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Things To Know Before Appointing An Auditor for your Company

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Every company requires an Auditor to audit its financial accounts. This ensures that the company is not manipulating its accounts, inflating its profits or cheating its shareholders. An audit is an examination of accounting records to determine its genuineness. The law mandates that every company needs to appoint an Auditor to examine their accounts. Through this post, we shall discuss how to appoint an auditor.

 

 

Appointment of Auditors

 

Appointment of auditors occurs in many situations. We shall discuss below the procedure and the situations where an auditor is required to be appointed: 

 

 

Appointment of first Auditor 

 

Every company needs to appoint the first auditor within 30 days of incorporation. Typically, the Board of Directors appoints the first auditor. Certain criteria are laid down in the Companies Act for an auditor, The auditor is required to sign a written consent and certificate confirming that he fulfills the given criteria. 

 

The tenure of an auditor appointed by the board shall be until the conclusion of the first Annual General Meeting (AGM). In case they fail to appoint one, an Extraordinary General Meeting (EGM) shall be convened within 90 days. Government companies are exempted from this rule. Appointment in government companies is done by Comptroller Auditor General within a set period from incorporation, failing so the Board of Directors fulfills the duty. In case both fail to carry out an appointment it is the members, through an EGM, who end up appointing an Auditor. 

 

 

Appointment of Auditor in the first AGM

 

During the first AGM the company (except government companies), can appoint an individual or a firm as an auditor. The tenure would be from the conclusion of that meeting until the conclusion of the sixth AGM. It is carried out through an ordinary resolution. 


An Audit Committee formed by the Company shall recommend the candidates after taking into consideration the requirements of the company and the qualification of those concerned. The Board of Directors can disagree with the recommendation and can ask them to reconsider. 

 

 

Appointment of Auditor arising out of a casual vacancy

 

If there is a vacancy arising out of death, disqualification or resignation of an auditor then it’s referred to as Casual Vacancy. If the same arises out of resignation, then the EGM appoints a new one within 3 months of the recommendation of the Board.  If it is any other reason than Resignation the Board appoints an Auditor within 30 days. Any auditor appointed in a casual vacancy continues to hold office until the ending of the next Annual General Meeting. 

 

 

 

Appointment of Retiring Auditor

The retiring auditor can be reappointed again provided that he is not disqualified, has not given a notice to the company about his unwillingness to continue and no special resolution appointing some other auditor or specifically denying his re-appointment has been passed. If no auditor is appointed at the end of the tenure of the serving auditor then the same auditor shall continue.

 

 

Removal of Auditor

An Auditor, who is statutorily appointed can only be removed by a special resolution, after obtaining the previous approval of the Central Government on that behalf in the prescribed manner. The auditor concerned shall be given a reasonable opportunity of being heard before proceeding with the same.

 

 

Conclusion

 

An Auditor is a necessary part of company functioning. They ensure the money invested or earned by the company is utilized in a proper manner. Audits carried out by the Auditor increases trust of the Public and Government in a company. This increase in trust and compliance ultimately helps in increasing investment in the business. It also helps keep the company financially healthy by detecting fraud. 
 

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Impact of COVID-19 On Project Financing
Company

Impact of COVID-19 On Project Financing

The impact of COVID-19 (coronavirus) cannot be miscalculated in project finance, as this virus is considered as a global pandemic and has resulted in the closedown of construction work and its related operations. The consequences can be seen as slow production and manufacturing of necessary equipment in projects are delayed due to the outbreak of COVID-19 which means the supply chain will be disrupted worldwide. Moreover, in project financing, Project Company is usually considered as a special purpose vehicle (SPV), and pursuant to present critical situation lenders are having no recourse to sponsors where the project is not performing as per the expected plan. But considering the different scenarios as the government now is hacking interest rates and making banking rules more convenient at this time of financial crunch.


Due to lower interest rates, demand for financing the new upcoming projects will increase along with debt financing and this effect will operate for the long term from the present. However, this article provides a snapshot of FORCE MAJEURE clause activation in project financing, how to get through the force majeure risk, and what all are the necessary consideration for the purpose of force majeure. Along with the force majeure aspect this article will also focus upon other immediate impacts on project financing due to COVID-19.

