The Companies Bill 2012 received the President’s accent on August 29, 2013, and has become the Companies Act 2013. The changes in the 2013 Act have far-reaching implications that are set to significantly change the manner in which corporates operate in India. The Act has introduced several new concepts and has also tried to streamline many of the provisions of the 1956 Act. A few of the significant aspects of the 2013 Act that impact lenders are highlighted in this article.

A non-banking finance company (NBFC) may be defined as a company registered under the Companies Act and also registered under the provisions of Section 45-IA of the Reserve Bank of India Act, 1934, which are basically engaged in the business of loans and advances. Under the Companies Act, 2013, NBFCs are granted parity with banks, as being considered as a financial institution; accordingly, the Act has provided headways to NBFCs impacting its operations.

The following is the brief snapshot of lending by the NBFC and relevant sections of the Companies Act, 2013 which have been introduced/modified in the Act:


The 2013 Act introduces changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, and more. The section-wise impact in terms of the options available to the lenders and diligence required on the part of the lenders and borrowers has been provided herein below:

  1. Borrowing powers:

    Section 179/180 (1) (c) (powers of board & restrictions on borrowing powers): The first step for NBFCs is to ensure that relevant approvals of the Board and Shareholders have been obtained by the Borrower, as specified under section 179 and 180 (1) (a) of the Act. Certain powers, which earlier were exercised by the Board with the approval of general meeting by way of ordinary resolution, shall now to be passed by special resolution.

  2. Financing through loan/guarantee/investments
    1. Section 185 (loan to directors): The provisions of section 185 of the Act particularly prohibits the grant of any loans, giving of guarantee or providing of any security to directors or any other person in whom the Director is interested, other than the loan made by a holding company to its wholly owned subsidiary. The lending company needs to ensure the applicable stipulations provided under this section while granting the loan to the borrower company.   

       
    2. Section 188 (related party transaction): The scope under Section 188 has been widened with a relaxation that the prior approval of the central government as was required under 1956 Act has been dispensed with. The new Act has introduced the requirement of observing specified process of approval provided the transactions value exceeds threshold limits and are not in the ordinary course of business and at arm’s length.

    3. Section 71 (issuance of debentures): A Company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption provided such issue has been approved by a special resolution passed at a general meeting. As per the provisions of the section, a contract with the Company to take up and pay for any debentures of the Company may be enforced by a decree for specific performance. The Company issuing the Debentures will have to comply with creation of Debenture Redemption Reserve (DRR); this DRR is required to be created out of the profits of the Company available for payment of dividend. The Company shall create DRR equivalent to 50% of the amount raised through the debenture issue before the debenture redemption commences. In the case of partly convertible debentures, DRR shall be created in respect of the non-convertible portion of debentures.

    4. Section 42 (issuance of securities on private placement): A company shall not make any private placement of securities unless the same has been approved by a special resolution. Shareholders’ approval will be required for each offer or invitation for subscription. The Securities Issuing Company needs to observe the stipulations, as provided under the Act and the rules made thereof, while making offer or invitation for subscription of Securities on Private Placement.

  3. Creation of security:
    1. Section 180 (1) (a) (disposition of undertaking): The section now specifically provides the definition of the word ‘undertaking’ and ‘substantially the whole undertaking’. The ‘undertaking’ shall mean undertaking in which the investment of the Company exceeds 20% of its net worth, as per the audited balance sheet of the preceding financial year or an undertaking that generates 20% of the Company’s total income during the previous financial year. Certain powers, which under the Section 293 of the Companies Act, 1956 were to be exercised by the Board with the approval of general meeting only, are now applicable to all companies including private limited companies. Hence, while extending secured loans to the borrower company, it is essential for the lending company to ensure that the borrower company has obtained relevant approval of its members vide a special resolution under section 180 (1) (a).

    2. Section 77 (duty to register charge): Unlike the Companies Act of 1956, all types of charges created by the Company on its property or assets or any of its undertakings would require to be registered under the new Act. The charge has to be registered within 30 days of its creation. The additional period for registration of charges has been increased to 270 days. In case of non-registration of a charge within additional 270 days, the application will be required to be made to the central government, for extension of time.

    3. Section 82 (satisfaction of charge): The borrower Company shall intimate to the Registrar of Companies, the discharge of debt within the period of 30 days from the date of discharge. The Registrar shall record the said satisfaction of charge after verification of necessary evidence in this regard

  4. Servicing of loan:

    As per loan covenants, the borrower company needs to repay its debt in the form of principal and interest as well as any other charges on predefined time and situations. In case the borrower defaults on debt repayment, the lender company would have recourses, as per the agreed loan covenants and also under the Companies Act.
    The recourse available under the Companies Act is highlighted as follows:

    1. Section 36 (fraudulently inducing a person to invest money and punishment for fraud): This new provision of the Act gives parity to NBFCs with banks. The section has far reaching consequences, as NBFCs will be able to charge borrowers with the “fraud provisions” of the Companies Act, if any person (persons in charge of management of the company) knowingly or recklessly makes any statement, forecast or promise, which is false, deceptive or misleading, or deliberately conceals any material facts, and thereby induces a bank or NBFC to lend money to the Company, such person is liable for fraud provisions under Section 447. Hence, in view of the above, NBFCs may, therefore, make a case, under appropriate circumstances, that the borrowers made deliberately false or misleading statement/s to induce the NBFC to lend or grant a credit facility and accordingly, the borrower, or officers of the borrower shall be liable to charge with fraud.

