#Wake-up MCA – Act Amended Through Removal of Difficulties Power Under Section 470

Companies Act, 2013 empowers the Central Government to issue orders to remove any difficulty arising from effectuating the provisions of the Act (Section 470). The CG can make such provisions which are not inconsistent with the provisions of the Act.

The power to remove difficulties has been the subject of judicial interpretation:

In Jalan Trading Co. Private Limited Vs. Mill Mazdoor Union, 1967 AIR  691, 5 member Bench of Supreme Court dealt with this issue and observed that “Power to remove the doubt or difficulty by altering the provisions of the Act would in substance amount to exercise of legislative authority and that cannot be delegated to an executive authority. Sub-section (2) of s. 37 which purports to make the order of the Central Government in such cases final accentuates the vice in sub-section (1), since by enacting that provision the Government. is made the sole judge whether difficulty or doubt has arisen in giving effect to the provisions of the Act, whether it is necessary or expedient to remove the doubt or difficulty, and whether the provision enacted is not inconsistent with the purposes of the Act.

Similarly in Mahadeva Upendra Sinai Etc. vs Union Of India & Ors, 1975 AIR 797, the Supreme Court observed as under-

(2) The existence or arising of a ‘difficulty’ is the sine qua non for the exercise of the power under clause 7 of the 1963-Regulation. The ‘difficulty’ contemplated by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act and no further. It may slightly tinker with the Act to round off angularities and smoothen the joints or remove minor obscurities to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. Under the guise of removing a difficulty, it cannot change the scheme and essential provisions of the Act.”

The above judicial interpretation leads us to conclude that the Central Government is not empowered to exercise legislative power, that is, it cannot change the basic structure and primary features of the Act.

Recently, the Central Government has issued two orders under Section 470 of the Act on 9th July, 2014 and 24th July, 2014.

The order issued on 9th July, 2014 is known as The Companies (Removal of Difficulties) Fifth Order, 2014 and the one issued on 24th July, 2014 is the next in series, i.e., The Companies (Removal of Difficulties) Sixth Order, 2014.

The Fifth Order amends Section 2(76)(v) by replacing the words “or holds” with the words “and holds”.

The Sixth Order amends Section 2(76)(iv) by adding the words “or his relative” after the word manager.

The old and new clauses (iv) and (v) read as under:

Old Clauses

(iv) a private company in which a director or manager is a member or director;

(v) a public company in which a director or manager is a director or holds along with his relatives, more than two percent of its paid-up capital;

New Clauses

(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director or and holds along with his relatives, more than two percent of its paid-up capital;

 

Clause (iv)

In clause (iv) ‘or his relative’ has been added on the pretext that “his relative” appears in all sub-clauses (i), (ii), (iii) and (v) and non-occurrence of this phrase has resulted in disharmonious construction.

The reasoning given is without any substance for following reasons:

1. It was a clear legislative intent to leave out the phrase “or his relative” from clause (iv) as it relates to private companies and it would be too burdensome for companies to identify and maintain fair record about membership or directorship of relative of a director or manager. How would a director or manager gain knowledge of his relatives’ membership and directorships in private companies. What if the relatives and the concerned director or manager are not on talking terms? Even if they have good relations, why would any relative disclose his shareholding or directorship in private companies to his relative? This was precisely the reason, the phrase “or his relative” was deliberately and intentionally left out from clause (iv).

2. If we read clause (v), the phrase “or his relative” has been used only in the context of holding shares beyond 2% of the share capital of the Company. It does not per se brings the relatives’ shareholding or directorship within the related party definition. The context is entirely different. The text and the context does not match with the reasoning stated by the Central Government.

Clause (v)

By replacing “or” with “and”, the flavour of the entire clause stands altered. In the garb of difficulty of removal, the Central Government  has changed the entire meaning and construction. The reasoning stated is that ‘or’ has appeared inadvertently and therefore defeats the intention of this clause. How it defats intention is beyond comprehension? In previous clause (iv), the words ‘or’ appears indicating that directorship and membership conditions are in the alternative. In clause (v), how can the Central Government interpret it in its own discretionary way? By replacing “or” with “and”, the conditions have been made simultaneous, resulting in a diametrically opposite meaning.

The Central Government is expected to issue the Orders within purview of law and boundaries laid down by Hon’ble Supreme Court and not tinker with the provisions twisting and turning their meanings on the head.

