USUAL MISTAKES WHICH A PRIVATE COMPANY MAKES
How much amount of loan the private company makes or takes are depend upon the provisions of the Companies Act, 2013. This Act tells about all about the sources from whom the private company can take or make loan/guarantee or provide securities in connection with that loan and also from whom they are prohibited or restricted from granting or providing loan/deposits/guarantees etc.
But there are most of the private Companies which takes or grant loans by/from the restricted persons and by which they attracts heavy penalties, such as:
1. A Company cannot accept loans from friends of the directors except with some terms and conditions.
2. A Private Company can accept loan/deposit from any other Company and would NOT be deposits under the Companies Act, 2013, however, it cannot accept monies from another Company (other than its wholly owned holding Company) except with such terms and conditions applied by the Company;
3. Without passing special resolution, Company cannot directly or indirectly give any loan/guarantee or provide any security in connection with that loan to any person or other body corporate or acquire any securities of any other body corporate in excess of the limit prescribed in the Companies Act, and if so, then it is a contravention of the law which attracts heavy penalty.
All these required an expertise by which Company prevent itself from the penal consequences.
Every company has legal agreements that are important to its operations. These include real estate and equipment leases, contracts with customers and suppliers, employment agreements, financing documents, etc. However, a remarkable number of companies find, when a question arises about a contract, that their file copies are unsigned or only partially signed, or they are missing important schedules or exhibits.
A similar problem often arises when a company is asked to document who owns the company. While the owners are rarely in doubt regarding company ownership, in a remarkable number of cases, they have difficulty producing the paperwork to verify ownership. Stock certificates are often lost or perhaps not even issued and subsequent transfers resulting from death or people leaving the company are often not properly documented.
During the lifespan of a business other than tangible assets like building, equipment etc, a lot of intangible assets are also procured and created. It can be your domain name, unique product design, shape, label, company logo, a unique combination of ingredients that makes your product distinct from every other product in the market. These ideas, logos, designs etc are together called intellectual property.
Intellectual property is a legal term that refers to the ownership of creation of an artistic idea. It is an intangible asset of your business that you have created exclusively for your products or services. Companies should inventory their IP and seek legal protection by getting them registered under applicable protections available which are Patents, Copyrights, and Trademarks.
As per the Companies Act and other relevant laws, there is a requirement to file returns or forms on the event occurred.
But sometimes, due to the lack of knowledge and expertise, most of the company delay in filing or wrongly filed the forms or returns which attracts penal consequences.
Compliances are a set of rules and requirements dictated by legislation that are compulsory to adhere to.
Ignorance of the law is not an excuse. Failure to adhere to legislation can become a costly exercise that can normally be avoided.
The responsibility for compliance of the regulations under various statutes is with the directors, company secretary and some of the senior officers of the Company who have been designated for specific compliances. In case of any non-compliance, the laws are very specific in terms of the liabilities which could be civil or criminal. The penalty if found guilty, could be in the form of a substantial fine or an imprisonment or both.
The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors and its authorized persons had been emphasized in many cases. Their position has further changed in the era of Corporate Governance to the extent that the directors have to protect the interests of not only the shareholders but also other stakeholders.
There are multiple Central and State level authorities that form policies and regulate business operations. The authorities require businesses to get registered under the legislation such as Shops and Establishments Act, Professional Tax Act etc.
Often entrepreneurs are ignorant about the applicability of particular registration and end up paying heavy fines and penalties for non-compliance.
Every Company have an auditor who audit there accounts and compliances with the relevant laws. For appointment of the auditor’s, one needs to comply with the provisions of the Companies Act. But in practice, most of the private Companies appoint auditor but fails to intimate to the ROC regarding there appointment which attracts penalties.
A distinct feature of companies is the fact that they operate as a separate legal entity in the eyes of the law. This means that the company can hold property in its own name. In light of this, the bank account of the company is usually opened in the name of the company itself. However, in order to carry on the regular functioning of this bank account, at least one authorised signatory needs to be appointed. The person appointed as the authorised signatory will require his signature to be provided for any bank-related work with regard to the company account moving forward.
Related parties are an area that everyone knows, but where confusion and disagreement can also occur. The disclosure requirements in relation to related parties do cause confusion. This disclosure is required in respect of any person who was a director at any time in the financial year to which the accounts relate, and also for any advance, credit or guarantee subsisting at any time in the financial year, whenever it was entered into and whether or not the person concerned was a director at the time it was entered into. The new regime for RPTs seems complex because the definition of ‘related party’ has changed significantly. The scope of transactions has been significantly enhanced and proposes to cover sale, purchase, and leasing of any property of any kind (including immovable property).
The Common mistakes makes by the Private Companies is that they don’t know the limits of the RPT, they don’t know upto which limit the company requires to pass a board resolution and after which they requires special resolution. Also, most of the times they don’t pass resolution regarding this, pertains to which attracts penalties. Private Companies also most of the times don’t disclose the RPT transactions in the Board Report, which shows a wrong picture of the Company.
The director of a company has a fiduciary relationship with the company. Hence, it is important to examine whether there exists a conflict between the personal interests and the duty of a director. Hence, it is very much clear that the rationale behind having a provision like Section 188 is to prevent any conflict of interest in the functioning of the company. More often than not, the related party transactions are considered to be influenced by ulterior motives of profiting the persons who are involved in such transactions. Such transactions diminish the transparency and disclosures norms in the company and are against the spirit and objectives of the Companies Act.
Due diligence doesn’t wait for the completion of the asset purchase contract or transactional details. Data collection and analysis should begin when you first begin to consider a business opportunity and continue through the closing of escrow. While access to some information such as the books, financial and accounting records may not be available until after an initial agreement or preliminary understanding is achieved, it should be all but completed before the final contract is signed.
The risks associated with a lack of due diligence easily outweigh associated costs.
For any clarifications/suggestions or any queries please write drop a comment or write to us at info@sigmalegal.in
TEAM SIGMA LEGAL
(SECRETARIAL DEPARTMENT)
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