A Presentation On The Salient Features Of
The Companies Bill, 2009.
September 26, 2009
Introduction
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A liberal regulatory set-up for corporate entities is on the anvil
with the Cabinet approving the introduction of a new Companies
Bill (“the Bill”) that will replace the existing rigid and voluminous
Companies Act of 1956 (“the Act”).
The Companies Bill, 2009, has been introduced in the last session of
Parliament in October and once enacted, will replace the
Companies Act, 1956.
The Bill proposes to halve the Sections from 650 in the existing Act
to around 426.
The Companies Bill 2009 is an effort to usher in self-regulation in
corporate affairs with disclosures and accountability, and to
substitute government control over internal corporate processes
and decisions by shareholder control.
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Salient Features of the Bill
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One Person Company (OPC) allowed, more stringent regime for
Not-For-Profit Firms (Section 25 companies).
Transition of Companies from private to public and vice versa to be
easier.
Restrictions on number of partners in partnership firms, banking
firms relaxed.( minimum 2 and no ceiling on maximum partners)
Insider trading by Company Directors/ Key Managerial Personnel
(KMP) to be an offence with criminal liability.
Class action suits/ Derivative suits by shareholder associations,
groups against Companies allowed.
Appointment of minimum 33% independent directors on board.
No issue of shares on discount.
Provides for a single forum approval process for M&As.
Dividend can be claimed by investors even after 7 years.
Use of technology such as tele and video conferencing, e-mail,
digital signatures etc. in various situations.
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Speedy Incorporation
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A Majority of the recommendations made by Sir JJ Irani have been
implemented; e.g;
e-governance and on line filing,
limited interfacing with ROC officials,
correct disclosure based process of incorporation,
Reduced time for response;
No requirement to obtain “COB Certificate”,
No minimum capital required for companies.
Rational Classification of Companies; small, OPCs, control based etc.
Provision of ‘printing’ of memorandum and articles dispensed with.
Process of incorporation simplified and compacted in few sections.
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Incorporation Process
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Clause 3:A company may be formed for any lawful purpose by any
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(a) seven or more persons, where the company to be formed is to be
a public company, or
(b) two or more persons, where the company to be formed is to be a
private company, or
(c) one person, where the company to be formed is to be a One
Person Company.
A company formed under sub-section (l) may be either:(a) a company limited by shares, or
(b) a company limited by guarantee, or
( c) an unlimited company.
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Incorporation Process
Clause 5. Memorandum of a company shall state –
(i)
name of the company; with last words as “Private Company”;
Public Company; or OPC Limited;
(ii)
Place of Registered Office’
(iii)
Objects;
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the liability of members of the company, whether limited or
unlimited .
(v)
Name of the Company not to be identical to any other company.
(vi)
Not to be registered with a name giving impression that it has
Govt. patronage.
(vii)
Name Availability application to be made in the form to be
prescribed. Registrar to reserve the name for 2 months and
maximum 4 months. Memorandum to be in the form as may be
prescribed.
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Incorporation Process
Clause 6. The articles shall also contain such matters, as may be
prescribed. Company free to provide Additional matters in he
Articles.
-articles may contain provisions for entrenchment to the effect that
specified provisions of the articles may be altered only if
conditions or procedures as that are more restrictive than those
applicable in the case of a special resolution, are met or complied
with.
The Central Government may prescribe model articles for different
types of companies .
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(sections 12,13,14,20,26,27,28,29 of the 1956 Act dealing with
incorporation have been reduced and clubbed into Clauses 3,5,6
and 7 of the Bill). Section 25 company has been dealt with in
section 4 of the Bill.
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Incorporation Process
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Clause 7(1) file with the Registrar within whose jurisdiction the
registered office of a company is proposed to be situated,
following documents and information for registration, namely:(i) memorandum and articles of the company duly signed by all
the subscribers to the memorandum in such manner as may be
prescribed;
(ii) declaration by an advocate, a Chartered Accountant, Cost
Accountant or Company Secretary, engaged in the formation of the
company, or by a person named in the articles as a director,
manager or Secretary that all provisions have been complied with;
(iii) an affidavit from each of the subscribers to the memorandum
and from persons named as first directors that no conviction of any
offence in connection with the promotion, formation or
management of any company, or that he has not been found guilty
of any breach of duty to any company under this Act .
