FLAW IN THE LAW (COMPANIES ACT, 2013)

FLAW IN THE LAW (COMPANIES ACT, 2013)

By Cs. Aashish Jain

From a couple of days I was thinking to pen my thoughts and write an article on any provision of the Companies Act, 2013.  But then I felt, I should write something on the problem faced during these days due to negligent provisions/rules/forms “notified issued” under the Companies Act, 2013.

Each one of us were waiting for the provisions of the Companies Act, 2013 (CA, 2013) to get notified. This dream also became a reality on September 12, 2013 when Ministry of Corporate Affairs (“MCA” or “Ministry”) notified 98 Sections of the CA, 2013. However this dream/reality came loaded with lots of difficulties and ambiguities.

Let us discuss on what has happened so far in the order of circulars/notifications issued:

1.      Commencement Notification- September 12, 2013: MCA notified 98 Sections of CA, 2013- dream became reality. Only those provisions were notified which has no reference to the Rules because the same were in the draft stage. Unlike SEBI, MCA does not provide any prior intimation about the provisions which are going to be made applicable.

2.      General Circular No. 15/2013- September 13, 2013: Not even a day would have been settled with 98 provisions coming into effect, next day MCA came out with clarification on four different issues. Well it was good that clarification came sooner as the ambiguities which could have arisen at a later date have been removed at the early stage itself.

These issues could have been avoided if MCA like SEBI provides a date from which the relevant provisions will be made applicable. Eg. Clause 35B and Revised Clause 49 of listing agreement is finalised and available on the website of SEBI on this date but the date of application is October 1, 2014. The stakeholders are given a fair time to understand and apply the law. But that is not the case with MCA.

3.      General Circular No. 16/2013- September 18, 2013: MCA clarified that since some provisions are notified under the CA, 2013,  their corresponding provisions in Companies Act, 1956 (CA, 1956) ceases to have effect from September 12, 2013.

So far,  Ministry has been comparing New Act with Old Act. No attempt has been made to compare old Act with the new Act.  Comparing only new provision with old provisions has created some unwarranted ambiguities. Take a look….

Let me consider two examples which will help you to understand the flaw here:

a)     Section 185 of CA, 2013 has come into effect. Therefore relying on MCA Circular 16/2013, we can safely interpret that Section 295 of CA, 1956 has ceased to have effect.  This happen when we compare new provision with old provision. Now try to compare old provision with new provision. Section 165 of CA, 1956 which talks about Statutory Meeting and Statutory Report. Is Section 165 of CA, 1956 is still into force. Well legally the answer is Yes..!! But logically and intentionally the answer is No…!! Going by the MCA circular only those provision of CA, 1956 will cease to have effect whose corresponding provisions are notified under CA, 2013. But there is no corresponding provision of Section 165 of CA, 1956 in CA, 2013 as the concept itself has been removed. (This question is raised in one Forum)

b)     Now Compare the Old form with the New Form.  Can anyone explain what are the corresponding e-forms for DIN-2 and DIN-3? If those forms were not required to find a place in CA, 2013 then why Section 156 and Section 157 are finding a place in CA, 2013.

Unlike General Circular 15/2013, these ambiguities in the law are yet to be removed. Hope MCA realizes this soon.

4.      Companies (Removal of Difficulties) Order, 2013- September 20, 2013: Ministry by exercising its powers under Section 470 tried to remove the difficulty of Section 24, 58 and Section 59 of CA, 2013.

What were the difficulties in these Sections and what difficulty has arouse? This is because Section 24, 58 and Section 59 were notified but certain power is exercisable by the Tribunal under each of these Sections. Since the Tribunal is not constituted so far,  the difficulty arose on exercise of powers.

Difficulty was removed by making CLB to exercise the power of tribunal until Tribunal is constituted.

But question is not on the removal of difficulty. When NCLT/NCLAT is not constituted, what was the need in notifying these provisions? Similarly Provisions of Chapter Compromises & Arrangement, Winding Up are not notified pending constitution of NCLT/NCLAT; Hence these three sections should have been kept pending.  

This was the point in time when the industry felt that provisions of CA, 2013 has come into effect in haste.

5.      General Circular 19/2013- December 10, 2013: MCA issued clarification on the disclosure requirement of Section 182(3) of CA, 2013. Now you may think what is wrong in this Circular. Well I would say…. Download the circular and read again. If you are not able to find, then read the following:

The Circular makes a reference to Section (24AA) of Income Tax Act, 1961. As on the date of this circular and even today, there is no section called Section (24AA) in place in Income Tax Act, 1961. The Ministry would have probably intended to refer Section 2(22AAA) of Income Tax Act, 1961 which defines the term “electoral trust scheme”.

Is this a clerical error/drafting error? I am not sure about it. But when any circular/notification is issued, utmost care and diligence should have been taken. 

6.      General Circular 20/2013- December 27, 2013: Ministry clarified by its circular that shares held in the fiduciary capacity shall not be counted for determining the holding-subsidiary relationship.

The term subsidiary is defined in Section 2(87) of CA, 2013 corresponding to which is Section 4 of CA, 1956.

Section 4(3) of CA, 1956 excluded certain categories in which despite holding shares, holding-subsidiary relationship shall not be reckoned. Those excluded categories are not contained in Section 2(87) of CA, 2013.

When industry raised the issue, Ministry clarified that shares held in fiduciary capacity {Contained in Section 4(3)(a)of CA, 1956} shall not be counted for reckoning holding subsidiary relationship.

