For the sake of restoring credibility, the least that should be done is to pilot the Companies Bill.
The year 2011 has ended on a note of dissaray, with the Lok Pal Bill floundering, Retail FDI on hold, and the Companies Bill, whose passage was assured, back to the cold storage. For the sake of restoring credibility, the least that should be done is to pilot the Companies Bill, the least contentious and most ancient , on priority.
Having reviewed the final draft of the Bill, one fails to understand why it remained a protected document with the MCA. Having done several rounds, the 2009 version was regarded as definitive, but eventually withdrawn, and the 2011 Bill passed by the Cabinet, reportedly undergoing last minute changes, after the clear chit from the Parliamentary Standing Committee. The Bill was introduced in Parliament as a trade off for stalling the Multi Brand Retail process on the assumption that it was denuded of all snagging items. Media reports indicate that opposition parties allege that the imprecise language of the Statement of Objects and Reasons (SOR) was a reason for the rejection, not a satisfactory explanation, though the reasons stated in paras 2 to 4 of the SOR charting the history of the ‘travails’ of the Bill makes a tedious and uninspiring read, but that should not be a show stopper.
It’s not easy to draft a Statute from scratch as a replacement for the existing legislation, particularly on a subject such as Company Law, which is a “constantly changing morass”. An informed exercise has to be undertaken on what to retain and discard. The process envisages a single Adjudicator substituting three major tribunals (referred to in their abbreviated forms) – AIIFR, BIFR and CLB. The High Courts also have to phase out their Company jurisdiction. The Repeal and Savings (R&S) provision in the Bill provides for the dissolution of the CLB after the NCLT is in place, as also the relocation of staff. However, the R&S contains no such provision on insolvency law regimes. Sections 253 to 258 which deal with sick companies provide for the reference being filed with the NCLT. Incidentally, going sick will no longe be the prerogative of industrial companies. The Bill is ambivalent on the fate and future of the current regime, the establishment and staff. Section 343, which ideally should have been part of the aforesaid provisions, mentions that pending proceedings will abate, but not seamlessly transferred. Parties will have the option to make a reference to NCLT within 180 days, which is unfair, as it implies starting afresh. The R&S is also silent on the repeal of the SICA or the closure of AAIFR or BIFR.
It is the NCLT which will determine sickness; therefore the matter is now to be determined by the judicial body which will evaluate mergers and class actions. Section 268 provides that the decision of the Tribunal will be conclusive and no appeal shall lie to any Court or other authority. Does that mean a closure for recourse under constitutional writs to the High Court or the Apex Court?
These are not the only confusions in the Bill. Take the definition clause, which attempts to reconcile the old with the new. The term ‘Key Managerial Personnel’ (KMP) is defined to include the Chief Executive Officer (CEO), (interchangeable with the ‘managing director’ or the ‘manager’), the Chief Financial Officer (CFO) and the Company Secretary. All these terms are also separately defined. The term “Officer” from the old Act is retained to include any “Director, manager or KMP. The definition of “Officer in Default” is retained from the old Act to include a whole time director and KMP. The concept of manager is retained, though not included in either the Officer or in the Officer in default categories, only in the KMP incidentally, as interchangeable with the CEO. The haphazard referencing in nomenclature is a form of imprecision.
Concerns have been voiced in the context of the provisions of Sections 244 and 246 of the Bill pertaining to redressal of grievances, not just of minority shareholders, but depositors as well, till date governed by the Companies’ Acceptance of Deposit Rules, 1975. On the other hand, other creditors who featured in an earlier version have been excluded. The section enables these specific stakeholders to seek restraint orders against ultra virus breaches by the Company, and also claim damages and other reliefs arising from any fraudulent, unlawful act or omission. There is a difference of opinion on whether shareholders and depositors can be placed on equal footing, considering that the shareholders are the owners of the Company, whereas depositors are short term investors with limited rights. Be that as it may, what the law seeks to provide for is the right of such stakeholders to file an additional action against the management of the company. The genesis of this lies in the Foss vs. Harbottle ruling, but as an exception to the rule that only a Company can seek vindication against breach by its directors; the Chancellor would intervene in the affairs of a company only with a view to dissolution. Class Action. which is the Chancery Court’s enforcement of Common Law principles, is already addressed under Sections 397 to 402 of the Old Act, which entitle shareholders to approach the Company Law Board (CLB) if the affairs of the Company are conducted in an oppressive manner or prejudicial to public interest. These provisions have been retained in the Bill as part of Class Action remedies What is being additionally afforded under Class Action is the right to apply for restraint orders and and claim monetary damages. And these rights are available and enforceable, other than the company, against its auditors, as well as experts, advisors and consultants. Of course, the NCLT has to be satisfied that the action is bonafide, but that assumption is not a precondition to be determined at the threshold.
The punitive measures are harsh; imprisonment is up to three years, and the fine ranges from five to twenty five lakh rupees. Clearly, the raison d’être is the Satyam incident – the auditors behind bars were recently granted bail. In so far as such statutory provisions are concerned, the definition of Section 5 of the old Act till recently included the auditor as an officer in default. Even now, Section 233 provides for penalty payable by Auditors for non-compliance with Sections 227 & 229 of the Act. The difference is the fine which currently does not exceed Rs 10,000, but the threshold limit under the Bill is enhanced to Rs 25 lakhs, which can also be imposed for non compliance with orders.
The potential conflict between the Chartered Accountants Act which has a Disciplinary Committee and Board, to deal with situations of misconduct is largely illusory. It’s the financial exposure and the prospect of imprisonment, not just for Chartered Accountants and Company Secretaries who discharge statutory obligations under the Act, but the wide undefined net of other ‘advisors, consultants, experts’ et al, whether or not performing either a statutory or authentication function, needs to be addressed and clarified. Scams cannot be prevented nor extinguished by witch-hunting.
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in