The Companies Act: An Overview

The Companies Act, 2013 has replaced the older Companies Act, 1965, to make the provisions more in line with the current corporate scenario. The provisions of the older Act were reformed and modernised to adjust to the evolving business world. The new Act is less bulky, consisting of only 29 chapters and 484 sections, unlike its predecessor. It contains seven schedules.

The Act was granted the assent of the President on August 29th, 2013 and it came into force in parts on September 12th, 2013 and April 1st, 2014.

What does Companies Act Define?

The Companies Act of 2013 addresses the formation, functioning, control, obligations, and dissolution of corporations. In order to make the Act more consistent with the modern corporate environment, it was introduced to replace its predecessor. Additionally, by making the process of establishing and sustaining an organisation simpler, this act seeks to promote economic growth and development. Following independence, in 1956, the country's corporate enterprises were governed by the first Companies Act. The Bhabha Committee's suggestions served as the foundation for the 1956 Act. Multiple amendments to this Act were made, and significant revisions were added in 2013.

Incorporation of a Company

Sections 3 to 22 relate to the formation of companies and other incidental matters. It provides that a company may be formed by seven or more persons in the case of a public company; two or more persons in the case of a private company; and one person in the case of a one-person company, by subscribing their names to the memorandum of association and complying with registration requirements under the Act. The company formed may be a company limited by shares, a company limited by guarantee or an unlimited company.

These provisions contain provisions regarding the process of incorporation, registration, effect of registration, alteration to articles and memorandum of association, etc.

Sections 4 and 5 lay down provisions regarding the Memorandum of Association and Articles of Association of a company.

Shares

Sections 23 to 72 broadly relate to the prospectus, allotment of shares, private placement, issue of capital, issue of bonus shares, debentures etc.

Annual General Meeting

According to Section 96, every company other than a one-person company must hold an annual general meeting, and no more than 15 months must elapse between the dates of two general meetings. Section 100 relates to the calling of an extraordinary general meeting.

Prevention of Oppression and Mismanagement

Sections 241 to 246 relate to the prevention of oppression and mismanagement of minority shareholders. An application may be made to the Tribunal for relief in cases of oppression by any member of the company when the company's affairs are being conducted in a manner prejudicial to the public interest or oppressive to a particular member of the company. Even the Central Government can make such an application. The Tribunal has been empowered to pass such an order or make any provision as it deems fit.

Winding up

Section 270-303 relates to the winding up of the company by the Tribunal and matters like procedure, powers of the Tribunal, appointment and removal of company liquidators, jurisdiction of the Tribunal, powers and duties of the company liquidator, etc.

Different Types of Businesses

The following types of companies can be formed under the Act −

• Public limited companies (more than 200 shareholders)

• Private companies (not more than 200 shareholders)

• One Person Company (a private company with one shareholder and only one director).

• Section 8 Companies (non-profit companies incorporated as per section 8)

• Producer Company (for agricultural purposes)

Corporate Social Responsibility

Section 135 of the Act relates to Corporate Social Responsibility (CSR). It makes it mandatory for public companies with a net worth above five hundred crores or a turnover above a thousand crores or a net profit above five crores during the immediately preceding financial year to make CSR contributions. For this, the company must have a CSR committee with three or more directors, with at least one independent director, to oversee the expenditure to be made by the company on such activities. Every fiscal year, the company must spend at least 2% of its average net profit from the three immediately preceding fiscal years.

Auditors

Sections 139 to 148 contain provisions regarding the appointment of auditors; term of office; eligibility for appointment; disqualifications; removal and resignation; and audit reporting.

Directors

Sections 149 to 172 contain provisions regarding the Board of Directors; manner of selection; appointment; director identification number; disqualifications; number of directors; resignation and removal of directors; etc. Sections 196 to 205 relate to the appointment of Managing Directors.

Directors are the pivot of a company. Directors are collectively called the board. The important provisions mentioned in these sections have been briefly discussed as follows:

• A public company must have at least three directors, a private company must have at least two directors, and a one-person company must have at least one director. There can be a maximum of 15 directors without any special resolution passed in this regard.

