Importance of Corporate Law: Everything You Need To Know

The author in this article discusses the importance of corporate law and the various concepts relating to corporate law. It further discusses the fact that the law of corporate has a function that goes beyond just ensuring that contracts between two parties are performed. The law gives such companies legal recognition and makes them a legal entity.
Estimated Reading Time: 11 minutes

Introduction

Everyday lives nowadays are dependent on big corporations producing and working around the clock. A vast number of Indians work in these corporations and occupy various positions. Sunder Pichai is a CEO while some Indian factory worker assembles smartphones to support their families. Let us discuss the importance of corporate law.

These corporations are regulated and governed by a special law known as The Company Act, 2013. The law of corporate has a function that goes beyond just ensuring that contracts between two parties are performed. The law gives such companies legal recognition and makes them a legal entity.

Concepts of Company Law

A company is a legal entity that is separate from the people who make it. This independent identity allows a company to live beyond its founders and into the hands of a successor. People may build a company but once registered, a company is its person.

The need for regulating and providing safety guidelines for the functioning of a company made the legislators enact the Companies Act, 1956. The said act helps in regulating the basic aspects of company law, from its incorporation to its dissolution. An act or law provides a proper legal framework for the said functions. The companies Act, 2013 provides for all these.

Section 2(20) of the companies Act, 2013 defines a company as “a company incorporated under this Act or under any previous company law”. Hence, the law recognizes only those companies that have been authorized to function under the 2013 act or its predecessors. The law won’t recognize any other entity claiming to be a company. 

Formation of a company

Under the 2013 Act, Section 3 states that as long as the company is formed for lawful purposes it may be formed by 7 or more persons in case the company formed is a public company; 2 or more persons in case of a private company. Another feature added by the 2013 Act is the ability of one person to form a one-person company.[1]Thus depending on the number of people involved a company may be a private company or a public company or one-person company. The section also explains how a person can withdraw their names from the formation of a company.

The 2013 Act provides a new form of a private company, i.e., a one-person company. It may have only one director and one shareholder.

Section 3(2) allows for the formed company to be of any one of the three types, a company limited by guarantee, a company limited by shares & an unlimited company.[2]All these details go to the memorandum of the company. Memorandum of a company is an integral part of forming a company as it states the liability of members, address of the company, names of its members, share capital of the company, etc., Section 4 of the Act goes into great detail about what a memorandum should hold to be valid. Another document is the Articles of Association. These are mentioned in Section 5, and it states that the regulations must be contained in the articles of the company.[3]

Section 7, 9&10 are about registration of the company and the effect that it has. Section 10 goes into further detail and tells us about the effects of memorandum and articles of a registered company. In the initial days of incorporation, promoters help in providing fiduciary aid in setting up a company. They help throughout the incorporation process. 

Shares and Securities under Corporate law

Another important feature of company law is that it provides a structured way for both public and private companies to make offers and trade in securities. Section 23 explains how both a public company and a private company may issue securities. Theissuing of securities and other related security functions of a company are regulated by SEBI.

A document that helps in issuing securities and attracting potential investors is the prospectus. A Prospectus is like a document that contains the information of all securities & related issues; and other details of a company. Prospectus are of different kinds and company law through Sections 31 & 32 defines these variations as Self-prospectus- a prospectus in which securities and shares are issued over some time in one or more issues, without the need for issuing further prospectus;  Red-herring prospectus is issued without any particular specifics of prices of the securities that are included in it. The Prospectus is an important document and hence any sort of misappropriation or mischief leading to wrong information and untrue assumptions is penalized by company law under section 34, 35, 36, 37, 38& 447 of the companies Act, 2013.

Share Capital

Company law allows for (a) equity share capital (b) Preference share capital. Share capital decided whether a member will have voting rights or not and when will the member receive their share of profits from the company. Section 43 defines the kinds of share capital shareholders of a company limited by shares may have.