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Incorporation Process
Affidavit to state that that all the documents filed with the
Registrar for registration of the company contain information that
is correct and complete and true to the best of his knowledge and
belief;
(iv) the particulars of name, including surname or family name,
residential address, nationality and such other particulars of every
subscriber to the memorandum along with proof of identity, as
may be prescribed, and in the case of a subscriber being a
company, such particulars as may be prescribed;
(v) the particulars of the persons mentioned in the articles as first
directors of the company, their names, including surnames or
family names, the Director Identification Number, residential
address, nationality and such other particulars including proof of
identity as may be prescribed;
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Incorporation Process
(vi) the particulars of the interests of the persons mentioned in the articles
as first directors of the company in other firms or bodies corporate
along with their consent to act as directors of the company in such
form and manner as may be prescribed.
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Upon satisfaction of the above conditions, Registrar to issue
certificate of incorporation and CIN.
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Submission of false information or making of false declarations for
incorporating company made punishable with a imprisonment of
one year and a minimum fine of Rs.25,000 and maximum of Rs.
One lakh. Promoters, first directors and other persons making false
declarations are liable to be punished. (Clause 7(5))
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Without prejudice to above, Tribunal has ben given sweeping
powers to pass orders of managing company by directing changes
in M/A, making liability unlimited, removal of name and winding
up.
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Incorporation….
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Clause 8: Effect of Registration
Clause 9: Effect of M/A &A/A.
Clause 10: Commencement of Business-No certificate required;
However, a company once formed cannot do business unless a
declaration by a director or subscriber that every subscriber has paid
full value of shares and verification of the Registered Office has been
filed in the prescribed manner with the Registrar.
Clause 11: Registered off ice of the Company including shifting
thereof;
Clause 12 & 13: Alteration of M/A and A/A including change of
name.
Clause 15: Rectification of name of Company (section 21/22).
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One Person Company (OPC)
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Currently, minimum number of persons required to incorporate a
Company is 2 in the case of a Private Company and 7 in the case of a
Public Company.
Clause 3 read with 2(zzk) of the Bill provides for a new entity in the
form of a One-Person Company (OPC). This is with the intention of
encouraging individual entrepreneurs to operate and contribute
effectively in the economic domain.
The J.J. Irani Report proposes for an OPC with the following
characteristics:a) OPC may be registered as a Private Company with one member
and may also have at least one director;
b) Adequate safeguards in case of death/disability of the sole person
should be provided through appointment of another individual as
Nominee Director. On the demise of the original director, the
nominee director will manage the affairs of the Company till the date
of transmission of shares to legal heirs of the demised member.
c) Letters ‘OPC’ to be suffixed with the name of One Person
Companies to distinguish it from other Companies.
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One Person CompanyBackground & Concept
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increasing use of information technology emergence of the service
sector;
the entrepreneurial capabilities of the people are given an outlet
for participation in economic activity;
Such economic activity may take place through the creation of an
economic person in the form of a company called OPC;
OPC is an enterprise that runs with extremely few human,
financial and infrastructural resources while offering products or
services to a large customer base;
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Back to Saloman vs. Saloman
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Classic OPC=Salomon v. Salomon & Co. was decided by the House
of Lords in 1897. It was basically the first case to uphold the
concept that a corporation is an independent legal entity.
Mr Solomon was a Victorian bootmaker. He sold the assets of his
business to a company Solomon & Co Ltd. of which he was the sole
(or virtually the sole shareholder). He continued to trade as a
bootmaker in his own name and went bust. His creditors tried to
sieze the assets of the business (now owned by Solomon & Co Ltd.
The decision of the court was that Solomon & Co Ltd formed a
separate legal entity from Mr Solomon. Mr Solomon's debts were not
the debts of Solomon & Co. Ltd. The rule is that a properly formed
limited liability company is a legal entity in its own right.
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Relaxation of limit to have
Number of Partners
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Section 11 of the 1956 Act provides for a maximum of 20 partners in general
business and 10 partners in case of banking business. Section 11 is proposed
to be deleted in the 2008 Bill as per JJI committee recommendation.
New Section 422 added. Provides for a maximum of 100 persons or
association of persons or a partnership who can come together and do
business only by forming a company under the Bill. Exceptions are HUF and
professional partnership under special Acts.
It has been provided in the Bill, with the intention to promote the setting up
of specialized firms or businesses, to relax the restrictions limiting the number
of partners in partnership firms, banking Companies etc. with no ceiling as to
professions regulated by Special Acts.
Clause 6 of the LLP Bill provides that Every limited liability partnership
shall have at least two partners.
