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COMPARISON BETWEEN COMPANIES ACT 1956 AND COMPANY BILL 2009

By : Atin kumar Das on 19 July 2010 Report Abuse Print Print this
 



 

COMPARISON BETWEEN COMPANIES ACT 1956 AND COMPANY BILL 2009: SOME NEW CHALLENGES

ATIN KUMAR DAS. LL.M III SEMESTER, NATIONAL LAW INSTITUTE UNIVERSITY BHOPAL.

INTRODUCTION

 

The long awaited re-codification of company law has taken a definite shape in the reintroduction

Of Companies Bill, 2009 the Bill in Parliament recently by the Ministry of Corporate Affairs as the 2008 Bill had lapsed with the dissolution of 14th Lok Sabha. The Bill seeks to establish a new benchmark for corporate governance when compared to the existing legal framework in the Companies Act, 1956 the Act.Re-codification of company law is overdue as the present Act has become a voluminous piece of legislation which is in force since 1956 consisting of 658 Sections, 6 Tables, and 14 Schedules. [1]

Companies Bill, 2009 is old wine in a new bottle except that the bottle is made to look much smaller and the wine has been largely diluted. The Companies Bill, 2009 consists of 426 Sections, which largely represent the condensed version of the 658 Sections of the Companies Act, 1956. The reduction of 232 Sections in the Companies Bill, 2009 as compared to the Companies Act, 1956 has been made possible by the power to make an unacceptably large number of Government made rules to be prescribed under Companies Bill, 2009. The Companies Bill, 2009 has the words 'as may be prescribed' in 233 places which means the Government can make more than 200 sets of rules. This obsession with size rather than substance may largely  found the situation in a highly litigious country like India. Contrast this with what has been done in the Companies Act, 2006 of the U.K. where the size of the Companies Act has increased to 1300 Sections and 16 Schedules. If the Companies Bill, 2009 is passed as it is into Law, the intensity of Company Law and of corporate governance regulation would have stood considerably diluted. [2]

 

Formulation of Problem:

The Comparison between Companies Bill 2009 and Companies Act 1956

 

Statement of problem

The long awaited re-codification of company law has taken a concrete shape in introducing the Companies Bill, 2009. The Bill seeks to establish a new benchmark for corporate governance when compared to the existing framework in the Companies Act, 1956.

 

Aims and Objectives:

The Bill aims at simplification of Company law by:

(i)                 Revising and modifying the Act in consonance with the changes in the National and International economy,

(ii)                Bringing about compactness of company law by deleting the provisions that had become redundant over time and by re-grouping the scattered provisions relating to specific subjects,

(iii)              re-writing of various provisions of the Act to facilitate easy interpretation,

(iv)              Deleting the procedural aspects from the substantive law and provide to greater flexibility in rule making to enable adoption to the changing economic and technical environment.

 

Scope, focus and limitations of the project: (Hypothesis)

v  To analyze the procedural laws prescribed by the central government in the form of Rules.

v  To revise and modify the companies Act, 1956.

v  Harmonisation of company law with some of the provisions of SEBI governance norms.

 

Sources of data:

The researcher has mainly relied upon secondary sources such as books and articles.

 

References and style of footnoting:

All references are cited and a uniform style of footnoting has been followed throughout the project, acknowledging the respective sources that have been used.

 

 

 

COMPARISON BETWEEN COMPANIES ACT 1956 AND COMPANY BILL 2009

 

Duties of Director

The Act does not define the duties of Directors and it has to be gathered from some of the provisions of the Act. However, over a period of time, the judiciary has attempted to define Directors’ duties as fiduciary in nature emanating from the position they occupy as special trustees and agents of a company.[3] One of the important duties of a director is the obligation to act with care, skill and diligence in relation to the affairs of a company and the degree of care expected of them is that of a person of ordinary prudence and to avoid conflict of interest with the company. This is essential as the Company, being a legal entity has no physical existence of its own and it cannot act for itself. Hence it should be managed by the Directors who are elected representatives of shareholders.[4]

 

The Bill by Clause 147 now seeks to define duties of Directors. They are:

(a) To act in accordance with the articles of the company,

(b) Act in good faith in order to promote the objects of a company for the benefit of its members, (c) Exercise duties with due and reasonable care, skill and diligence,

(d) Not to place in conflict situation either direct or indirect interest of the company,

 (e) Not to achieve or attempt to achieve any undue gain or advantage to himself or to his relatives, partners or associates

(f) Not to assign the office and assignment so made is void. Contravention of any of the duty is punishable with fine.