 


ACTIVATION OF FORCE-MAJEURE IN PROJECT FINANCING

Force majeure clause comes into play when one party is unable to perform his contractual obligation which he needs to perform and due to natural circumstances i.e. unforeseeable circumstance’s which includes acts of war and natural disaster, he was hindered or delayed in performing the same. Force majeure is governed by Section 32 and Section 56 of Indian Contract Act, 1872 and is also considered as exception to what amounts to breach of contract. This concept is explained in detail in one of the celebrated Supreme Court Judgement titled Energy Watch Dog vs. CERC. Usually this concept of force majeure is prevalent in project financing and construction cases. In an epidemic or pandemic scenario, like of COVID-19 this clause gets into play by contractor in construction project because he is the first one to encounter the consequences because of disrupted supply chain. When the force majeure clause is invoked due to the COVID-19 outbreak there is no surety that the contractor will succeed because it will depend on contractual interpretation whether this outbreak will be considered as “epidemic” or not.

 


After invoking force majeure number of key considerations arose which are as follows:

  1. Project Company has to ascertain that whether force majeure will succeed as per the interpretation of construction contract and this has to be done with the limited time frame.
  2. Assessing the evidences and circumstances which will prove that due to COVID-19, project company/contractor is unable to perform their obligation. Also, on the basis of a contractual agreement between the parties, it demands the contractor to prove that he is being prevented by the force majeure event to carry on his contractual obligation. Furthermore, the contractor also needs to produce the evidence to prove his onus pertaining to the contract

 

Now in order to analyze the force majeure in the contract the contractor or say the project company has to establish connectedness between the qualifying force majeure event and the impact to its performance of contractual obligations, and in most of the cases this will be based upon factual circumstances which will differ from case to case basis. Due to government measures that are related to business lockdown, mandatory quarantine measures, which will directly affect the working of the project and contractual obligations can be considered as evidence for the activation of force majeure clause. Concerned expert feedback would be required for the collection and preparation of evidence for notices of force majeure.

 

This also requires the affected to take steps in order to mitigate the force majeure events and it is considered as an obligation upon the affected party to do so. Also, it was required to draft or take the alternative options in consideration to perform the obligations pertaining to the contract and it would be advantageous to take remedying measures to address the impact due to unforeseeable events like COVID-19. However, in order to ensure that the claim is not time-barred, time is an essential ingredient for the notice requirement for the purpose of force majeure claim.

 


HOW TO TACKLE FORCE MAJEURE RISK?

The loopholes in the force majeure clause should be taken into consideration and such gaps should be addressed when the project documents were subject to bankability due diligence. Bankable project documents will typically contain similar force majeure provisions and the contractor's notice of force majeure will form part of the project company's notice in the project documents. Also, if there is any discrepancy or say loophole is identified, then the force majeure will be tested through the COVID-19 outbreak.


Further, others get through consideration include the timeline for submission for force majeure clause. In practice, the contractor and the project company may be engaged in negotiations or discussions on the impact of force majeure and will, therefore, need to consider the timelines that are running in parallel. Usually, Project documents with future cash flows contain time which provides a sufficient amount of time to project companies to provide its notice of force majeure under the upstream project documents. Another important contemplation is the different governing laws for project documents. Offshore construction contracts will be governed by English law, but on the other hand, power purchase agreements should be governed by the local law. Therefore, if the risks associated with different governing laws are not mitigated when the project documents were being developed, contractual interpretation of force majeure provisions can be difficult.


Moreover, the party claiming force majeure has to prove that he has taken all reasonable circumstances in order to avoid or mitigate the risk and its effect. Thus, this will depend upon case to case basis and in project company case contractor has to prove the same. In project financing consideration under financial document needs to be taken care of, project lenders are widely analyzing the COVID-19 outbreak as they begin receiving notices related to force majeure and due to which they cannot wash their hands off this outbreak. This outbreak requires taking steps in financial documents that are in consonance to the terms of the project document. Furthermore, after receiving the notice of force majeure the project lender has to consider carefully the impact on the project and positions under the financial document. Also, prior consent is also required before agreeing to any relief obtained through force majeure and certain time constraints need to be undertaken by the project company in this case.

