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SEMINAR ON COMPANY LAW ORGANISED BY DTPA STUDY CIRCLE, ICAI

SEMINAR ON COMPANY LAW ORGANISED BY DTPA STUDY CIRCLE, ICAI. 22/04/14. COMPANIES ACT, 2013 SOME SELECTED TOPICS. CA. NITESH MORE. Companies Act, 1956 Companies Act, 2013. It has 658 Sections, Rules & 15 Schedules It was introduced on 1st April, 1956

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SEMINAR ON COMPANY LAW ORGANISED BY DTPA STUDY CIRCLE, ICAI

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  1. SEMINARON COMPANY LAWORGANISED BYDTPA STUDY CIRCLE, ICAI 22/04/14

  2. COMPANIES ACT, 2013SOME SELECTED TOPICS CA. NITESH MORE

  3. Companies Act, 1956Companies Act, 2013 • It has 658 Sections, Rules & 15 Schedules • It was introduced on 1st April, 1956 • It extends to the whole of India (except Sikkim- it has its own Companies Act) • The Act has 470 Sections(309 pages), 29 chapters, 7 Schedules & 29 rules(338 pages) • 98Sections has been notified w.e.f. 12th September, 2013 & 282 sec. has been notified w.e.f. 1st April, 2014. • It applies to the whole of India

  4. Relevant provisions • SEC 185 • SEC 186 • CHAPTER V & ITS RULES: SEC 73 TO SEC 76 &

  5. Sec 185: An Anti-business sec NO LOAN / SECURITY / GUARANTEE TO DIRECTORS &other PERSONS IN WHOM DIRECTOR IS INTERESTED • No company can directly or “indirectly” advanceloan to its “directors” or to“other persons in whom directors are interested”. • No company can give anyguaranteeor provide any securityin connection with any loan taken by him or such other person. • Company can’t give loan represented by a book debt to above mentioned person”.

  6. Meaning of the word ‘Indirect’ The word ‘indirect’ used means that the co does not give a loan to director through the agency of one or more intermediaries. The word ‘indirect’ cannot be read as converting what is not a loan into a loan. [Dr. FredieArdeshir Mehta V Union of India (1991) 70 Comp Cas 210]

  7. Planning • ConvertLender co & borrower co toLLPor • Convert other co (to whom loan is given) to public Ltd to enjoy 25% limit or • Rearrange shareholding pattern & directorship pattern: a)Appointnew directors in lender Co, who personally neither hold any share in other co nor are directors in other co. If their relatives holds shares or are directors than there is no problem or b) Gift of shares

  8. MEANING OF “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED” • (a) INDIVIDUAL:Director of  lending co., or holding co. or any partner or relative of any “such director”; (b)FIRM:in which any such directoror relative is a partner;(c) PVT LTD CO:of which such directoris a director or member; • [Note- Relative of Director are not covered under this sub clause]

  9. MEANING OF “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED” • (d) BODY CORPORATEat a general meeting of which at least25 %of voting power may be exercised or “controlled” by such director, or by two or more such directors, together; or[Note - Relative of Director also not covered under this sub-clause] • (e)BODY CORPORATEBoard, MD or manager, whereof is accustomed to act in accordance with directions or instructions of Board, or of any director or directors, of lending company.

  10. Planning • ConvertLender co toLLPor • Convert other co (to whom loan is given) to public Ltd to enjoy 25% limit or • Rearrange shareholding pattern & directorship pattern: a)Appointnew directors in lender Co, who personally neither hold any share in other co nor are directors in other co. If their relatives holds shares or are directors than there is no problem or b) Gift of shares

  11. How to rearrange shareholding & Directorship pattern? Suppose A,B,C,D are 4 members in a family. They have 2 Cos: A Pvt Ltd & C Pvt Ltd. i) We can appoint A& B as directors of A PvtLtd. & gift all shares in name of C & D in A Pvt Ltd to A & B. ii) We can appoint C& D as directors of C PvtLtd & gift all shares in name of A & B in C Pvt Ltd to C & D.