The seriousness attached with the power needs serious legal attention and the Central Government cannot disfigure the basic structure of the legal provisions as legislated by the Parliament.

Wake-up MCA!!

Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

 

 

 

 

 

 

# Is Filing of Form ADT-1 Mandatory For Appointment Of Auditor Under Section 139(6) & (8)?

CA Gopal ji Aggarwal raised an interesting query relating to filing of Form ADT-1

We want to seek your opinion whether the fourth proviso to Section 139(1) for filing the notice of the appointment of auditor is required to be filed with ROC for the First auditors appointed u/s 139( 6) and appointment u/s 139(8) as the said proviso has been made applicable for the auditors appointed in AGM u/s 139(1) only.

Opinion

If one examines Section 139(1), fourth proviso mandates the companies to intimate RoC about auditor’s appointment and the Form is ADT-1. Similar proviso is absent in Section 139(6) and 139(8).

Technically, since similar proviso is not present in Section 139(6) and 139(8), one can conclude that there is no requirement to intimate RoC about appointment of Auditor. This logic also gets strength from Form ADT-1, which refers to Rule 4(2) of Companies (Audit & Auditors) Rules, 2014. Rule 4(2) relates back to fourth proviso to Section 139(1). This means legally Form ADT-1 is required to be filed for appointment of auditor under Section 139(1) and not under Sections 139(6) and 139(8).

To answer this question in a reasonable manner, we have to refer similar provisions of Companies Act, 1956. Section 224(1) was similar to Section 139(1). Sub-section (1A) stated that “Every auditor appointed under sub-section (1) shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment.” Section 224(5) was similar to Section 139(6) and Section 225(6) was similar to Section 139(8).

Sub-section (1A) of Section 224 dealt with filing of intimation with RoC but it only covered the situations under sub-section (1). This means even earlier Form 23B was to be filed for appointments taking place under Section 224(1) and not under Section 224(5) or 224(6).

Now the pertinent question – Whether the auditors were filing Form 23-B for appointments under 224(5) and 224(6)? The answer is yes as filing of Form 23B became mandatory due to its linking with 23AC and 23ACA. In an indirect way, this became essential in all circumstances i.e. appointment under Section 224(1), 224(5) and 224(6).

The MCA has again linked quoting of SRN for auditor’s appointment in Form AOC-4 (see Col. 10). And this Form does not distinguish between appointments under 139(1) or 139(6) or 139(8). Thus, in an indirect manner,  appointment of an auditor in any situation needs to be intimated to RoC or else the company will not be in a position to quote SRN, which is a mandatory field.

To conclude, law does not mandate filing of ADT-1 in situations under 139(6) and 139(8) but looking at overall conspectus of CA 2013, it seems filing of ADT-1 in all circumstances becomes essential (I have deliberately not used the words ‘mandatory’). 

We await MCA to correct the situation.

 Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

#Wake up MCA #2: Law Making Through Circulars – A New Trend

Is MCA circular extending time for DPT-4 filing beyond vires?

Section 74 lays down the time limit within which the company having deposits on the commencement of CA 2013 has to file a statement in DPT – 4. MCA, on the basis of reference received from various quarters, extended time for filing by 2 months i.e. up to 31.08.2014. The extension of time has been granted by way of a general circular no. 27/2014.

We are learning new ways of governance and legislation through circulars. Ministry of Corporate Affairs is changing the laws through circulars. The time limit for filing DPT-4 is specified in the Act and the Executive machinery (read MCA) has no power to amend, alter, reduce or enhance the time limit. This a classic example of stepping on the domain of Legislature.

The circular is per se bad in law. On practical side, since it is a beneficial circular, unless challenged, it will be deemed as good. Challenge or no challenge, MCA should refrain from issuing circulars for which it has no power.

Another aspect which has been overlooked is that Section 74(1)(a) allows time limits under two different situations. It mandates filing of statement within a period of three months from such commencement or from the date on which such payments are due.

This means the time limit of 3 months from commencement of  CA 2013 is not sacrosanct. It could be 3 months from the due date. To explain, if the due date is 30th April, then DPT-4 is to be filed on or before 31st July. The MCA’s circular categorically states that time for filing DPT-4 is expiring on 30th June, 2014. It has failed to take into account the alternative limit.

MCA, by issuing such circulars, is compounding confusion. Law making through circulars is a new trend. This trend needs to be halted as MCA should realise that buck stops at them.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.