 


EVENTS WITH ITS NEGATIVE IMPACT

After considering force majeure scenario there are other events too which will be triggered due to COVID-19 outbreak in project financing and major of these defaults might extend to necessary parties involved in the successful completion of the project that is construction contractor, operator, and main manufactures of necessary equipment’s. Default events are as follows:

 

  1. Emerging Economies: COVID-19 outbreak affected economy drastically which would be clearly seen through interruptions created in supply chains, fall in exchange rates, limited support, or say financial support of government for projects as impacted by COVID-19 outbreak. Whilst it also includes travel restrictions, the lockdown of major working sites and financial covenants involved in the projects are also affected. Thus, this pandemic affected economy but it insurances should be taken into consideration to take up protection form this drastic effect and all these measures should be taken into consideration by the project company, lenders, and all sponsors, who may be coming under pressure due to this outbreak.
  2. On-going Projects: one should expect, that this outbreak already affected on-going construction projects due to hampered supply chain and labour availability worldwide. In India, labourers are going back home because of this outbreak and it is expected that this impact will be amplified in the future. Further, as the government has taken initiatives in lowering interest rates and baking measures which will benefit the upcoming projects in the future but presently debt financing and tax equity financing is going through a negative impact. Lack of funds would be witnessed pertaining to the on-going projects which will attract defaulting lending provision in loan documentation.
  3. Material adverse effect clauses: ongoing projects which contain Material adverse effect clause, will get triggered because of circumstances that arose due to COVID-19. Further, this clause will be activated when specifically the situation or say circumstances will affect the project. Thus, there should be material adverse effect and circumstances from case to case basis has to be administered and considered. In my opinion, this clause will get in activation mode because each and every project is hampered due to this virus outbreak. Also, the borrower should inform the lender about these circumstances from time to time.
  4. Financial ratios: The effect of COVID-19 as of now cannot be said to be accurate because it is still in action and according to the Health Ministry and government inputs it may extend for some more time. Due to which debt financing or tax equity financing will hamper but the project financing sector will surely bounce back with a boom in itself from this recession as it was earlier seen in the 1987 recession. The present slashing interest rates and tax incentive proposal will allow the project finance sector to recover.

 

Considering the impact, Project Company has to take the following measures:

 

  1.  A project-related review should be done by the project companies so that it can analyze the impact which the project has to go through due to the COVID-19 outbreak. As seen in normal circumstances the risk associated with the project will be the supply of necessary equipment, labour availability risk, financial covenant risk, and other lending and funding scenario. Whilst with the effect of COVID-19 these risks will get one level up and due to the slowing of economy financial crunch will also arise in project financing.
  2. Major contracts involved in project financing like an employment contract, shareholder agreement, the loan agreement should be critically analyzed in respect of termination, force majeure, and law jurisdiction and dispute resolution mechanism. Also, repayment covenants, information covenants, events of defaults should be critically reviewed.
  3. A detailed review of Supply chains should be done so that an alternate option can be finalized in advance by the project company. This step should be in respect to mitigating the losses and reasonable steps that can foresee.
  4. Expected outcome after inserting force majeure and list of events in which it can be invoked and other ways as stated earlier about how to get out of the force majeure and compliances which are necessary as per Indian Contract Act, 1872.
  5. Consider developments or impacts of steps taken up by the government pertaining to the COVID-19 outbreak with respect to project financing along with tax implication involved. Also, the Project Company should amend all it’s an important document well in advance so that it can save time and cost for the same.

 

 

CONCLUSION


COVID-19 outbreak is spreading at an alarming rate due to which economy is diversely affected and the project finance sector is also facing uncertainties through the hampered supply chain, labour availabilities, financial crunch, and unforeseen circumstances. This outbreak has also affected debt financing and tax equity involved in project financing. Further, continuous monitoring of government policies are required for project financing. So, at last, after considering the crucial aspects of force majeure, the negative impact of several defaults due to the COVID-19 outbreak is one of the worst nightmares in today’s economic sense for project financing.

 

Authored By: Vaibhav Chauhan

JEMTEC School of Law

 

Disclaimer: The content of this article is solely the author’s personal analysis and interpretation. In case you wish to act upon on the basis of the content of this article, please seek legal advice. The author shall not be responsible for any loss you may incur as a result of your actions relying upon this content. The content herein is the copyrighted material of the author and is informational and shall not be used for commercial purposes other than for personal reading.

Business Lookouts During COVID-19
Company

Business Lookouts During COVID-19

Businesses are experiencing unprecedented challenges and market disruption due to the Covid-19 pandemic and consequential economic meltdown seems inevitable. Economists predict that economy is now dealing with a situation far worse than the global recession of 2008. We are not prepared to deal with this situation since no business has anticipated or predicted menace to this extent, where globally national borders are locked down halting global market and business operations. 

 

Importantly, we are dealing with a war waged by the unknown, and nations are fighting to safeguard and protect their people and economy. In this context, businesses/ entrepreneur has to operate sustainably, and it is important to set up and administer certain proactive measures to mitigate financial and business losses. These special circumstances require special measures to sustain and thrive, and this article covers some measures that companies may imbibe to thrive over the crisis and to sustain. 

