The Hindu Business Line : More appropriate to rewrite

THE Concept Paper (CP) that gives a draft of the Companies Bill — prepared by the Ministry of Company Affairs (MCA), but yet to be vetted by the Law Ministry — is claimed to be a "compact version" that contains only 384 sections against 781 in the extant law (1956 Act).

Collapsed version

On a careful reading of the CP, it emerges that the main "achievement" that the MCA is its expertise in compressing the extant 1956 Act in a scientific manner.

While the number of sections in the CP has been reduced by 50 per cent, the contents of the 1956 Act have been retained almost at the same level, barring the deletion of a few antique provisions which industry associations and the professional bodies have been clamouring for long. These included statutory meeting to be held by public companies, deletion of Sunday from the list of public holidays and the provisions relating to appointment of sole selling agents.

There is no justification in the MCA claim that the CP seeks to "achieve simplification and rationalisation of the provisions of company law."

That the exercise of re-codifying the law has been carried out by the MCA without involving industry association or professional bodies is evident in the CP having retained intact the list of matters which require Central Government approval.

Even to increase the number of directors beyond 15, a company has to obtain Government approval.

Additions lacking vision, wisdom

The CP not only lacks novelty in conceptualising a revision to the Act but also adds new provisions that are short on vision. For instance, the need for a deemed director (a person in accordance with whose directions the board is accustomed to act) to disclose to the company within 30 days of his appointment/relinquishment of such office, particulars relating to the office in the other body corporate.

While it is for the administrator of the law to charge a person to be a deemed director when there are circumstances in evidence of such de jure rule, it is highly illogical and irrational to make it obligatory for a person to declare to the company that he is a deemed director while not being a member of a board.

A person may as well choose to become a director officially rather than taking a circuitous route.

The CP has not considered the following legal issues of such declarations under the company law: a) Would such a director have to be counted for the purpose of determining the quorum at a board meeting?; b) What is the status of such a director, that is, whole-time/managing director or part-time director? Is he liable to retire by rotation at the annual general meetings (AGMs)?; and c) In the offer documents that may be issued by a company, would the details of such a director be mentioned as "deemed director"?

The definition of `officer' (which includes any director, manager, secretary, chief accounts officer or auditor) is another case of inept drafting. The auditor who is appointed by the shareholders discharges his functions as prescribed under the Act which also specifies the scope of the audit. In this background, it is ridiculous for the MCA to call the auditor of a company an officer of the company.

The confusion in the minds of the authors comes through in clause 58 of the CP (dealing with the disqualification of an auditor), which prohibits an officer being appointed as auditor.

Clause 48, on declaration and payment of dividend, is a classic case of amateurish drafting. Sub-clause 2 of this clause requires the payment of interim dividend to be paid during any financial year to be approved by a general meeting at the end of the financial year.

The implication of this is that interim dividend can be declared only during the financial year — the extant Act recognises interim dividend (although there is no definition of the term) as dividend paid between two AGMs.

This enables the board declare interim dividend for a financial year any time before the AGM, that is, even after the end of the financial year. But this facility is withdrawn by the proposed definition.

With the advent of accounts being published on a quarterly basis, companies should have the flexibility of paying dividends in as many instalments as considered necessary. The MCA should realise that while redrafting any statute, the outlook should be progressive and existing benefits should not be withdrawn unless they are against public interest. The need to obtain the approval of general body is inexplicable especially when regulation 86 currently permits directors to pay interim dividend

Departure from the amended Act

In defining sick industrial company, the CP has changed the definition given in the current Act as amended in 2003. Though the wordings have been changed only slightly, the consequences are far-reaching.

Under the extant Act, erosion of net worth or default in payment to creditors by a company, as prescribed, would render it a sick company. Whereas, in the CP, for a company to be branded sick, it should have witnessed erosion of net worth and defaulted in payment to creditors

While the new definition may bring cheer to a section of industry, it is not known whether this clause has been consciously drafted or whether there is a drafting error that is to be amended in the final draft, in line with the existing provisions.

Rules and forms

When there is a serious attempt to re-codify the company law, a meaningful draft emerges only when the rules and forms are also publicised for public opinion. As the CP contemplates a thorough rearranging of the various sections in the Act and shifting of many of the provisions now contained in various sections to the Rules, the draft Rules and Forms need to be made public for comments of all concerned.

Although the extant Act was amended in 2002 (the effective date has not been notified yet) by inserting the provisions relating to constitution of the National Company Law Tribunal, in place of the Company Law Board, the High Court and the Board for Industrial and Financial Reconstruction, the Rules and Forms have not yet been notified.

If the CP were to become a Bill, drafting the Rules and Forms would be a challenging task, which in effect would mean rewriting the Rules/Forms under the Companies Act, the SICA, the Companies (Court Rules) and those under the Company Law Board Bench Regulations. If the redrafting of the Act through the CP is any indication, it is certain that the Rules and forms that would be drafted by the MCA would suffer from a number of inaccuracies and other deficiencies.

Need to reconsider

The fact that after about 50 years efforts have been made to rewrite the law is heartening. But the manner of drafting makes it incongruous, that is, instead of rewriting the law taking into consideration the various changes that have taken place in the economy, in the industrial front and the effect of international laws and liberalised trade practices in the past two decades, the authors have merely tinkered with the various sections of the extant law.

The drafting of the CP is an exercise in futility. The CP is a laptop in its looks, but a calculator in terms of features and capabilities. The MCA should abandon the CP and take up the exercise of rewriting the law to make it more pragmatic and relevant for corporates and investors.

(The author is DGM-Secretarial, T V Sundram Iyengar & Sons Ltd, Madurai.)