The Clause also provides that if any director is found guilty of making any undue gain as aforesaid, he shall be liable to pay an amount equal to that gain, to the company. What is stated above is a codification of duties of Directors and any deviant behavior will attract penal consequences.[5]

 Board Meeting by Video Conferencing

The directors are required to be present physically in Board meetings. This is pursuant to section 285 of the Act which mandates holding of board meetings at least once in every three months and four such meetings are to be held in a year for deliberating and deciding on major policy matters of a company. There has been persistent demand from trade and industry organizations, to permit the companies to hold their board meetings through video conferencing by making use of latest technology available in our country. The Companies Amendment Bill, 2003 had recognized, for the first time, the facility of holding board meeting by video conferencing but the

Bill having been withdrawn by the Govt. of India, the new provision could not be given effect to.

The present Bill by clause 154 now provides that the participation of directors in a board meeting may be in person or through video conferencing or other electronic means as may be prescribed. Such a system should be capable of recording and recognizing the participation of directors and storing the proceedings of such meetings.[6] However, the Central Govt. has reserved to itself the power to specify, by notification, the matters which should not be dealt with in a meeting through video conferencing or other electronic means, i.e. the matters which will have to be transacted only at a meeting of the board. The items of business listed in Section 292 of the Act clause 159 of the Bill may come in handy for exclusion from video conferencing. Nonetheless video conferencing is a great facility for transacting business with utmost speed, apart from cost saving and helping the non-resident directors placed as they are in distant places to participate in board meetings from their work place.[7]

 

Registered Valuer

This is a new concept proposed to be introduced by the Bill. If valuation is required by any of the provisions of the Act in respect of any property, stocks, assets, it should be done by a registered valuer appointed by the audit committee or the Board, in terms of clause 218 of the Bill. Any Chartered Accountant, Cost& Works Accountant, Company Secretary or such other persons possessing such qualification as may be prescribed may apply to the Central Govt. For being registered as a valuer. Clause 56 of the Bill which deals with further issue of capital by private placement provides that the price of such an issue should be determined by a registered valuer. Similarly clause 201 of the Bill which deals with compromises, arrangements, amalgamations with creditors and members corresponds to sections 391 to 394 of the Act also provides for valuation report in respect of shares, other properties and all assets, tangible and intangible, movable, immovable of the transferor company by a registered valuer.[8]

 

Setting up of Special Court outside India

Register of Members is one of the statutory registers prescribed by the Act and serves as prima facie evidence of ownership of shares held by a member. The corresponding provision is contained in clause 78 of the Bill and specifically recognizes the holders of shares and debentures residing in India and outside. Clause 53 of the Bill provides for “Rectification of Register of Members.” If the name of any person is entered in the Register without sufficient cause or after having been entered in the Register is, without sufficient cause, omitted there-from, the person aggrieved or the company may appeal to the Tribunal  now CLB for rectification of the register. In respect of foreign members or debenture holders, the Bill proposes to set up a competent court outside India for rectification of the register. This is a new provision and recognizes the presence of foreign investors in India in corporate securities.[9]

 

 Kinds of share capital

Clause 37 of the Bill provides that the share capital of a company limited by shares shall consist of only two kinds i.e. Equity share capital and Preference share capital. In relation to equity share capital, the clause further clarifies that it is that part of the issued share capital of the company which has no limits for participation, either with respect to dividend or with respect to capital, in the distribution of profits or otherwise. This provision virtually amounts to doing away with the differential voting rights as to dividend, voting or otherwise recognized by section 86 of the Act. What happens to the companies which have already amended their articles and issued equity capital with differential voting rights? Such companies will have to cancel shares with variable voting rights and revert to the earlier position of having to have only equity shares with suitable changes in the articles.

