Confusion over new Companies Act may stymie corporate asset sales

Ashish Sinha Posted online: Wednesday, Sep 18, 2013 at 0000 hrs
New Delhi : The notification of 98 Sections of the new Companies Act, 2013 on September 12 has left India Inc worried as in case of many past activities, such as sale of certain assets, it is unclear whether the new provisions would apply. As per the new norm, it is mandatory for every company — including the private ones — to pass a special resolution (get approval from 75% shareholders) if it wants to sell, lease or dispose of any undertakings in which its investments exceed 20% of its net worth.

Under the corresponding provision in the Companies Act, 1956, private companies were exempt from the requirement of a special resolution in such cases and an ordinary resolution sufficed.

Company secretaries and corporate lawyers who have already been working on sale/lease cases are at sea as to whether to redo the whole process. Worse, there is also confusion over whether the old provisions have indeed ceased to apply because Section 465 of the new Act, which deals with repeal and saving, has not been notified.

Basically, an expert now has to refer to two sets of laws, Companies Act, 1956 and Companies Act, 2013, simultaneously. Experts have called for further clarifications from the government and leniency as companies move from Companies Act, 1956 to the new Companies Act, 2013.

Section 180 of the Companies Act, 2013 (restriction on the powers of the board) is now applicable to every company whereas the corresponding Section 293 of the Companies Act, 1956 was not applicable to private companies.

"One of our clients, a private company, had taken the board’s approval as per the 1956 Act for selling an undertaking before September 12. But the deal is yet to be executed. Now, the confusion is whether to go back and get a new approval via special resolution or will the boards approval will do. There is confusion for sure," said a senior corporate lawyer.

As a result, the entire 1956 Act continues to remain in full force and effect along with the 98 Sections of the new Act. "Hence, the notification of a few sections has created confusion, which could have been avoided," said Lalit Kumar, partner in law firm J Sagar Associates.

"The hurried manner in which the Sections were notified recently has posed some transitory challenges and practical problems. An official clarification in a gazette clarifying this would have been helpful," Kumar said.

There is also confusion among companies with regard to Sections 379, 382, and 383, dealing with the operations of a foreign company in India, which have been notified. These provisions require foreign companies in India to furnish incorporation papers among others to the Registrar of Companies, display their names indicating country of origin, etc. But the definition of a foreign company as per the new Act is yet to be notified, leaving problems of interpretation between the old and new law. Similarly, the Section on fraud is notified, but several provisions where fraud is mentioned are yet to be notified.

Besides, a number of exemptions granted to private companies under the Companies Act, 1956 have been removed overnight, experts said. For example, the old Companies Act allows for loans/advances to directors or directors of holding companies. However, Section 185 of new law not only prohibits that, but violations attract penalty of R5-25 lakh and imprisonment up to six months.

In order to dispel some of this confusion, the corporate affairs ministry has said the Registrar of Companies will register memorandum and articles of association of companies under the Companies Act, 1956 that were received till September 11. Thereafter, the new law will come into effect. Similarly, all notices for general meetings happening after September 12 will have to comply with the new provisions.

When contacted, a senior official in the corporate affairs ministry said the government will cooperate with the legitimate transition problems of companies. "But companies need to realise that the new Act is now in place and they should try and align themselves with the new laws at the earliest," the official said. The corporate affairs ministry has already initiated the feedback process on the rules pertaining to over 340 Sections in the new Act. Once incorporated, the Companies Act, 2013 will be enforced replacing the old law.

Orderly mayhem

* As per the new norm, it is mandatory for every company to pass a special resolution (get approval from 75% shareholders) if it wants to sell, lease or dispose of any undertakings in which its investments exceed 20% of its net worth. Under the corresponding provision in the Companies Act, 1956, private companies were exempt from the requirement — an ordinary resolution sufficed

* Section 180 of the Companies Act, 2013 (restriction on the powers of the board) is now applicable to every company whereas the corresponding Section 293 of the Companies Act, 1956 was not applicable to private companies

* The definition of a foreign company as per the new Act is yet to be notified, leaving problems of interpretation between the old and the new law. Similarly, the Section on fraud is notified, but several provisions are yet to be notified

* In fact, the entire 1956 Act continues to remain in full force and effect along with 98 Sections of the new Act