Wednesday, August 10, 2016

Amendments to the Companies Incorporation Rules

[The following guest post is contributed by Bhushan Shah and Neha Lakshman from Mansukhlal Hiralal & Company. The views expressed in the article are personal.]

The Ministry of Corporate Affairs (MCA) has notified the Companies Incorporation (Third Amendment) Rules, 2016 by way of a notification in the official gazette on 27 July 2016. This update captures some of the important changes brought about by the amendment:

1.         Eligibly to Incorporate One Person Company: Earlier, the rules stated that no person shall be eligible to incorporate more than a single One Person Company or become nominee in more than one such company. However, the new rules now state that 'A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than a one Person Company'. Therefore an individual may now incorporate multiple One Person Companies, subject to renouncing membership of the earlier companies or cessation of the corporate existence of the earlier One Person Companies.

2.         DIN Verification: In case a subscriber to the memorandum possesses a valid Director Identification Number (DIN) and the particulars provided therein are up to date on the date of application and the declaration to this effect is given in the application, the proof of identity and residence of such subscribers need not be attached.

3.         Certified Resolution: Partnership firms are no longer required to submit to the Registrar of Companies (ROC) the certified true copy of the resolution agreed to by all the partners specifying inter alia the authorization to subscribe to the memorandum of association of the proposed company and to make investment in the proposed company, the number of shares proposed to be subscribed in the body corporate, and the name of the partner authorized to subscribe to the Memorandum.

4.         Online Business: Every company which has a website for conducting online business or otherwise, shall disclose/publish its name, address of its registered office, the Corporate Identity Number, Telephone number, fax number if any, email and the name of the person who may be contacted in case of any queries or grievances on the home page of the said website. The Central Government may, as and when required, notify the other documents on which the name of the company shall be printed.

5.         Shifting of registered office: A company was not allowed to shift its registered office if any inquiry, inspection or investigation had been initiated against the company or any prosecution was pending against the company under the Companies Act, 2013. However, the amendment states that if, on completion of such inquiry, inspection or investigation, no prosecution is envisaged or no prosecution is pending, then the shifting of registered office shall be allowed. The same is applicable to the shifting of the registered office of a company from one state to another.

6.         No Change of Name in the Event of Default:  Henceforth, the change of name shall not be allowed to a company which has not filed annual returns or financial statements due for filing with the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon. However, the change of name shall be allowed upon filing of the necessary documents or payment or repayment of matured deposits or debentures or interest thereon as the case may be.

7.         Unlimited Liability to Limited Liability: The Rules also prescribe the procedure for conversion of a company with unlimited liability into one with limited liability, which includes: (a) the passing of a special resolution, (b) publication of notice in newspapers seeking objections to the conversion and (c) thereafter making an application to the ROC along with the documents prescribed by the rules, which includes a copy of the altered memorandum and articles, declaration of solvency signed by two directors, no-objection certificates from secured creditors, auditor's certificate, etc.

Further, this converted company shall not change its name for a period of one year from the date of such conversion. The company shall also refrain from declaring or distributing any dividend without satisfying past debts, liabilities, obligations or contracts incurred or entered into before conversion.

It is important to note that an unlimited liability company shall not be eligible for conversion into a company limited by shares or guarantee in case: (a) its net worth is negative, or (b) an application is pending under the provisions of the Companies Act 1956 or the Companies Act, 2013 for striking off its name, or (c) the company is in default of any of its Annual Returns or financial statements under the provisions of the Companies Act, 1956 or the Companies Act, 2013, or (d) a petition for winding up is pending against the company, or (e) the company has not received amount due on calls in arrears, from its directors, for a period of not less than six months from the due date; or (f) an inquiry, inspection or investigation is pending against the company.

Comment: We believe these amendments to the Rules have been made with the intention of mitigating the practical difficulties faced by business persons in incorporating companies and with the intent of increasing transparency and accountability.

- Bhushan Shah and Neha Lakshman

1 comment:

vswami said...

“COMMENT : ...”
Unclear; hence needs to be reviewed, and if so agreed, to be elaborated on the twofold ‘intention’ referred to.
As regards ‘the intent of increasing transparency and accountability’, how far such a belief is well founded is suspect; and requires an in-depth study , separately, wrt each of the listed amendments, in isolation.

To Add:

"1. Eligibly to Incorporate One Person Company..."

Essence of the change (s) intended to be ushered in, as believed, is not clear. In substance, the new rules do not seem to bring into effect any such identifiable change !

"4. Online Business: Every company which has a website for conducting online business or OTHERWISE,..."

‘OTHERWISE’ – No clarity as to what it seeks to convey!

"7. Unlimited Liability to Limited Liability:..."

The enumerated amendments are not seen to have fully /squarely taken care of all the basic deficiencies in the LLP, recognized as a safe-/ foolproof- form of ‘legal entity’.

For independent viewpoints, as shared and repetitively urged for due consideration, anyone interested, may care to go through the 2 articles-

(2005) 128 Com. Cas. 1
(2006) 65 SCL 42

Over to eminent law experts, both within and without the portals of the government, for a proactive and sincere deliberation, and to share independent views, for enlightenment in 'public interest'.