The NCLT, also known as the tribunal, is a quasi-judicial body established to resolve corporate civil disputes under the Companies Act of 2013. The recommendations to establish the National Company Law Tribunal (NCLT) in India were made by the Eradi Committee. The Eradi Committee, officially known as the “High Powered Expert Committee on Companies and MRTP Acts,” was constituted in 1999 to review and suggest changes to the Companies Act, 1956, and the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969.
The Eradi Committee submitted its report in 2001, proposing significant reforms to the corporate legal framework in India. One of its key recommendations was the establishment of a specialized tribunal for company law matters to streamline the adjudication process and enhance the efficiency of resolving corporate disputes. Based on the recommendations of the Eradi Committee, the National Company Law Tribunal (NCLT) was eventually set up under the Companies Act, 2013, replacing the Company Law Board (CLB). The NCLT became operational in 2016 and has since been playing a crucial role in adjudicating various company law matters, including insolvency proceedings, mergers and acquisitions, and other disputes related to corporate governance and compliance.
Legislative Basis: The NCLT was established under Sections 408 to 434 of the Companies Act, 2013. These sections deal with the establishment, composition, powers, and functions of the NCLT.
Composition:
The NCLT is composed of judicial and technical members.
Judicial members are typically retired judges of the High Court.
Technical members are individuals with expertise in various fields such as law, finance, economics, accounting, and industry.
Appointment:
The members of the NCLT, both judicial and technical, are appointed by the central government.
The appointments are made based on the recommendations of a selection committee.
Jurisdiction:
The NCLT has jurisdiction over a wide range of company law matters, including disputes related to mergers and acquisitions, insolvency proceedings, class action suits, and others.
Companies in India where it is mandatory to have a woman director. The second clause in Section 149(1) of the Companies Act, 2013 mandates that a specific category of companies (as delineated in the Rules) must include at least one woman director on their boards.
Definition:
Section 149 read with Rule No. 3 of Chapter XI of the Companies Act, 2013, requires the following class of companies to appoint at least One. Women Director: i) Every listed company ii) Every other public company having:- a) paid up share capital of one hundred crore rupees or more; or b) turnover of three hundred crore rupees or more: However, a company, which has been incorporated under the Act and is covered under provisions of second proviso to sub- section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation.
Regulation 17(1) of the Securities and Exchange Board of India (Listing Obligation Disclosure Requirements), Regulations 2015, requires that the composition of board of directors of the listed entity shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty per cent of the board of directors shall comprise of non-executive directors. However, the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020
Tenure of Woman Directors
The tenure of the appointment of a woman director is till the next Annual General Meeting (AGM) from the date of appointment. She is entitled to a re-appointment at the general meeting.
Disqualifications
Section 164- Disqualifications for appointment of Director A person intending to become a director shall ensure that he is eligible to be appointed as a director and does not incur any of the disqualifications stated under section 164 of the Act. A person
who is of unsound mind and stands so declared by a competent court.
is an undischarged insolvent; he has applied to be adjudicated as an insolvent, and his application is pending.
has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence.
against whom an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force.
has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call.
has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
the person appointed as a director of a company has not been allotted DIN shall not be eligible for appointment as director of a company.
Powers
Section 179- Powers of the Board This section states that the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things as the company is authorised to exercise and do, however it shall not be inconsistent with provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations including regulations made by the company in general meeting. The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely: ✓ to make calls on shareholders in respect of money unpaid on their shares; ✓ to authorise buy-back of securities under section 68; ✓ to issue securities, including debentures, whether in or outside India. ✓ to borrow monies; ✓ to invest the funds of the company; ✓ to grant loans or give guarantee or provide security in respect of loans; ✓ to approve financial statement and the Board’s report; ✓ to diversify the business of the company; ✓ to approve amalgamation, merger or reconstruction
✓ to take over a company or acquire a controlling or substantial stake in another company; ✓ any other matter which may be prescribed
Section 180- Restrictions on Powers of the Board This section imposes restrictions on the powers of the Board on certain matters, and in respect of those matters, the Board can exercise its power only with the consent of the company by a special resolution.
Functions of Directors:
Strategic Planning: Directors are involved in the formulation and execution of the company’s strategic plans and objectives.
Compliance: Directors ensure that the company complies with all applicable laws, regulations, and corporate governance norms.
Risk Management: Directors participate in identifying, assessing, and managing risks that may affect the company.
Stakeholder Relations: Directors engage with various stakeholders, including shareholders, employees, customers, and regulatory authorities.
Board Meetings: Directors attend and actively participate in board meetings, where important decisions are made.
Conclusion:
It’s crucial to note that the specific powers and functions of directors, including women directors, can also be influenced by the company’s articles of association, board resolutions, and corporate governance policies. The intention behind having women directors is to promote diversity and inclusivity in corporate decision-making, and their powers and functions align with the broader responsibilities of the board of directors.
