Company Law in India (Companies Act, 2013) - Fighting against Crime & Corruption

1. Formation of Companies

1.1 History of Company Legislation in India

The evolution of company law in India has been significantly influenced by English laws. Some key milestones include:

Companies Act, 1850 – The first company legislation in India, based on British laws, which introduced joint-stock companies.
Companies Act, 1913 – Modeled on the British Companies Act, 1908, this act provided for incorporation, management, and winding-up processes.
Companies Act, 1956 – A comprehensive legislation governing all aspects of companies.
Companies Act, 2013 – The latest act that introduced major reforms such as Corporate Social Responsibility (CSR), better governance mechanisms, and the National Company Law Tribunal (NCLT).

1.2 Meaning and Nature of a Company

A company is a legal entity separate from its owners, providing benefits such as limited liability, perpetual succession, and ease of capital raising. However, disadvantages include strict legal compliance and lesser flexibility compared to sole proprietorships and partnerships.

1.3 Kinds of Companies

Private Company: Limited to 200 members; shares are not freely transferable.
Public Company: No limit on members; shares can be publicly traded.
One Person Company (OPC): Owned by a single person; limited liability applies.
Government Company: More than 50% shareholding by the government.
Foreign Company: Registered outside India but operating in India.
Section 8 Company: Formed for charitable purposes.

1.4 Corporate Personality and Lifting the Corporate Veil

The doctrine of corporate personality ensures that a company is a separate legal entity. However, courts may lift the corporate veil to identify fraudulent activities.

Case: Salomon v. Salomon & Co. (1897) – Confirmed corporate personality doctrine.
Case: Delhi Development Authority v. Skipper Construction (1996) – Corporate veil lifted to prevent fraud.

1.5 Promotion of Companies

Promoters initiate company formation. Pre-incorporation contracts are those signed before company registration and become binding only if ratified after incorporation.

1.6 Memorandum and Articles of Association

Memorandum of Association (MoA): Defines company’s objectives and scope.
Articles of Association (AoA): Internal governance rules.
Doctrine of Ultra Vires: Any action beyond MoA is invalid.
Doctrine of Indoor Management: Protects outsiders dealing with the company.
Case: Ashbury Railway Carriage v. Riche (1875) – Established the doctrine of ultra vires.
Case: Royal British Bank v. Turquand (1856) – Defined doctrine of indoor management.

1.7 Prospectus and Statement in Lieu of Prospectus

A prospectus is issued by public companies inviting investment. It must be truthful, and misleading statements can lead to liability.

1.8 Membership of a Company

Membership is acquired through shareholding. Termination occurs via share transfer, forfeiture, or death.

2. Corporate Capital

2.1 Share and Share Capital

Shares represent ownership. Types include equity shares (voting rights) and preference shares (fixed dividends, limited voting rights).

2.2 Issuance and Allotment of Shares

Shares are issued through public offers or private placements, regulated by SEBI.

2.3 Alteration of Share Capital

Increase in Share Capital: Requires shareholder approval.
Reduction of Share Capital: Needs NCLT approval to safeguard creditors.
Pre-emptive Rights: Existing shareholders get priority in purchasing new shares.
Case: British and American Trustee v. Couper (1894) – Upheld shareholder rights in capital reduction cases.

3. Company Management and Administration

3.1 Company Organs

Board of Directors (BoD): Decision-making body.
General Meeting: Key decisions are approved by shareholders.
Managing Director (MD): Handles day-to-day operations.

3.2 Company Meetings and Resolutions

Meetings include AGM (Annual General Meeting), EGM (Extraordinary General Meeting), and Board Meetings. Resolutions can be ordinary or special.

3.3 Directors and Managing Director

Directors owe fiduciary duties to the company and shareholders.

3.4 Oppression and Mismanagement

Minority shareholders can seek protection under Sections 241-242 of the Companies Act, 2013.

Case: Tata Sons v. Cyrus Mistry (2021) – NCLT ruled in favor of Tata Sons regarding director removal.

3.5 Investigation into Company Affairs

SFIO and other government agencies investigate fraud and mismanagement.

Case: Satyam Scandal (2009) – Led to criminal prosecution of promoters.

3.6 Reconstruction and Amalgamation

Mergers and restructurings require NCLT approval.

Case: Vodafone-Idea Merger (2018) – NCLT approved to strengthen the telecom business.

3.7 National Company Law Tribunal (NCLT)

NCLT adjudicates disputes related to company law, including mergers, insolvency, and shareholder grievances.

4. Winding Up of a Company

4.1 Modes of Winding Up

Compulsory Winding Up: Ordered by NCLT due to insolvency, fraud, or mismanagement.
Voluntary Winding Up: Initiated by shareholders when a company ceases operations.
Liquidation under IBC, 2016: A time-bound resolution process for insolvent companies.

4.2 Compulsory Winding Up

Triggered when a company is unable to pay debts, engages in fraudulent activities, or violates the law.

Case: Kingfisher Airlines (2016) – NCLT ordered winding up due to financial default.

4.3 Voluntary Winding Up

Can be initiated by:

Members’ Voluntary Winding Up: For solvent companies.
Creditors’ Voluntary Winding Up: When the company cannot pay debts.

