A Comparative Analysis of the Provisions of Companies Act, 1956 and Companies Act, 2013

In this article, the author seeks to comprehensively analyse the provisions of the Companies Act, 1956 and the Companies Act, 2013. The article highlights the shortcomings of the earlier legislation and points out how the 2013 Act has rectified the same. It also focuses on the changes in definitions, incorporation, directors, share capital, CSR etc.

I. Introduction

The colonization by the British and their enactment of laws like Joint Stock Companies Act, 1850, Joint Stock Companies Act, 1857, Companies Act, 1866, and the Indian Companies Act, 1913 traces the history of the beginnings of corporate governance in India. However, the most significant development took place by the enactment of the Companies Act, 1956 on April 1^st 1956 based on the recommendations of the H.C. Bhaba Committee.

More than half a century after the enactment of Companies Act in 1956, the new legislation, the Companies Act, 2013 was passed at the end of August 2013 based on the recommendations of the J. J. Irani committee. The new Act brought in several much-needed changes in India’s corporate governance and fulfilled the inadequacies and shortcomings of the 1956 Act.

A need for new legislation was felt absolutely essential because, despite several amendments to the 1956 Act, the Act was unable to effectively handle complex issues in the context of the evolving requirements of the business entities in India. One glaring instance of the incompetence of the Companies Act, 1956 was witnessed during the Satyam Scam [1] which highlighted the poor state of Corporate Social Responsibility and corporate governance in India. New legislation which was on par with foreign jurisdictions was felt necessary to accommodate the changing needs and requirements of corporate structure and their governance as well as to protect and promote the safety and interests of the investors in a highly competitive environment both nationally and internationally.

II. The Framework of both the Acts

Initially, The Companies Act, 2013 contains 29 Chapters divided into 470 sections and 7 schedules, as opposed to the XIII parts divided into 658 sections and 15 schedules under the Companies Act, 1956. Currently, the total number of sections increased to 484 under 42 chapters in the Companies Act 2013. Moreover, the new law makes reference to subordinate legislation in the form of rules much more rigorously than the 1956 act, which forms an integral part of the new law governing companies in India.[2]

The Companies Act, 2013 has introduced some very important concepts into India’s corporate regime such as Corporate Social Responsibility, NCLT, Class Action Suit, One Person Company, dormant companies, etc. in order to ensure that good governance prevails.

III. Comparative Analysis of the Provisions of both the Acts

1. Changes in Definitions and New Inclusions

• The CA, 2013 has enlarged the definition of ‘Charge’ as compared to the earlier legislation. Under the CA, 1956 only a mortgage of the property or assets were considered as a charge.[3] Whereas under the 2013 Act, ‘Charge’ means an interest or lien created on the property or assets of a company and includes a mortgage.[4]
• The scope of the term “Officer in default” has been broadened under the new act. Whereas S. 2(31) of the CA, 1956 explains who is an “officer in default”, the same has been incorporated under S. 2(60) of the CA, 2013. The share transfer agents, registrars and merchant bankers to the issue or transfer related issue of shares have been brought under the scope. Moreover, directors who are aware of the default, CFO and any Key Managerial person will also be brought under the ambit if he/she knowingly commits default.
• The CA, 2013 has provided that the financial year must mandatorily end on 31^st March of every year.[5] Whereas under the previous act, Companies were permitted to have a financial year ending on a date decided by the said company.
• The definition of “Listed Company” has been modified under CA, 2013 to include any company which has any of its securities listed on any recognised stock exchange[6], whereas the earlier Act only provided for ‘listed public company[7]’.
• The CA, 2013 introduces certain terms which were not defined under the 1956 Act such as:

1. Associate company (S. 2(6))
2. Independent Directors (S. 2(47)
3. Small company (S. 2(85))
4. Promoter (S. 2(69))
5. Related party (S. 2(76))
6. Global Depository Receipt (S. 2(44))
7. Key Managerial Personnel (S. 2(51))