 

 

 Key Managerial Personnel

The Bill, for the first time, proposes to re-group in relation to a company “key managerial personnel” consisting of

v  The Managing Director, the Chief Executive Officer or the Manager, a whole-time director or directors,

v  The Company Secretary, and

v  The Chief Financial Officer. This means that the Key Managerial Personnel will become liable for penal consequences by virtue of the positions they hold. About 24 clauses in the Bill (excluding winding up provisions) recognize “Officer who in Default” and this term includes Key Managerial Personnel for imposition of monetary penalties for non compliance of law.[10]

 

 Independent Directors

The Act does not prescribe induction of independent director’s on the board of companies. However, this requirement is presently applicable to listed companies in terms of listing agreement. If the chairman of a company is a non-executive chairman, at least one-third of the total strength of the Board should comprise of independent directors and if the chairman is an executive chairman, then the Board should comprise of 50% independent directors. These directors are expected to bring in professionalization of corporate management and assist the Board in taking corporate decisions in an objective manner for the benefit of the company and its shareholders. The Bill by clause 132 provides that every listed public company having such paid up capital as may be prescribed should have at least one-third of the total number of directors as Independent Directors. The Central Govt. may prescribe the minimum number of independent directors in the case of other public companies and their subsidiaries. Such a director is a non-executive director of integrity and should possess relevant expertise and he or any of his relative should not have any pecuniary relationship with the company more fully described in the aforesaid clause. Nominee directors are excluded from the definition of Independent Director. The companies in existence before the commencement of the new Act will have to comply with the requirement of Independent Director within one year from the commencement of the new Act. The Bill, for the first time, recognizes the role of independent Directors and brings about uniformity in the number of such directors, irrespective of the Board chairman being Executive or non-Executive. In the context of Satyam fiasco, the role and responsibility of Independent Directors has come in for critical review. While the concept is good, the observance of governance norms expected of an Independent director requires to be strengthened.[11] One of the aspects relate to the manner of appointment of Independent Directors. They are picked up by the promoters, back up their appointment in the general meeting and get them elected by virtue of their shareholding strength. Hence the Independent Directors are dependent on the patronage of the promoters and this will not allow them to act independently. This is a tricky situation and the partial solution seems to lie in nominating a least one Independent Director by SEBI or alternatively place a panel of independent directors before the shareholders for election by postal ballot, excluding promoter shareholder.[12]

 

Appointment as Administrator

Under the Companies Act, 1956 no such provision is defined, but in the Companies Bill, 2009 Clause 234(1) is provides that Company Secretary[13] recognized to be included in the panel maintained by the Central Government for appointment as administrator. The Tribunal may direct the company administrator to take over the assets or management of the company.

 

Company Liquidators

Under the Companies Act, 1956 no such provision of Company Liquidator but in the Companies Bill, 2009 Clause 250(2) provides that company secretary recognized to be included in the panel maintained by the Central Government for appointment as company liquidator who shall be appointed by the Tribunal at the time of the order of winding up.Clause 266(1) provides the assistance Company Liquidator.

 

 

 

 

Mergers & Amalgamations

The Scope of Clauses 201 to 205 of the Bill which correspond to sections 391 to 394 of the Act have been considerably enlarged so as to include[14]:

v  Compromises or arrangements with creditors and members including take-over offers and the scheme of debt restructuring together with valuation of shares and other properties of the company,

v  Merger and amalgamation of companies including merger by absorption or merger by formation of a new company,

v  Amalgamation by mutual consent of companies incorporated in the jurisdictions of such countries as may be notified by the Central Govt. This scheme is an improvement over the existing provision in the Act and gives the much needed flexibility to operate the scheme quickly.