In the words of Prof. L.C.B. Gower, the winding-up of a company is the process whereby its life is ended, and its property administered for the benefit of its creditors and members. A liquidator is appointed, and he takes control of the company, collects its debts, and finally distributes any surplus among the members in accordance with their rights. The main purpose of winding up a company is to realize its assets and pay its debts expeditiously and fairly in accordance with the law. The Companies Act, 2013 provides for an effective time-bound winding-up process.
Under the process, the life of the company is ended, and its property is administered for the benefit of the members and creditors. A liquidator is appointed to realise the assets and properties of the company. After payment of the debts, any surplus of assets left out will be distributed among the members according to their rights. Winding up does not necessarily mean that the company is insolvent. A perfectly solvent company may be wound up with the approval of members in a general meeting.
As per Section 2(94A) of the Companies Act, 2013, “winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016. Thus, winding up ultimately leads to the dissolution of the company. In between winding up and dissolution, the legal entity of the company remains, and it can be sued in a Tribunal of law.
The meaning of dissolution
A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution, the company’s name shall be struck off by the Registrar from the Register of Companies and he shall also get this fact published in the Official Gazette. The dissolution thus puts an end to the existence of the company.
Modes of dissolution
Dissolution of a company may be brought about in any of the following ways:
Through transfer of a company’s undertaking to another under a scheme of reconstruction or amalgamation. In such a case the transferor company will be dissolved by an order of the Tribunal without being wound up.
Through the winding up of the company, wherein assets of the company are realized and applied towards the payment of its liabilities. The surplus, if any is distributed to the members of the company, in accordance with their rights.
Difference between dissolution and winding up.
Particulars
Winding up
Dissolution
Meaning
Winding up means appointing a liquidator to sell off the assets, divide the proceeds among creditors, and file to the NCLT for dissolution.
Dissolution means to dissolve the company completely. Any further operations cannot be done in the company name.
Process
Winding up is one of the methods through which the dissolution of a company is carried on.
Dissolution is the end process/result of winding up and getting the name stuck off from the Register of Companies.
Existence of Company
The legal entity of the company continues and exists at the commencement and during the winding up process.
The dissolution of the company brings an end to its legal entity status.
Continuation of Business
A company can be allowed to continue its business during the winding up process if it is required for the beneficial winding up of the company.
The company ceases to exist upon its dissolution.
Moderator
Liquidator carries out the process of winding up.
The NCLT passes the order of dissolution.
Activities Included
Filling of winding up resolution or petition, the appointment of the liquidator, receiving declarations, preparation of reports, disclosures to ROC and filing for dissolution to the NCLT.
Filing of resolutions, declarations and other required documents to the NCLT to pass dissolution order.
Modes of winding up
A company may be wound up in any of the following two ways:
Compulsory winding up. (Sec. 272)
Liquidation under Insolvency and Bankruptcy Code, 2016.
Grounds of Winding up
As per section 271, Tribunal may order for the winding up of a company on a petition submitted to it under section 272 on any of the following grounds:
Passing of special resolution for the winding up. When a company has by passing a special resolution resolved to be wound up by the Tribunal, winding up order may be made by the Tribunal. The resolution may be passed for any cause whatever. Tribunal may not order for the winding up if it finds it to be opposed to public interest or the interest of the company as a whole.
Inability to pay debts. As per section 271(2), a company shall be deemed to be unable to pay its debts under the following circumstances: a) Notice for payment. If a creditor to whom the company owes a sum exceeding one lakh rupees has served on the company a demand for payment and the company has for three weeks thereafter neglected to pay the sum or otherwise satisfy the creditor, it shall be deemed that the company has become unable to pay its debt. It is essential that the debt is payable presently. Negligence in paying a debt on demand is omitting to pay without reasonable cause. Mere omission by itself will not amount to negligence. Further, where a debt is bonafide disputed, there is no negligence to pay. Failure to pay public deposits on their due dates amount to inability to pay debts. A dividend when declared becomes a debt due by the company and the shareholder can also apply for company’s liquidation if the company is unable to pay his dividend.
b) Decree. If a decree or order issued by a Tribunal/court in favour of a creditor of the company on execution remains unsatisfied on its execution.
c) Commercial Insolvency. It is proved to the satisfaction of the Tribunal that the company cannot pay its debts. This implies commercial insolvency (when company’s assets are insufficient to meet its existing liabilities) of the company as is disclosed by its balance sheet. The mere fact that the company is incurring losses does not mean that it is unable to pay its debts, for its assets may be more than its liabilities. Liabilities for this purpose will include all contingent and prospective liabilities and even if the debt relied upon in the petition is disputed bona fide, the company may be wound up if the applicant can prove the insolvency of the company. However, non-payment of a bona fide disputed claim is no proof of insolvency.