2. Incorporation and Incidental Matters

• Under the CA, 1956 the Certificate of incorporation of a company was considered as conclusive proof whereas under the new legislation a certificate is not a conclusive proof as per Section of the Act. It provides that an action can be taken even after incorporation if incorporation is on the basis of false or incorrect incorporation.
• One of the major changes brought in by CA, 2013 was the incorporation of ‘One Person Company’ (OPC) which found no place under the 1956 legislation. OPC means a company which has only one person as a member as provided in S. 2(62) of the Act. It is a private company having only one member and one director and there is no compulsion to hold an annual general meeting. The concept of OPC has been introduced to make it easier for sole-entrepreneurs to do business. Moreover, under the 2013 Act, no prior approval is required for the conversion of the private company to one-person company or vice versa or the for the conversion of a private company into a public company.
• The CA, 2013 has also increased the limit of the number of members for a private company from 50 to 200.
• With respect to matters incidental to incorporation, the ‘object clause’ under the Memorandum of Association (MOA) has been altered. Under the 1956 Act, the object clause was divided into different parts such as main objects, incidental and other objects while now the MOA now only contains the object for which the company is incorporated. The earlier bifurcation has been omitted under the new legislation.[8]
• There were no entrenchment provisions provided for altering the Articles of Association of a company under the 1956 Act, whereas, under Section 5 of the 2013 Act, articles may provide for a more stringent or restrictive procedure than the passing of a special resolution for altering the certain provisions of AoA.
• Under the 2013 Act, the Company has to file a return with the ROC in case of changes in promoters or top ten shareholders of the company within 15 days of such change as per Section 93 whereas no such provision existed under the 1956 Act.
• The 2013 Act permits the conversion of LLPs into companies under section 371 of the Act while such conversion was not permitted under the earlier regime.

3. Directors of a Company

• A whole-time director, MD, manager, CEO, CS included in a board of directors
• Under the CA, 1956, the maximum number of directors in a company was 12 and in order to appoint more directors, the approval of the central government was necessary.[9] Whereas under the CA, 2013 provides for a maximum of 15 directors and more can be appointed by passing a special resolution in a meeting as provided under S. 149(1) of the Act. It is thus evident that the approval of the central government is not required under the present legal regime.
• Under the 1956 Act, there were no provisions which mandated the requirement of a woman director. Whereas under section 149(1) of the CA, 2013, it is provided that in prescribed class or classes of companies there should be 1 women director.
• There was no provision regarding the requirement of a Resident director under the CA, 1956, whereas, under S. 149(3) of the CA, 2013, every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
• There was no provision under the CA, 1956 which mandated the requirement of Independent directors, whereas under section 149(4) of the CA, 2013 every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
• Whereas the duties of a director were not specifically provided under the 1956 Act, Section 166 of the CA, 2013 clearly lays them down.
• As per the 1956 Act, the maximum number of directorship was 15 whereas under the CA, 2013, the maximum number of directorship is 20 out of which 10 can be public companies. Moreover, the new act also includes alternate directorship but earlier alternate directorship was not included.
• There was no specific provision for the resignation of a director under the CA, 1956 whereas under Section 168 of the CA, 2013, a director can resign by tendering his resignation letter. He must also send a copy of resignation letter within 30 days to ROC so as to ensure transparency.

4. Prospectus and Allotment of Securities

• The scope is widened to include all type of securities now than just shares.
• Specification for raising of funds by a public company through IPO/FPO, Private placement and Rights/Bonus shares.
• Now company after varying the terms of contract or objects mentioned in the prospectus cannot use the amount raised by it through prospectus for buying/trading/otherwise dealing in equity shares of other company.
• Private placement offers have several conditions which are listed below:

1. Offer to a section of public other than QIBs
2. Not more than 50 number of people
3. In compliance with prescribed terms and conditions.
4. Made through private placement offer letter, not through a prospectus.
5. Public placement offer should comply with the provisions of Companies Act 2013, Securities Contract Regulation Act 1956, SEBI Act 1992.

• A person responsible for fraudulently inducing others to invest money is now liable for stringent punishment under section 470 of the act which shall be non-compoundable.
• Any person affected by misleading statement, any inclusion/omission of a matter in the prospectus can file suit/take an action:
• For civil liability for misstatement in the prospectus.
• For Punishment of Fraud.
• Under the earlier Companies Act 1956, only public financial institution, public sector banks or scheduled bank with the main object of the financing were allowed to issue their shelf prospectus but now Companies Act 2013 provides that the government shall prescribe the types of companies that can issue shelf prospectus.