 This Provision is intended to provide for amalgamation of foreign companies with Indian entities and pay for such acquisitions in cash or partly in Indian Depository Receipts. While the schemes at items (i) and (ii) require the sanction by the Tribunal, the scheme at item (iii) will be by mutual consent of the companies without having to seek the consent of the Tribunal.[15] The amalgamations and mergers proposals which are presently under the jurisdiction of the High courts will be shifted to NCLT under the new Act. Clause 208 of the Bill which corresponds to section 396 of the Act confers powers on the Central Govt. to order amalgamation of companies in public interest.[16]

 

 One Person Company

The Bill, for the first time, seeks to introduce the concept of “One-person Company” as one more form of business organization. It is defined as a company which has only one person as a member. Clause 3 of the Bill provides for incorporation of “One Person Company” for any lawful purpose and it enjoys limited liability as applicable to other types of companies. However, the Memorandum of such a company should indicate the name of the person who shall, in the event of the subscribers’ death, disability or otherwise becomes the member of the company.

Any change in the name of such a person indicated in the Memorandum should be informed to the Registrar and any such change is considered as an alteration of the Memorandum. One Person Company is not required to hold Annual General Meeting as envisaged in clause 85 of the Bill. All other provisions of the Bill relating to maintenance of books of accounts and audit of accounts etc. will apply in the same manner and to the same extent to One Person Company. This is intended to bring about transparency in their operations and it offers some measure of protection to the creditors having business relationship with One-person Company. More regulations in this behalf are expected to be prescribed by the Central Govt in the form of Rules.[17]

 

Small Company

Small company means a company, other than a public company whose paid up share capital does not exceed more than five crore rupees, or whose turnover as per its last profit and loss account does not exceed such amount as may be prescribed and the prescribed amount shall not be more than twenty crore rupees: 2(zzg).

 

Adjudication proceedings

The categorization of offences under the Act is too archaic and unscientific and it calls for a new approach. There is heavy concentration of offences which are required to be decided by the Criminal Courts irrespective of the gravity of the offence. The Bill, for the first time, seeks to introduce the concept of adjudication of penalties in respect of non compliance of procedural laws. It seeks to provide minimum and maximum quantum of penalties for each offence with a suitable deterrence for repeated defaults. In case of fraudulent activities, there is provision for recovery and disgorgement of monies. This is refreshingly a drastic departure from the existing practice under the Act and provides for determination and imposition of penalties on non discriminatory basis. The offences committed by the directors and officers of a company also fasten on the company, being an independent legal entity in the same manner and to the same extent as the perpetrators of the offence. Heavy monetary penalties ranging from 5,000 to 50,000 rupees and in some cases the penalty ranging from one to ten lakhs of rupees have been prescribed. In the case of failure to repay matured deposits or the interest thereon within the agreed period or any extension thereof given by the Tribunal, the company is punishable with fine of not less than one crore of rupees and it may extend to ten crores of rupees and in addition the officer in default is also punishable with fine of not less than 25 lakhs of rupees and it may extend to two crores of rupees as provided in clause 67(3) of the Bill. The determination of quantum of penalties will be decided by the Adjudicating officers. The Central Govt. will publish in the Official Gazette the status of Adjudicating officers, not below the rank of Registrar who will be empowered to impose penalty on the company and the officer who is in default, following the principles of natural justice. A person aggrieved of decision of the Adjudicating officer may appeal to the Regional Director within 60 days. As these are officers of the MCA, there should be a provision for appeal to NCLT. There are about 32 clauses in the Bill which refer to “Officer who is in default” for the purpose of imposition of penalties.[18]

 

 Constitution of Special Courts

Another novel feature of the Bill relates to constitution of Special Courts for speedy trial of offences punishable for non compliance of law as envisaged in Clauses 396 and 397 of the Bill. The Central Govt. may by a notification establish as many Special Courts as may be necessary. The Special Court will consist of single Judge, appointed by the Central Govt. with the concurrence of the Chief Justice of the High Court within whose jurisdiction the Judge will be working. The Judge of the Special Court, before appointment should be holding the office of a Sessions Judge or an Additional Sessions Judge as he alone can impose punishment by way of imprisonment as authorized by law, as per section 28 of the Criminal Procedure Code, 1973. There are many offences, both major and minor, in the Bill which come within the jurisdiction of the Special court which can impose, in addition to fine on the company and the officer in default, imprisonment ranging from six months to three/five years. Such a provision is there in about 24 clauses in the Bill. Minor offences like failure to file a resolution or agreement (clause106), failure to provide information (clause108) etc should be weeded out of Special court jurisdiction and they may come under adjudication proceedings. Only serious offences should go to Special court as appearance before the court involves a lot of time and expense and it diverts the attention of the company from its business. There is, therefore, an urgent need to review the nature of offences which should go to the Special court.