Just and equitable. The Tribunal may order for the winding up of a company if it thinks that there are just and equitable grounds for doing so. The Tribunal has very large discretionary power in this case. This power has been given to the Tribunal to safeguard the interests of the minority and the weaker group of members. Tribunal, before passing such an order, will take into account the interest of the shareholders, creditors, employees and also the general public. Tribunal may also refuse to grant an order for the compulsory winding up of the company if it is of the opinion that some other remedy is available to the petitioner to redress his grievances and that the demand for the winding up of the company is unreasonable. A few of the examples of ‘just and equitable’ grounds on the basis of which the Tribunal may order for the winding up of the company are given: (i) Oppression of minority. In cases where those who control the company abuse their power to such an extent that it seriously prejudices the interests of minority shareholders, the Tribunal may order for the winding up of the company. (ii) Deadlock in management. Where there is a complete deadlock in the management of the company, the company may be ordered to be wound up. (iii) Loss of substratum. Where the objects for which a company was constituted have either failed or become substantially impossible to be carried out, i.e., ‘substratum of the company’ is lost. (iv) Losses. When the business of a company cannot be carried on except at a loss, the company may be wound up by an order of the Tribunal on just and equitable grounds. But mere apprehension on the part of some shareholders that the company will not be able to earn profits cannot be just and equitable ground for the winding up order.
(v) Fraudulent object. If the business or the objects of the company are fraudulent or illegal or have become illegal with the changes in the law, the Tribunal may order the company to be wound up on just and equitable grounds. However, the mere fact of having been a fraud in the promotion or fraudulent misrepresentation in the prospectus will not be sufficient ground for a winding up order, for the majority of shareholders may waive the fraud.
4. If the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years.
5. If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.
6. If on an application made by the Registrar or any other person authorized by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up.
Example: Re. Yenidje Tobacco Ltd. W and R were the only two shareholders as well as the directors of a private company. Subsequently some serious differences developed, and they became hostile to each other. They stopped even talking to each other. It was held that there was complete deadlock in the management of the company and, therefore, it would be just and equitable to order for its winding up.
Who may file petition?
An application for the winding up of a company has to be made by way of petition to the Court. A petition may be presented under Section 272 by any of the following persons: (a) the company; or (b) any creditor or creditors. (c) any contributory or contributories. (d) all or any of the parties specified above in clauses (a), (b), (c) together (e) the Registrar. (f) any person authorized by the Central Government in that behalf. (g) by the Central Government or State Government in case of company acting against the interest of the sovereignty and integrity of India. Section 272 provides that the petition for compulsory winding up of a company may be filed in the tribunal by any of the following persons:
Company. A company can make a petition to the Tribunal for its winding up by an order of the Tribunal, when the members of the company have resolved by passing a special resolution to wind up the affairs of the company. Managing director or the directors cannot file such a petition on their own account unless they do it on behalf of the company and with the proper authority of the members in the general meeting. (Section 272(5))
Creditors. A creditor may make a petition to the Tribunal for the winding up of the company, when he is able to prove that the company is unable to pay off his debts exceeding Rs. 1, 00,000 within three weeks of the notice of demand or where a decree or any other process issued by the Tribunal in favour of a creditor of a company is returned unsatisfied in whole or in part. Law does not recognize any difference between the secured and unsecured creditors for this purpose. ‘A secured creditor is as much entitled as of right to file a petition as an unsecured creditor.’ But in case of secured creditor’s petition, winding up order shall not be made where the security is adequate, and no other creditor supports the petition. A contingent or prospective creditor can also file a winding up petition if he obtains the prior consent of the Tribunal. The Tribunal shall grant the permission only when: (i) It is satisfied that there is a prima facie case for the winding up of the company; and (ii) The creditor provides such security for costs as the Tribunal thinks reasonable. The Tribunal may, before passing a winding up order, on a creditor’s petition, ascertain the wishes of other creditors. If the majority of the creditors in value oppose, and the Tribunal having regard to the company’s assets and liabilities considers the opposition reasonable, it may refuse to pass a winding up order.
Contributories. A contributory3 shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder. (Section 272(3))
Registrar. Registrar may with the previous sanction of the Central Government make petition to the Tribunal for the winding up the company only in the following cases: a) when it appears that the company has become unable to pay debts from the accounts of the company or from the report of the inspectors appointed by the Central Government under section 210; or b) If the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years. c) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality. d) if on an application made by the Registrar or any other person authorized by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose, or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up.
Modes of Buyback of Shares of Private/Unlisted Company One of the first points of interest are the various modes through which a company can execute a share buyback:
1. Proportionate Basis: A company can choose to buy back shares from its existing shareholders or security holders on a proportionate basis. This means that the allocation of buyback shares is directly proportional to their current ownership in the company.
2. Open Market: Alternatively, companies can opt to buy back shares from the open market. This method involves purchasing shares from the open stock market, which provides more flexibility and less direct influence over the shareholders involved.
