Unit 3: The Companies Act and related regulation

Section 2(20), Companies Act, 2013: a company means a company incorporated under this Act or under any previous company law. In the words of Lord Justice Lindley, a company is an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose.

Companies named in the syllabus

• Small companies enjoy relaxations: no cash-flow statement required, fewer board meetings (two a year), lower fees and penalties.
• Section 8 company: formed to promote commerce, art, science, sports, education, charity; profits applied to objects, no dividend.

• SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) is an integrated web form on the MCA portal offering 10+ services in one application.
• Certificate of incorporation is conclusive evidence that all requirements have been complied with (Section 7(7) allows action if obtained by fraud).
• Commencement of business: a company with share capital must file a declaration (INC-20A) within 180 days that subscribers have paid for shares (Section 10A).
• Registered office must be established within 30 days and verified (Section 12).

The MOA is the charter of the company — it defines its constitution and the scope of its powers. Defined in Section 2(56); contents in Section 4.

Form

• Must be in the form given in Tables A to E of Schedule I (Table A — company limited by shares; B — limited by guarantee without share capital; C — guarantee with share capital; D — unlimited without share capital; E — unlimited with share capital).

Contents (clauses)

Alteration of MOA (Section 13)

Doctrine of constructive notice and indoor management

• Constructive notice: the MOA and AOA are public documents, so every outsider is deemed to know their contents.
• Indoor management (Turquand's rule): outsiders dealing with the company in good faith are entitled to assume that internal procedures have been properly followed — Royal British Bank v. Turquand (1856).
• Exceptions to indoor management: knowledge of irregularity, negligence (failure to inquire when suspicious), forgery (Ruben v. Great Fingall Consolidated, 1906), acts outside apparent authority.

Section 2(70): a prospectus is any document described or issued as a prospectus, including a red herring prospectus, shelf prospectus, or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of securities.

Types

Statutory requirements

• Must be dated and the date deemed the date of publication.
• Filed with the Registrar before issue, signed by every director or proposed director.
• Contents as per Section 26 and SEBI (ICDR) Regulations, 2018: company details, objects of the issue, capital structure, risk factors, financial information, management, legal proceedings, expert reports, minimum subscription.
• Must be issued within 90 days of filing with the ROC.
• Experts' consent required for their statements.

Liability for misstatement

• Civil liability (Section 35): directors, promoters, experts liable to compensate investors for loss.
• Criminal liability (Section 34): punishable as fraud under Section 447.
• Defences: withdrawal of consent before issue, issue without knowledge, reasonable belief in truth, statement by an expert.
• Golden rule of framing a prospectus (New Brunswick and Canada Railway Co. v. Muggeridge): the truth, the whole truth and nothing but the truth.

• Number: public 3, private 2, OPC 1; maximum 15; one resident director; woman director and independent directors as prescribed; DIN compulsory.
• Appointment: by shareholders in general meeting; additional, alternate and casual-vacancy directors by the board; retirement by rotation (one-third of rotational directors of a public company at each AGM).
• Disqualifications (Section 164): unsound mind, undischarged insolvent, conviction with 6 months' imprisonment, non-payment of calls, default in filing returns for 3 years.
• Duties (Section 166): act per articles; in good faith for members, employees, community and environment; due care and independent judgement; avoid conflicts; no undue gain; no assignment of office.
• Removal (Section 169): ordinary resolution after special notice and hearing.

• Replaced FERA, 1973; came into force on 1 June 2000; objective — facilitate external trade and payments and promote orderly development of the forex market.

• Key provisions: current account transactions are free (except those restricted by the Central Government — Schedule I, II, III); capital account transactions regulated by RBI (FDI, ECB, investments abroad); authorised persons (banks, money changers); Liberalised Remittance Scheme (US$ 2,50,000 per year); penalties up to three times the amount involved; compounding of contraventions.

Replaced the MRTP Act, 1969; the Competition Commission of India (CCI) became functional in 2009.

• Penalties: up to 10% of average turnover (now global turnover for abuse cases under the 2023 amendment); for cartels up to three times profit or 10% of turnover.
• Appeals: to the NCLAT (since 2017) and then the Supreme Court.
• 2023 amendments: settlement and commitment mechanisms, leniency plus, deal value threshold.