The Companies Amendment Bill 2014 has been introduced and passed in Lok Sabha recently. This blog post has intention to analyse proposed changes in the Companies Act 2013.
Most important massage, this amendment prepares a best case for drafting skill development programmes in India. I am reading here this Bill clause by clause. This will be a three part series and part 2 of 3 is present here.
To amend sub-section (1) of section 188 of the said Act to exempt related party transactions between holding companies and wholly owned subsidiaries (WOS) from the requirement of approval of non-related shareholders [Section 16 of the Amendment Bill]
This amendment dispense the requirement of special resolution by the company as provided in first and second provisos to Sub – section (1) of Section 188 and also in sub – section (3) of Section 188. Existing law may be slightly different as:
“No (related party) contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution.
No member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
Nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.”
This further adds a fourth proviso to the effect that :
“the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.”
The net effect of this amendment shall be:
- Related party transactions entered into by the company in its ordinary course of business at arm’s length basis need no approval from shareholders.
- Related party transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders (of holding company) at the general meeting for approval need no approval from shareholders.
- Other related party transactions which are either not in its ordinary course of business or not at arm’s length basis or both shall need approval of shareholders.
- Such approval shall be accorded by company by passing an “ordinary resolution” passed by “members who are not a related party”.
I find requirement of “members who are not a related party” more stringent, non – practical and absurd than requirement of “Special Resolution” This proposed amendment may be a case of poor representations made to the government rather than a case of poor drafting.
To amend sub-section (6) of section 212 of the said Act to provide for bail restrictions to apply only for offence relating to fraud u/s 447 [Section 17 of the Amendment Bill]
In section 212 of the principal Act, in sub-section (6), for the words, brackets and figures “the offences covered under sub-sections (5) and (6) of section 7, section 34, section 36, sub-section (1) of section 38, sub-section (5) of section 46, sub-section (7) of section 56, sub-section (10) of section 66, sub-section (5) of section 140, sub-section (4) of section 206, section 213, section 229, sub-section (1) of section 251, sub-section (3) of section 339 and section 448 which attract the punishment for fraud provided in section 447”, the words and figures “offence covered under section 447” shall be substituted.
After this proposed amendment Section 212(6) shall read as under:
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offences covered under section 447 of this Act shall be cognizable and no person accused of any offence under those sections shall be released on bail or on his own bond unless—
(i) the Public Prosecutor has been given an opportunity to oppose the application for such release; and
(ii) where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail.
This will make bail easier in case of offences under sub-sections (5) and (6) of section 7, section 34, section 36, subsection (1) of section 38, sub-section (5) of section 46, sub-section (7) of section 56, subsection (10) of section 66, sub-section (5) of section 140, sub-section (4) of section 206, section 213, section 229, sub-section (1) of section 251, sub-section (3) of section 339 and section 448.
I always support sure action than stringent action. However, this may result in lesser fear in our very important white color criminals. I wish, offences under section 34, section 36, sub – section (1) of section 38 may being back under this stringent provision.
Update 27 May 2015
To amend Section 248 removing a condition which require removal of Name from Register for non receipt of subscription money [Section 19 of the Amendment Act 2015]
In section 248 of the principal Act, in sub-section (1) in clause (a), after the word ‘incorporation’, the word ‘or’ shall be inserted and clause (b) shall be omitted.
After this amendment Section 248 (1) shall read as under:
Where the Registrar has reasonable cause to believe that—
(a) a company has failed to commence its business within one year of its incorporation; or
(c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455, he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.
To amend sub-section (4) of section 419 of the said Act to provide for winding up cases to be heard by 2-member Bench instead of a 3-member Bench [Section 19 Section 20 of the Amendment Bill]
Presently sub – section (4) of Section 419 read as under:
“The President shall, for the disposal of any case relating to rehabilitation, restructuring, reviving or winding up, of companies, constitute one or more Special Benches consisting of three or more Members, majority necessarily being of Judicial Members.”
Now, words “or winging up” is being deleted. This gives two effects. First, winding up cases may be heard by two member bench as claimed by government. Second, there will be no “or” or “and” before word “reviving” making interpretation of this sub – section hard and higher number of dispute on this subject matter. I hope a correction in this drafting error, please.
To amend sections 435 and 436 of the said Act to provide for that Special Courts to try only offences carrying imprisonment of two years or more [Section 20 and 21 Section 21 and 22 of Amendment Bill]
After proposed amendment sub – section (1) of Section 435 shall read as under:
“The Central Government may, for the purpose of providing speedy trial of offences punishable under this Act with imprisonment of two years or more, by notification, establish or designate as many Special Courts as may be necessary.
Provided that all other offences shall be tried, as the case may be, by a Metropolitan Magistrate or a Judicial Magistrate of the First Class having jurisdiction to try any offence under this Act or under any previous company law.”
After amendment Section 436(1)(a) of the principal Act will read as under:
“Notwithstanding anything contained in the Code of Criminal Procedure, 1973, — (a) all offences specified under sub-section (1) of section 435 shall be triable only by the Special Court established for the area in which the registered office of the company in relation to which the offence is committed or where there are more Special Courts than one for such area, by such one of them as may be specified in this behalf by the High Court concerned.”
These amendments effectively deny “speedy trial” to “small offences” but may require lesser number of “Special Courts”. Practitioners of Corporate Law know, usual courts of Metropolitan Magistrate or Judicial Magistrate do not understand basics of corporate laws. Explaining Corporate laws to a magistrate court take much time than a higher court.
I do not support “Special Courts” to give speedy trial for certain offenders but support these provisions for domain expertise in judiciary. I know, magistrate and judges are competent enough to understand everything under the sun but time is also an important factor in justice.
Update 27 May 2015
To amend Section 462 to provide to change procedure to exempt certain companies [Section 23 of Amendment Act]
In section 462 of the principal Act, for sub-section (2), the following sub-sections shall be substituted, namely:—
‘‘(2 ) A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses.
(3) In reckoning any such period of thirty days as is referred to in sub-section (2), no account shall be taken of any period during which the House referred to in subsection (2) is prorogued or adjourned for more than four consecutive days.
(4) The copies of every notification issued under this section shall, as soon as may be after it has been issued, be laid before each House of Parliament.”
I am not sure, what this amendment of Section 462 achieve. Readers may please enlighten me.
In summary, we have a poorly drafted amendment bill to correct an excellently poor drafting of an Act called the Companies Act, 2013.
Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.