3. Employee Schemes: Another avenue for buyback lies in purchasing securities issued to employees through schemes like stock options or sweat equity. This approach aligns with incentivizing and rewarding the company’s workforce.
Sources for Buyback of Shares of Private/Unlisted Company Equally important is understanding where the funds for share buybacks can be sourced from. Companies have several options, including Free Reserves: Utilizing the accumulated free reserves of the company to fund the buyback process. Securities Premium Account: Tapping into the securities premium account to finance the buyback.
Proceeds from Share or Securities Issuance: Alternatively, companies can use the proceeds generated from the issuance of new shares or securities to facilitate the buyback. However, it’s vital to note that the source of funds for buybacks cannot come from the proceeds of a prior issuance of the same category of shares or securities.
This rule ensures the integrity of the buyback process and prevents any misuse of funds. Essential Conditions for Buyback of Shares of Private/Unlisted Company For a successful and compliant buyback, certain conditions must be met: Authorization by Company’s Articles: The company’s articles of association must specifically authorize share capital buybacks. In cases where the articles lack relevant provisions, they need to be modified in accordance with the provisions of the Companies Act, 2013. Shareholder Approval via Special Resolution:
Except for specific cases, buybacks require shareholder approval through a special resolution passed in a general meeting. However, if the buyback is 10% or less of the company’s total paid-up equity capital and free reserves, board authorization through a board resolution is sufficient. Maximum Limit:
The aggregate value of the shares bought back should not exceed 25% of the paid-up share capital and free reserves of the company. Debt-Equity Ratio Post-Buyback: Following the buyback, the debt-equity ratio of the company must not exceed 2:1. Fully Paid-Up Shares or Securities: Only fully paid-up shares or securities can be bought back.
Completion Period: Every buyback process must be completed within one year from the date of passing the special resolution or board resolution, as the case may be. Minimum Gap Between Buyback Offers: There must be a minimum gap of one year between two successive buyback offers. These conditions ensure that buybacks are conducted with transparency, accountability, and adherence to regulatory norms. Step-by-Step Process for Buyback of Shares of Private/Unlisted Company Let’s navigate through the step-by-step process that private or unlisted companies need to follow for a successful buyback:
1. Article Authorization: Ensure that the company’s articles of association authorize the buyback of share capital. In case of the absence of relevant provisions, modify the articles in line with the provisions of the Companies Act, 2013.
2. Convene a Board Meeting: If the buyback constitutes 10% or less of the company’s total paid-up equity capital and free reserves, the Board of Directors can authorize the proposal through a resolution passed during a board meeting.
3. Convene a General Meeting: For any buyback exceeding the 10% threshold, the proposal must be authorized by a special resolution passed in a duly convened General Meeting.
4. File Form MGT-14 with ROC: Within 30 days of passing the Board Resolution or Special Resolution in the General Meeting, as the case may be, file Form MGT-14 with the Registrar of Companies (ROC). This submission should include requisite documents and fees as specified in the Companies (Registration offices and fees) Rules, 2014.
5. Declaration of Solvency: Prior to the buyback, file a declaration of solvency in Form SH.9 along with the letter of offer in Form SH-8. This declaration should be signed by a minimum of two directors, with one of them being the managing director, if applicable. The declaration should affirm that the Board of Directors has conducted a thorough assessment of the company’s financial affairs and ascertained its capability to meet its liabilities without rendering the company insolvent within a year from the declaration’s adoption.
6. Dispatch the Letter of Offer: Once the necessary filings are made, dispatch the letter of offer to shareholders or security holders. This should occur promptly after filing but not later than 20 days from the filing date with the Registrar of Companies.
7. Offer Period: The offer for the buyback should remain open for a period of not less than 15 days and not exceeding 20 days from the date of dispatch of the letter of offer. However, in cases where all members of the company are in agreement, the offer period may be less than 15 days.
8. Verification of Offer: The company is required to complete the verification of offers received within 15 days from the closure of the offer. If no communication of rejection is conveyed within 21 days from the closure date, the shares or other securities lodged will be deemed accepted.
9. Open a Separate Bank Account: Following the closure of the offer, the company must immediately open a separate bank account. This account will hold the necessary funds to cover the entire sum due and payable as consideration for the shares tendered for buyback, as per the stipulated rules.
10. Extinguishment of Shares/Securities: Within seven days of the last date of completion of the buyback, the company should extinguish and physically destroy the shares or securities that were bought back. This step ensures the removal of such shares or securities from circulation.
11. File Form SH-11: After the completion of the buyback, the company should file a return in Form No. SH.11 within 30 days of the completion date. This filing should be made with the Registrar, accompanied by stipulated fees and specific documents, including a description of the bought-back shares or securities, particulars relating to holders of securities before the buyback, a certified true copy of the special resolution passed at the general meeting, a certified true copy of the board resolution authorizing the buyback, the company’s balance sheet, and a declaration certifying that the buyback was conducted in compliance with the provisions of the Companies Act and the relevant rules.
