:: Asanjokutch.com :: The First Kutchi E-Directory

C.V.O. Chartered & Cost Accountants' Association

Companies (Second Amendment) Act, 2002

Contributed by : Shri Paras Savla
& Smt. Priti P. Savla

The winter session of Parliament has passed 2 Bills amending Companies Act, 1956, one being the Companies’ (Amendment) Bill, 2002 facilitating the formation of cooperative business as companies & to convert existing business into companies & the other being the Companies (2nd Amendment) Bill, 2002. The said Companies (2nd Amendment) Bill, 2002 seeks to provide for a new, modern, efficient and time bound Insolvency Law for both rehabilitation and winding up of Sick companies and other provisions has been assented to by the President as Act 11 of 200 and has been published in the Q Gazette (Extraordinary) on 14th January 2003. Let us deal with some of these amendments below:

Definitions:
Section 2 has introduced certain more definitions viz. Tribunal, Appellate Tribunal, Industrial Company, Industrial Undertaking, Net Worth, Operating Agency, Sick Industrial Company, State-level Institution.

An “Industrial Company” is defined as a company which owns one or more industrial undertakings.

An “Industrial Undertaking” means any undertaking pertaining to any industry carried on in one or more factories or units by any company, as defined in clause (aa) of section 3 of the Industries (Development & Regulation) Act, 1951(65 of 1951) but does not include a small-scale industrial undertaking as defined in clause (j) of that section.

“Sick Industrial Company” means an industrial company which has –
(1) Accumulated losses equal to fifty percent or more of its average net worth during four years immediately preceding such financial years or in any financial year.

(2) Failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company.

“Net Worth” means the sum total of the paid-up capital & free reserves after deducting the provisions or expenses as may be prescribed.

“Free reserves” means all reserves created out of the profits & share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions & amalgamation;

Thus, this Act has widened the definition of Sick Industrial Companies also to include the companies which have failed to repay the debts within three consecutive quarters on demand made in writing for its repayment by creditors. Further Part VIA has been introduced for the revival & rehabilitation of Sick Industrial Companies. The Auditor of a company is required to comment under MAOCARO as regards whether a company is sick or not, as per provisions of SICA, 1985. Now SICA has been repealed & corresponding sections has been introduced in Part VIA of the Companies Act. Now would an Auditor be required to comment about the sickness of the company under MAOCARO, where there is no corresponding modification in MAOCARO Order ?

Overriding effect of provisions of SICA, when inquiry is pending or a scheme of rehabilitation is under consideration or appeal is pending before AAIFR is no more now available. Allahabad High Court in case of Moti Prasad Agrawal v. Prabandh Nideshak, Pradeshiya Industrial & Investment Corporation of U.P. Ltd 41 SCL 214 has for this very reason declared SICA as unconstitutional. In the Court’s view SICA grants protection to the rich in respect of recovery against them by bringing their company before BIFR. Now with the amendment in the companies Act, powers, which were earlier exercised by the BIFR, shall now be exercised by National Company Law Tribunal (NCLT) & appeal against the order of NCLT shall lie before National Company Law Appellate Tribunal instead of AAIFR earlier.

Set up of the Company Law Tribunal & Appellate Tribunal
The Companies’ (Second Amendment) Act, 2002 has introduced the National Company Law Tribunal & the Appellate Tribunal. The various powers, which earlier were with the Company Law Board & the High Court, have now been vested with the Company Law Tribunal. In fact, a Tribunal was also set up in the year 1964 which functioned for a very short period & was abolished by the Companies’ Tribunal (Abolition) Bill, 1967.

The high level committee on law relating to insolvency & winding up of companies, set up under the chairmanship of Justice V.Balakrishnan Eradi, had suggested that Article 323B of the Constitution should be amended to incorporate the subjects of debt recovery, company insolvency including revival & reconstructing as an additional head of legislation so as to enable Parliament to set up a National Tribunal for the revival & winding up of the companies. However, no such amendment has been carried out in the Constitution, but the Company Law Tribunal has already been set up. Is this Company Law Tribunal ultra-vires the Constitution? The Madras Bar Association has already filed a writ petition challenging its constitutional validity under Articles 14, 19 (1)(g), 21, 50 & 323B of the Constitution, with the Chennai High Court. The Companies’ (Second Amendment) Act proposes to set up a single Appellate Tribunal (probably at New Delhi) for the entire country. This would result in undue hardships to various sections of people scattered all over the country. There are no provisions for constituting the various benches of the Appellate Tribunal as contained under the Income-Tax Act.