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Relaxation of limit to have
Number of Partners
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If at any time the number of partners of a limited liability
partnership is reduced below two and the limited liability
partnership carries on business for more than six months
while the number is so reduced, the person, who is the only
partner of the limited liability partnership during the time that it
so carries on business after those six months and has the
knowledge of the fact that it is carrying on business with him
alone, shall be liable personally for the obligations of the
limited liability partnership incurred during that period.
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Duties of Directors
To act in accordance with Articles;
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To act in good faith and promote objects of the Company;
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To exercise duties with reasonable care, skill & diligence,
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Avoid conflict of interest situations;
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Not to attempt or achieve undue gain or advantage for himself or
relatives or partners;
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Not to assign his office.
In case the duties are violated not only there is a levy of fine but also
“class action/Derivative action” can be launched.
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Class Action/ Derivative Suits
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Under the 1956 Act, no shareholder’s association can take legal action
against fraudulent action by Companies.
The Bill enables Shareholders Associations/ a Group of shareholders
to take legal action in case of any fraudulent action on the part of the
Company and to take part in Investor Protection Activities and Class
Action Suits.
In case of fraud on the minority by wrongdoers, who are in control
and prevent the Company itself bringing an action in its own name,
derivative actions in respect of such wrong non-ratifiable decisions,
have been allowed by courts. Such derivative actions are brought out
by shareholder /(s) on behalf of the company, and not in their
personal capacity /(ies), in respect of wrong done to the Company.
Similarly the principle of “Class/Representative Action” by one
shareholder on behalf of one or more of the shareholders of the same
kind have been allowed by courts on the grounds of persons having
same locus standi.
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Class Action-Understanding
the Meaning of:
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class action was developed in the 20th century as a way of managing complex,
multiparty litigation. It may be traced to the “bill of peace,” a proceeding that
originated in England's equity courts in the 17th century. The bill of peace was
used when the parties to a dispute were too numerous to be easily managed
and when all parties shared a common interest in the issues.
It is a lawsuit brought by one or more plaintiffs on behalf of a large group of
others who have a common interest.
An action where an individual represents a group in a court claim. The
judgment from the suit is for all the members of the group (class).
If the court permits the class action, all members must receive notice of the
action and must be given an opportunity to exclude themselves. Members
who do not exclude themselves are bound by the Judgment, whether
favorable or not.
often done when shareholders launch a lawsuit, mainly because it would be
too expensive for each individual shareholder to launch their own law suit.
a way to resolve multiparty disputes quickly and effectively.
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Understanding a Class Action..
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Clause 216 enables shareholders/creditors to seek an
injunctive/declaratory relief against wrongdoer directors-form of
“Equitable Remedy only”.
Who can file: Any one or more members or class of members
or one or more creditors or any class of creditors.
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When can file: if they are of the opinion that the management or
control of the affairs of the company are being conducted in a
manner prejudicial to the interests of the company or its members or
creditors.
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Understanding a Class Action..
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For what orders: for seeking all or any of the following orders:
(i) to restrain the company from committing an act which is ultra
vires the articles or memorandum of the company;
(ii)to restrain the company from committing breach of any provision
of the company’s memorandum or articles;
(iii)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 misstatement to the members or
creditors;
(iv) to restrain the company and its directors from acting on such
resolution;
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Understanding a Class Action..
(v) 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;
(vi) to restrain the company from taking action contrary to any resolution
passed by the members.
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Any order passed by the Tribunal shall be binding on the company
and all its members and creditors.
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Fine: Max 25 Lakhs for Company and OinD 3 years + Fine.
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Examples of Class Actions in US: civil rights cases, antitrust cases
to combat consumer fraud, price fixing, and other commercial
abuses, mass tort cases, where numerous plaintiffs are injured at the
hands of a single defendant;
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Understanding a Class Action..
Dalkon shield (an intrauterine
device); Agent Orange (a herbicide used as a defoliant in the
Vietnam War), and of asbestos insulation has involved class
action suits.
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eg; Union carbide caseor Bhopal Gas,
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Principle:" all persons materially interested, either as plaintiffs or defendants
in the subject matter of a bill ought to be made parties to the suit, however
numerous they may be," so that the court could "make a complete decree
between the parties [and] prevent future litigation by taking away the
necessity of a multiplicity of suits" (West v. Randall, 29 F. Cas. 718, 2 (C.C.R.I.
Mason) 181 [1820] [No. 17, 424]). “
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Idea: Common issues that could have similar outcomes did not have
to be tried piecemeal in separate actions, thus saving the courts and
the litigants time and money.
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Understanding a Class Action..
