Introduction to Company Law CS Executive – Companies Act 2013
The term Company Law in simple words mean legislation relating to Companies. The development of Company Law in India is quite historic. Considering the relevancy of the study we can curtail it to the old Act, i.e.,Companies Act 1956 and current or new Act – Companies Act 2013. Though years have passed, the number of amendment made to 2013 Act envisages us to call it as new Act.
About the CS Executive Company Law:
The Companies Act is a mammoth legislation. The Companies Act, 1956 was one of the lengthiest Act with 658 Sections which was repealed by The Companies Act 2013 containing 470 Sections. The new Act was a need of the hour as the 50 years old law required a new structure with added perspectives. It Act is nothing but all about companies since its incorporation till its winding up. In spite of several sections to understand this statue, we just need to understand few basic principles.
A company in a normal sense is an association of persons. Further comes into the purview the reason for such association. A group of friends planning for a vacation, here the intent is to associate and keep a company with each other. But the company in legal sense is termed with commercial intensions.
In legal sense, Company is a business association. A group of persons associate themselves to conduct a business under a common name. They invest their amounts into business under a common named entity, by way of subscription of shares. They appoint personnel to look after and direct the business, known well as Directors. When the business makes profit, it is distributed to the holders of the share. In case of losses, the holders of share are held responsible only for their limited liability.
Unlike other modes of business structure like sole proprietorship firm or partnership firm, a Company is also a form of organization. To be more appropriate, the form that contains the optimal advantage. Lets’ look into few basic concepts but not limited which helps us to understand better along with the comparative study as to why we refer it as optimal form.
Underlying Concepts of Company Law:
- Legal Personality: The status of legal personality is the special feature in the company form of organization. Here comes the question, is mere existence means the legal personality? No.
The key element of determining it is to examine the legal status before law. The key words are “to Act in its own name” and “capable to sue and being sued in its own name”.
A company is an artificial person that can be created and destroyed only by the process of law. Technically we term, creation as Incorporation and Destructions as Dissolution/ Winding Up. Being recognized as person before the eyes of law the company is said to be a legal person.
Unlike sole proprietorship or partnership, the individuals behind the name of the firm may not be directly got involved in the structure. Say for a sole proprietor firm it’s the proprietor who carry on the business and shall be responsible for profit or losses. In the eyes of law, the proprietor alone is a legal person and not his firm. He is solely responsible for the business outcome. His personal assets can be pulled in during losses. The ownership and risk stays with him.
Next in a partnership firm, the partners of the firm are collectively responsible for the outcome of the firm’s performance. The registration for firm under Partnership Law is optional; however for the protection of its interests against third parties it is mandatory that a firm registers itself. Though registered the firm does not gets its status as legal entity, it is just again represented by its partners. The acts of the firms are viewed as the acts of the partners. Even here the ownership and risk lies with the individual partners.
Finally in a company form of organization, the company has its own legal status. This means the company is considered same as status an individual person, it can in its own name and capability of legal person can buy, sell, pledge, mortgage, undertake, carryon business, sue and be sued etc. The acts of company cannot be termed acts of its shareholders. But for the Doctrine of Alter Ego it’s the corporate veil which determines the Acts of the Directors in their capacity as Directors of the company or as individuals (discussed in later part of the article).
- Separate Entity: Company is a separate legal entity distinct from its shareholders/ members. The members only have a relationship of their shareholding in the company. The vital characteristic of the company is the distinction between theownership and risk. The assets of the company are not the assets of the members and vice versa. Similarly the liabilities of the company are not the liability of the members (subject to limited liability discussed in Point 3 below).
The shareholders invested the monies as shares and let the company’s management and directors to carry out the business. They need not participate directly in the business of the company but still they hold the ownership. The Shareholders/ Members are called the owners of the Company.
- Limited Liability: The unique feature that optimizes the company from other form of organization is the concept of limited liability. It is here the liability of the members is limited. Unlike the other forms of sole proprietorship and partnership there is no personal liability vested on the proprietor or partner.
