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Companies Act, 2013 – Act swiftly to save

private companies

Dr S. Chandrasekaran

Damages to private companies

The Companies Act, 2013 (2013) was notified on 30th

August, 2013. Ninety-eight sections of the Act were

partially notified w.e.f. 12th September, 2013. The

statement of objects and reasons lists several

amendments including protection for minority

shareholders, investor protection, etc. New concepts

such as one person company, independent directors,

class action suits, registered valuer, corporate social

responsibility, rotation of auditors and secretarial audit

were also introduced. At the same time, a great

injustice is done to private limited companies. Several provisions which were

earlier exempted on private limited companies in the Companies Act, 1956,

have been taken away. The introduction of 98 sections has no sunset

clause, which gives an opportunity to all existing private limited companies

to plan their course of action to avoid any future non-compliance.

Some of the unavailable privileges

1. To any other person in whom director is interested:

Section 185 of the Act 2013, which is corresponding to sections 295 and

296 of the Act of 1956, deals with loans to directors. The meaning of “to any

other person in whom director is interested” in the section is:

· Any director of the lending company, or of a company which is its

holding company or any partner or relative of any such director;

· Any firm in which any such director or relative is a partner;

· Any private company of which any such director is a director or

Great injustice is done to private limited companies. Several

provisions which were earlier exempted on private limited

companies in the Companies Act, 1956, have been taken

away.

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member;

· Any body corporate at a general meeting of which not less than

twenty- five percent of the total voting power may be exercised or

controlled by any such director, or by two or more such directors,

together; or

· Any body corporate, the Board of directors, managing director or

manager, whereof is accustomed to act in accordance with the

directions or instructions of the Board, or of any director or directors,

of the lending company.

(a) Guarantees

It is usual for a private company to give guarantee for another private

company in which a director of one private company is director or member

in another private company. The Act of 1956 exempts private companies

from such provisions, and with the withdrawal of such exemption the

situation in a private company is alarming.

(b) Loan represented by a book debt

It is trade practice to extend credit facilities for supplies of goods to another

company. The dues from such supplies are represented as book debts in the

financial records of the company. Interestingly, even if the goods are

supplied today and payment is accounted by next day, it is expressed as

book debt at least for a day. Such an accommodation is now not available

for a private company.

2. Shall not participate in such meeting

Section 184 of the Act of 2013 corresponding to sections 299, 300 of the Act

of 1956 deals with disclosure of interest by directors and participation in

Board proceedings by disinterested directors. This section applies to every

director of a company meaning, thereby, it applies to directors of a private

limited company. The Act of 1956 exempts the applicability of such

provision to private company and for public company the interested director

cannot participate in the proceedings of the transactions in which he is

Even if the goods are supplied today and payment is

accounted by next day, it is expressed as book debt at least

for a day. Such an accommodation is now not available for a

private company.

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directly or indirectly interested and also cannot vote thereat. Now, the

section 184 of the Act of 2013 goes one step further that such interested

director “shall not participate in such meeting” since Clause (b) of sub

section 2 of section 184 ends with such condition.

A private company can function with a minimum of two directors. In a

situation where one of the directors is interested he is barred from attending

the board meeting. This would result in a deadlock situation and the private

company cannot even have a board meeting since there would not be

quorum.

3. Loans to any person

Section 186 of the Act of 2013 corresponding to section 372A of the Act of

1956 deals with loans, guarantee, surety and investments by company. The

Act of 1956 again exempts private companies from the applicability of

section 372A of the Act of 1956 and now the section 186 of the Act of 2013

does not provide such an exemption to private companies.

More interestingly, clause (a) of sub section 2 of section 186 reads as

follows: “give any loan to any person or other body corporate”

Now, with the above provision, a private company cannot even give a loan to

an employee in emergency situation without obtaining the prior consent of

the shareholders. This is a great hardship for private companies and the

normal working conditions of a private company could worsen.

4. Related party transactions

Section 188 of the Act of 2013, corresponding to sections 297 and 314 of

the Act of 1956, deals with related party transactions.

The said provisions of section 188 are equally applicable to private

companies. Every related party transaction requires firstly the Board’s

consent. Directors in a private company are normally the family members

related to each other within the provisions of the Act of 2013. The

A private company cannot even give a loan to an employee in

emergency situation without obtaining the prior consent of

the shareholders. This is a great hardship for private

companies.

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requirement of board’s consent itself is very difficult in a private company

for related party transaction.

Secondly, the section moves one step further in restricting the voting rights

of an interested member in any related party transaction. The second

proviso to sub section (1) of section 188 runs as:

“Provided further that no member of the company shall vote on such special

resolution, to approve any contract or arrangement which may be entered

into by the company, if such member is a related party”.

The above condition would result in a deadlock situation, since there is no

power for Central Government to accord any permission. The privilege

available to a private company in the Act of 1956 now withdrawn puts a

private company in difficulty.

Act swiftly to invoke section 462 of the Act

Fortunately, Section 462 is introduced in the Act 2013 corresponding to

section 620 of the Act of 1956. Section 462 gives powers to Central

Government to exempt a class or classes of companies from provisions of

the Act of 2013. Section 620 of the Act 1956 was only for Government

Companies and now section 462 of the Act of 2013 extents to all companies.

Section 462 of the Act of 2013 runs as:

1) The Central Government may in the public interest, by notification

direct that any of the provisions of this Act-

a) Shall not apply to such class or classes of companies; or

b) Shall apply to the class or classes of companies with such

exceptions, modifications and adaptations as may be specified in

the notification.

The above-said situations are a few among other restrictions or exemptions

withdrawn for a private company. The Central Government in order to save

private companies from all such deadlock situations has to act swiftly by

invoking the provisions of section 462 of the Act of 2013.

The Act of 2013 has not given any specific exemption, but the Central

Government may, in public interest, by notification direct that any of the

provisions of the Act of 2013 shall not apply to such class or classes of

Companies.

It is the need of the hour for the Central Government to take all necessary

steps at the earliest in this direction.

(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)