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Requirement: must be met, e.g., the class must be so large or
dispersed that actual joinder of all individuals would be impractical;
there must be questions of law and fact common to all members, and
these must outweigh any individual questions; and the named
parties must adequately represent the interests of their class. Certain
forms of notice to members of the class, e.g., by newspaper or
broadcast publication or by mail, are also required.
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Shareholder Derivative
Actions-Foss v Harbottle Rule
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Majority rule in company law is a long established principle. It
provides an equitable solution to determining many disputes, and
culminated in the Foss v Harbottle rule.
It states that damage done to the company by outsiders may only be
remedied by corporate action. As the court’s are reluctant to interfere
in internal management.
The Courts have used this to justify not interfering in a company’s
internal affairs, giving the majority power to prevent a member
litigating when a breach of the articles has occurred. This helps
prevent “futile actions” and “companies being torn apart by
litigation”.
Majorities can also ratify acts that are Intra Vires by ordinary
resolution, a power capable of abuse, but this may be beneficial to
the company.
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Shareholder Derivative
Actions-Foss v Harbottle Rule
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These rules are generally termed the “exceptions” to the Foss v
Harbottle doctrine.
any act that is Ultra Vires the company, either as prohibited by the
memorandum or statute, or illegal, is incapable of being ratified by
any majority.
a “fraud on the minority” would relax the rule that a majority must
approve litigation because, without this, the fraudulent parties
could possibly prevent an action. This would apply, especially, to
shareholder directors who abused their power and then ratify their
acts.
“special minorities” exception. The automatic barrier to suit has
been set at the level of an ordinary majority of the general meeting.
It will thus have no application when the rules of company law
require some higher majority, or where the matter is such that it is
inappropriate to refer it to an ordinary majority.
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Shareholder Derivative
Actions-Foss v Harbottle Rule
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remedy of minority shareholders, allowing any member to petition the
court on the grounds that the company’s affairs are being run in an unfairly
prejudicial manner. Such actions do not need to be oppressive1, and the
court is empowered to make whatever order it thinks fit to remedy the
matter. Thus, so long as a petition is well founded, this can be used without
the consent of the majority to allow relief.
A shareholder derivative suit is a lawsuit instigated by a shareholder of a
corporation, not on the shareholder's own behalf, but on behalf of the
corporation. The shareholder brings an action in the name of the
corporation against the parties allegedly causing harm to the corporation.
Often derivative suits are brought against officers or directors of a
corporation for violations of fiduciary duties owed to the shareholders visa-vis the corporation. Any proceeds of a successful action are awarded to
the corporation.
In the U.K., an action brought by a minority shareholder is liable to be
defeated by the Foss v. Harbottle principle. But exceptions have been
evolved to the principle laid down in that case primary among them being
"the ultra vires exception" and the "fraud on minority" exception.
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Shareholder Derivative Action
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Typical Requirements:
(a) Shareholder must have standing to sue, or they must own the
shares at the time the act or omission occurred.
(b) Shareholder must make a written demand on the corporation so
that they may take action.
(c) Burden of proof is on the shareholder unless a majority of the
directors have a personal stake in the dispute.
(d) the alleged wrong or breach of duty is one that is incapable of
being ratified by a simple majority of the embers;and
(e) the alleged wrondoers are in control of the company,so that the
company,which is the “proper Claimant” cannot claim by itself.
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Single Forum For M&As
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Section 390 to 396 (Chapter V) of the Act deals with compromise,
arrangements and reconstructions which include mergers and
acquisitions which requires approval of High Court and other
regulatory authorities like RBI, BIFR etc.
The Bill provides for a single forum for approval of mergers and
acquisitions along with the concept of deemed approval in certain
situations.
This would reduce the time period involved in mergers and
acquisitions.
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Mergers & Aquisitions
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Clause 201– this clause corresponds to section 391;
powers to Tribunal to make order on the application of the company
or any creditor or member or in case of winding-up, of liquidator for
the proposed compromise or arrangements including debt
restructuring, etc., between company, its creditors and members ;
application by affidavit shall disclose all material facts relating to
company, reduction of share capital scheme of corporate debt
restructuring;
arrangement includes a reorganization of the company’s share
capital by the consolidation of shares of different class or by the
division of shares into shares of different classes, or by both of those
methods.
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Mergers & Aquisitions
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An application made under sub-section (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 auditor’s report on the
accounts of the company and the pendency of any investigation oro
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 percent of the secured creditors in value,
including –
(i) a creditor’s responsibility statement,
(ii) safeguards for the protection of other secured and unsecured
creditors,
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Mergers & Aquisitions
(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.