 

 Abolition of Public Deposits

Clause 66 of the Bill provides, inter alia, that a company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the RBI, accept deposits from its members on such terms and conditions, including the provision of security etc. This means that the companies will no longer be permitted to accept deposits from public as envisaged in section 58A of the Act. Even the deposits from the members will have to be secured. This is a drastic departure from the existing facility and the companies have been enabled to accept deposits from the public/members which is cheaper finance when compared to bank finance. Heavy penalties which shall not be less than rupees one crore but which may extend to rupees ten crores and fine/imprisonment to every officer in default has been proposed for failure to repay depositor part thereof and any interest thereon. With the new provision in the Bill for the creation of security, there is no hitch in allowing companies continuing to accept deposits from the public. The depositors who fail to get back their deposits on maturity or interest thereon can always look to the enforcement of security. The restriction proposed to be placed by the Bill will not apply to banking company and non-banking financial company and to such other companies as the Central Government, after consultation with the RBI, specify in this behalf.[19]

 

Major criticism against the new Bill

The proposed omission of Section383A regarding mandatory appointment of Company Secretary in certain-sized companies is sought to be justified on the plea that there is no such provision for the other professionals. The remedy for such a situation is to enact a provision for them too. The high-powered Sachar Committee on Company Law reforms has, as far back as in 1978, stated in its report thus “With a view to achieve the objectives of professionalization, all companies with a paid-up capital of twenty five lakh rupees or more should be required to employ (a) a Chief Accountant or a Financial Controller and (b) a Cost Accountant and an Internal Auditor, if such companies are engaged in manufacturing or other specified activities. Accountant and the Cost Accountant must be members of the Institute of Chartered Accountants of India and the Institute of Cost & Works Accountant of India respectively”.  Thus a mandate regarding appointment of professionals in companies to man the distinct and specialist functions has found favour with the high-powered committee. Such a mandate cannot be said to impinge or constrict the managerial freedom, especially in the context of, the cases of vanishing companies and fraud-hit companies that we continue to witness even today. If the mandatory appointment of a Company Secretary is violative of the managerial freedom of a company, the mandate regarding appointment of Independent Directors is equally violative of shareholder democracy that the Bill is seeking to espouse. Between the two, I would venture to say that it is the mandatory appointment of a Company Secretary that promotes good corporate governance than the mandate regarding Independent Directors, for reasons best known to all! To some extent the damage caused by the removal of Section383A would seem to be curtailed by Clause 178 which requires certain classes/description of companies to be prescribed to have whole-time key management personnel which includes Company Secretary. The Secretarial Compliance Certificate maybe expected to be introduced through delegated legislation in the new regime.[20]

 

 

Suggestions for further reforms

The objectives of ushering in good corporate governance, promoting investor protection, providing adequate internal control, ensuring authentic and transparent disclosures by companies in their public documents may be achieved only in letter but in spirit unless some more fundamental and progressive measures are addressed in the new Bill. These are:

(a) Prescribing basic educational and professional/management qualifications for company directors;

(b) Providing for equitable exercise of voting power at general meetings;

(c) Clear definition of basic duties and responsibilities of key managerial personnel leaving details to be compulsorily added by the Boards of companies;

(d) Induction of worker/employee director into the Board;

(e) Empowering the proxies to speak and vote at general meetings like members; fixing threshold limit of shares to be held to be entitled to speak at general meetings;

(f) Ensuring real and requisite independence to the corporate professionals like Practicing Company Secretaries, Chartered Accountants, Cost Auditor etc. to discharge their attest functions properly;

(g) Mandatory appointment of duly qualified and well experienced internal auditor with requisite powers to discharge his onerous duties and responsibilities;

(h) Strengthening the role of shareholder- association’s participation in general meetings; and

(I) Submission of a Social Report. These are explained below in requisite detail.