12. Maintain the Statutory Register: The company is also obligated to maintain a register of shares or other securities that have been bought back. This register, Form No. SH.10, should be housed at the company’s registered office and be in the custody of the Company Secretary or another individual authorized by the board for this purpose.
The entries in this register should be authenticated by the Company Secretary or the authorized individual. Navigating Complex Waters: Share Buybacks and the Companies Act Understanding and adhering to Sections 68, 69, and 70 of the Companies Act, 2013, along with the ramifications of Rule 17 from the Companies (Share Capital and Debentures) Amendment Rules, 2016, is crucial for private and unlisted companies aiming to conduct successful share buybacks. Compliance not only ensures seamless navigation through the intricate landscape of corporate regulations but also upholds transparency, accountability, and the credibility of the company’s operations.
The process of appointing auditors in accordance with the Companies Act, 2013 involves a structured set of rules and regulations. Understanding the provisions outlined in Section 139, as well as the associated rules and guidelines, is crucial for companies to ensure a smooth and compliant auditor appointment process.
An auditor appointment covers aspects such as the term of appointment, eligibility, procedures, and more. Appointment of Auditor Under section 139 of the Companies Act, 2013 read with Companies (Audit & Auditors) Rules, 2014. Section 139 (1)– Every Company shall at the 1st AGM, appoint an individual or firm as an auditor who shall hold the office from the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th AGM. As per Rule 4 of the Companies (Audit & Auditors) Rules, 2014, Before the appointment is made, the written consent of such appointment and certificate shall be obtained from the auditor. The Auditor shall submit a Certificate that-
a. He is not disqualified for appointment under the Companies Act, 2013 and Chartered Accountants Act, 1949 and the rules or regulations made thereunder.
b. The proposed appointment is as per the term provided under the Act;
c. The proposed appointment is within the limits laid down by or under the authority of the Act;
d. The list of proceedings against the auditor or audit firm or any partner of the audit firm is pending, if any, as disclosed in the certificate.
The Notice to the registrar about the appointment of an auditor shall be in Form ADT-1 within 15 days from the date of appointment. Section 139(2) read with rule 5 of the Companies (Audit & Auditors) Rules, 2014- The following classes of Companies excluding OPC and Small Companies shall not appoint or reappoint- Listed Company or Unlisted Public Company having a PSC of Rs. 10 Crore or more; Private Limited Company having a PSC of Rs. 50 Crore or more; All Companies having public borrowings from financial institutions, banks or public deposits of Rs. 50 crore or more;
(a) An individual as auditor for more than 1 term of 5 consecutive years, and
(b) an audit firm as auditor for more than 2 terms of 5 consecutive years. Provided that – an individual auditor or an audit firm has completed the term under clauses (a) and (b) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term.
On the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a Company immediately preceding the financial year, shall be appointed as auditor of the same Company for a period of five years. Section 139(3)- The audit shall be conducted by more than 1 auditor. Section 139(5)- In the case of a Govt. Company or any other Company owned or controlled directly or indirectly, by the Central Govt. or State Govt. or partly by the Central Govt. or partly by the 1 or more State Govt., the Comptroller and Auditor-General (C&AG) of India shall, in respect of financial year, appoint an auditor within a period of 180 days from the commencement of the financial year, who shall hold the office till the conclusion the AGM. [The 1st Auditor shall be appointed by the C&AG of India within 60 days from the date of registration of the Company and in case of failure of C&AG, the BOD of the Company shall appoint such auditor within the next 30 days and in case of failure of the Board, it shall inform the members of the Company who shall appoint such auditor within 60 days at an EGM, who shall hold the office till the conclusion 1st AGM].
Section 139(6)- The First Auditor of Company other than Govt. Company shall be appointed by the BOD within 30 days from the date of registration of Company and in case of failure of Board to appoint such auditor, it shall inform the members of the company who shall within 90 days at an EGM appoint such auditor and such auditor shall hold the office till the conclusion of 1st AGM. Any Casual Vacancy in the office of an Auditor shall-
a. In the case of Companies other than Govt. Company, be filled by the BOD within 30 days but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall be approved by the company at a general meeting convened within 3 months of recommendation of the Board and hold the office till the conclusion next AGM.
b. In case of Company is filled by the C&AG of India within 30 days and in case of failure of C&AG of India, the BOD shall fill the vacancy within the next 30 days. A retiring auditor may be reappointed at an AGM if- a. He is not disqualified for the appointment. b. He has not given a notice in writing of his unwillingness to be reappointed
c. Special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be reappointed. Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
Rule 3 of Companies (Audit & Auditors) Rules, 2014, deals with the Manner and Procedure of Selection and Appointment of Auditors.
1. In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as an auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.
2. The Audit Committee or the Board, as the case may be, may call for such other information from the proposed auditor as it may deem fit.