The liability of the members is limited to the extent of his dues payables in relation to his shareholding and nothing more than that. In no way his personal assets can be looped into for the liability of the company. This is where the risk and ownership clearly stand separated.
Doctrine of Alter Ego:
Alter Ego simply means an alternative self. Technically the self who acts as an alternative personality, distinguishes himself/herself from the identity of the self. This legal term and its interpretation become quite interesting when we apply it to a relatable scenario.
Say looking at Superman as an Alter Ego personality it is Clark Kent, Journalist who is the original self, but his act as Superman is distinguished. When the movie portrays superman saving the world, its Clark Kent, the one beneath the superman costume, so here we get to that gripping point, we can say finding the real man behind the show.
Similarly applying Alter Ego to a Company, a company is an artificial person that cannot act by itself. It does not have a body or a soul. It’s an artificial person created by the process of law. Despite the technological developments and invention of artificial intelligence, it is the human individuals who acts and thinks on behalf of the company.
Here comes the difficulty in distinguishing between the acts and thoughts of the human individual, when it is determined to be actions and thoughts of individual and when they are on behalf of the company. This is where the Courts exercise the lifting of corporate veil where a fraud or improper conduct of business has taken place to look at the true individuals whose act led to such fraud or improper conduct.
Now the question arises, who is the responsible officer in case of alter ego of the company? Whether is it only the Board of Directors, definitely not? It is whom so ever in the company either any KMP, officer, employee or any person acting in concert determined to be capable of thinking and acting on behalf of the company and it is ought to be treated as the company itself has acted.
We can see certain provisions in Companies Act, attracting penal provisions both to the company as well as the officers in default. This is where the actions of the individual are considered as the actions of the company itself. Few quirky provisions that were in Companies Act, 1956, namely:
- Section 372A – dealing with Inter-corporate Loan, Investment, Guarantee and Securities provides for imprisonment for a company. Should the company be imprisoned along with its officers? Is that possible? – Lets thanks Companies Act, 2013 that dispensed the impossible task
- Section 433 – dealing with Winding Up by Tribunal provides in subsection (h) if the company has acted against decency or morality a Tribunal may wind up the company on this grounds; how to expect decency and morality from an artificial person. – Sorry that Companies Act, 2013 haven’t revisited this yet.
Companies Act, 2013 – An Overview
The Companies Act 2013 consists of 470 Sections dividend in 29 Chapters and 7 Schedules. The Bill for the new companies act was considered and approved by the Lok Sabha on December 18, 2012 as the Companies Bill, 2012 and the same was considered and approved by the Rajya Sabha on August 08, 2013. It received thePresident’s assent on August 29, 2013 and has become the Companies Act, 2013. Section 1 of the Act became effective on the same date.
The Act is envisaged with the provisions of coming into force in a phased manner. Following that different provisions were notified and came into existence of different dates. Subsequent to Section 1, 98 Sections notified on September 12, 2013 and then Section 135 relating to CSR alone came into existence on February 27, 2014. Further in same manner the other sections also came into force.
Several new concepts pitching in extended the scope of the Act, ruled out the loopholes persisted in the old companies act and had made itself at par with the other regulatory laws such as Income Tax Act, SEBI Regulations etc.
Sections to clarify the Applicability
Of all queries of applicability sections 1, 465 and 470 enabled the professionals and corporates to understand the applicability.
Section 1- stated that sections shall come into existence on different dates / in phased manner.
Section 465 – clarified on the repealing and savings of certain enactments
Section 470 – envisaged the Central Government to pass orders in relation to remove difficulties in certain provisions found to be inconsistent. Only by virtue of this section 470, several amendment and orders were passed to clarify the intent of the provisions.
On an end note to this introduction without any doubt, the new Companies Act, 2013 has brought in significant changes in provisions related to better governance, e-management, compliance and disclosure requirements. And also has introduced several new concepts of one-person company (OPC), small companies, class action suits, registered values, independent directors, special courts and corporate social responsibility etc.
The real task for the professional is to act as drive agents to travel along with the ever changing requirement of law and governance and to ensure utmost compliance.
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