 

 

 

 

Concluding Remarks

The Bill seeks to reduce Govt. intervention in the affairs of company by removing controls and approvals but the companies and the directors are expected to function strictly in accordance with the regulatory framework. Failure to do so will attract heavy penalties in the form of fine on the company and a term of imprisonment and fine on the officer who is in default which includes key Managerial personnel. The need to induct Independent Directors in all public companies is intended to bring about professionalization of corporate management and providing outside expertise to the corporate boards. It remains to be seen how the Independent Directors will discharge their fiduciary responsibility in the context of Satyam fiasco. A few changes in the manner of appointment of Independent Directors are required to ensure and protect the “Independence “of Independent Directors come. However, it is felt that implementation of a few more reforms detailed below should aid and hasten the achievement of the laudable objectives of the Bill.

 

 

 

 

 

 

 

BIBLIOGRAPHY

 

JOURNALS

 

D.K. Prahlada Rao, FCS, Advocate & Director Training Centre for Professional Legal Education, Bangalore.

 

Suvir Sharma, Comparative Study of The Companies Act, 1956, and The Companies Bill, 2009, 2010, 1 Company Law Journal.

 

Sharada T.R., Companies Bill, 2009, Student of Vth Year University Of Law College, Bangalore.

 

Divya Gupta & Sumit Agarwal, Comparison Between Companies Bill, 2009 and Companies Act 1956, CS Trainees, GAIL (INDIA) Ltd.

 

J. Krishna Murthy FCS, The companies Bill, 2009, Hyderabad.

 

BOOKS

 

Ramaiya A. and other, Guide To Companies Act, IV Edition 1998, Wadhwa & co. Nagpur.

 

Chakrabarti A.M, Taxman’s Co. Law, 1994, Volume I, Taxman Allied Service Pvt. Ltd.

 

Saharay H.K, Company Law, Vth Edition 2008,Universal Law Publishing Co.

 

Singh Avtar, Company Law, XIV Edition 2005, Eastern Book Company Lucknow.

 

 

 

 

WEBLIOGRAPHY

 

http://www.taxguru.in

 

http://www.icsi.edu

 

http://www.ebcwebstore.com

 

http://www.thehindu.com

 

http://www.indlaw.com

 

http://www.wirc-icai.org

 

http://www.caclubindia.com

 

http://www.jurisonline.com

 

http://www.articles.manupatra.com



[1] D.K. Prahlada Rao, FCS, Advocate & Director Training Centre for Professional Legal Education, Bangalore.

 

[2] Mr. V V Iyer,Companies Bill, 2009 – A Desultory Exercise,Manupatra Articles.

[3] Ferguson vs. Wilson (1866) 36 LJ.

[4] Suvir Sharma, Comparative Study of The Companies Act, 1956, And The Companies Bill, 2009, 2010, 1 Company Law Journal.

[5] http://www.taxguru.in

[6] http://www.icsi.edu

[7] http://www.ebcwebstore.com

[8] http://www.thehindu.com

[9] http://www.indlaw.com

[10] Sharada T.R., Companies Bill, 2009, Student of Vth Year University Of Law College, Bangalore.

[11] http://www.wirc-icai.org

[12] Ramaiya A. and other, Guide To Companies Act, IVth Edition 1998, Wadhwa & co. Nagpur.

[13] Define in clause 178(1) of the companies Bill, 2009.

[14] Chakrabarti A.M, Taxman’s Co. Law, 1994,Volume I, Taxman Allied Service Pvt. Ltd.

[15] http://www.caclubindia.com

[16] Saharay H.K, Company Law, Vth Edition 2008, Universal Law Publishing Co.

[17] Divya Gupta & Sumit Agarwal, Comparison Between Companies Bill, 2009 and Companies Act 1956, CS Trainees, GAIL (INDIA) Ltd.

 

[18] J. Krishna Murthy FCS, The companies Bill, 2009,Hyderabad.

[19] http://www.jurisonline.com

[20] http://www.articles.manupatra.com


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