum paid up capital of Rs. One lakh and Rs. Five lakhs respectively for the Private Limited Company and the Public Company. This amendment was introduced to prevent the formation of illegal, bogus and fictitious companies. So, the present amendment on one side having its positive effect and negative also. But at the same time this removal of minimum paid up capital limit may have positive effects if there will be control surveillance over the working of the companies.

2. No Need to have Common Seal

Amended Section 9 of the companies Act, 2013 provides that:

From the date of incorporation mentioned in the certificate of incorporation, suchsubscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession[5] with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

Amended Section 12 sub section 3 of the companies Act, 2013 provides that:

(3) Every company shall—

(a) paint or affix its name, and the address of its registered office, and keep thesame painted or affixed, on the outside of every office or place in which its business iscarried on, in a conspicuous position, in legible letters, and if the characters employedtherefor are not those of the language or of one of the languages in general use in thatlocality, also in the characters of that language or of one of those languages;

(b) [6]

(c) get its name, address of its registered office and the Corporate IdentityNumber along with telephone number, fax number, if any, e-mail and website addresses,if any, printed in all its business letters, billheads, letter papers and in all its notices andother official publications; and

(d) have its name printed on hundies, promissory notes, bills of exchange andsuch other documents as may be prescribed:

Provided that where a company has changed its name or names during the last twoyears, it shall paint or affix or print, as the case may be, along with its name, the former name or names so changed during the last two years as required under clauses (a) and (c):

Provided further that the words ‘‘One Person Company’’ shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.

Amended Section 22 sub section 2 of the companies Act, 2013 provides that:

(2) A company may, by writing under its common seal, if any[7] authorise any person, eithergenerally or in respect of any specified matters, as its attorney to execute other deeds on itsbehalf in any place either in or outside India.

“Provided that in case a company does not have a common seal, the authorisation under this sub-section shall be made by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.”[8]

Amended Section 22 sub section 3 of the companies Act, 2013 provides that:

(3) A deed signed by such an attorney on behalf of the company and under his sealshall bind the company[9].

Amended Section 46 sub section 1 of the companies Act, 2013 provides that:

(1) A certificate “issued under the common seal, if any, of thecompany or signed by two directors or by a director and the Company Secretary, whereverthe company has appointed a Company Secretary”[10] specifying the shares held by any person, shall be prima facie evidence of the title of the person to suchshares.

Amended sub-section (4) to section 223 provides for Inspector’s Report as under

(4) The report of any inspector appointed under this Chapter shall be authenticated either—

(a) by the seal if any[11]of the company,whose affairs have been investigated; or

(b) by a certificate of a public officer having the custody of the report, as providedunder section 76 of the Indian Evidence Act, 1872,and such report shall be admissible in any legal proceeding as evidence in relation to anymatter contained in the report.

3. Punishment for Acceptance of Deposits

Newly Inserted Section 76A provides as-

Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made there under or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made there under or such further time as may be allowed by the Tribunal under section 73,—

(a) the company shall, in addition to the payment of the amount of depositor part thereof and the interest due, be punishable with fine which shall not beless than one crore rupees but which may extend to ten crore rupees; and

(b) every officer of the company who is in default shall be punishable withimprisonment which may extend to seven years or with fine which shall not beless than twenty-five lakh rupees but which may extend to two crore rupees, orwith both:

Provided that if it is proved that the officer of the company who is in default,has contravened such provisions knowingly or wilfully with the intention to deceivethe company or its shareholders or depositors or creditors or tax authorities, he shallbe liable for action under section 447.

COMMENTARY:

The section is added to the Companies Act, 2013 to protect the interest of innocent investors in the Companies. After the Shahadra Scam, the government become more vigilant to protect the innocent public. Now, this section has made severe punishments for the violation of the provisions of Companies Act, 2013 for acceptance of the Deposits from General Public. The Company and delinquent officers of the company both are made liable for the violation of the provisions of acceptance of deposits. In case of fraud, the provisions of section 447 are applicable.

4. Restrictions on Inspection and obtaining the copies of Resolution:

Newly Inserted provision to Section 117 sub-section (3) provides as

“Provided that no person shall be entitled under section 399 to inspect orobtain copies of such resolutions;

Commentary:

This provision has been added to the existing law to maintain the secret information of the company. It restricts the inspection or obtaining of the copies of resolutions of the companies. The general information which is in regard to the Certificate of Incorporation, Name of directors, authorised signatories, date of board meetings, Memorandum and articles of the Company are generally available to the general public but there are some information which are secret or on the basis of which some strategic decisions are to be taken by the companies are immune from the provisions of the section and same has been given effect by way of addition in the section.

