Complete understanding of Section 62 and 42 of the Companies Act 2013

COMPLETE AND CLEAR UNDERSTANDING OF 
SECTION 62 & 42 OF THE COMPANIES ACT 2013
FURTHER ISSUE OF SHARE CAPITAL Section 62 of the Companies Act 2013
1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares; such shares shall be offered--
a. ON RIGHT BASIS:
To the existing shareholders in proportion to the paid up share capital of the Company held by them by way of a letter of offer.
PROCEDURE FOR ALLOTMENT OF SHARES ON RIGHT ISSUE BASIS :

• Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]
• Convene a Board Meeting
• Pass a Board resolution for approving “Letter of offer”. The offer letter shall include right of renunciation also.
• Dispatch Letter of offer to all existing shareholders through registered post or speed post or through electronic mode at least three days before the opening of the issue.
• Receive acceptance, renunciations, rejection of rights from shareholders.
• Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]
• Convene a Board Meeting
• Pass Board resolution for approving allotment and issue of shares.
• File with Registrar a return of allotment in E-Form PAS-3 within 30 days of allotment of shares.
• File E-form MGT 14 within 30 days of Issue of securities.

OTHER INFORMATION:

• There is no prescribed format for “Letter of offer” to be issued, in case of right issue of securities. Format of “Letter of offer” prescribed in Companies Act, 2013 is Pursuant to section 42 and rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 and not for Section 62.

• Letter of offer shall specify the number of shares offered and other information and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

• Attach with E-Form PAS-3 (i) Board Resolution for allotment and issue of share. (ii) Letter of offer (iii) List of Allottees

• List of Allottees attached with E-Form PAS-3 shall state the names, address, occupation, if any, of the shareholder and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the company.

b.  ISSUE OF SHARES UNDER THE ESOP: No such Technicality refer Act
c. TO ANYOTHER PERSON (Conditions prescribed under Rule 13 of the Share Capital & debenture Rules 2014) – Preferential offer
Rule 13: For the purposes of clause (c) of sub-section (1) of section 62, If authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act.
Explanation 1. the expression ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.

(Since these are covered specifically under different sections of the act as under: Rights Issue Sec. 62(1) of Companies Act, 2013 Employee Stock Option - Sec. 62(1)(b) Sweat Equity Shares - Sec. 54 Bonus Issue Sec. 63 read with Rule 14 of Companies (Share Capital and Debenture) Rules, 2014)

Explanation 2: the expression, “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date. (that means whatever instrument convertible into equity would be covered under above)
Main highlights, if above option i.e. preferential offer is exercised

1. Prior approval of Shareholders is required to be obtained via Special Resolution
2. Allotment to be made within 12 months from the date of Special Resolution

Provided in the event of receipt of application money, the said allotment is required to be made within 60 days from the date of receipt.
c. Mandatory Disclosures in the Explanatory Statement to the Notice calling General Meeting:

1. intention of the promoters, directors & KMPs
2. Change in control, if any, consequent to the preferential offer
3. Justification for the allotment proposed to be made for consideration other than cash
4. Details of the proposed allottees along with post preferential shareholding
5. Basis on which price is arrived along with the report of Registered Valuer

PLEASE NOTE THAT nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company: Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
Further Valuation from registered valuer is required in all above cases i.e. Whether it is right issue , ESOP or Preferential Offer.
PRIVATE PLACEMENT
Chapter III: Prospectus And Allotment of Securities
Section 42: Offer or invitation for subscription of securities on private placement
Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
Private Placement to a select group of persons by a company other than by way of  securitieshas been specifically defined to mean any offer of securities or invitation to subscribe public offer   through issue of a private placement offer letter.
Securities as defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956
CONDITIONS FOR PRIVATE PLACEMENT
A private placement offer cannot be made to more than 200 people in aggregate in a financial year excluding “qualified institutional buyers” and employees of the company being offered securities under a scheme of employee’s stock option as per provisions of clause (b) of sub-section (1) of section 62.
“Qualified institutional buyer’’ means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended from time to time.
If a company, whether listed or unlisted makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than 200 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of Chapter III.
No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation madeearlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.
Any allottee under a private placement offer/invitation shall not transfer his/its securities to more than 20 persons during a quarter and the company shall not register any transfer which is not in conformity with this requirement.
The number of such offers or invitations shall not exceed 4 in a financial year and not more than once in a calendar quarter with a minimum gap of 60 days between any 2 such offers or invitations.
The value of such offer or invitation shall be with an investment size of not less than Rs. 50,000/- per person.
No company offering securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.
PROCEDURE FOR PRIVATE PLACEMENT
Filing of Form MGT 14 with ROC: In compliance with the provisions of Section 117(1) of the Companies Act 2013, a copy of special resolution along with the Explanatory Statement is required to be filed within 30 days from the date of passing of the said resolution.
Preparation of a private placement offer letter in terms of Form PAS-4: In terms of Rule 14(1)(a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014: A Company may make an offer or invitation to subscribe to securities through issue of a private placement offer letter in Form PAS-4.
Filing of private placement offer document in Form PAS-5 within 30 days from the date of circulation of the private placement offer: In terms of Section 42(7) read with proviso to Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
Filing of Form PAS 3 with ROC within 30 days of allotment of securities: As per Section 42(9) of the Companies Act, 2013 read with Rule 14(4) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
Maintenance of Register of holders of securities in compliance with the provisions of Section 88 of the Companies Act, 2013
Penal Provisions:
If a Company makes an offer or accepts monies in contravention with the provisions of Section 42, its promoters & directors shall be liable for a penalty which may extend to:

1. The amount involved in the offer or invitation; or
2. Rupees 2 Crores,

And
The Company shall also refund all monies to subscribers within 30 days of the order imposing the penalty.

Specific Provisions prescribed under the Act for issuance of any specified Securities Section 55: Issue and redemption of preference shares Rule 9 & 10 the Companies (Share Capital and Debentures) Rules, 2014 Section 71: Debentures Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014

Interplay of Private Placement and issuance of other securities

Private Placement: Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 Bible for all types of issues to a specific group of persons

Specific Provisions prescribed under the Act for issuance of any specified Securities

For Example, if the Company proposes to issue redeemable preference shares to a specific group of persons, then in addition to Section 42, the Company is required to comply with the provisions of Section 55 read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014

INDUSTRY CONCERN:

< >Company is having pending application money/unsecured loan as on 1st April, 2014 and now it would like to allot the shares against the said outstanding money/unsecured loan. The pertinent question is how to comply with the stringent stipulations of Section 42 & 62 of the Companies Act, 2013?WAY OUT: Presently, the option available with the Company is to tender the pending application money/unsecured loan in the separate bank account and then make the allotment

(Author can be reached at By- Sonu Mehla Mobile- 8285910007 E-Mail- sonuandfirm@gmail.com)

Summary of 27 Chapters on Board of Directors for examinees

Summary of 27 Chapters on Board of Directors’ in 27 Pages covering about 30% Examination Paper

Company To Have Board Of Directors (Section 149)

(1) Minimum Number of Directors

• For public company, minimum number of directors is 3
• For private company, minimum number of directors is 2
• For One person company, one director is the minimum director.

(2) Maximum Number of directors

• Maximum number of directors is 15 for each kind of company
• After passing special resolution company may appoint more than 15 directors.

(3) Woman Director (Sub sec. 1)

Woman Director on the Board (Rule 3) Companies (Appointment of Directors)Rules 2014

Class of companies shall appoint minimum one woman director –

(a) Listed company

(b) Other public company

- With paid up capital of 100 crore of rupees or more or
- Turnover of 300 crore of rupees or more

(4) Resident Director: Every company to have at least one director having stayed in India for total period of not less than 182 days in previous Calendar Year.

(5) Independent Director (Sub sec. 4)

In case of Listed Company at least 1/3rd of total number of directors will be independent directors. Any fraction in 1/3rd shall be rounded off as one (In a company where Audit Committee is constituted, minimum number of directors shall be 2 and not 1 of 3 directors.)

(i) For public companies (not listed companies) at least 2 directors will be independent directors.

(a) Public companies with paid up capital of 10 crore of rupees or more or

(b) Public companies having turnover of 100 crore of rupees or more

(c) Public companies which have outstanding loans, debentures and deposits exceeding 50 crore rupees.

(ii) (a) Who can be Independent Director?

One who is a person of integrity and has expert knowledge.

(b) Who cannot be Independent Director?

Managing Director	Whole Time Director	Nominee Director.
		Nominee director is one nominated by financial institution or may be appointed by Govt. or by any person to represent its or his present.

(iii) Term of the Independent Director:

To hold office for a term up to 5 consecutive years.

Eligible for re-appointment on passing of special resolution by the company. Disclosure of such appointment be made in Board’s report

(Remember one term is up to 5 years)

Not more than 2 consecutive terms

No independent director shall hold office for more than 2 consecutive terms. After completion of 2 consecutive terms, he will be eligible for the appointment after a gap of three years. But during 3 years he shall not be appointed in the company nor be associated with the company in any capacity.

(iv) Vacancy: Vacancy be filled up by Board not later than immediate next Board meeting or 3 months whoever is later.

Maintenance of Data Bank

(Selection of Independent directors) (Sec. 150)

Data Bank shall be kept & maintained and Independent director may be selected from a data bank Data Bank to contain names, addresses & qualifications of persons eligible & willing to act. It will be maintained by agency with experience in creation & maintenance of data bank.