Pragmatic ideation and proactive resolution will mitigate the impact of impending problems”

 

 

WORK FROM HOME

Work From Home is not an exception but has become a Rule”

Legally, the success of a business and its sustenance depends on how well it protects its confidential information and trade secrets. Especially, in times like now, it has become imperative not only to have sustainable business modus operandi to thrive and succeed during bad market conditions but also to protect what has been already built through years of hard work. This sounds simple yet very difficult to implement and execute in the frontline. 

 

Employees are key to every organization. Their performance and conduct in operating the business decide the company's future. Good employees build a successful business and the bad ones ruin the organization. A simple claim or lawsuit will change the future of the company or drag the company into darkness (third party infringement and damages suits), so the company should explicitly set out the framework within which the employees have to function within the company. 

 

With a large number of employees working remotely at the comfort of their houses, the management is now grappling with the management of infrastructure to facilitate employees with work from home access and to keep the business running. While companies are dealing with infrastructure difficulties, protection of confidential information and trade secrets should be set on high priority in order to avoid future uncertainties and to govern the way the organization continues to operate within an uncontrolled environment of homes of the employees.

 

Measures: Implementing effective policies and conduct awareness training programs so as to how to operate and function while working at the comfort of home. Data Protection Policy, Information Technology and Security Policy and Work from Home Policy are few policies that companies should implement and effectuate measures for protection of data and confidential information.

 

 

STRUCTURE BUSINESS CONTRACTS

Businesses don’t operate in silos but are reliant upon clients, service providers, and customers (the list may vary business to business). It is important to evaluate and strategically secure and retain existing business connections. Practically, retaining old clients is a cost-effective measure, since securing new clients is a costly affair during this market meltdown. The business relationship with the client is regulated by a document called “Agreement” and this provides how to govern and operate during the subsistence of the agreement.

 

An agreement may be implied or express contract. Where the terms of the agreement are explicit, the business should evaluate the risks and be prepared for any foreseeable risks that may arise in the current market circumstances and protect itself from the unforeseen risks (Force Majeure Clause). For implied and unwritten business arrangement, the company will be operating in an uncontrolled and ungoverned territory and may cost the company irreparably, if things don’t operate the way they are supposed to, and legal binding of the implied agreement depends on external factors and burden of proving the transaction and losses are high. So, the management should focus on dealing with the governing business through the Agreements.

 

Agreement decides whether you have a falling business or scope to rise above the troubled water.”

 

It is imperative to work along with the legal team to overcome the uncertainties and to operate within a controlled business environment. In the interest of economies of scale of business, as a rule, litigation should be the last resort. When agreement provides for business certainty why take long shots with regard to company future.

 

As such, in case a client (or a set of clients) is important for the survival of a business, then the business should take proactive measures to re-negotiate, re-design, or structure the transaction to make it sustainable to both the business and the clients. If you are expensive to your client, your dealings with them are bound to fall to the ground. Importantly, be the first to make a proposal for restructuring a transaction before your clients make a decision against you and it’s too late.

 

Change is constant, adaption is a rule and knowing when to adapt will decide the success” 

 

Conventionally, business teams are oriented to gain business, finance to control costs and project profits, so they pay no heed to transactional risks. Inevitably, in order to succeed, the leaders have to make decisions that involve exposure to risk. However, it is important to take calculative and informed decisions with regard to such a risk exposure and the same has to be documented through an agreement to avoid uncertainties and ambiguity. Drawing up an agreement is not just a good-to-have measure, but it is a tool to resolve conflicts in case of disputes. 

 

To be triumphant, all teams should collaborate and structure a workable business transaction for the clients. Overpromising-Underperformance and low promises and overperformance both strategies kill the business, but a sustainable, performance and an achievable business agreement works well for all and leads business to a successful path. In this, the legal contribution would be to enlighten the business with unbiased views of the nature of risk and consequences that may arise therefrom.

 

Notably, business conglomerates are successful in a way they are, since they operate and function by making informed decision knowing their exposure and risks, and on the contrary, start-ups can’t afford legal costs and hence fall prey in the hands of business eagles who specialize in acquiring businesses at low cost (or no cost). As a result, start-ups rise and fall over-night. 

 

Measures: Evaluate your business agreement and understand the cost-value proposition as the deal/ transaction stands. In essence, restructuring your business agreement to current market will help companies to retain clients. This task also helps companies to evaluate high-cost clientele and to allocate funds to sustain the business or make the decision to let go of a client for the larger good.