In addition to share capital, section 47 also gives voting rights to the members of a company based on their holding of equity shares or in proportion to their share. Furthermore, the shares are also divided into different classes and the members or shareholders holding these shares are further divided.

Transfer of Securities under Corporate law

Section 50 of the Act empowers a company to transfer its shares and places an obligation to deliver the certificates of securities transferred within a specified period depending on the security being transferred. 

Annual General Meetings under Corporate law

Section 96 of the Act mandates that other than a one-person company, every other kind of company must hold an annual general meeting. This is excluding other meetings that a company holds. By adequately notifying its members and the board, the company should not let more than 15 months pass without holding at least one AGM, this is mandatory to ensure smooth functioning and decide on important matters AGMs are held in a company.

Class Action Suits & Mismanagement under Corporate law

Section 245 of the Actempowers the members of a company or depositorsor any class of them to apply to oppression before the tribunal if they think that the management or the conduct of the affairs of the company are being carried out in a prejudicial or particularly oppressive way to its members or depositors. This is a major clause that allows minority shareholders who might face oppression from the majority shareholders to come together and file a ‘class action suit’ against such members whose actions might affect the company or the functioning of it.

The Companies Act itself, in Section 241 provides for a remedy to the shareholders in case of oppression by the majority or any instances of mismanagement affecting the company. Thecompany itself cannot apply for any relief. It has to be a case of oppression within the company adversely affecting minority shareholder interest. The section provides that a proportion of the member strength must make the application to the Company Law Board, but the Central Government may, on the application, allow any member or members to sue if ‘it is just and equitable to do so.’

Company to have Board of Directors

One of the important features is the fact that Section 149 makes it mandatory to have at least one woman director and providing for women empowerment. 

Corporate Social Responsibility under Corporate law

Section 135 of the companies Act, 2013 has an important mandate of corporate social responsibility for the companies. The section makes it compulsory for every company which has a net worth of 500 crores or more; or turnover of 1000 crore rupees; or a net profit of 5 crore rupees or more, to mandatorily have a committee dedicated to corporate social responsibility.This section requires big corporations to undertake basic mandatory activities promoting Social Responsibility. The board is constituted for the sole purpose of making sure that the activities are undertaken and everything is done properly. 

National Company Law Tribunal and Appellate Tribunal

One of the most important features for corporate law is that it provides for a dispute resolution authority in NCLT & NCLAT.  Section 408 establishes the power given to the central government further qualifies the members of the tribunal. Section 410 provides for the constitution of an appellate tribunal and the subsequent section provides for the qualifications for its members. Section 422 makes it important for the above-mentioned authorities to deal with pending applications as fast as possible.  Other sections relating to NCLT & NCLAT showcase how these authorities can change their orders and within what period and when and in what conditions does the appeal to the Supreme Court lies. Section 423 provides for an aggrieved party file an appeal to the Supreme Court against any order of the tribunal within a stipulated time of 60 days from the day of order receipt being received from the tribunal.Theproviso to the section further explains that in case S.C is satisfied with a reasonable delay that prevented an applicant from filing an appeal in the stipulated time of 60 days, the court may allow an appeal after the stipulated period. This allows for additional suits to be filed in case of dissatisfaction from any aggrieved person.

Section 430 however limits any aggrieved person to exhaust their legal remedies by barring civil court from having any jurisdiction. The section explains that a civil court does not possess the jurisdiction to entertain suits or matters which the NCLT & NCLAT are empowered to handle.The court taking into the considering that India is a country with a large, ever-growing population and subsequently, with an ever-increasing number of corporations being incorporated year after year, there needs to be a special institutional platform for redressal.[4] Moreover, the shah committee also recommended changes in the system to reduce the overburdening of courts with corporate cases and establish a quicker and efficient justice dispensing body.[5]A step that has helped improve the corporate governance in India and increase the accountability in corporate legal cases. The legal framework of India was hugely impacted by the introduction of NCLT and NCLAT and since then Indian courts have faced a reduced pressure of cases in corporate matters

Auditing

The 2013 Act provides for Auditing service by an Auditing Firm or an independent auditor. The key take away from it is in section 144 of the act which prohibits any auditor from performing any of the 9 non-auditing functions. The functions under the Act are : (a) accounting and bookkeeping services; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial services; (e) investment advisory services; (f) investment banking services; (g) rendering of outsourced financial services; (h) management services; and (i) any other kind of services as may be prescribed.