    2. Section 230 (power to compromise or make arrangement): The section specifies compromises and arrangements, deals comprehensively with all forms of compromises and arrangements and extends to the reduction of share capital, buy-back, takeovers and corporate debt restructuring (CDR). The Act has introduced a new CDR provision under subsection (2) (c) of Section 230. The CDR application can be made to the Tribunal with the consent of at least 75% of the secured creditors in value along with the statement of adoption of CDR guidelines, as specified by the RBI. The positive inclusion within this section is that objection to any compromise or arrangement can now be made only by persons holding not less than 10% of shareholding or having an outstanding debt amounting to not less than 5% of the total outstanding debt, as per the latest audited financial statements.

    3. Section 245 (class action): The new provision for Class Action suit has been introduced under the Act. The 2013 Act empowered shareholder associations or a group of shareholders to take legal action in case of any fraudulent action on part of a company and permit the shareholders to take part in investor protection activities and class action suits.

      A class action suit can be exercised, if a specific number of members or depositors are satisfied that the affairs of the Company are conducted in the manner, which is prejudicial to the interest of the Company or members or depositors. Such a class of members or deposit holders have right to claim damages or compensation against the Company, Directors, Auditor, Expert, Legal Advisor or Consultants under Section 245.

    4. Sections 253 and 254 (determination of sickness and application for revival and rehab): These sections describe the circumstances that determine the declaration of a company as a sick company, including the rehabilitation process.

      The coverage of the Sick Industrial Companies Act, 1985 (SICA) is limited to only industrial companies, while the 2013 Act covers the revival and rehabilitation of all companies, irrespective of their sectors. The manner of declaring a company as sick and process of its revival and rehabilitation has been completely rationalised.

      The determination of whether a company is sick, would no longer be based on a situation where accumulated losses exceed the net worth, rather it would be determined based on whether the company is able to pay its debts.  The secured creditors, banks and financial institutions will assess the company as a sick company based on the debt servicing track record of the company.

      Secured creditors representing 50% or more of the debt of the Company and whose debt the Company has failed to pay within 30 days of service notice, can apply to the Tribunal for declaring the Company as Sick or the Company that fails to repay the debt of secured creditor representing 50% or more of debt, may also apply to the Tribunal for getting it declared sick.

    5. Section 256 (appoint interim administrator): Unlike the Companies Act of 1956, there is a provision for the appointment of the Interim Administrator to find out possibilities to revive and rehabilitate a sick company and to submit his report, specifying the measures for revival and rehabilitation of the identified sick Company.

    6. Section 258–265 (order of Tribunal): The revival and rehabilitation scheme will need to be approved by the secured and unsecured creditors, representing three-fourth and one-fourth of the total representation in amounts outstanding, respectively, before submission to the Tribunal for sanctioning the scheme. The Tribunal after examining the scheme and report of the Interim Administrator, will approve it with or without any modification. However, if the scheme is not approved by Creditors, the Company Administrator shall submit a report to the Tribunal within 15 days and the Tribunal shall order the winding up of the sick company.

    7. Section 270–365 (winding up process): The 1956 Act prescribes three modes of winding up. This includes winding up by the court, under the supervision of the court and voluntary winding up. On the other hand, the 2013 Act prescribes two modes of winding up: by the Tribunal and voluntary winding up.

    The 2013 Act has specified new grounds for winding up by the Tribunal, as follows:

    • In a situation when the Company has acted against the interests of sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality

    • Order has been made under Revival and Rehabilitation of Sick Companies

    • An application has been made by the ROC or any other person authorised by the central government by a notification under the 2013 Act

    • The Tribunal is of the opinion that the Company’s affairs have been conducted in a fraudulent manner or the Company was formed for fraudulent and unlawful purposes or the persons concerned in the formation or management of its affairs have been found guilty of fraud, misfeasance or misconduct in connection therewith, and that it is proper that the Company be wound up

    • The Company has made a default in filing with the ROC, its financial statements or annual returns for immediately preceding five consecutive financial years

     

    The Companies Act, 2013, aims to improve transparency and accountability in corporate sector. The Act has introduced pragmatic reforms as enumerated above in the interest of the Stakeholders, Lenders, Deposit Holders as well as the Corporate Sector at large

 

Neelam Desai

- IFIN

Neelam Desai is Company Secretary of IL&FS Financial Services Limited (IFIN), based in Mumbai.




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Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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