Dear NCLT : Till Now We Believed Circulars Do Not Override Law?

 

While disposing off a Petition under Section 74(2) of the Companies Act, 2013 (the 2013 Act) of Darshan Jewel Tools Private Limited, Mumbai Bench of National Company Law Tribunal (NCLT) has ruled on 17th February, 2017 that in the light of a general circular issued by the Ministry of Corporate Affairs, the petition has become redundant, effectively reversing the settled legal position on the point whether circulars can override the provisions of law?

Darshan Jewels had sought extension of time in repayment of deposits accepted from the directors and shareholders for a period of 3 years until 31st March, 2018.While the petition of the company was pending, Ministry of Corporate Affairs issued a general circular on 30th March, 2015 that the deposits accepted by private companies prior to 1st April, 2014 from the members, directors or their relatives shall not be treated as deposits under the 2013 Act and the relevant rules provided appropriate disclosure is made in the financial statement by the company. On this basis, it sought withdrawal of the Petition.

Without examining the legal validity of the general circular issued by Ministry of Corporate Affairs, NCLT dismissed the Petition. The operative part of the order is reproduced here –

“In the light of the above discussion and the present legal position, the Company Petition, now under consideration, has become redundant. The General Circular (supra) issued by Ministry of Corporate Affairs dated 30th March, 2015 has clarified that the amounts received by a Private Limited Company from their members, Directors and relatives prior to 1* April, 20L4 shall not be treated as deposits under the Companies Ad, 2013. In the financial statements and in the Petition, the Company has duly recorded the figures of such amount along with relevant details. As a consequence of the said General Circular, this Petition has now become redundant. The same is, therefore, dismissed due to non-applicability of the relevant provisions of Companies Act, 2013. No order as to cost.”

Dear NCLT, the legal position on general circulars is otherwise and not what has been ruled in the order. The circulars lack statutory recognition. Not only the Principal Bench of erstwhile Company Law Board has reiterated the position that general circulars lack statutory recognition, Bombay High Court, relying on the judgment of Supreme Court in State Bank of Travancore v. CIT [1986 AIR 757]  held that ”such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.” [Banque Nationale De Paris v. CIT [(1999) 237 ITR 518 Bom].

The legal position on the validity of the circulars vis-a-vis statutory provisions stands settled. NCLT, not only ignored to examine the legal position but accepted the general circular issued by Ministry of Corporate Affairs as the ‘new legal position’. The question that arises is – whether NCLT was not bound to examine the legal validity of the general circular, which stated a position in complete contrast to the statutory provisions? The cursory manner in which the ruling has been given makes a strong case against ‘tribunalisation’ in the country. Judicial examination of the provisions is lacking.

Unfortunately, this position is likely to continue as the circular favours the companies and the MCA, having issued the circular, is not going to challenge this ruling.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone 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 Payment of Filing Fee or Tax Payment by Professional on behalf of the Company Deposit under Companies Act, 2013?

Whether filing fee or tax deposit by a Professional on behalf of a Company will be treated as a Loan or Deposit under Companies Act, 2013

 Any professional be it a Chartered Accountant or a Company Secretary renders various services to a company including filing of documents or filing of tax returns. Many a times, even some portion of tax is  deposited by the professional on behalf of the company. In some cases, the professionals also deposit filing fee through their credit cards under online filing regime. In turn, these professionals claim reimbursement from the companies with or without raising bills for professional services. In other words, sometimes filing of forms is done gratis and no bill is raised. The question that arises is what is the nature of such tax payments or filing fee from company’s standpoint?

 The tax deposited by a professional or filing fee paid by him on behalf of the company is incidental to service rendered by the professional. It is immaterial whether for such a service a bill is raised or not as service does not loses its character, even if not billed. The tax deposited or filing fee paid by a professional is a mere claim of reimbursement by him. It does not fall under the definition of deposit or loan. The professional, in the books of account of the company, will be shown as trade creditor until paid. It is a transaction in usual course of business and not a loan or deposit.

Let us also examine this aspect from standpoint of whether it falls in one of the exempt categories of Deposit Rules, 2014. On this note, it can be stated that the need to look at exempt categories arises if and only if it falls under the definition of deposit as defined in the Rules.. In terms of Rules,Deposit includes any receipt of money by way of deposit or loan or in any other form, by a Company“.