3. Where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases, the Board shall consider and recommend an individual or a firm as auditor to the members in the annual general meeting for appointment.
4. If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the annual general meeting.
5. If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.
6. If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration by the members in the annual general meeting; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the annual general meeting.
7. The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such appointment has been made being counted as the first meeting. The word “firm” shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008.
Conclusion:
The Companies Act, of 2013, which governs the auditor appointment procedure, is intended to ensure openness, responsibility, and conformity to legal requirements. Companies can confidently hire auditors who fulfil the necessary credentials and who can play a significant role in protecting the financial integrity of the organization by adhering to the processes outlined in Section 139 and the related laws. Maintaining compliance while navigating the auditor appointment process smoothly requires keeping current with the rules and processes stated in the Act.
Corporate personality is a creation of law. The legal personality of the corporation is recognized in English and Indian Law. A corporation is an artificial person enjoying the direction of the capacity to have rights and duties and hold property. A corporation is distinguished by reference to different kinds of things which the law selects for personification. The individuals forming the corpus of the corporation are called its members. The juristic personality of corporations presupposes the existence of three conditions. 1) Firstly, a group or body of human beings must be associated with a particular purpose. 2) Secondly, there must be organs through which the corporation functions, and 3) Thirdly, the corporation is attributed will (animus) by legal fiction.
A corporation that has been incorporated in accordance with the Act is given a corporate personality, which entitles it to use its own name, act in its name, have its own seal, and own assets that are different from those of its members. The members who make up it are not the same ‘person’ as it. Consequently, it has ownership potential. owning property, incurring debts, borrowing funds, keeping money in a bank account, hiring staff, making contracts, and being sued or sued against in the same way as an individual. Its members are its owners, but they may also be its debtors. Even though a shareholder owns nearly the whole share capital, he cannot be held responsible for the company’s actions.
The concept of the corporate personality of a company was recognized in the case of Saloman v. Saloman &Co.Ltd. The facts of the case are as such: Solomon was a leather merchant. Due to the overwhelming response to his leather business, he decided to convert his business into a Limited Company- Solomon & Co. Ltd. The company consisted of Solomon, his wife and five of his children as members. The company purchased the business of Solomon for £39,000, the purchase consideration was paid in terms of £10,000 debentures conferring a charge over the company’s assets, £20,000 in fully paid £1 share each and the balance in cash. Within a year of incorporation of the company, it ran into a financial crisis and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Solomon himself). And nothing was left for the unsecured creditors. The House of Lords held that the company has been validly constituted since the Act only required seven members to hold at least one share each. It said nothing about their being independent, or that there should be anything like balance of power in the constitution of the company. Hence, the business belonged to the company and not to Solomon. Solomon was its agent. The company was not agent of Solomon.
The shareholders are not the agents of the company and so they cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus, ‘incorporation’ is the act of forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights and obligations and is dealt with in accordance with law. In other words, the entity acts like a natural person but only through a designated person, whose acts are processed within the ambit of law [Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139].
The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, recognised the principle of the separate legal entity even much earlier than the decision in Salomon v. Salomon & Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the ground that since they themselves were also the shareholders in the company, it was nothing but a transfer from them in one name to themselves under another name. While rejecting this Calcutta High Court observed: “The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.
Conclusion:
From the date of its incorporation, a company becomes in law a different person altogether from the member who composes it. Thus, an incorporated company has a legal personality distinct from that of its members from the date of its incorporation.
A company is an artificial person according to the law. It is capable of exercising rights, carrying out obligations, and holding property in its own name. As a result, the law was the only source of inspiration for the idea of corporate personality. The corporate personality of a corporation under the 2013 Companies Act is the best illustration of this. According to the legislation, such a corporation has its own legal identity. The members and representatives of such a corporation serve as its representatives. However, unlike a regular person, these corporations remain indefinitely.
Corporate Governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate Governance essentially involves balancing the interest of the company’s many stakeholders such as shareholders, management, customers, suppliers, financiers, government and the community.
Corporate governance enables organisations to achieve their goals, control risks, and ensure compliance. Good corporate governance incorporates a set of rules that define the relationship between stakeholders, management and the board of directors of a company and influence how the company is operating.
Principles of Corporate Governance
The principles of Corporate Governance are:
Accountability
Accountability means to be answerable and be obligated to take responsibility for one’s actions. By doing so, two things can be ensured-
That the management is accountable to the Board of Directors.
That the Board of Directors is accountable to the shareholders of the company.
This principle gives confidence to shareholders in the business of the company that in case of any unfavourable situation, the persons responsible will be held in charge.
Fairness
Fairness gives shareholders an opportunity to voice their grievances and address any issues relating to the violation of shareholders’ rights. This principle deals with the protection of shareholders’ rights, treating all shareholders equally without any personal favouritism, and granting redressal for any violations of rights.
