Companies Act: Proposals to improve governance rules

By Manoj Kumar, Hammurabi & Solomon
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Following the recent Companies Amendment Ordinance, 2018, in effect from 2 November 2018, the government of India now plans to bring further amendments to the Companies Act, 2013. The proposed changes considered to be urgent in nature and needed to strengthen the corporate governance and enforcement framework in India, are as follows:

Manoj KumarFounder and managing partnerHammurabi & Solomon
Manoj Kumar
Founder and managing partner
Hammurabi & Solomon

Resignation of independent directors: It proposes to increase the oversight by the Registrar of Companies around the circumstances and the reasons for resignations of independent directors by requiring them to forward a copy of their resignation letters to the registrar within seven days, and also giving detailed reasons for it. Further, the resignation would only become effective after 30 days from the date of receipt of the notice or any other later date as mentioned in the notice.

Removal of independent directors: In February 2018, the government had amended section 169 of the act to provide that in the case of removal of independent directors, who are reappointed under section 149(10), a company would need to pass a special resolution in addition to giving him an opportunity to be heard. It proposes to apply the same process in case of all independent directors.

Compromise and arrangements: Section 233(12) of the Companies Act extends the same fast track process applicable in cases of merger or amalgamation involving group companies (under sub-section 1 of section 233) to compromises and arrangements involving such companies under sections 230 and 232 of the act. It now proposes to remove sub-section 12 and instead authorize the central government to make rules for allowing compromise and arrangement involving companies with their creditors, members or any other companies.

Prevention of oppression, mismanagement: The act provides that the central government may apply to the National Company Law Tribunal (NCLT) for an order if it is of the opinion that the affairs of a company are being conducted in a manner prejudicial to public interest. It is now proposed that such an application should be made only to the principal bench of the NCLT.

It further proposes that while making such an application, the central government should state the circumstances clearly suggesting as to how the alleged person concerned has mismanaged the affairs of the said company i.e. acts of fraud, persistent negligence, default of legal obligations, breach of trust, failure to carry out affairs of the company in accordance with sound business principles or prudent commercial practices, causing damage to trade, industry or business or conducting affairs of the company with an intent to defraud its creditors, or any other person etc. The person against whom such application is filed must also be made a party to the said proceedings.

It is also proposed that the NCLT should record a clear decision specifically stating whether the person is fit to hold the office of a director or any other office in the management of the company. A person found unfit by the NCLT shall not be qualified to hold office as a director for a period of five years unless the central government, with the leave of the NCLT, permits the person to be appointed as a director.

Winding up of companies by NCLT: The act permits a company to be wound up by the NCLT if the company has, by a special resolution, resolved that it be wound up by the NCLT. It is now proposed to remove this provision and allow the NCLT to wind up a company only if the company is unable to pay its debts and other circumstances as listed therein including if the NCLT is of the opinion that it is just and equitable to wind up the company.

Winding up of unregistered companies: Unregistered companies include entities such as partnerships, LLPs, societies/cooperative societies, associations or companies consisting of more than seven members. The act empowers the NCLT to wind up an unregistered company if such a company is unable to pay its debts. It is now proposed to remove this provision and instead permit the NCLT to allow winding up of such a company only if it has ceased (or intended as such) to carry on business or in the case the NCLT is of the opinion that it is just and equitable that such company be wound up.

While speed of reforms and a clinical approach to removing difficulties are welcome, insertions of provisos, exceptions or changes to the statutory provisions through government orders, notifications or ordinances should be done with caution to ensure that certainty of laws and policies lead to a healthy corporate governance ecosystem.

Manoj Kumar is the founder and managing partner at Hammurabi & Solomon.

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