The payment of fee or deposit of tax by a professional on behalf of the company is neither a deposit or loan. Hence it does not fall under the term deposit under the Rules. The words ‘in any other form’ will have to be interpreted by using the principles of ejusdem generis. By applying this principle, the amount spent on behalf of the company is neither a deposit nor loan. It is a mere case of reimbursement on account of services rendered. We need to make a distinction on account of nature of transaction. The nature of transaction here is incidental to service rendered and hence the professional can claim the amount as reimbursement.

Let us take another case where a company has to deposit heavy amount of tax and is short of funds, it may take financial assistance from outside to support its tax payment. The nature of assistance here is in the nature of deposit/loan as the intent is also to take financial assistance. It may fall under exempt deposit if the assistance is taken from bank or from other companies or other exempt categories. It is not a case of service rendered. The person who has financed it will be treated as lender and not creditor. A distinctive factor between this transaction and previous one is the element of service. The lender per se is not rendering service but providing financial assistance. The professional, on the other hand, is providing service and not lending money.

 It can, therefore, be concluded that professional depositing tax or filing fee on behalf of the company will not be in the nature of deposit or loan.

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 – 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.

 

 

 

 

 

 

 

 

#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.

#Wake up MCA – Circular on Indian Private Subsidiaries of Companies Incorporated Outside India Stokes Confusion

Ministry of Corporate Affairs (MCA) is expected to clear confusion and not compound it much less through a clarification. The clarification issued by MCA on 25th June (here is the link : http://www.mca.gov.in/Ministry/pdf/General_Circular_23_2014.pdf) about the status of Indian Subsidiaries of Foreign Companies has been lapped up by media as a major celebratory news without examining the legal status and interpretation of the words used.

Let us understand the position of Indian subsidiaries of companies incorporated outside India under Companies Act, 1956 (‘Old Act’). A private company being a subsidiary of a company incorporated outside India was deemed as subsidiary of a public company in India under Section 4(7) of Old Act. The only exception was if 100% of the shareholding of Indian private company was held by companies incorporated outside India.

After notification of Section 2(11), 2(46), 2(68), 2(71) and 2(87) of Companies Act 2013 (‘New Act’), the provisions of Section 4 of Old Act are not in operation (well, this is another story for another time but let us presume this for a moment). This means no reference to Section 4(7) is necessary while interpreting the New Act and determining status of such companies. With fangs of Section 4(7) of Old Act gone, the Indian private subsidiaries can no longer be deemed to be a subsidiary of a public company unless the New Act again brings them to such a category.

Section 2(87) makes a company or body corporate a subsidiary of another company or body corporate (i.e. holding company), if the holding company controls more than 50% of the total share capital. A holding company can be a company (which means company registered under Indian laws) or a body corporate ( which includes a company incorporated outside India). This means if a company incorporated outside India holds more than 50% shares in Indian company, then such Indian Company becomes a subsidiary of company incorporated outside India. 

So far so good. Now the big question: Whether Indian private company, a subsidiary of company incorporated outside India, retains its status as a private company or becomes a ‘deemed subsidiary of a public company’? Provision similar to 4(7) is no longer in place. This question needs interpretation of definition of a public company.

Moving over to public company under 2(71), its proviso makes interesting reading. It needs reproduction here for proper understanding:

“Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.”

The language is plain and clear. The  interesting part is that the proviso uses the term ‘company’ and not body corporate. It does not have an explanation similar to Section 2(87) which says – “the expression company includes body corporate”. The question thus arises is, whether the Indian private company, which became a subsidiary of a company incorporated outside India by virtue of explanation in 2(87) and inclusion of ‘company incorporated outside India’ in definition of ‘body corporate’ in Section 2(11),  will be deemed to be a public company in India under proviso to Section 2(71)?”

The proviso uses the term ‘company’. It is difficult to import explanation attached to 2(87) in interpreting the term ‘company’ used in 2(71). Indian private company became subsidiary of a company incorporated outside India due to deeming provision in Section 2(87) read with 2(11). Becoming a subsidiary has its own consequences and it does not mean that it becomes a public company under 2(71) unless there is a clear cut deeming provision in 2(71).

Section 2(71) is clear in its terms and is similar to Section 3(1)(iv)(c) of Old Act. Under the Old Act, an Indian private company became a deemed subsidiary of public company by virtue of Section 4(7) and not because of Section 3(1)(iv)(c). In New Act, a provision similar to Section 4(7) does not exist. Hence, Indian private company, albeit a subsidiary of a company incorporated outside India (whether private or not private as per laws of that country), is not deemed to be a subsidiary of a public company. This view gains strength from the fact that Section 2(71) has used the term ‘company’ and this does not include body corporate. Legislature, having used different terms in different provisions, obviously meant differently.