5. Restrictions on Declaration and Payment of Dividend

Newly inserted proviso after the third proviso to section 123 of Act

“Provided also that no company shall declare dividend unless carried overprevious losses and depreciation not provided in previous year or years are set offagainst profit of the company for the current year”.

COMMENTARY:

The provision has been added to provide financial stability to the companies. This proviso ensure to secure the company from the previous year losses and thereby promoting a healthy business environment with financial stability.

6. Amendment for Unpaid Dividend Amount

Amended Section 124 sub section 6 of the companies Act, 2013 provides that:

All shares in respect of whichdividend has not been paid or claimed for seven consecutive years or more shall be[12] transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may beprescribed:

Provided that any claimant of shares transferred above shall be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed.

Explanation.—For the removals of doubts it is hereby clarified that in caseany dividend is paid or claimed for any year during the said period of sevenconsecutive years, the share shall not be transferred to Investor Education and Protection Fund’’.[13]

7. Addition disclosure in Directors’ Responsibility Report

Newly Inserted clause (ca) after clause (c) to Section 134sub-section (3)provides as

(ca) details in respect of frauds reported by auditors under sub-section (12) ofsection 143 other than those which are reportable to the Central Government”.

Explanation:

This clause pertains to broaden the transparence to the general public. The director Responsibility Report is a report which gives an insight view of the Company Affairs to the shareholders and outsiders. On the other side the provision is also encasting a duty on the auditors to report the frauds. This provision covers within its bounds all kind of frauds whether reportable to the central government or not.

8. Additional responsibility of the auditors

Amended Section 143 sub section 12 of the companies Act, 2013 provides that:

“Notwithstanding anything contained in this section, if an auditor of acompany in the course of the performance of his duties as auditor, has reason tobelieve that an offence of fraud involving such amount or amounts as may beprescribed, is being or has been committed in the company by its officers or employees,the auditor shall report the matter to the Central Government within such time and insuch manner as may be prescribed:

Provided that in case of a fraud involving lesser than the specified amount, theauditor shall report the matter to the audit committee constituted under section 177 orto the Board in other cases within such time and in such manner as may beprescribed:

Provided further that the companies, whose auditors have reported fraudsunder this sub-section to the audit committee or the Board but not reported to theCentral Government, shall disclose the details about such frauds in the Board's reportin such manner as may be prescribed”.

COMMENTARY:

The provision cast an additional responsibility on the auditor of the Company. It provides that the company auditor shall report to the Central government about the offence involving huge amount of frauds. The section also encast a duty upon the auditor that if the fraud in his opinion is not so grave he has to inform the matter to board of the company and the board is duty bound to provide the same information through board report. The section enhanced the responsibility of the auditors of the company in such a manner that they cannot escape their liability by only disclosing the matter in Auditors’ Report. Further the same is required to be reported to the central government and public.

9. Special provisions for Related Party Transactions

Amended sub-section (4) clause (iv) of section 177 of the companies Act, 2013 provides that:

(4) Every Audit Committee shall act in accordance with the terms of reference specifiedin writing by the Board which shall, inter alia, include (iv) approval or any subsequent modification of transactions of the companywith related parties;

"Provided that the Audit Committee may make omnibus approval for relatedparty transactions proposed to be entered into by the company subject to suchconditions as may be prescribed".

COMMENTARY

The amendment seeks to remove the barriers for related party transactions. The purpose of business is not to restrict the positive efforts but to raise the economic standard I life of people. One business get work from another and vice-versa. So, only on the ground that the business is related to the promoter group or related party, whether directly or indirectly cannot fetter the free flow of business. If the disclosures are made properly there shall be no barriers in the governance of business.

Amendment to sub-section 1 Section 188 of the Companies Act, 2013

(1) Except with the consent of the Board of Directors given by a special resolution[14]at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party's appointment to any office or place of profit in the company,its subsidiary company or associate company.

Addition of proviso after the third proviso to sub-section 1 to section 188

"Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval."

Amendment to sub-section 3 Section 188

Where any contract or arrangement is entered into by a director or any other employee,without obtaining the consent of the Board or approval by a resolution[15]in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

COMMENTARY TO SECTION 188

The Amendment to the provisions of Section 188 of the Companies Act, 2013 on the one hand encast more responsibility on the board and on the other hand the powers of the board has been broadened. Further the amendment is giving practicability to the business. It provides that where the consolidated accounts of the holding and subsidiary companies are presented before the shareholders in the general meeting of the company, the requirement of passing special resolutions is not mandatory as the net result of the both the businesses is same. The loss of one may be profit of other and vice-versa having nill effect of profitability of the company.