4.4 Official Liquidator and Liquidator

Official Liquidator: Appointed by NCLT to oversee liquidation.
Powers: Realizes assets, pays creditors, distributes funds to shareholders.

4.5 Landmark Case on Winding Up

Case: Reliance Communications Insolvency (2019) – NCLT initiated liquidation due to financial defaults.

Detailed Explanation of the Companies Act, 2013

The Companies Act, 2013 is the primary legislation in India that governs the incorporation, regulation, and dissolution of companies. It replaced the Companies Act, 1956 and was enacted to improve corporate governance, enhance compliance, and make doing business in India easier.

1. Objectives of the Companies Act, 2013

The key objectives of the Act include:

Enhancing corporate governance by making boards more accountable.
Protecting investor interests by ensuring better transparency and disclosure.
Improving ease of doing business through simpler compliance procedures.
Encouraging corporate social responsibility (CSR).
Introducing stricter enforcement against fraud and mismanagement.

2. Key Features of the Companies Act, 2013

A. Types of Companies Recognized

The Act recognizes several types of companies:

Private Limited Company – Requires at least 2 directors and 2 shareholders, restricts share transfers, and has a limited liability structure.
Public Limited Company – Requires at least 3 directors and 7 shareholders, allows shares to be freely traded on stock exchanges.
One Person Company (OPC) – Introduced in the 2013 Act, it allows a single individual to register a company with limited liability.
Section 8 Company – A non-profit company that works for charitable purposes.
Producer Company – A company formed by farmers or producers to collectively work in their industry.

B. Key Provisions and Changes

1. Incorporation of Companies

The process of company registration has been simplified with SPICe+ (Simplified Proforma for Incorporating Company Electronically).
Digital signatures (DSC) and Director Identification Numbers (DIN) are required.
Companies must have a registered office address within 30 days of incorporation.

2. Corporate Governance

Independent Directors: Listed and certain other large companies must have independent directors to ensure unbiased decision-making.
Board Committees: Companies must establish committees such as the Audit Committee, Nomination and Remuneration Committee, and Stakeholders Relationship Committee.
Annual General Meetings (AGMs): Companies must hold AGMs to present their financial statements and approve important decisions.
Director’s Duties: Directors must act in good faith and in the best interest of shareholders.

3. Financial Reporting & Audits

Mandatory Audits: Companies must get their financial statements audited by a Chartered Accountant.
Rotation of Auditors: To prevent conflict of interest, listed companies must rotate their auditors every 5 years (for individuals) or 10 years (for firms).
Internal Audit: Certain companies are required to have an internal audit system.

4. Corporate Social Responsibility (CSR)

Companies with a net worth of ₹500 crore, turnover of ₹1,000 crore, or net profit of ₹5 crore must spend 2% of their average net profits on CSR activities.
CSR activities include education, poverty alleviation, gender equality, environmental sustainability, etc.

5. Share Capital & Securities

Companies can issue equity shares, preference shares, debentures, and bonds.
Public companies can issue shares through Initial Public Offerings (IPOs).
Buyback of shares is allowed under specific conditions.

6. Mergers, Amalgamations, and Takeovers

Fast-track mergers are available for small companies and startups.
Companies need approval from the National Company Law Tribunal (NCLT) for major mergers and acquisitions.
Takeover rules prevent hostile takeovers and protect minority shareholders.

7. Insolvency & Winding Up

The Insolvency and Bankruptcy Code (IBC), 2016 governs the resolution of companies in financial distress.
Companies can be voluntarily wound up or compulsorily liquidated by the NCLT if they fail to meet their obligations.

8. Fraud, Penalties, and Compliance

The Act defines corporate fraud and prescribes strict penalties, including imprisonment.
Serious Fraud Investigation Office (SFIO) is authorized to investigate fraud cases.
Companies that fail to comply with regulations face heavy penalties and director disqualification.

3. Important Amendments to the Companies Act, 2013

Several amendments have been made to make compliance easier and improve governance:

Companies (Amendment) Act, 2015

Removed the requirement of a minimum paid-up capital for private and public companies.
Simplified company incorporation procedures.

Companies (Amendment) Act, 2017

Allowed relaxation in private placement of shares.
Increased penalties for non-compliance.

Companies (Amendment) Act, 2019

Strengthened enforcement against corporate fraud.
Decriminalized minor offenses to reduce the burden on courts.

Companies (Amendment) Act, 2020

Enabled companies to conduct AGMs and Board Meetings via video conferencing.
Simplified compliance for small and startup companies.

4. Impact of the Companies Act, 2013

Boosted investor confidence by ensuring transparency.
Encouraged startups with the concept of One Person Company (OPC).
Improved corporate responsibility through mandatory CSR.
Strengthened legal framework to curb fraud and mismanagement.

5. Conclusion

The Companies Act, 2013 is a modern and comprehensive law that aligns India’s corporate regulations with global standards. It promotes corporate governance, transparency, and investor protection, while also making compliance easier for small businesses and startups. With regular amendments, the Act continues to evolve to suit the dynamic business environment.