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Mergers & Aquisitions
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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, either individually or by an
advertisement, which shall be accompanied by a statement disclosing
the details of the compromise or arrangement, the valuation report, if
any, and explaining their effect on creditors, 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.
A notice under sub-section (3) shall also indicate that the persons to
whom the notice is sent shall intimate in writing their consent to the
adoption of the compromise or arrangement within one month from
the date of receipt of such notice:
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Mergers & Aquisitions
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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.
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 Reserve
Bank of India, the Securities and Exchange Board, the Registrar, the respective
stock exchanges, the Official Liquidator, the Competition Commission of
India established under sub-section (1) of section of the Competition Act,
2002, if necessary.
Such Notice shall require that representations, if any, to be made by them
shall be made within one month from the date of receipt of such notice,
failing which, it shall be presumed that they have no representations to make
on the proposals.
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Mergers & Aquisitions
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at a meeting held in pursuance of this section, a majority
representing three-fourths in value of the creditors, or class of
creditors or members or class of members, as the case may be,
present and 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 thereof.
order made by the Tribunal shall provide for all or any of the
following matters, namely:(i) conversion of preferential 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 ;
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the protection of any class of creditors;
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Mergers & Aquisitions
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If the compromise or arrangement is agreed to by the creditors, any
proceedings pending before the BIFR shall abate;
No compromise or arrangement under this section shall include any
buy-back of securities as is provided under section 61;
Any compromise or arrangement may include takeover offer made
in such manner as may be prescribed. “takeover offer” means an
offer to acquire all the shares in a company .
Clause 202 –corresponds to section 392 of 1956 Act; provide powers
to Tribunal to enforce compromise or arrangements with creditors
and members;
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Mergers & Aquisitions
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Clause 203. – This clause corresponds to section 394 of the 1956 Act; provides
powers to Tribunal to order for holding meeting of the creditors or the
members and to make orders on the proposed reconstruction, merger and
amalgamation of companies ;
manner and procedure in which the meeting so ordered by the Tribunal be
held ;
Orders for transfer of any property or liability, that property or liability shall
be transferred to and become the liabilities of the transferee company and any
arrangement.
Clause 204. –new clause provides for merger between two small
companies or between a holding company and its wholly owned
subsidiary company by giving a notice of the proposed scheme
inviting comments or objections by both the transferor and the
transferee company.
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Mergers & Aquisitions
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The scheme to be approved by the members at a general meeting by
passing a special resolution and by three-fourths in value of the
creditors of respective companies ;
Transferee Company to file a copy of the approved scheme with the
Registrar and the Official Liquidator;
If Registrar is of the opinion that such a scheme not in public interest
or in interest of the creditors, he may file an application before the
Tribunal stating his objections and requesting to consider the scheme
for reconstruction merger or amalgamation, etc., under clause 203.
The Tribunal may direct accordingly or it may confirm the scheme by
passing such order as it deem fit.
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Mergers & Aquisitions
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The transferor company shall be deemed to be dissolved on
registration of the scheme.
Clause 205. –new clause provides the mode of merger between
registered companies and companies incorporated in the
jurisdictions of such countries as notified from time to time by the
Central Government by mutual agreement.
a foreign company may merge or amalgamate into a company or vice
versa and the terms and conditions of the scheme of merger.
may provide for the payment of consideration to the shareholders of
the merging company in cash or partly in cash or partly in Indian
Depository Receipts.
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Mergers & Acquisitions
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Clause 207. –corresponds to section 395 of the 1956 Act provides the
procedure and manner in which the registered holder of at least 90 per cent
shares of a company shall notify the company of their intention to buy the
remaining equity shares of minority shareholders, by virtue of an
amalgamation, share exchange, conversion of securities, etc., provision for
valuation of shares have been provided by a registered valuer.
Clause 208. amalgamation of two or more companies in public interest by
passing an order to be notified in the Official Gazette.
Clause 210. –corresponds to section 396A of 1956 Act, provides that
no company which has been amalgamated or whose shares has been
acquired by another company to dispose of its books of accounts and
papers without the prior permission of the Central Government. The
Government may appoint a person to examine books and papers to
ascertain whether they contain any evidence of commission of
offence in connection with promotion, formation, management, etc.,
of the company.
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Conclusion
Apart from the above discussed salient features, the Companies
Bill, 2009 contains other novel and path-breaking provisions
which when passed, would apart from streamlining the current
legislation and procedure, also enable the corporate sector in India
to operate in a much liberalized regulatory environment that
fosters entrepreneurship, investment and growth.
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The End