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(Author can be reached at By- Sonu Mehla Mobile- 8285910007 E-Mail- sonuandfirm@gmail.com)

Analysis of defects in appointment of directors

BACKGROUND

The Board of Directors { Board} of a company is its highest decision making organ whose actions are however subject to shareholders jurisdictions as per the scheme of the Company jurisprudence. The directors constituting the Board act collectively, as well as individually, depending upon the position they hold and the authorities granted to them by the Board/ shareholders and the statute.

To ensure smooth functioning of the corporate sector it is imperative that the past actions of the directors are protected in case it is noticed later that their appointments have become invalid.

Provision to this effect was already present in the section 290 of the erstwhile Companies Act 1956 , and, in the new Companies Act 2013  this has again be provided in section 176.    

SECTION  176  COMPANIES ACT  2013

“176. No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company:

Provided that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.”

ANALYSIS

The section can be understood  better by breaking it in the following manner:-

1. This applies to all companies.

2. No act done by a director shall be deemed to be invalid although it was subsequently noticed that his appointment was invalid by reasons of:-

• any defect, or
• disqualification, or
• had terminated.

3. The invalidity should be by virtue of any provision contained in Companies Act 2013  or  in the articles of association of the company:

4. Exception provided herein is that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company:

• to be invalid, or
• to have terminated.

COMMENTS

This provision is in line as compared to section 290 of the erstwhile Companies Act 1956. Basically this provision defends the proper actions  taken  by a director on behalf of his company.  If subsequently it is noticed that his appointment was invalid due to defect or disqualification or has been terminated by virtue of any provisions in the Companies Act 2013 or in terms of the articles of association of the company, such past actions of the director will continue to remain valid.

It is important to keep in mind that in absence of this provision it could have been held that once a director’s appointment has become invalid or terminated from a particular date, all his past actions could also become invalid. This would have led to confusion and obstruction in the functioning of the directors, individually, as well as collectively as a Board. This is also not a desirable state of affairs for the corporate since past actions taken on its behalf by a director in good faith, not knowing that his appointment, later on, could be held to be invalid, may shake the very foundation of the corporate functioning. 

Protection to outsiders

Pertinently, this provision enables providing protection to third parties which or who are outsiders. [ Ref case : Modal Bank Ltd v Janwi Narain {1932} 2 Com Cases 137, 142 {Lah} ]. Here the doctrine of indoor management will be applicable in terms of which an outsider is able to presume that internal management of  a company is being carried out as per law and hence actions of directors are assumed to be valid. It is however necessary that bona fide contracts have been entered into by outsiders with the company. 

Bonafide acts

This provision, it is reiterated,  fittingly applies where the past actions of the directors are valid and done in good faith, and therefore  no ultra vires acts or any forgery are involved. It was held in the case of Shiromani Sugar Mills Ltd v Debi Prasad [1950] 20 Com Cases, 296 that directors who continued to act even after they were disqualified, but not aware of it, were saved by section 290 of the Companies Act 1956.{ Ref also to the case: Seth Mohan Lal v Grain Chambers Ltd., {1968} 38 Com Cas. 543 {SC}}. It was necessary that after such disqualification, which directors were not aware, if they had acted honestly they should be relieved from prospective liability. {Ref case: Gilt Edge Safety Glass Ltd., In re {1940} 10 Comp Cas 244 { Ch D} . 

Exceptions

Nevertheless, it was held in the case of Morris v Kanssen {1946} 1 All ER 586 that this provision did not give validity to acts of directors where there was total absence of appointment.  Besides a director cannot take advantage of this provision if he has notice of the defects in his appointment or on his appointment being challenged he does not take steps to know the facts or does not refrain from doing any act on behalf of the company. 

Significantly, the proviso herein goes on to further lay down that nothing in this section shall give validity to any act done by the director after his appointment has been “noticed”  by the “ company” to be invalid or to have terminated. Hence the protection of valid actions by the director can only remain till just before the said notice.

Significantly the word “noticed”  has been used in the main body of the section as well as in the proviso. However, in the main body it is not provided who should take notice but as per the proviso the notice has to be taken by the company and non else.

Moreover, noticing the fact of invalidity of appointment/termination  is relevant and not the happening of the actual fact which could be on an earlier date or perhaps the same date.

Interestingly section 290 of the Erstwhile Companies Act had used the word “discovered” in the main body of the section and the word “shown” in its proviso in place of use of the word “noticed” in the new section.  This new provision appears to be a better drafted law giving a uniform interpretation.

Notice comes to knowledge

The question which may now arise as to in what manner the fact of the defect or disqualification or termination in/of the appointment,  which makes the appointment invalid, is noticed by the company, and, also by the person for whom it is material to know it, viz. the director himself.

The company concerned may become aware of this fact through any notice of the statutory authority or through process of court or suo motu or in any other manner.  It should immediately inform the concerned director.

The director may become aware of the fact of  the defect or disqualification or termination of his appointment, in any manner, in which case he should, immediately, bring this fact to the notice of the company. 

