With the new Companies Act, the law has become more stringent for private companies than for public companies, especially while appointing directors
Moving from the Companies Act 1956 to the Companies Act 2013 is like shifting from your old house to a new one. In the old house, where you have stayed for years, everything would have found its own place – the shoes, the clothes, umbrella, first aid, brooms, and whatever else you need in your household. Your legs can find their own way, even in pitch dark of night – they know the way to the bathroom, to the stairs, they even know where the stairs end.
As you move into the new house, first, there is a huge process of “getting used to” – which is anyway usual for any such shifting. But the biggest issue is – we get to realise several shortcomings that we did not realise until we shifted. This might include silly things such as an electric point that we missed, or a water outlet that is not working, and so on. In case of the new house, all these are our own follies, or those of the architect – so we go ahead and get them fixed. In case of the new Act – the fixing process is the long trail of amending the law, and in the meantime, you have the 6-months-in-jail staring at you all the time!
One such folly is the provisions of the new law relating to the appointment of directors in case of private companies. Notably, about 90% of all incorporated companies are private companies, and these companies, being incorporated proprietorships or small businesses in essence, may not be well served by competent professionals. Hence, the chances of errors and omissions are substantially high, exposing the companies to the spectre of hefty prosecutions.
Appointment of directors in case of private companies: Old law
English law, based on which the 1956 Act was drafted, was quite reasoned and seasoned, and had stood the test of over six decades. Lately, UK has gone for substantial de-regulation of private companies, realising that these companies are de facto partnerships, and there is no reason for these companies to suffer regulation at par with larger companies where public interest is significant.
The rules about appointment of directors, under the 1956 Act, were as follows:
In case of private companies, there was absolute liberty as to the manner of appointment of directors. The articles could have named all directors, or the articles could have laid the manner of appointment of directors.
In case of public companies, at least two third of the total number had to be those appointed by general meetings. That is, public companies had the right to self-regulate appointment of one third of the total board strength.
The board could, subject to articles, appoint additional directors. These were pro-tem directors – they will lay down their office at the AGM and may be regularised there.
The board could also fill up casual vacancies.
The board could also appoint alternate directors.
In essence, in case of private companies, there was absolute liberty as to the appointment of directors. Private companies could self-regulate the process by their articles.
Appointment of directors in private companies as per new law:
The liberty given to private companies to self-regulate the appointment process has, surprisingly, been completely taken away in the new Act. This sounds completely paradoxical, in view of the fact that in case of public companies, they still have the liberty to self-regulate to the extent of one third of the board strength.
This highly anomalous and surprising implication is coming due to a combined reading of sec 152 (2) and sec 152 (6) (b).
Section 152 (2) casts a generic, unexceptional principle, stating that except where the Act provides a carve-out, all director of all companies will be appointed by the general meeting. This provision is applicable to private companies too.
Sec 152 (6) (b) provides liberty, but only to public companies, to appoint one third of the total board by a self-regulated process. While there was an exception to private companies in Sec. 255 (2) of the 1956 Act, that exception has been dropped while transporting the provisions into the new Act.
It could not be the case that such was the intent of the lawmaker – there is absolutely no case for imposing more stringent regulations in case of private companies, than in case of public companies.
Even casual vacancies cannot be filled by the board:
Now, as if the anomaly above was not enough, sec 161 (4) empowering the board to fill a casual vacancy is also not applicable to a private company. This means, the board of a private company cannot act to fill up a casual vacancy even – it will have to move to call a general meeting, and get he vacancy filled up only in general meetings.
What if the section is violated?
Since the 8-lakh odd companies, sitting with more than 16-lakh directors, may not even be aware of this change of law, what is the provision gets violated? There you have section 159 to take care of – which provides for a jail up to six months, of course with/without a fine too!
It is no one’s case that the move from the 1956 Act to the 2013 Act was to scare people away from corporatisation. In fact, the much hyped concept of one person company (OPC) was explicitly for encouraging small businesses to move to the corporate form. However, what has clearly and undenyingly happened, not due to the intent of the lawmaker, but the myriad follies of the lawmaker, is that the corporate form has become strangulatingly difficult for small companies.
It is certainly necessary to revisit these provisions and exempt private companies where exemptions are logically necessary. Private companies must be regulated with a reason, and not exempted for a reason.
is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance. He has written a book titled “Securitisation, Asset Reconstruction and Enforcement of Security Interests
”, published by Butterworths Lexis-Nexis Wadhwa.)