Legal Aspects of Management

Companies Act , 2013

7th SESSION
SEMINAR 4
18.10.2019
Course Code – GM 201

©Amitava Banerjee
JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019
 COPYRIGHT ©
The presentation has been specifically made for students of
MBA course – GM 201 (Batch 2019-21) - Trimester-II
section A, B & C of the institution.

The presentation does not substitute any literature on the

subject but is intended to clarify the basic fundamentals.

No part of this presentation should be copied, reproduced

or distributed in any manner without my explicit prior
permission.

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 Introduction to Companies Act , 2013

- Definition , characteristics of Companies .

- Corporate veil
- Types of companies
- Incorporation , Memorandum & Articles of
Association.
- Prospectus ( shelf prospectus, red herring
prospectus, information memorandum, deemed
prospectus & statement in lieu of prospectus).

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 History of Company law in India
 Company legislation in India started with the Joint Stock
Companies Act, 1850
 The predecessor of the Companies Act, 1956, was Act of 1913
 Then came the Companies Act (I o f 1956)
 Government should have greater control over the formation
and management
 Recognition of the legitimate interests of the shareholders and
creditors
 A fair and true disclosure of the affairs of companies in their
annual balance sheets and profit and loss accounts.
 Now we have the Companies Act 2013

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 Structure of Companies Act , 2013
Companies Act 1956 & Companies Act 2013
Particulars 1956 Act  2013 Act
Parts 13 NA
Chapters 26 29
Sections 658 470
Schedules 15 7

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 New Provisions of Companies Act, 2013

 Class action suits for Shareholders: The Companies Act 2013 has

introduced new concept of class action suits with a view of making
shareholders and other stakeholders, more informed and knowledgeable
about their rights.
 More power for Shareholders: The Companies Act 2013 provides
for approvals from shareholders on various significant transactions.
 Women empowerment in the corporate sector: The Companies Act
2013 stipulates appointment of at least one woman Director on the Board
(for certain class of companies).
 Corporate Social Responsibility: The Companies Act 2013 stipulates
certain class of Companies to spend a certain amount of money every year
on activities/initiatives reflecting Corporate Social Responsibility.
 National Company Law Tribunal: The Companies Act 2013 introduced
National Company Law Tribunal and the National Company Law Appellate
Tribunal to replace the Company Law Board and Board for Industrial and
Financial Reconstruction. They would relieve the Courts of their burden
while simultaneously providing specialized justice .

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 New Provisions of Companies Act, 2013
 Fast Track Mergers: The Companies Act 2013 proposes a fast
track and simplified procedure for mergers and amalgamations of
certain class of companies such as holding and subsidiary, and
small companies after obtaining approval of the Indian
government.
 Cross Border Mergers: The Companies Act 2013 permits cross
border mergers, both ways; a foreign company merging with an
India Company and vice versa but with prior permission of RBI.
 Increase in number of Shareholders: The Companies Act
2013 increased the number of maximum shareholders in a private
company from 50 to 200.
 One Person Company: The Companies Act 2013 provides new
form of private company, i.e., one person company. It may have
only one director and one shareholder.
JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019
 New Provisions of Companies Act, 2013

 Electronic Mode: The Companies Act 2013 proposed E-Governance for

various company processes like maintenance and inspection of documents
in electronic form, option of keeping of books of accounts in electronic form,
financial statements to be placed on company’s website, etc.
 Indian Resident as Director: Every company shall have at least one
director who has stayed in India for a total period of not less than 182 days
in the previous calendar year.
 Independent Directors: The Companies Act 2013 provides that all listed
companies should have at least one-third of the Board as independent
directors. Such other class or classes of public companies as may be
prescribed by the Central Government shall also be required to appoint
independent directors. No independent director shall hold office for more
than two consecutive terms of five years.
 Board Meeting by video conferencing : The Companies Act 2013 allows
BOD meetings to be held by video conferencing
JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019
 New Provisions of Companies Act, 2013

 Duties of Director defined: Under the Companies Act 1956, a director

had fiduciary (legal or ethical relationship of trust)duties towards a
company. However, the Companies Act 2013 has defined the duties of a
director.
• Liability on Directors and Officers: The Companies Act 2013 does
not restrict an Indian company from indemnifying (compensate for
harm or loss) its directors and officers like the Companies Act 1956.
 Rotation of Auditors: The Companies Act 2013 provides for rotation
of auditors and audit firms in case of publicly traded companies.
 Prohibits Auditors from performing Non-Audit Services: The
Companies Act 2013 prohibits Auditors from performing non-audit
services to the company where they are auditor to ensure
independence and accountability of auditor.
JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019
 What is a company ?

“Company” means a company incorporated under the Act [i.e

Companies Act, 2013] or under any previous company law [Section
2(20)].

According to Chief Justice Marshall of USA

“A company is a person, artificial, invisible, intangible, and

existing only in the contemplation of the law. Being a mere
creature of law, it possesses only those properties which the
character of its creation confers upon it either expressly or as
incidental to its very existence”.

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

Concept of Separate Legal Entity

Lord Macnaghten in the famous case of Salomon v. Salomon & Co.