We attain clarity to this extent. Let us examine the need of clarification by MCA. The relevant part extracted below makes interesting reading:

“An existing company, being a subsidiary of a company incorporated outside India, registered under the Companies Act, 1956, either as private company or a public company by virtue of section 4(7) of that Act, will continue as a private company or public company as the case may be, without any change in the incorporation status of such company.”

MCA clarification stokes confusion. Let me have the liberty of pointing it out:

1. Where was the need to refer to Section 4(7) though it is no longer in operation?

2. If MCA had to clarify the questions asked on 4(7), a simple clarification that since 4(7) is no longer there, the Indian private companies hitherto deemed as subsidiaries of public companies will retain their original status as private companies.

3. The use of words “registered under …..by virtue of Section 4(7)….” were unnecessary. No company was ever ‘registered’ …. ‘by virtue of Section 4(7)’  under the Old Act. Section 4(7) was a deeming provision and not a provision dealing with registration of companies.

4. The reading of the clarification leads to conclusion that the status of the company continues. What does this mean? This leads us to believe that if a company, though incorporated as private company, but was deemed as a public company ‘by virtue of Section 4(7)’  will continue to be deemed as a public company irrespective of incorporation status.

Unfortunately, Indian pink press and media is interpreting differently.  They are spreading the message that companies incorporated outside India can happily treat their India private arms as private companies. The clarification says otherwise.

Wake up MCA!

Clarifications must be issued after proper legal scrutiny. The impromptu clarifications with poor language cause more inconvenience to the stakeholders. I am sure MCA still has bench strength of persons having deep knowledge of Company Law.

© 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.

 

 

 

 

 

Whole-time KMP – Can a Single person hold two posts – Company Secretary and CFO in compliance of Section 203?

The Companies Act 2013 requires mandatory appointment of whole-time KMP in every listed company and every other public company having a paid-up share capital of Rs. 10 crore or more. An interesting question has arisen:

Can one person hold the position of CFO as well as Company Secretary(duly qualified) under the provisions of Section 203 of the Companies Act 2013?

Pursuant to the provisions of Section 203 of the Companies Act, 2013 every class of companies as prescribed shall be mandatorily required to have Key Managerial personnel. The relevant extract of the Section is reproduced hereinbelow:

203. (1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,—

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

(ii) company secretary; and

(iii) Chief Financial Officer :

 The term Chief Financial Officer is defined under Section 2(19) of the Act which states that  “Chief Financial Officer” means a person appointed as the Chief Financial Officer of a company. No qualification of a CFO is thus prescribed.

There is no restriction under the CA 2013 or rules whereby a single person is debarred from holding dual post.

However, we cannot lose sight of Article 78 of the Table F of the Companies Act, 2013 ( corresponding to  Article 83 of Table A of the erstwhile Companies Act, 1956). The relevant Articles of the model Articles of Association are reproduced hereinbelow:

“Table A of the Companies Act, 1956

83. A provision of the Act or these regulations requiring or authorising a thing to be done by or to a director and the manager or secretary shall not be satisfied by its being done by or to the same person acting both as director and as, or in place of, the manager or secretary.”

“Table F of Companies Act, 2013

78. A provision of the Act or these regulations requiring or authorising a thing to be done by or to a director and chief executive officer, manager, company secretary or chief financial officer shall not be satisfied by its being done by or to the same person acting both as director and as, or in place of, chief executive officer, manager, company secretary or chief financial officer.”

The model articles imposes a restriction on appointment of a single person for dual posts as mandated under the Act. It clarifies the fact that if under the Act, a thing is required to be done specifically by director and chief executive officer, manager, company secretary or chief financial officer, then it shall not be satisfied by its being done by the same person acting both as Director and CFO or CS. 

Following points emerge:

1. If a company has such a prohibitory clause in its Articles, then a single person cannot hold dual post as CFO and Company Secretary.

2. Care should be taken to exclude clause 78 of Table F of CA 2013.

3. It is not mandatory to amend Articles to bring it in line with CA 2013 but the companies will do well to amend it in accordance with new Act so as to avoid any confusion. In such a case, the companies are advised to include a clause enabling a single person to hold dual post as KMP.

Note : This opinion is based on relevant facts for the opinion and is based on my personal interpretation of the provisions of the Companies Act, 2013. I undertake no responsibility for any non-compliance if reliance is placed on the aforesaid opinion.