The date of knowledge of the fact, in either case, should be the relevant date. In case the dates are not same or in all cases the date on which the company has noticed the fact is statutorily relevant.  

However, where the facts or conclusions are disputed then a court has to decide upon them and if invalidity or termination is confirmed then it will relate back to the date of knowledge or coming to know of facts of invalidity. [Ref case: Concord Finance {P} Ltd v Rawalpindi Theaters  Pvt  Ltd { 1970}, 40 Com cases 156 {Del}]       

CONCLUSION

These provisions of section 176 of the Companies Act 2013 is  very important  considering the consequences of valid actions taken by directors for working of the corporate and the problems which will arise if their appointments are found to be invalid, later. This could put the working of companies in jeopardy. Thankfully the earlier law in this regard has been tightened in the new section.

(Author can be reached at By- Sonu Mehla Mobile- 8285910007 E-Mail- sonuandfirm@gmail.com)

Section 8 Company- Non Profit Making Company

First of all we have to understand what is non profit making Company:

A Non Profit making Company is a Company which:

• Has in its objects, the promotion of Commerce, art, science, sports, education, research, social welfare, religion, charity, and protection of environment or any other such objects.
• Intends to apply its profits or any other income in promoting its objects.
• Intends to prohibit the payment of any dividend to its members.

An association desirous of being incorporated as a Company with limited liability without addition to the name of the word “LIMITED “ or the words “PRIVATE LIMITED” and shall take following steps for securing a license under section 8 of companies Act 2013.

Procedure for a newly Incorporated Companies. Refer Rule 19 of Companies (Incorporation) Rules 2014

• Obtain DSC– First of all it is mandatory for Companies to obtain DSC from DSC issuing Company for at least one director for signing E- forms relating to incorporation of Companies.
• Obtain DIN– Every person intending to become the Director of the Company shall apply for DIN in form DIR-3 to Central government in form and manner as may be prescribed.
• Apply for availability of name– application for availability of name shall be made in form no INC.1 along with prescribed fees of Rupees 1000/-
• Application for obtaining License under section 8 of Companies Act 2013– A Person or an association of persons desirous of incorporating a Company with limited Liability under section 8(1) without addition to its name of the word “Limited or “Private Limited” shall make an application in Form No. INC.12, along with prescribed fees to Registrar.

Main Attachments of Form INC 12 are as follows:

• Draft MOA & AOA as per form INC 13 of the proposed Company
• Declaration shall be in form INC 14 by an advocate, a Chartered Accountant, Cost Accountant or a Company Secretary in practice.
• An estimate of future income & expenditure of the Company for next 3 years, specifying the sources of the income and the objects of the expenditure.
• Declaration of each of person making application in Form INC.15
• The license shall be in form INC 16 or INC 17, as the case may be and Registrar shall have the power to include in the license such other conditions of the license as may be specified by the Registrar in its behalf.

Basic exemptions or relaxation given to section 8 Company:

• Section 2(24) shall not apply to a section 8 Company.

Explanation: section 2 (24) of Companies Act 2013 defines Company Secretary. It means section 8 Company need not to appoint CS.

• Section 101 (1) – States that a general meeting may be called by giving 21 days’ notice either in writing or through electronic mode or any other mode as may be prescribed

But for section 8 Company, a general meeting may be called by giving 14 days’ notice. The word 14 days shall be substituted

• Section 118 shall not apply to a Section 8 Company relating to the minutes of proceedings of general meeting, board meetings etc. except in case AOA of the Company contains a provision that minutes of the meeting have to be confirmed by circulation then in that case minutes have to be recorded within 30 days.

Important Note: The question whether Secretarial Standards are applicable to section 8 Company or not ?

Section 118(10)- states that Every Company shall observe Secretarial standards with respect to general meeting and Board meetings specified by Institute of Company Secretaries of India constituted under Section 3 of Company Secretaries ACT, 1980 AS APPROVED BY Central government.

But w.e.f Notification dated 5^th June 2015, which provide relaxation that entire section 118 shall not apply to section 8 Company.

So in Short Secretarial Standards are not applicable to Section 8 Company.

• Section 173 states that every Company shall hold at least 4 Board meeting in a year but for Section 8 Company, it is sufficient to hold one board meeting in every six calendar months. i.e. 2 Board meetings in a year.
• Section 174 (1) states the quorum of the Board Meeting which is 1/3^rd of the Total strength or two director whichever is higher ,

But for section 8 Company quorum is 8 Director or 1/4^th of total strength whichever is lower subject to minimum 2 Directors

Important Note: quorum shall not be less than 2 members.

For example: Total strength of Board of Director= 12

1/4^th of 12 is 3, so 8 Director or 1/4^th of Total strength whichever is lower

In above example it should be 3 Directors.

• Section 189 of Companies Act 2013 deals with the provisions relating to making of entry in register of related party transactions

But for section 8 Company, such a provision shall be available only if transaction with reference to section 188, i.e. Related part transaction on basis of terms and conditions of Contract or arrangement exceeds one Lakh rupees.

