MCA’s Clarifications are making changes to legislation without Parliamentary oversight
MCA's latest circular on 'transitional period for resolutions passed Under the Companies Act, 1956’ adds to a long list of such clarifications that seem to be standing in for lawmaking
The Ministry of Corporate Affairs’ (MCA) new avatar as the lawmaker seems to be gaining ground by the day, as is their trend of bringing out more ‘clarification’ circulars. These circulars seem to rewrite the law of the land rather than just clarify it. The subject of the latest ‘clarification’ circular of the MCA, dated 23 July 2014, is ‘Clarification on transitional period for resolutions passed Under the Companies Act, 1956’.
This new Circular seeks to protect the validity of the resolutions passed under the erstwhile Companies Act, 1956 (‘Act of 1956’) which was under various stages of implementation at the time of commencement of the new Companies Act, 2013 (‘Act of 2013’). Since the stance in this regard was pretty clear in the Act of 2013 read with the General Clauses Act, 1897, a mere clarification from the MCA in this regard would have been enough. Instead, the Circular comes loaded with riders which has made it seem increasingly as though the MCA has taken unto itself the responsibility of writing the law according to its own whims and fancies.
In this article we discuss the effect of the Circular by delving into some of the resolutions passed under the Act of 1956 which might be affected by this Circular.
Effect of repealed enactments
Section 6 of General Clauses Act, 1897
Section 6 of the General Clauses Act provides that where a Central Act has been repealed, then, unless a different intention appears, the repeal shall not affect the previous operation of the enactment so repealed or anything duly done or suffered thereunder or affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed.
Section 465 of the Act, 2013
Section 465 (2) (a) of the Act, 2013 also lays down a similar provision. It provides that unless something has been done under a repealed enactment which is inconsistent with the provisions of the Act of 2013, the said act shall be deemed to have been done or taken under the corresponding provisions of the Act of 2013.
Further, sub-clause (b) goes on to say that ‘any order, rule, notification, regulation, appointment, conveyance, mortgage, deed, document or agreement made, fee directed, resolution passed, direction given, proceeding taken, instrument executed or issued, or thing done under or in pursuance of any repealed enactment shall, if in force at the commencement of this Act, continue to be in force, and shall have effect as if made, directed, passed, given, taken, executed, issued or done under or in pursuance of this Act’.
It is clear from the above provisions, that any act done in pursuance of a repealed enactment, that is not inconsistent with the provisions of the Act of 2013 would have been deemed to be passed under the provisions of this Act.
Contents of the Circular
The Circular provides that ‘resolutions approved or passed by companies under relevant applicable provisions of the Old Act during the period from 1st September, 2O13 to 31st March, 2014, can be implemented, in accordance with provisions of the Old Act, not withstanding the repeal of the relevant provision subject to the conditions:
(a) that the implementation of the resolution actually commenced before 1st April, 2014 and
(b) that this transitional arrangement will be available upto expiry of one year from the passing of the resolution or six months from the commencement of the corresponding provision in New Act whichever is later.’
With the above provisions, the Circular practically seeks to rewrite the law and has laid down a series of limitations for the clarification to take effect. Instead of providing validity to the resolutions passed under the Act, 1956, it has in turn, set out their expiry date i.e. implementation of the resolutions must be done within one year from passing the resolution or six months from the commencement of the Act of 2013, whichever is later. Further, it lays down that the implementation of such resolutions should have commenced before 1 April 2014 for taking benefit of the Circular. This means that resolutions passed under the Act of 2013, pending implementation as on 1 April 2014 would mandatorily have to comply with the provisions of the new Act, as applicable.
The Circular also provides than in case the resolutions are amended after their passing, the amendment shall be in accordance with the relevant provisions of the new Act of 2013. However it can be presumed that if they are amended prior to the relevant provision of the Act of 2013 comes into effect, the same may not be followed.
No clarity has been provided in respect of the status of resolutions passed prior to 1 September, 2014. Can their implementation be in accordance with the old Act of 1956? The question remains unanswered.
Sections / Provisions of the Act of 1956 inconsistent with the Act of 2013
Below we discuss in briefm a few of the sections of the Act of 2013 which had different requirements than the Act of 1956.
(i) Section 42 of the Act of 2013 pertaining to private placement of securities
Under the Act of 1956 there was hardly any compliance required for private placement of securities. The requirements under the Act of 2013 have changed drastically and have laid down a plethora of compliances to be done in this regard. Thus, resolutions passed under the Act of 1956 that were not implemented before 1 April 2014 will have to comply with the newer and stricter regulations.
(ii) Borrowings from banks pursuant to Section 180 (1) (c) of the Act of 2013
Section 180 requires a special resolution to be passed for borrowings by the company that exceed the aggregate of the paid up share capital and free reserves of the company. This section was implemented w.e.f. 12 September 2013. The Act of 1956, however, required an ordinary resolution for this purpose.
In view of the change in the provisions, banks have been asking for fresh resolutions to be passed under the provisions of the Act of 2013 before granting of loans. This confusion was however clarified by the MCA vide its circular dated 25 March, 2014 which provided that resolutions passed in this regard under the erstwhile section 293 of the Act of 1956 would hold good for a period of one year from the date of commencement of the section.
(iii) Related Party Transactions under Section 188 of the Act of 2013.
The list of related party transactions under the Act of 2013 has been widely enhanced over and above the erstwhile provisions under Section 297. Moreover, compliances with respect to such transactions now include passing of special resolutions. Concepts such as ‘ordinary course of business’ and ‘arm’s length’ have been introduced.
Thus resolutions for entering into related party transactions under the old Act of 1956 which were not implemented before 1 April 2014, will have to meet many compliance requirements as under the new Act of 2013.
(Shampita Das works as an Associate in Corporate Law Group at Vinod Kothari & Company)