  12. MEANING OF “CONTROL” [Sec. 2(g)] "Control" has been defined as to include the right toappoint majority of the directors or to control the management or policy decisionsexercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

  13. EXCEPTIONS • MD/WTD- The giving of any loan to a Managing or Whole-time director- (i) as a part of the conditions of service extended by the company to all its employees; or • Pursuant to any schemeapproved by the members by a special resolution; b) ORDINARY COURSE - A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank ratedeclared by RBI.

  14. Ordinary Course of Lending: TWO TEST(MY VIEW) : • If the company is engaged in lending activities regularity & • Lend not only to directors/directors’ entities but also to“arms’ length parties/unrelated parties” Question: “All NBFC” engaged in lending activities in “ORDINARY COURSE”? Ans: May not be

  15. DEFINITION OF LOAN Loan has not been defined under Co Act. Any transaction of giving money to be returned in money with or without interest can be treated as “loan”.  Group companies usually give guaranteeor provide securities for loan taken by other group company. Q: Should we stop doing this also? Ans: Depend on shareholding & directorship pattern.

  16. ADVANCE NOT COVERED BY SEC 185 • Normally an advance is not repayable as an advance • It usually conveys an idea of a prepayment, that is, paying something in advance before it is actually due.

  17. IMPRISONMENT & FINE UPTO 25 LAKHS • Lender Company– Fine Rs. 5 lakhs toRs. 25 lakhs & • Receiver: Director or other personto whom any loan is advanced or guarantee or security is given -Imprisonmentupto6 months or fineRs. 5 lakhs to Rs. 25 Lakhs, or both.

  18. Guarantee covered, not letter of comfort • In case of Guarantee, guarantor undertakes the liability of principal debtor, whereas • In case of letter of Comfort, intention is to give introduction of debtor, without undertaking the liability of principal debtor

  19. LOAN existing on 12 sep: Repayon due dates • Existing loan/guarantee/security provided before 12th Sep, 2013 isnot affectedby above provisions.However, it should not be renewed & should be repaid on due date. • “Loan repayable on demand”shouldbe repaid on demand. • “Loan repayable after fixed period”should be repaid on expiry of Fixed period.

  20. LOAN given after 11th Sept. • If any loan had already been given after 11th sep., there is contravention. • However, if share application money/ advancefor property/purchase of goods/ services etc. is given than there is no contravention.

  21. LOAN given to group companies • Afamilyhastwo Pvt Ltd Companies. One Co has surplus fund , which they require in other. • Can they transfer surplus fund to other as loan? • Ans: Depend on shareholding & directorship patter

  22. LOAN given by subsidiary to holding co. & Vice versa • Assuming that directors (& “persons in whom directors are interested”)of subsidiary co. does not hold any shares in holding co, Sec. 185 is not attracted. • Q: Can a subsidiary give loan to its holding? • Ans: Depend on shareholding pattern & directorship patter of both company.

  23. LOAN/security/guarantee given by holding to subsidiary co. & vice versa MAY NOT COVERED IN • Clause (a) (as applicable for individual) or • Clause (b) (as applicable for Firm), • Clause (c) (for PvtLtdco.,only if directoris a director or member), • Clause (d) (only if the director either by himself or two or more such directors hold 25% or more of total voting power in the borrowing company, • Clause (e) (only if borrowing company /its Board/Directors are accustomed to act as per the Directors of the board/Directors of the lending company • To attract Sec. 185, any interest of director (or other person) in his “personal capacity(not holding as nominee of company)” is relevant. Interest of holding co. in subsidiary is not relevant. Cont………..