• Section 149(1) shall not apply to section 8 Company which states the criteria of Minimum and Maximum no Directors,

Proviso to section 149(1) states that Company can appoint maximum 15 Directors, Such a limit shall also not apply to section 8 Company.

• Section 165 states that after the Commencement of act, No person shall hold the office as a Director in more than 20 Companies at the same time including alternate directorship.

But the above provision shall not applicable on section 8 Company

Interpretation: It means person holding office as Director in more than 20 Companies can still be appointed as Director in Section 8 Company.

Critical Analysis of Provisions of Resignation of Director

INTRODUCTION

Recently the Company Law Board, Delhi Bench while dealing with a matter involving resignation of a director under the Companies Act, 1956, has passed an order in the case of Manav Kumar Agarwal V. Discovery Enterprises Pvt. Ltd & Others[1] that, the resignation given by any Director from the post of Director shall not be construed as the resignation until the Board of Directors approve such resignation by passing a resolution in this regard. In this article we will analyze the aspects of

resignation of director by considering the recent judgement made by Company Law Board, and whether it has any impact on the legal position stipulated under the Companies Act, 2013 (hereinafter referred to as ‘2013 Act’)

Facts of the case of Manav Kumar Agarwal V. Discovery Enterprises Pvt. Ltd & Others-

In the recent ruling quoted above, the petitioner had alleged that he had resigned from the post of director of the company w.e.f 18^th of January, 2011, but the company did not file e-Form 32 and which was an obligatory action to be taken by the Company as per the provisions of Section 303(2) of the Companies Act, 1956.

Sub-section (2) of Section 303 of the Companies Act, 1956 says that-

The company shall, within the periods respectively mentioned in this sub-section, send to the Registrar a return  in the prescribed form containing the particulars specified in the said register and a notification in the prescribed form of any change among its directors, managing directors, managers or secretaries, specifying the date of the change.

The period within which the said return is to be sent shall be a period of thirty days from the appointment of the first directors of the company and the period within which the said notification of a change is to be sent shall be thirty days from the happening thereof.

Further, the petitioner also alleged that as per Article 37 of the Company, a director shall be allowed to resign from the office of Director from such date as he may specify in the intimation regarding resignation given by him.

The petitioner had filed the said petition under section 614 of the Companies Act, 1956, which states as follows-

“If a company, having made default in complying with any provision of this Act which requires it to file or register with, or deliver or send to, the Registrar any return, account or other document, or to give notice to him of any matter, fails to make good the default within fourteen days after the service of a notice on the company requiring it to do so, the 1 [Tribunal] may, on an application made to it by any member or creditor of the company or by the Registrar, make an order directing the company and any officer thereof to make good the default within such time as may be specified in the order.”

Further, the petitioner also alleged that his name was not showing on the Board of the company in the duration of 11^th of June, 2014 to 16^th of July, 2014. That gap in the visibility of the name in the signatory details, might have occurred due to some technical issue. On analysing the same the petitioner filed the complaint that the name of the petitioner shall be removed, for which no action has been taken by the company or ROC.

Petitioner had also stated though the private companies are not covered under the ambit of Section 283 of the Companies Act, 1956 but still due to the enforcement of the article 37, the vacation of the office shall be considered valid.

Based on the facts available in the present case, the CLB, New Delhi Bench passes an order stating that-

1. Office of the director shall not be deemed to be vacated unless the resolution by the company has been passed in this respect;

2. The petition is not eligible to be entertained in the said provisions of Section 614 of the Companies Act, 1956, because if we go through the plain reading of the Section it intends to say that for every filing, atleast board resolution is required to be passed.

3. The tenure for which the name of the petitioner is disappeared from the signatory details of the company cannot be construed as the vacation of his office.

4. Section 283 is not going to be considered for the present case as it is not applicable on private companies, and because it specifically mention some situations under which the office of the director shall be considered as vacated, whether or not, resolution has been passed in this respect, and the resignation given by the director voluntarily does not construed any situation under it.

LEGAL POSITION UNDER THE COMPANIES ACT, 1956 BEFORE THIS RULING BY THE CLB, DELHI BENCH.

In the 1956, Act, there were no such provisions governing the aspects or actions to be taken in the case of resignation of Directors to give it a valid go through, and it was governed by the articles of association of the Company

Further the aspect regarding resignation of a person from the post of director was decided by the Company Law Board, Chennai Bench in the case law of Rajan Sangameshwaran v. Saralaya Technologies (P.) Ltd. and Others[2], and it was held that-

“the resignation letter given by the director concern, will be treated as the valid proof of his resignation and no one can restraint him from vacating the office from the date of receipt of resignation letter by the company or the date mentioned in it, if any. And the director will be liable for the acts or deeds done in his tenure acting as the director of the Company.”

