• The Government of India has on March 26, 2014, notified majority of the provisions of the Companies Act, 2013.
• The new Companies Act seeks to rectify various defects in the existing law governing companies and has brought about radical changes in the Indian corporate law regime.
• The Companies Act 2013 has also introduced new concepts such as a one man company, class action suits etc.
• All companies are required to ensure compliance with the new law with effect from April 01, 2014.
• Lot of questions still remain unanswered on transition from old regime to the new regime.

The Government of India has recently brought into force the Companies Act, 2013 (“CA 2013”), which replaced the erstwhile Companies Act, 1956 (“CA 1956”). The CA 1956 had been in existence for over 50 years, and was proving to be ineffective while handling complex issues in the context of the evolving requirements of India Inc. While the CA 2013 was passed by the Lok Sabha on December 18, 2012 and the Rajya Sabha on August 08, 2013, only some of its provisions were brought into force in September 2013. On March 26, 2014, the Ministry of Corporate Affairs (“MCA”) notified most (still not all) of the remaining provisions. The notified sections came into force on April 01, 2014. The CA 2013 marks a seminal shift in India's corporate law regime by introducing new concepts like a one person company, class action suits, etc. which were hitherto not recognized under CA 1956 and establishes new benchmarks for corporate governance by codifying directors’ duties, prescribing more stringent independence criteria for independent directors and expanding the definition of related parties etc.

To help understand the panorama of changes introduced under the CA 2013, we shall be analyzing the key changes and their implications for all stakeholders by setting out the changes into our series of updates on the CA 2013 (“NDA CA 2013 Series”) touching upon various themes under the new law and setting out the practical aspects of some of the important changes introduced by the new law on India Inc. In addition to the NDA CA 2103 Series, for a quick look at the changes brought forth by the CA 2013, please refer to our previous hotline through this link.

This, the first of our series, is an introduction to the CA 2013 and analyses the framework of the CA 2013, the implementation of the CA 2013 and the transitory phase as we move to a new company law regime.

The CA 2013 contains 29 Chapters divided into 470 sections and 7 schedules, as opposed to the 658 sections and 15 schedules under the CA 1956. However, the new law also makes extensive reference to sub-ordinate legislation in the form of rules, which form an integral part of the new law governing companies in India. Pursuant to the powers vested under the CA 2013, the MCA has also finalized the rules under each chapter, most of which have been notified.

The phased implementation of CA 2013 commenced on September 12, 2013 when 98 sections were notified with immediate effect (“Phase I”). This was followed by phase two, when on March 26, 2013, a further 183 sections were notified and which came into effect on April 01, 2014 (“Phase II”).

The following table provides a chapter wise break-up of the notified provisions in the CA 2013.

The phased implementation of the CA 2013 has introduced a large number of difficulties and questions relating to the applicability of the new law.

I. Compliance time frame

When the Phase I of the CA 2013 was notified on September 12, 2013, companies were provided with just a day’s notice to comply with the notified provisions. For the Phase II of the notification, where a total of 183 sections, 6 schedules and rules for 11 chapters were notified, companies were given 5 days. This form of unplanned implementation with limited transitory assistance, has led to a large amount of uncertainty and compliance burden for India Inc.

Certain provisions of the CA 2013 specifically provide for a time frame within which companies are required to comply with the new law. However, these are limited to a few references in the CA 2013, and a majority of the provisions of the new law come into force immediately. The table below highlights the key sections which provide for a timeframe for compliance. The short time frame for companies to comply with the provisions of the CA 2013 may create significant difficulties in ensuring timely compliance.

II. Transitional challenges: Actions taken but not completed prior to CA 2013 becoming effective

Crucial to the transition from an old regime to a new regime is the effect of past acts – i.e. the ‘savings’ clause. Section 465 of the CA 2013, the repeals and saving clause, provides for the repeal of the CA 1956, and also provides the consequences of the repeal on actions done under the CA 1956. While Section 465 deals with the consequences of repeal on actions undertaken and completed under CA 1956, it is silent regarding actions undertaken under the CA 1956 but not completed. This has resulted in significant confusion as to the applicability of CA 2013 in such cases. For instance, it is not entirely clear as to the applicability of the CA 2013 in case of transactions initiated prior to April 01, 2014 especially if certain actions such as contracts for slump sale, filing of Draft Red Herring Prospectus, conducting meetings for creation of treasury stock upon merger, etc. have occurred prior to April 01, however the matters with respect to which such actions were taken have not been consummated. These aspects also become important since Section 465 of the CA 2013, the only provision dealing with repeal of CA 1956 and savings has not yet been notified.

We may rely on the existing jurisprudence for determining the applicability of CA 2013 for actions undertaken before its commencement:

I. Common law 

• Under common law, except for transactions past and closed, a statute after its enactment was completely obliterated, as if it had never been enacted. Under this rule, any pending actions or prosecutions could not be proceeded with after the repeal of the law under which they were started. Therefore, unless the repeals and savings provision of a statute specifically preserved the actions initiated under a repealed enactment, pending actions / proceedings could not be proceeded under the repealed law.
• The Supreme Court of India has, in the case of Keshava Madhava Menon versus State of Bombay¹, held that where an act was repealed, in the absence of provision to the contrary, it was formerly regarded as having never existed, except as to matters and transactions passed and closed.

II. General Clauses Act, 1897 

• In order to relax the above common law rule, the General Clauses Act, 1897 was enacted, which provided a general savings provision in case of the repeal of any act.
• Section 6 of the General Clauses Act, 1897 provides that the repeal of any enactment does not affect the previous operation of any enactment so repealed or anything duly done or suffered under the previous enactment. Further, Section 6 also states that the repeal shall not affect any right, privilege, obligation or liability acquired, incurred or accrued under the repealed enactment.
• The Supreme Court has held that the relevant question while determining if the provisions of a new law would apply to an act commenced under a repealed act, is not whether the new act expressly keeps alive old rights and liabilities but whether it manifests an intention to destroy them.² The question that arises in this context would be whether the CA 2013 has been enacted with an intention to destroy the rights created under CA 1956. This seems unlikely in view of the preamble to the CA 2013, which states that it is an act to consolidate and amend the law relating to companies in India, and does not state specifically that the CA 2013 seeks to replace the CA 1956 or override the actions taken under the CA 2013.

Although the MCA by various circulars has tried to clarify what prevails in the overlap of sections between the CA 2013 and CA 1956, the confusion stills prevails. In this backdrop, a view may be taken that unless the contrary is established by a specific circular, acts done under CA 1956 should continue to hold good and would be governed under the CA 1956.

Though the CA 2013 is riddled with implementation challenges and snags in compliance at this stage, the CA 2013 is a radical development promising significant changes in the corporate landscape in India. While we seek to address the major implications of the CA 2013 in the NDA CA 2013 Series, several of these issues may require a formal clarification from MCA. With the requirement to ensure compliance at the earliest, the CA 2013 may throw up several implementation glitches, leaving stakeholders in a quandary till the law is clarified.

– Corporate Team

You can direct your queries or comments to the authors