Transparency
Providing clear information about a company’s policies and practices and the decisions that affect the rights of the shareholders represents transparency. This helps to build trust and a sense of togetherness between the top management and the stakeholders. It ensures accurate and full disclosure timely on material matters like financial condition, performance, and ownership.
Independence
Independence means the ability to make decisions freely without being unduly influenced. Decisions should be made freely without having any personal interest in the company. It ensures the reduction in conflict of interest. Corporate governance suggests the appointment of independent directors and advisors so that decisions are taken responsibly without influence.
Social Responsibility
Apart from the 4 main principles, there is an additional principle of corporate governance. Company social responsibility obligates the company to be aware of social issues and take action to address them. In this way, the company creates a positive image in the industry. The first step towards Corporate Social Responsibility is to practice good Corporate Governance
Conclusion:
Corporate Governance is a continuous process of applying the best management practices, ensuring the law is followed the way intended, and adhering to ethical standards by a firm for effective management, meeting stakeholder responsibilities, and complying with corporate social obligations.
It contains policies and rules to maintain a strong relationship between the owners of the company (shareholders), the Board of Directors, management, and various stakeholders like employees, customers, the Government, suppliers, and the general public. It applies to all kinds of organizations-profit or not-for-profit.
The incorporation of OPC into the legal system is a step that would promote the corporatization of microbusinesses and entrepreneurship with a less onerous legal framework so that the small business owner is not required to spend a lot of time, energy, and money on intricate legal compliances. Individuals will be able to contribute to economic progress thanks to this, and it will also create job opportunities. Under the Companies Act of 2013, the One Person Company, a sole proprietorship and company type of business, has been given concessional/relaxed conditions. Under the One Person Company (OPC) idea, the Companies Act of 2013 now allows a single national person to form a company.
Origin of the concept in India In the report of the Dr. J.J. Irani Committee, the idea of OPC was floated. OPC was briefly mentioned by the Irani Committee in its report. The committee offered numerous classifications of firms in Chapter III, “Classification and Registration of Companies,” as shown below.
1 The concept of ‘One Person Company’ may be introduced in the Act with following characteristics :- (a) OPC may be registered as a private Company with one member and may also have at least one director; (b) Adequate safeguards in case of death/disability of the sole person should be provided through appointment of another individual as Nominee Director. On the demise of the original director, the nominee director will manage the affairs of the company till the date of transmission of shares to legal heirsof the demised member. (c) Letters ‘OPC’ to be suffixed with the name of One Person
Companies to distinguish it from other companies.” OPC’s effect on Indian entrepreneurship In India, the idea of OPC is still in its infancy and needs more time to develop and be completely embraced by the corporate community. The OPC style of company organization is poised to overtake other business organization models in the future, particularly among small business owners. The advantages of using this idea are many, to name a few –
Minimal paper work and compliances
Ability to form a separate legal entity with just one member
Provision for conversion to other types of legal entities by induction of more members and amendment in the Memorandum of Association.
The One Person Company concept holds a bright future for small traders, entrepreneurs with low risk taking capacity, artisans and other service providers.
The OPC would act as a launch pad for such entrepreneurs to showcase their capabilities in the global arena. The counterparts of Indian OPCs in Europe, United States and Australia have resulted in further strengthening of the economies in the respective countries. OPCs in India are aimed at structured, organised business units, having a separate legal entity ultimately playing a crucial role in further strengthening of the Indian economy.
One Person Company: As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as a membe.
Salient features of OPC
The salient features of OPC are:
Desire for personal freedom that allows the Professional skilled person to adopt the business of his choice.
Personality driven passion and implementation of a business plan.
The desire of the entrepreneurial person to take extra risk and willingness to take additional responsibility.
Personal commitment to the business which is a sole idea of the person and close to his heart.
It is run by individuals yet OPCs are a separate legal entity similar to that of any registered corporate.
A One Person Company is incorporated as a private limited company.
It must have only one member at any point of time and may have only one director.
The member and nominee should be natural persons, Indian Citizens and resident in India. The term “resident in India” means a person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year.
One person cannot incorporate more than one OPC or become nominee in more than one OPC.
If a member of OPC becomes a member in another OPC by virtue of his being nominee in that OPC then within 180 days he shall have to meet the eligibility criteria of being Member in one OPC.
OPC to lose its status if paid up capital exceeds Rs. 50 lakhs or average annual turnover is more than 2 crores in three immediate preceding consecutive years.
No minor shall become member or nominee of the One Person Company or hold share with beneficial interest.
Such Company cannot be incorporated or converted into a company under section 8 of the Companies Act, 2013.
Such Company cannot carry out Non Banking Financial Investment activities including investment in securities of any body corporate.
No such company can convert voluntarily into any kind of company unless 2 years have expired from the date of incorporation, except in cases where capital or turnover threshold limits are reached.
An existing private company other than a company registered under section 8 of the Act which has paid up share capital of Rs. 50 Lakhs or less or average annual turnover during the relevant period is Rs. 2 Crores or less may convert itself into one person company by passing a special resolution in the general meeting.