It is very surprising that in as many as 20 sections, the powers which were earlier enjoyed by the Company Law Board, have now been conferred on the Central Government, instead of the Company Law Tribunal. These Sections are as below:

17(2)	-	alteration of Memorandum,
18(4)	-	alterations to be registered within three months,
19(2)	-	effect of failure to register,
43	-	membership of holding company,
49(10)	-	investment of company to be held in its own name,
79(1)(3)	-	powers to issue shares at discount,
113	-	limitation of time for issue of certificates,
117B(4)	-	appointment of debenture trustees & duties of debenture trustees,
118(3)	-	right to obtain copies of & inspect Trust Deed,
141	-	rectification by CLB of register of charges,
144(4)	-	right to inspect copies of instrument creating charges and Company’s register of charges,
163(6)	-	place of keeping & inspection of registers & returns,
167	-	power of CLB to call AGM,
188(5)	-	circulation of members’ resolution,
196(4)	-	inspection of Minutes Book of general meetings,
219(4)	-	right of member to copies of Balance Sheet & Auditor’s Report,
225(3)	-	provisions as to resolutions of appointing or removing Auditors,
304(2)(d)	-	inspection of register,
307(9)	-	register of directors’ shareholdings, etc.

Scope for the Professionals
Section 10GD has provided that the Applicant or the Appellant shall, either in person or through Authorised Representative can present his case before a Tribunal or a Appellate Tribunal. Authorised Representative now can be practising Chartered Accountants or Company Secretaries or Cost Accountants or Legal Practitioners or any Officer of Company.
Section 448 has provided information in relation to winding up of a company by the Tribunal. The following persons can act as an Official Liquidator:
(a) From the panel (as constituted by the Central Government) of professional firms of Chartered Accountants, Advocates, Company Secretaries, Cost & Work Accountants or the firms having a combination of these professionals
(b) Any Body Corporate as approved by the Central Government, consisting of such professionals
(c) Any whole-time or part-time officer appointed by the Central Government

Levy by way of Cess:
Section 441A has been inserted for levy & collection of cess at such rate not less than 0.005 % & not more than 0.1% to be calculated on the value of annual turnover of every company or its annual gross receipts, whichever is more, as notified by the Central Government in the Official Gazette. The cess collected shall be deducted in computing net profits u/s 349 of the Act. The amount so collected by way of cess, shall be first credited to the Consolidated Fund of India. The Central Government may, if Parliament by appropriation made by law in this behalf so provides, pay to the Tribunal from time to time, such sums of money as it may think fit for being utilized for the purposes of Rehabilitation & Revival Fund.

Amendment in Auditors’ Report
Section 227 has been amended, so as to comment on whether the cess payable u/s 441A has been paid or not & further to give the details of the amount if any unpaid. The Bill gives the reference of sub-section 2 of section 227. It appears that the reference should be to sub-section 3 relating to matters to be stated in the Auditor’s Report.

Powers of compromise
Section 392 contains the power with the High Court to enforce an order of compromises & arrangements u/s 391. The power of the Court has now been conferred on the Tribunal.

Winding Up
Section 433, which provided the circumstances in which company may be wound up by the Tribunal, (the Tribunal has been replaced for the Court) has now been enlarged to provide new three categories viz.
(a) If the company has been in default in filing with the Registrar, its Balance Sheet or Profit & Loss Account or Annual Return for any five consecutive financial years.
(b) If the company has acted against the interest of the sovereignty & integrity of India, the security of the State, friendly relations with foreign states, public orders, decency or morality on application made by the Central Government or the State Government.
(c) If the Tribunal, after consideration of all the relevant facts & circumstances & after giving an opportunity of being heard to all concerned parties, is of the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated losses within a reasonable time while meeting all its financial obligations & the company, as a result thereof, is not likely to become viable in future & that it is just & equitable to be wound up.

Section 434 provides that for a company, which is unable to pay its debts exceeding Rs.500, the Court shall order for its winding up. However now, the limit of Rs.500 has been raised to Rs.1 lakh & the powers are given to the Court or Tribunal, as the case may be.