10. Relaxation on restriction for providing loans to Directors

Insertion of clause (b) and (c) tosub-section (1) of section 185 of the companies Act, 2013 provides that:

(1) Save as otherwise provided in this Act, no company shall, directly or indirectly,advance any loan, including any loan represented by a book debt, to any of its directors orto any other person in whom the director is interested or give any guarantee or provide anysecurity in connection with any loan taken by him or such other person:

Provided that nothing contained in this sub-section shall apply to—

"(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities".

11. Restrictions on the powers of benches of Tribunal

Amended sub-section 4 to Section 419 proving for the Benches of Tribunal provides

(4) The President shall, for the disposal of any case relating to rehabilitation,restructuring, reviving[16] of companies, constitute one or more Special Benches consisting of three or more Members, majority necessarily being of Judicial Members.

12. Correction of Law and Jurisdictional matter

Amendment to sub-section 1 to Section 436 proving for the Offences triable by special courts provides

(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973,—

(a)all offences specified under sub-section (1) of section 435[17]shall be triable only by the Special Court established for the area in which the registered office of the company in relation to which theoffence is committed or where there are more Special Courts than one for such area, bysuch one of them as may be specified in this behalf by the High Court concerned;

COMMENTARY:

The section has been amended with the view to provided clarification of jurisdictional error. Earlier the authority given to the special courts was unfettered but now this amendment has made clarification and the jurisdictional matter has been precisely cleared.

In end, it can be said that the Companies Amendment Act, 2014 has brought into effect many remarkable changes like removal of minimum share capital for Companies, no need of common seal, enhancing the responsibility of key managerial personnel, promotes transparence as well as sercery, enhancement in responsibility of Audit committee as well as Chartered Accountants and promotion of new businesses. At the same time it has removed certain technical errors in enforcement of law like in relation to the related party transactions.

But, on the other hand many issues still remains uncleared like the limit beyond which the Chartered Accountant are required to disclose information to the government, Compulsory CSR Audit, Mandatory Independence of the Independent directors, provisions in relation to the meetings of the companies, powers of Key Managerial Personnel, and many other issues which may be removed on some other time. We can see that on one side the government is enhancing the government fee and on other side removing the minimum capital limits for the companies. But, the amendment is always to improve the present errors and technical matters. Hope a positive response to this Companies Amendment Act, 2014.

Mayank Tiwari[1]

[1]Assistant Professor, Department of Laws, G.N.D.U. Regional Campus, Jalandhar.Formerly Company Secretary, Vardhman Acrylics Limited.

[2]The words “of one lakh rupees or such higher paid-up share capital” omitted by the Companies Amendment Act, 2014.

[3] The words “of five lakh rupees or such higher paid-up capital” omitted by the Companies Amendment Bill, 2014.

[4]The words “and the paid-up share capital of the company is not less than five lakh rupees in case of a public company and not less than one lakh rupees in case of a private company” omitted by the Companies Amendment Act, 2014.

[5]The words “and a common seal” omitted by the Companies Amendment Bill, 2014.

[6] The words “have its name engraved in legible characters on its seal” omitted by the Companies Amendment Bill, 2014.

[7] The words “under its common seal” has been replaced by the words “under its common seal, if any” by the Companies Amendment Act, 2014.

[8] The proviso has been added by the Companies Amendment Act, 2014.

[9] The words “and have the effect as if it were made under its common seal” omitted by the Companies Amendment Act, 2014.

[10] The words “issued under the common seal of the company” has been replaced by “issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary” by the Companies Amendment Bill, 2014.

[11]The words “by the seal” has been replaced by the words “by the sea, if any” by the Companies Amendment Act, 2014.

[12]The words “unpaid or unclaimed dividend has been transferred under sub-section (5) shall also be” has been substituted by “dividend has not been paid or claimed for seven consecutive years or more shall be” by the Companies Amendment Act, 2014.

[13]The Explanation has been added by the Companies Amendment Act, 2014.

[14] The word “resolution” has been substituted by the word “special resolution ” by the companies Amendment Act, 2013

[15]The word “special resolution” has been substituted by the word “resolution ” by the companies Amendment Act, 2013.

[16]The words “or winding up” omitted by the Companies Amendment Act, 2014.

[17]The words “all offences under this Act” have been substituted by “all offences specified undersub-section (1) of section 435” by the Companies Amendment Act, 2014.