Goodwill is an intangible asset associated with the purchase of one company by another. Specifically, goodwill is recorded in a situation in which the purchase price is higher than the sum of the fair value of all visible solid assets and intangible assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.
Good will Meaning in Accounting
Goodwill arises when a company acquires another entire business. The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase.
How to Calculate Goodwill
To calculate goodwill, we should take the purchase price of a company and subtract the fair market value of identifiable assets and liabilities.
Goodwill Formula:
Goodwill = P−(A+L)
where,
P = Purchase price of the target company
A = Fair market value of assets
L = Fair market value of liabilities
Types of Goodwill
There are two distinct types:
Purchased: Purchased goodwill is the difference between the value paid for an enterprise as a going concern and the sum of its assets less the sum of its liabilities, each item of which has been separately identified and valued.
Inherent: It is the value of the business in excess of the fair value of its separable net assets. It is referred to as internally generated goodwill, and it arises over a period of time due to the good reputation of a business. It can also be called as self generated or non-purchased goodwill.
For example, suppose you are selling an outstanding product or providing excellent service consistently. In that case, there is a high chance of an increase in goodwill.
Goodwill Accounting Treatment
There are five types of accounting treatment of goodwill at the time of admission of a new partner:
When the amount of goodwill is brought in cash and not recorded in books.
When the new partner brings his share of goodwill in cash and is retained in business.
When the new partner does not bring his share of goodwill in cash.
When goodwill already exists in the books.
When goodwill is raised at its full value.
Goodwill Example
To put it in a simple term, a Company named ABC’s assets minus liabilities is ₹10 crores, and another company purchases the company ABC for ₹15 crores, the premium value following the acquisition is ₹5 crores. This ₹5 crores will be included on the acquirer’s balance sheet as goodwill. It is also recorded when the purchase price of the target company is higher than the debt that is assumed.
Factors Affecting Goodwill
The following factors have an impact on the goodwill, which are:
Location of the business : A business which is located in a suitable location will have a more favourable chance of higher goodwill than a business located in a remote location.
Quality of goods and services: A business which is providing a higher quality of goods and services stands a great chance of earning more goodwill than competitors who provide inferior goods and services.
Efficiency of management : An efficient management results in increase in profit of the business which enhances the goodwill of the business.
Business Risk : A business having lesser risk has a better chance of creating goodwill than a high risk business.
Nature of business: It means the type of products that business deals with, the level of competition in the market, demand for the products and the regulations impacting the business. A business having a favourable outcome in all these areas will have a greater goodwill.
Favourable Contracts: A firm will enjoy a higher goodwill if it has access to favourable contracts for sale of products.
Possession of trade mark and patents : Firms that have patents and trademarks will enjoy monopoly in the market, which will contribute to the increase in the goodwill of the firm.
Capital : A firm with a higher return on investment along with lesser capital investment will be considered by buyers as more profitable and having more goodwill.
Need for Valuation of Goodwill
The difference in the profit-sharing ratio (PSR) amongst the existing partners
Admission of a new partner
Retirement of a partner
Death of a partner
Dissolution of an enterprise involving the sale of the business as a trading concern
Consolidation of partnership firms
Methods of Valuation of Goodwill
The significant methodologies of valuation are mentioned :
Average Profits Method
Super Profits Method
Capitalisation Method
How Is Goodwill Used in Investing?
Evaluating goodwill is a challenging but critical skill for many investors. After all, when reading a company’s balance sheet, it can be very difficult to tell whether the goodwill it claims to hold is in fact justified. For example, a company might claim that its goodwill is based on the brand recognition and customer loyalty of the company it acquired.
When analyzing a company’s balance sheet, investors will therefore scrutinize what is behind its stated goodwill in order to determine whether that goodwill may need to be written off in the future. In some cases, the opposite can also occur, with investors believing that the true value of a company’s goodwill is greater than that stated on its balance sheet.
How Is Goodwill Different From Other Assets?
Shown on the balance sheet, goodwill is an intangible asset that is created when one company acquires another company for a price greater than its net asset value. Unlike other assets that have a discernible useful life, goodwill is not amortized or depreciated but is instead periodically tested for goodwill impairment. If the goodwill is thought to be impaired, the value of goodwill must be written off, reducing the company’s earnings.
Limitations of Goodwill
Goodwill is difficult to price, and negative goodwill can occur when an acquirer purchases a company for less than its fair market value. This usually occurs when the target company cannot or will not negotiate a fair price for its acquisition.
Negative goodwill is usually seen in distressed sales and is recorded as income on the acquirer’s income statement.
There is also the risk that a previously successful company could face insolvency. When this happens, investors deduct goodwill from their determinations of residual equity.
The reason for this is that, at the point of insolvency, the goodwill the company previously enjoyed has no resale value.