This is to allow the individuality of work and to limit the malpractices involved in auditing. This also increases the accountability of both the company and the auditor.

Fast Track Mergers and Acquisitions/Cross Border Mergers

Under Section 233 the Companies Act, 2013a fast track and simplified procedure for mergers and amalgamations of a certain class of companies such as holding and subsidiary, and small companies after obtaining approval of the Indian government is given.

Section 234(2) of the Act, empowers a foreign company with prior approval from RBI, merges with a company registered in India under the Companies Act.This section allows for foreign companies to merge with the Indian Ones and vice versa.

Insider Trading and Forward Dealing

Section 194 of the Act prohibits director anyone holding a managerial position in the company to make forwards with the company to buy shares at a specified time, place, or specified number of shares, etc. Forward dealing is punishable with imprisonment for a term which may extend to two years or with fine which shall not be less than one lakh rupees, but which may extend to five lakh rupees, or with both.

Section 195 of the Act has to define Insider Trading as an act that entails subscribing, buying, selling, or an agreement to do so, with an officer of the company, or with a director, or some other person in a key managerial position and possessing such non-public price information that one is reasonably expected to not possess. Insider trading also means the exchange of price-sensitive information that should not available to the public under normal circumstances and such information is sensitive for the company. This section makes it prohibitory to trade-sensitive information between companies or within the companies. Such an Act is punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but 122 which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.

Winding Up and Voluntary Winding Up

Under section 270 of the Act “The winding up of a company may be either— (a) by the Tribunal; or (b) voluntary”. Under section 271 of the act a company may, on a petition under section 272, be wound up by the Tribunal, — (a) if the company is unable to pay its debts; (b) if the company has, by special resolution, resolved that the company be wound up by the Tribunal; and other reasons as mentioned in the act.

Section 304 of the Companies Act, explains the conditions in which a company may be wound up. In case of voluntarily winding up of a company, a general meeting may be held with a resolution being passed to wound up the company. the reason ranges from, the objective of the company being fulfilled or the occurrence of such an event that the company is no longer required. Accordingly, a special resolution passed in general meeting wounds up the company voluntarily. If a company has been set up for a specific purpose or a fixed duration and that is provided for in the Articles of Association of the company, then, when the purpose is achieved or the duration is up, the company may be wound up by passing an ordinary resolution at a meeting.

Conclusion

The Companies Act, 2013, has 470 sections and seven schedules, it is vast and a major piece of legislation that has governed the operation of companies in India for a long time. These are some of the very important sections and key takeaways from the companies Act. The amendment and the ordinance are a big step towards a better legal framework for the corporate sector. 

These amendments further add to a model of company law that could be without its inefficiencies and uncertainties. The provision which was earlier termed as ineffective or inefficient have now been dealt with in these amendments. Further amendments in company law would bolster India’s corporate structure and help improve corporate governance. The conformity of laws to other laws by other agencies has allowed for interlinked governance and transparency in the corporate structure.

Also read Can a Government Employee be a Director in a Private Company?


[1] Section 3(1), Companies Act, 2013.

[2] Section 3(2), Companies Act, 2013.

[3] Section 5(1), Companies Act, 2013

[4] S.P. Sampath Kumar v. Union of India, (1987) 1 S.C.C. 12.

[5] Chaired by Justice A P Shah, Former Chief Justice, Delhi High Court, Report of the Group of Experts on Privacy, Law Commission of India.

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