5. Shares and Debentures

• The Companies Act, 2013 seeks to regulate all types of securities as opposed to equity shares and debentures only.
• Under the CA, 1956, there was no right of a stockholder to vote on matters of corporate policy and who will make up the board of directors. Voting often involved decisions on issuing securities, initiating corporate actions and making substantial changes in the corporation’s operations. However, this distinction has been removed by the CA, 2013.
• Under the CA, 1956, the companies had a power to issue shares at discount as per S. 79 whereas under the CA, 2013, the companies cannot issue shares at discount except sweat equity shares subject to fulfilment of certain condition as provided under S. 53. If a company contravenes the provision shall be punishable with a fine, not less than one lakh rupees which may extend to five lakh rupees.
• There was no exit option for the shareholder mentioned under the CA, 1956 whereas under Section 27 of the CA, 2013, shareholders have exit option if the money raised has not been utilised.
• There was no provision for the issue of bonus shares under the CA, 1956. However, rules were framed for public unlisted Company. Whereas under Section 63 and 23 of the CA, 2013 contains provisions for the same.
• Earlier under the CA, 1956 there were different sections which deal with debentures, which includes debenture trust deed, the appointment of debenture trustees etc.[10] Whereas under the CA, 2013, a company can issue debentures with an option to convert them into shares wholly or partly approved by special resolution. Now there is only one section which deals in debentures which is Section 71 of the CA, 2013.

6. Audit and Dividends

• All listed companies shall not appoint any individual auditor for more than 1 to 5 consecutive years and reappoint any auditor. It is required to fulfil that 5-year course no one can skip that rule if it has done, it will be considered void.
• Any auditor will be bound not to provide fortunately or, unfortunately, the internal audit, advisory to investment banking or institute, any actuarial services, bookkeeping audit sources, which is the most confidential part.
• The dividend will be paid to the employee, keeping in mind that these are their rights. Still, it should be given keeping in mind that those dividends not provided from the reserves or the free reserve of the company as the reserves are the companies right. That cannot be taken out of the company’s reserve for any personal use. it was the essential amendment made so that any misuse of reserves cannot entertain.

7. Corporate Social Responsibility (CSR)

There was no provision relating to CSR under the 1956 legislation. This is one of the most important additions brought in through the Companies Act, 2013 under Section 135. This section provides that:

“Every company having a net worth of rupees 5 hundred crores or more, or turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during any financial year shall constitute a Corporate social responsibility committee of a board consisting of three or more directors, out of which at least one director shall be an independent director.”

It must be noted that this section is mandatory for all those companies which fall under the ambit of the said provision.

8. Restructuring and Revival

• Under the CA, 1956, the scheme of compromise and arrangement was not wide enough to include a takeover offer. Whereas now under the CA, 2013, the scheme of compromise and arrangement includes takeover offer and works as per the SEBI guidelines
• Under the CA, 1956, the provision for Fast Track mergers were not present. However, the 2013 Act now incorporates the provision fast track merger between two companies. It will help the two companies to put forward their steps towards their goal at earliest.
• Reduction of capital must require two things there should not be any areas for a deposit, and there should be the conformity of having a good standard in the market.

9. Class Action Suits

The concept of class action suits was not found under the CA, 1956. It was introduced via the CA, 2013. Now that the provision of class action suit is introduced[11], it provides that if a class of members, depositors, or any class of them conduct the business in any manner which is prejudicial to the interest of the company or its member file an application before the tribunal on behalf of the company or its members. The benefit is that this will bring greater and more efficient judicial proceedings but this section shall not apply to banking companies.

10. Acceptance of Deposits

Under the Companies Act, 1956 provisions relating to the issue of deposits were far less stringent than that in the 2013 Act. In the 1956 Act, the Central Government had the power to prescribe the limits and manner in which deposits could be invited by the company either from the public or from its members. However, subsequent amendments to the 2013 Act have provided for some leniency in accepting deposits, the most crucial exemptions being given to private companies.

IV. Conclusion

From a comparative analysis of the provisions of both the Acts, it is evident that the 2013 legislation has been successful in fulfilling the inadequacies of the previous legislation. The Act was implemented in a phase-wise manner and it was only in 2019 that the 1956 act was completely repealed. The 2013 Act has successfully modernised India’s company law regime and places India on equal footing with corporate legislation elsewhere in the globe.

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References

[1] Available Here

[2] Available Here (Last accessed on 30-11-20).

[3] Section 124 of Companies Act, 1956

[4] Section 2 (16) of Companies Act, 2013

[5] Section 2(41) of CA, 2013

[6] Section 2(52) of CA, 2013

[7] Section 2(23A) of CA, 1956

[8] Section 4(1) of the CA, 2013

[9] Section 259 of CA, 1956

[10] Sections 117,117A, 117B, 117C, 118,119,122 of the Companies Act, 1956.

[11] Section 245 of CA, 2013

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1. Company Law; Notes, Case Laws and Study Material