MCA answers to queries only what is raised before it and does not try to analyse anything further. There are other excluded categories which contained in Section 4(3) of CA, 1956 like Section 4(3)(C) & 4(3)(d) which are not clarified so far.

Take an example. Section 4(3)(C) of CA, 1956 states that any shares held for the purpose of securing any issues of debentures shall be disregarded. Since the similar provision is neither contained anywhere in CA, 2013 nor any clarification is issued so far, it will only mean that if any company is holding majority of shares for the purpose of securing any issues of debentures shall be treated as holding company of the other company.

The question here is treating a company as holding company which is holding shares only to secure issue of debenture is fair? Was it not expected from Ministry to analyse further this provision and address other similar issues also?

7.      General Circular No. 3/2014- February 14, 2014: MCA issued clarification on section 185 of CA, 2013. I actually fail to understand the circular itself. 

Take for Example… This circular states that Section 185 of CA, 2013 prohibits any loan from holding to subsidiary company which itself is incorrect. Loan from holding to subsidiary is not at all prohibited unless it attracts the provisions of Clause (d) or (e) to explanation 0f Section 185.

Further there are other major issues with this circular which are not discussed here.

8.      General Circular No. 6/2014- March 3, 2014: MCA issued circular on roll out plan of forms under CA, 2013. What is the flaw of this circular:

Firstly, the circular is not signed.

Secondly the circular states additional fees on forms whose due date falls between 01.04.2014 to 30.04.2014 will be waived. But that has actually not happen. MCA portal has not been adjusted to take care of this circular (Additional fees are levied on forms filed by the stakeholders).

Thirdly, is only additional fees is a concern to the stakeholders? I don’t think so. Many e-form 1A for name availability were filed under CA, 1956 whose incorporation documents could not be filed as MCA portal was not available for one month period. Result has happen the SRN of those e-form 1A lapsed without any fault of the stakeholders. MCA has not taken any steps so far to address this issue.

9.  General Circular No. 8/2014- April 4, 2014: MCA clarified that financial statement/board’s report/auditor’s report for the financial year 2013-14 will be as per CA, 1956.

We do not know what happen to the compliance certificate and annual return?  Are they not annual filing forms/documents? Then why there is no reference in the circular about these?

Industry is still not clear despite the issue of this circular that whether annual return has to be in the format of CA, 2013 or CA, 1956.

Whether compliance certificate is required for financial year 2013-14?

Don’t you think that these questions should have been answered with the issue of this circular?

10.  General Circular No. 9/2014- April 25, 2014: MCA issued circular on availability of various forms under CA, 2013. So far 46 to 52 forms have been made available. These forms were made available from April 28, 2014.

Since till date we have already seen the style in which circulars/notifications were issued, it is actually not shocking for us if I say that within 14 to 15 days, out of 46 to 52 forms, 25 forms has been already revised.

Despite so many revisions in the forms, difficulties/defects from the forms have not been removed.

To consider some examples….

·        In case of resignation of director, both DIR-11 and DIR-12 is required to be filed. But this has been absorbed that when DIR-11 is filed, stakeholders are not able to file DIR-12 or vice versa.

·        Charge forms could not been signed; Company name is not prefilled on entering of CIN; Signature is not removed when form is modified.

11.   General Circular No. 10/2014- May 5, 2014:  Initially pre certification of forms itself was removed. Then on protest of ICSI members/students pre-certification was restored.

As per ICSI statistics, nearly 70% of the companies are outside pre certification purview. For the 30% of companies, MCA has issued this circular clarifying on practicing professional has to be very careful while certifying the forms.

Further you may refer para 3 of the circular which states that on wrong certification “QUICK” inquiry to be made against certifying professional and 15 days notice to be issued to them.

Why Ministry is not seeing the blunder which has been committed by it so far. No QUICK inquiry against MCA…???

 

12.  Two more removal of difficulties order (u/s 2(76) and 92) were issued which were neither dated nor signed. These were issued long back. However removal of difficulty u/s 92 is made available as on April 29, 2014 in gazette. Gazetted copy of removal of difficulty u/s 2(76) is so far not available.

13.  ICSI members/student organised protest/hunger strike against the rules… Why was such protest organized? Rules invited for public comments were entirely different from Rules notified. Question is then why the rules where invited for comments at all when they were not intended to be notified.

14.  Cost accountancy profession has been put at stake. They also organized protest.

15.  There are problems not only with the circulars/clarifications/notifications but also with the CA, 2013 itself. Many places there exist ambiguity in understanding the Act.

16.  Finally see the funniest part:

Final Rules issued by MCA were not signed.

Many of you would have observed that draft rules were changed and updated and placed on MCA website without any notice. Stakeholders are not sure whether they have the final copy of the draft rules or not.

Leave the draft rules, Final Rules issued were changed when gazetted. (See dividend rules). So there is a difference between final rules and notified rules.

Leave the changes in the Rules, for few of the Rules Gazetted copies itself are not available. (Bombay High Court has already vide its Judgment in the matter of scheme of arrangement of Wadala Commodities Limited and Godrej Industries Limited stated that gazetted copies of MCA Rules are not available. Even courts do not have gazette copies of Rules… And in the opinion of the court they are not binding and final until Rules are gazetted.)

I know you would not have enjoyed the article because this was not meant for enjoyment but to show the reality. I would like to conclude by saying that these are only few observations which have come to light so far.

Still we have a long way to go…….

The Views expressed in the article are that of the Author. The Author is a Company Secretary and can be reached at cs.aashishjain@live.com