• A class of companies may be required to have at least one female director.

• At least one-third of the total number of directors should be independent directors in the case of a listed company.

• One director should be elected by small shareholders in the case of a listed company.

• Subscribers to the memorandum of association appoint the first director of the company. If this has not been done, then all subscribers become directors.

• Generally, all directors, except nominee/regulatory directors, should be appointed by the shareholders in the general meetings. The person proposed for appointment must declare that he is free of all disqualifications. Such a person has to file his consent to act as so within 30 days.

• The directors can be appointed with respect to the articles of association as well. If there is an agreement between the shareholders in the articles that entitles every shareholder to be appointed as a director if they have more than 10% share, then they can be appointed as nominated directors.

• The Board of Directors may also appoint a new director if the article empowers the Board to appoint additional directors or there are casual vacancies.

• Directors can be removed by shareholders, tribunals, or resignation.

• The Board of Directors can exercise all powers and do all acts which the company is authorised to exercise. They have certain powers to be exercised with general meeting approval; power to constitute an audit committee; power to constitute nomination and remuneration committees; power to make a contribution to charitable or other funds; power to make a political contribution.

• Sections 173-193 dealt with the Board of Directors' meetings and powers.

Authorities Established

Sections 407 to 434 lay down provisions regarding the establishment, removal, and resignation of members; term of office; qualifications; powers; and functions of the National Company Law Tribunal and Appellate Tribunal. The National Company Law Tribunal (NCLT) shall consist of a President and such number of judicial and technical members as the Central Government deems necessary. The National Company Law Appellate Tribunal (NCLAT) shall consist of a Chairperson and judicial members or technical members not exceeding eleven.

An appeal from an NCLT order is preferred to the NCLAT within 45 days of such order. Within 60 days of the NCLAT decision, an appeal may be filed with the Supreme Court.

Conclusion

Companies Act has been of wide significance in taking corporate governance in India to a different level. The new Act of 2013 has taken the dynamic needs of the corporate sector and helps in establishing transparency and accountability in the operation of the company. Significant amendments to the laws governing governance, electronic management, compliance and enforcement, disclosure, standards, auditors, and mergers and acquisitions are made by the 2013 Act. The amendments made by the 2013 Act have broad ramifications and are expected to fundamentally alter how corporations function in India.

Frequently Asked Questions

Q1.What are the salient features of the Companies Act?

Ans: Some features of the Act are −

• It first mentioned the idea of "Dormant Companies." Companies that have not conducted business for two years in a row are considered dormant.

• The National Company Law Tribunal was introduced by it. In India, it is a quasi-judicial organisation that decides disputes between businesses. The Company Law Board was replaced.

• It allows for self-regulation of disclosures and transparency as opposed to a system relying on government approval.

• Electronic records must be maintained for documents.

• Merger and amalgamation processes have been streamlined and made more efficient.

• Public companies are now required by law to have independent directors.

• Women directors are required in a specific class of companies.

• Companies are required by the Act to create CSR committees and CSR policies. Mandatory CSR disclosures have been issued for a select few companies.

Q2. What are the major types of companies in India?

Ans: In India, there are many different kinds of business entities such as −

• Joint Hindu family businesses

• Limited liability partnerships

• Private limited companies

• Unlimited companies

• Public limited companies

• Sole proprietorships.

Q3. Is Companies Act 1956 still applicable?

Ans:Some sections like 106, 107, 80A, 81, 186, 168, 250, 243 etc. of the 1956 Act are still applicable.

Q4. What do you understand by the doctrine of indoor management?

Ans: Articles and Memorandum of Association are public documents. Before doing business with a corporation, a person must review its legal documentation to ensure compliance with the terms. But even if a person doesn't read them, the law nonetheless assumes that he is aware of what the documents contain. Constructive Notice is the name for such an implicit notice. 

There is an exception to the constructive notice rule known as the indoor management rule. It's significant to remember that the law of constructive notice forbids third parties from knowing about the internal operations of a firm. So, if a particular action is permitted under the Memorandum or Articles of Association, an outsider can assume that all specific requirements were met. This is known as doctrine of indoor management.