There were various other rulings which conveys the same view which has been decided in the above mentioned case.

In the case of Manav Kumar Agarwal V. Discovery Enterprises Pvt. Ltd & Others, principal bench of Company Law Board, New Delhi did not consider the order passed by the Company Law Board, Chennai Bench, and passed the contradictory order. In context of matters related to provisions of Companies Act, 1956 and subject to facts of the case and articles of association of companies, this CLB order would prevail in the states covered within the jurisdiction of CLB, Delhi Bench unless and until this order is reversed in the near future.

SCENARIO UNDER THE COMPANIES ACT, 2013

Unlike the Companies Act, 1956, the new act clearly stipulates the actions to be taken in the case of resignation of any director of the Company. Section 168 of the Companies Act, 2013 deals with the same and says that-

“ (1) A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company:

Provided that a director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.

(2) The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later:

Provided that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.

(3) Where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting.”

If we analyse the provisions of above section the legislature has clearly put obligations on each of the parties involved in the whole scenario. There are three parties involved in the scenario i.e. the Board of Directors, the company and the person resigning from the post of director of the company. Now, we will discuss the obligation on the part each of the parties one by one-

a) Obligation on the part of the Board of Directors of the Company-

If we go through the plain reading of the Section we can analyse that the following words have been used-

‘A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same’

The using of the words ‘and’ and ‘shall’ together stipulates the obligation on the board of Directors of the company to note down the resignation of the director by way of Board Resolution, in due course of time keeping in mind the consequences of delay in noting and filing Form DIR 12 (additional fee) as the resignation of the director will take effect from the receipt of the notice by the company or the date, if any particularly specified by the director, whichever is later.

b) Obligation and defence available to the director giving resignation-

In the 2013 Act, in the case of resignation of director without his consent, the registrar has put one obligation on the part of the director giving resignation by inserting a proviso to sub-section (1) of Section 168 of the Companies Act, 2013, which is as follows-

‘Provided that a director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.’

By analyzing the above proviso we can make a conclusion that the resignation shall be construed as fully implemented when the requirements discussed in the above paragraphs has been complied along with the proviso.

By proviso, the legislature has made the director also responsible to be concerned about his position.

The directors are made responsible to file e-Form DIR-11 to the registrar within 30 days of the informing of the resignation by him.

Though, it is considered as the obligation on the part of the director, but if we see the other side of the said proviso, it is creating a defensive ground for the director if the director has not made any resignation and the company had fraudulently made the same.

Conclusion

The order passed by the honble Company Law Board, Principal Bench, New Delhi is effective for the cases belonging to the 1956 Act. As we have discussed earlier that the Company Law Board, New Delhi Bench had not considered the order passed by the Company Law Board, Chennai Bench, it can be an interesting fact to be observed in future. But for now, the latest order will prevail in the areas covered under the jurisdiction of CLB, Delhi Bench.

While under the 2013 Act, the said order given will not be effective to the cases belonging to the 2013 Act, because as per the provisions of Section 168(2) of the 2013 act, the resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later and there is no requirement of Board Resolution for making the effect of the notice being served by the director on the company. Thus, the order given by the CLB in terms of the position under the Companies Act, 1956 founds to be of no importance in context of the 2013 Act, as under the 2013 Act, law clearly specifies compliances to be done by the director who is resigning from the Company.

[1]http://www.clb.nic.in/Publication/Principal_Bench_New%20Delhi_Bench/2016/Others/Discovery%20Enterprise%20Pvt.%20Ltd.%20&%20Ors..pdf

[2]http://www.clb.nic.in/Publication/Chennai_Bench/2015/Others/Saralaya%20Technologies%20Pvt.%20Ltd.%20&%20Others.pdf

(If you have any query, you may reach out to the author at  SONUANDFIRM@GMAIL.COM)

Comparison of CARO reporting as per Companies Act, 2013 and Proposed Caro (2016)

Comparison of CARO reporting as per Companies Act, 2013 and Proposed Caro (2016)

The Ministry had set-up a Committee on 16th September, 2015 to examine and recommend matter for inclusion in the statement to be attached with Auditor’s Report under Section 143(11) of the Companies Act, 2013 for the financial year 2015-16 onwards. The said Committee has since made

recommendations in the matter.

I. Applicability: It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act], Except CARO not applicable on below mentioned Companies

i. A Banking Company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
ii. An Insurance Company as defined under the Insurance Act,1938 (4 of 1938);
iii. A Company licensed to operate under section 8 of the Companies Act;
iv. A One Person Company as defined under clause (62) of section 2 of the Companies Act and
v. A Small Company as defined under clause (85) of section 2 of the Companies Act; and
vi. A private limited Company,

• Not being a subsidiary or holding of a public company,
• having a paid up capital and reserves and surplus not more than rupees one crore as at the balance sheet date and
• which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year and
• which does not have a total revenue as defined in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding rupees ten crore during the financial year as per the financial statements.

vii. Preparation of Consolidate Financial Statement also.