Ltd. (1897) AC 22 observed that:
A company is at law a different person altogether from the
subscribers…..; and
though it may be that after incorporation the business is
precisely the same as it was before and
the same persons are managers and the same hands receive the
profits, the company is at law not the agent of the subscribers or
trustee for them.
Nor are the subscribers as members liable, in any shape or
form, except to the extent and in the manner provided by the Act.
JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019
 Separate Legal Entity = Corporate Veil
The term Corporate Veil refers to the concept that members of a
company are shielded from liability connected to the company’s
actions.
If the company incurs any debts or contravenes any laws, the
corporate veil concept implies that members should not be liable
for those errors.
Thus, this case clearly established that company has its own
existence and as a result, a shareholder cannot be held liable for the
acts of the company even though he holds virtually the entire share
capital.
The whole law of corporation is in fact based on this theory of
separate legal entity

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 22-08-2019

 Lifting of Corporate Veil
 To determine the character of the company i.e. to find out
whether co-enemy or friend
Daimler Co. Ltd. vs. Continental Tyre & Rubber Co., if the public
interest is not likely to be in jeopardy, the Court may not be willing to
crack the corporate shell.
But the veil may be lifted for ascertaining whether a company is an
enemy company.
It is true that, unlike a natural person, a company does not have mind
or conscience; therefore, it cannot be a friend or foe.
It may, however, be characterised as an enemy company, if its affairs
are under the control of people of an enemy country

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 Lifting of Corporate Veil
 To protect revenue/tax:
In certain matters concerning the law of taxes, duties and stamps
particularly where question of the controlling interest is in issue.
Where corporate entity is used to evade or circumvent tax, the
Court can disregard the corporate entity [Juggilal vs.
Commissioner of Income Tax AIR (SC)].
The assessee earned huge income by way of dividends and interest.
So, he opened some companies and purchased their shares in
exchange of his income by way of dividend and interest.
This income was transferred back to assessee by way of loan.
The Court decided that the private companies were a sham and the
corporate veil was lifted to decide the real owner of the income.

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 Lifting of Corporate Veil
 To avoid a legal obligation
Where it was found that the sole purpose for the formation of the
company was to use it as a device to reduce the amount to be paid
by way of bonus to workmen, the Supreme Court upheld the
piercing of the veil to look at the real transaction
(The Workmen Employed in Associated Rubber Industries
Limited, Bhavnagar vs. The Associated Rubber Industries Ltd.,
Bhavnagar and another).

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 Lifting of Corporate Veil
 Formation of subsidiaries to act as agents
A transport company wanted to obtain licences for its vehicles, but
could not do so if applied in its own name.
It, therefore, formed a subsidiary company, and the application for
licence was made in the name of the subsidiary.
The vehicles were to be transferred to the subsidiary company.
Held, the parent and the subsidiary were one commercial unit and
the application for licences was rejected
Merchandise Transport Limited vs. British Transport
Commission (1982),

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

Limitation of number of subsidiaries – CA , 2013

To do away with the evils of complex company structure, shell companies

for diversion of funds or money laundering the CA 2013 limits the
layers of subsidiaries.

(a) Prohibits prescribed holding companies from having layers of

subsidiaries beyond prescribed numbers and

(b) Requires that no investments can be made through more than two
layers of investment companies.

(c ) Allows a company to acquire a company incorporated outside India

with subsidiaries beyond 2 layers as per the local laws of such country;

In computing the number of layers, one layer which consists of one or

more wholly-owned subsidiary or subsidiaries shall not be taken
into account.

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 05/02/2020

 Lifting of Corporate Veil
 Company formed for fraud/improper conduct or to defeat
law:
Where the device of incorporation is adopted for some illegal or
improper purpose, e.g., to defeat or circumvent law, to defraud
creditors or to avoid legal obligations.
[Gilford Motor Co. vs. Horne]

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 Section 25 / 8 Companies ……..
 It is a Company that is  licensed under Section 8 of the Companies Act,
2013 (the Act),
 The main object; For promoting research, social welfare, religion,
charity, commerce, art, science, sports, education, and the protection
of the  environment or any such other object
 The profits, if any, or the other income is applied for promoting only
the objects of the company and Also, No dividend is paid to its
members.
 This  Company is, however, similar to a Trust or Society;

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10- 2019

 Foreign Company [Section 2(42)]
It means any company or body corporate incorporated outside
India which—
(i) has a place of business in India whether by itself or through an
agent, physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner.

Rule 2 (c) of the Companies (Registration of Foreign

Companies) Rules, 2014 defines ‘electronic mode’ as carrying out
electronically based, whether main server is installed in India or
not, including but not limited to-
1. Business to business and business to consumer transactions,
data interchange and other digital supply transactions;

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 Foreign Company [Section 2(42)]
2. offering to accept deposits or inviting deposits or accepting
deposits or subscriptions in securities in India or from citizens of
India;
3. financial settlements, web based marketing, advisory and
transactional services, database services and products, supply
chain management;
4. online services such as telemarketing, telecommuting,
telemedicine, education and information research; and
5. all related data communication services.
These transactions may be conducted by e-mail, mobile devices,
social media, cloud computing, document management, voice or
data transmission or otherwise.

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019

 …….enlighten yourself

JAIPURIA INSTITUTE OF MANAGEMENT STUDIES - NOIDA 18-10-2019