  24. Rule 10 of chapter XII: Whether Valid? (1) Any loan made by a holding co to its wholly owned subsidiary coor any guarantee given or security provided by a holding co in respect of any loan made to its wholly owned subsidiary co is exempted from the requirements under this section; and

  25. Example If H ltd gives loan to its 100% subsidiary S Ltd, it is exempted from application of sec 185 provided fund is used for principal business purpose.

  26. Rule 10 of chapter XII: Whether Valid? (2) Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company is exempted from the requirements under this section: Provided that such loans made under sub-rule (1) and (2) are utilisedby the subsidiary company for its principle business activities.

  27. PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP • LLP is not a company, hence limitof auditof 20company will not be applicable. • As Companies Act will not be applicable, you can transfer fundfrom one LLP to another group LLP. • Many of exemptionwhich Pvt Ltd company enjoy under old Companies Act has been withdrawn, which are not applicable to LLP. • Compliancesunder new companies Act for Pvt Ltd Companies has been substantially increased, which are not applicable for LLPs. Cont…

  28. PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP 5) There is heavy penalty for non compliances under New Company Act. Penalty of Rs 50,000 is a small amount for a single violation. 6) Cost benefit analysis suggests that these should be converted into LLP. 7) However, as per Sec 47(xiiib) of Income tax Act,for tax neutrality of such conversion , turnover of Pvt Ltd company  in any of last 3 years must not exceeds 60 lakhs. So, if turnover exceeds 60 lakhs than such conversion will be subject to income tax.

  29. SHOULD PRIVATE LTD COMPANIES BE CONVERTED INTO PUBLIC LTD COMPANIES ?? • Clause (d) is not applicable to a companyat a general meeting of which less than 25% of the total voting power of Body corporate may be exercised or controlled by any such director, or by two or more such directors, together • We can plan accordingly and take benefit. • So, we can convert our existing Pvt Ltd companies to public Ltd companies and take benefits.

  30. LOAN AND INVESTMENT BY A COMPANY(sec 186) • According to section 186 without prejudice of the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies; Provided that provisions of this sub-section shall not affect: • A company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country; • A subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

  31. LOAN AND INVESTMENT BY A COMPANY(sec 186) • No companyshall directly or indirectly- • give any loan to any person or other body corporate; • give any guarantee or provide security in connection with a loan to any other body corporate or person; and • acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

  32. LOAN AND INVESTMENT BY A COMPANY(sec 186) exceeding 60% of its paid-up share capital, free reserve and securities premium account or 100% of its free reserves and securities premium account, whichever is more. • Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolutionpassed at a GM shall be necessary.

  33. DEFINITION OF “DEPOSIT” [Sec. 2(31)] UNDER CO Act, 2013 • “Deposit” includes: • any receipt of money by way of deposit or loan or in any other form by a company, • but does not include: • such categories of amount as may be prescribed in consultation with the Reserve Bank of India

  34. DEFINITION OF “DEPOSIT” UNDER deposit Rules, 2014 • “deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include – any amount received by a company from any other company any amount received from a person who, at the time of the receipt of the amount, was a directorof the company

  35. DEFINITION OF “DEPOSIT” UNDER CO Act, 1956[Expl. to Sec. 58A] • “Deposit" means any deposit of money with, and includes • any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

  36. DEFINITION OF “DEPOSIT” UNDER Companies (Acceptance of Deposits) Rules, 1975 • "deposit" means any deposit of money with, and includes any amount borrowed by, a company, but does not include- • any amount received by a Company from any other Company. • any amount received by a private company from a person who, at the time of the receipt of the amount, was a director, relative of director or member

  37. SEC 73:Prohibition on acceptance of deposits from public (Similar to Section 58A of The Companies Act, 1956) • 1) Co., except Banks, NBFC and other specified companies(Public co:100/500cr), shall not invite, accept or renew deposits from public.2) Co. may, by resolution in GM and subject to prescribed rules & conditions accept deposits from members. • 3) If co. does not secure deposits then, the deposits shall be termed as “unsecured deposits” and shall be quoted all document related to invitation or acceptance of deposits.