 

 

To read the full article 

Comparative Analysis of Section 185 of Companies Act 2013 & proposed amendment

A Comparative Analysis of Section 185 of Companies Act 2013 & proposed amendment in Companies Amendment Bill 2016

As we are all aware that the Central government on 16th of March, 2016 introduced in the Lok Sabha a bill to further amend the Companies Act, 2013 as part of efforts to address difficulties faced by stakeholders and improve the ease of doing business in the country, which is yet to get approval

from Rajya Sabha very soon.

Under such circumstance, let us discuss on one of the critical sections of Companies Act 2013- Section 185- Loans to Director– how it is going to affect the industry if it gets approved.

Under the Existing Act

Section 185(1) strictly prohibits the companies of giving of any loans whether directly or indirectly including any loan represented by book debt to any of its directors or to any other person in whom director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

For the above purpose the term- “any other person in whom director is interested” shall mean-

• Any director of lending company or of a company which is holding company or any partner or relative of any such director
• A firm in which any such director is a relative or partner
• A private company in which any such director is a director or member
• Any body corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director or by two or more directors together
• Any body corporate, the Board of Directors, Managing Directors or Manager, whereof is accustomed to act in accordance with the directions or instructions of the Board or of any director(s) of the lending company

However Rule 10 of the Companies (Meetings of Board and its powers) Rules, 2014:

• Holding Company gives loan/guarantee/ security  Wholly Owned Subsidiary is exempted from complying with section 185.

• Any security provided or guarantee provided by Holding Company in respect of  loan made by any bank or financial institution to its Wholly Owned Subsidiary Company is exempted from complying with section 185 also.

Provided such loans under sub rule (1) and (2) are utilized by subsidiary company for its principal business activities.

Exemptions to section 185

• If lending company gives loan to MD or Whole time Director as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by Special Resolution by the members.

• A company whose normal business activity is to provide loan or give guarantee or provide security for due repayment of loan and in respect of such loan interest is charged at a rate not less than bank rate declared rate.

PENALTY For Contravention  [Section 185(2)]

• Lending Company: Rupees 5,00,00 – Rupees 25,00,000 AND
• Person to whom Loan/ Guarantee/ Security is given:
  • Imprisonment up to 6 months or
  • Fine of Rupees 5,00,00 – Rupees 25,00,000 or

                                BOTH

Points to be noted:

From the above discussion we conclude the following:

a) Section 185 is applicable on public and private companies.

b) Section 185 is hit only to the lending company.

c) Where a company gives loan or provides security or guarantee to its 100% WOS, then such holding company can also provide loan, guarantee or security to its Directors and relatives as well. If the WOS does not utilize the loan given by the Holding Company in its principal business activity, then in that case this section does not get hit on the lending company, which means lending company can provide loan, guarantee and security freely to its director(s) and their related persons.

d) “Indirect lending” means that the company does not give loan to director through any agency. But this word of “indirect” cannot be read by converting what is not a loan to loan as was stated in Dr. Fredie Ardeshir Mehta V/s Union of India (1991)

e) Ordinary Course of business means usual business to lend and accept loans and deposits from people. It has two tests:

• If the company is engaged in lending activity regularly
• Lends not only to director(s) or their relatives but also lends at arm’s length parties. Arm’s length means to give loans to reasonable parties or at reasonable interest rate at which two or more rational people will give their consent to the transaction

Under the Proposed Bill

Under the Amendment Bill 2016, the whole Section is proposed to be substituted by inserting new Section 185 with some major changes which are discussed below:

1. The meaning of the term “any other person in whom director is interested” is reduced to the following persons only to the extent that no company shall directly or indirectly advance any loan including loan represented by book debt or give any guarantee or provide any security in connection of any loan –

• Any director of lending company or of a company which is holding company or any partner or relative of any such director and
• Any firm in which such director or his relative is a partner

2. Now a company can give loan to following persons subject to approval from the members by a special resolution at a properly convened General Meeting, the explanatory statement to such notice of such General Meeting shall contain full particulars of loan given, guarantee given and security provided and the purpose for which such loan guarantee or security is proposed to be utilized; the loan are to be utilized by the borrowing company for its principal business activity:

• A private company in which any such director is a director or member
• Any body corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director or by two or more directors together
• Any body corporate, the Board of Directors, Managing Directors or Manager, whereof is accustomed to act in accordance with the directions or instructions of the Board or of any director(s) of the lending company.

This means when lending company is providing loan, guarantee and security to such a private company where such director who is also a director or a member in such private company OR, such body corporate where such director whether solely or in concert with other directors hold 25% or more voting power OR such body corporate whose directors, Managing Director or Manager is accustomed to act, in such circumstances a general meeting is required to be convened and a special resolution is required to be passed for giving such loan, guarantee or security.