  38. SEC 73: Prohibition on acceptance of deposits from public (Similar to Section 58A of The Companies Act, 1956) • 4) Deposits accepted shall be repaid with interest. • 5) If co. fails to repay, depositor may apply to Tribunal for an order directing co. to pay sum due or loss incurred. • 6) The deposit repayment reserve a/c shall only be used for repayment of deposits

  39. SEC 74: Repayment of deposits, etc. accepted before commencement of this Act (New Provision) • If deposit or any interest remains unpaid on commencement of this Act, co. shall file, within 3 months, with ROC a statement(Form DPT-4) of all deposits accepted & sums remaining unpaid and repay the dues within 1 year or due date, whichever is earlier. • Tribunal may, on application made by co., allow further time to repay the deposit.

  40. SEC 74: Repayment of deposits, etc. accepted before commencement of this Act (New Provision) Penalty A) Company – shall pay deposit and interest along with fine Rs. 1 croreto Rs. 10 crores & B) Officer in default - Imprisonment upto 7 years or fine Rs. 25 Lakhsto Rs. 2 Crores, or both

  41. SEC 76: Acceptance of deposits from public by certain Companies • This new clause provides that a public company having specified net worth or turnover may accept deposits from persons other than its members subject to compliance with Sec 73(2), rules and credit rating.

  42. Definition of Eligible co : Chapter V Rule • “eligible company” means a public company as referred to in sub-section (1) of section 76, having a net worth of not less than 100 crorerupees or a turnover of not less than 500 crore rupees and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies before making any invitation to the Public for acceptance of deposits: • Provided that an eligible company, which is accepting deposits within the limits specified under clause (c) of sub-section (1) of section 180, may accept deposits by means of an ordinary resolution;

  43. Deposit Rules, 2014 • No company referred to in sub-section (2) of section 73 and no eligible company shall accept or renew any deposit, which is repayable on demand or upon receiving a notice within a period of less than six months or more than thirty-six months from the date of acceptance or renewal of such deposit

  44. REPORTING OF FRAUD TO CG [Sec. 143 (12)] If an auditor of a company, • in the course of the performance of his duties as auditor, • hasreason to believe that an offence involving fraud is being or has been committed against the company • by officers or employees of the company, he shall report the matter to the CG • Immediately or within prescribed time & manner.

  45. NO DUTY OF CONFIDENTIALITY UNDER THE CA ACT. [SEC. 143(13)] • No duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the CA Act, 1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith.

  46. APPLICABLE TO COST & SECRETARIAL AUDITORS (SEC. 143(14) • Section 143(14) extends obligation cast by section 143 mutatis mutandis to: Cost Auditors appointed u/s 148 & Secretarial Auditors appointed u/s 204.

  47. PENALTY FOR NOT-REPORTING OF FRAUD • Fine Rs. 1,00,000/- to Rs.25,00,000/- [Sec. 143 (15)].

  48. REPORTING OF MATERIAL FRAUD [DRAFT RULES 10.10(1)] • For the purpose of Sec.143(12), in case: • the auditor has sufficient reason and information to believe that anoffence involving fraud, is being or has been committed against the company by officers or employees of the company, such fraud is likely to materially affectthe company, he shall report the matter to CG within 30 days.

  49. REPORT TO AUDIT COMMITTEE/ BOARD ALSO IN PRESCRIBED FORM [DRAFT RULES 10.10(1)] • Report shall be in the form of a statement as given in Form No. 10.3: • Report to be sent immediately but not later than 30 daysof his knowledge or information, with a copy, • to the audit committeeor • in case the company has not constituted an audit committee, to theBoard.

  50. MEANING OF MATERIALITY[DRAFT RULES 10.10(2)] • Fraud(s) that is or are happeningfrequently; or • Fraud(s) where the amount involved or likely to be involved is not less than: • 5% of net profit or • 2 % of turnoverof the company for the preceding FY.

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