Conclusion: Section 185 remains restrictive clause after the proposed amendment. Though proposed amendment still prohibits giving any loan, provision of any guarantee and security to directors and firm in which such director or his relative is a partner, it slightly loosens down  the restriction on other person in which director is interested where a company can take approval from its members by passing a special resolution and give loan, guarantee and security to such persons easily.

 Expecting a quick and positive response from Rajya Sabha with respect to this section at least as this will ease the manner of doing business to a large extent.

(Author is Sonu Mehla)

Most Commonly asked Queries related to ROC Website

Common resolutions For MCA21 related queries including Annual filings, Linked filings, Cancel SRN service, Resubmission, and Additional Fee waiver

1. Which eforms can I file as attachments with GNL-2?

Annual filing eforms under the Companies Act, 1956 viz. 23AC/ACA, 23AC/ACA-XBRL, 20-B, 21-A, Form 66, I-XBRL, A-XBRL, 23B, 23C and 23D would be made available shortly for filing purposes. Users are requested not to file these forms as attachments with GNL-2 eforms.

2. How can I file CRA-4 and Refund eforms as they are not available on www.mca.gov.in?

The CRA-4 (Companies Act, 2013) and Refund eforms would also be made available shortly for
filing purposes. Stakeholders may kindly take note and plan accordingly.

3. My account is debited on making online payment; however, corresponding challan/receipt is not generated and system does not allow filing of the form again. What should I do next? OR

The payment was made but the SRN status is ‘Pending for Payment’ or ‘Not Paid’. What should I do next?

You need to cancel your SRN. On cancellation, the payment would be reversed by the bank. The filing can be re-initiated immediately.

MCA has issued a circular wherein it has been decided to relax additional fees payable on e-forms which are due for filings by companies between 25th March to 30th April ‘16. However, no such waiver of additional shall be applicable if such due forms are filed after 10th May 2016.

To cancel an SRN, do the following:

1. Login to the MCA21 application.

2. Click the MCA Services tab. The list of MCA Services is displayed.

3. Click the SRN / Transaction Status menu. The Track SRN Status page is displayed.

4. In the SRN field, enter the SRN to be cancelled and click Submit. The SRN details are displayed.

5. Click the Cancel SRN link available for the SRN. The Track SRN page will be displayed with SRN filled in the SRN field.

4. I am unable to upload the eform again after cancelling the SRN. How can I upload the eform after cancellation of SRN?

The same eform cannot be uploaded ‘As-Is’. You need to modify the eform, complete the Pre-scrutiny and then try to upload the form again. Please ensure that the latest version of the eform is downloaded from MCA21 portal.

5. The payment challan was generated but the total of fees shown is incorrect. How can I get the challan / receipt with correct amount?

The issue has been fixed and stakeholders are requested to download the corrected challan / receipt from “Track Payment Status / Track SRN Status” service on the MCA21 portal.

6. How can I upload linked eforms?

Incorporation forms in the new MCA21 portal need to be linked filed. You are required to select multiple eforms while uploading the form. Steps for linked filing of incorporation forms (INC-7, DIR-12, INC-22, URC-1) are as following:

1. Login to the MCA21 application.

2. Click the MCA Services tab. The list of MCA Services is displayed.

3. Under e-filing, click the Upload eForms menu. The Upload eForms page is displayed.

4. Click the eForm Upload button/link. The eForm Filing page is displayed

5. Click on normal filing or resubmission SRN as the case may be.

6. Check the Linked Forms option

7. Click the Browse button to navigate and select the eform to be uploaded. To upload linked eforms, click the Add more linked eForms button. Click the Browse button that appears in the second row, to navigate and select the linked eform to be uploaded. Follow similar process to upload more linked eforms. You can select upto 10 linked eforms.

8. Click the Upload button. In case you selected multiple linked eforms, all eforms will be uploaded in one go.

9. The pre scrutiny checks happens and after successful upload the SRN of the uploaded eForm will be displayed to the user.

10. The user will have an option to either make a payment soon after form upload or later 11. Click thee Pay Fee button. The fee details screen will be displayed.

12. The Payment Options page is displayed.

13. Select the desired payment option making payment of Fee. Make the payment. SRN is generated and displayed.

14. After you make the payment, a transaction receipt/acknowledgment is generated.

7. I could not resubmit my company eforms as the eform was not available in the portal/ I faced technical issues with the MCA21 portal. What are the timelines for resubmission of Company eforms?

The provision to extend resubmission due date has been made. The stakeholders will be allowed to resubmit the eform until 10th May 2016, in case the resubmission due date was between 25th March and 30th April 2016.

8. The name approval letters has expired for my proposed company. However, the Company formation process is not yet completed. Do I get another name approved?

If the company name was approved and the name expired between periods 25th March to 30th April 2016, the Name reservation date is extended for you till 10th May 2016.