 

 

SUMMARY

Pragmatic and proactive measures make to business sustainable and keep it afloat.”

This article outlines legal measures which the business managers have to evaluate and reconsider under the Covid-19 crisis. It aims to highlight the common areas of lacuna in business operations. Pragmatic and proactive measures make the business sustainable and keep it afloat. Introspection into business processes, models, operations, and business flow, and the results of such analysis helps to strategize and acclimatize to the current business environment. Change is inevitable so the factors are key to thrust and succeed. Having enforceable and sustainable contracts is vital to govern the way the business operates and to understand obligations and liabilities. This will help to plan, strategize, and execute business in an informed way during the time of change in the business environment, and to stay out of troubled waters. These measures may mitigate the disaster and help to survive and succeed in the long run.

 

Authored by: RAMYA KUNAPAREDDY

Corporate and Litigation Lawyer, Hyderabad

 

 

Disclaimer: The content of this article is solely the author’s personal analysis and interpretation. In case you wish to act upon on the basis of the content of this article, please seek legal advice. The author shall not be responsible for any loss you may incur as a result of your actions relying upon this content. The content herein is the copyrighted material of the author and is informational and shall not be used for commercial purposes other than for personal reading.

Things To Know Before Appointing An Auditor for your Company
Company

Things To Know Before Appointing An Auditor for your Company

Every company requires an Auditor to audit its financial accounts. This ensures that the company is not manipulating its accounts, inflating its profits or cheating its shareholders. An audit is an examination of accounting records to determine its genuineness. The law mandates that every company needs to appoint an Auditor to examine their accounts. Through this post, we shall discuss how to appoint an auditor.

 

 

Appointment of Auditors

 

Appointment of auditors occurs in many situations. We shall discuss below the procedure and the situations where an auditor is required to be appointed: 

 

 

Appointment of first Auditor 

 

Every company needs to appoint the first auditor within 30 days of incorporation. Typically, the Board of Directors appoints the first auditor. Certain criteria are laid down in the Companies Act for an auditor, The auditor is required to sign a written consent and certificate confirming that he fulfills the given criteria. 

 

The tenure of an auditor appointed by the board shall be until the conclusion of the first Annual General Meeting (AGM). In case they fail to appoint one, an Extraordinary General Meeting (EGM) shall be convened within 90 days. Government companies are exempted from this rule. Appointment in government companies is done by Comptroller Auditor General within a set period from incorporation, failing so the Board of Directors fulfills the duty. In case both fail to carry out an appointment it is the members, through an EGM, who end up appointing an Auditor. 

 

 

Appointment of Auditor in the first AGM

 

During the first AGM the company (except government companies), can appoint an individual or a firm as an auditor. The tenure would be from the conclusion of that meeting until the conclusion of the sixth AGM. It is carried out through an ordinary resolution. 


An Audit Committee formed by the Company shall recommend the candidates after taking into consideration the requirements of the company and the qualification of those concerned. The Board of Directors can disagree with the recommendation and can ask them to reconsider. 

 

 

Appointment of Auditor arising out of a casual vacancy

 

If there is a vacancy arising out of death, disqualification or resignation of an auditor then it’s referred to as Casual Vacancy. If the same arises out of resignation, then the EGM appoints a new one within 3 months of the recommendation of the Board.  If it is any other reason than Resignation the Board appoints an Auditor within 30 days. Any auditor appointed in a casual vacancy continues to hold office until the ending of the next Annual General Meeting. 

 

 

 

Appointment of Retiring Auditor

The retiring auditor can be reappointed again provided that he is not disqualified, has not given a notice to the company about his unwillingness to continue and no special resolution appointing some other auditor or specifically denying his re-appointment has been passed. If no auditor is appointed at the end of the tenure of the serving auditor then the same auditor shall continue.

 

 

Removal of Auditor

An Auditor, who is statutorily appointed can only be removed by a special resolution, after obtaining the previous approval of the Central Government on that behalf in the prescribed manner. The auditor concerned shall be given a reasonable opportunity of being heard before proceeding with the same.

 

 

Conclusion

 

An Auditor is a necessary part of company functioning. They ensure the money invested or earned by the company is utilized in a proper manner. Audits carried out by the Auditor increases trust of the Public and Government in a company. This increase in trust and compliance ultimately helps in increasing investment in the business. It also helps keep the company financially healthy by detecting fraud. 
 

Guide to Employee Provident Fund (EPF) – Registration & Compliance
Company

Guide to Employee Provident Fund (EPF) – Registration & Compliance

Employees Provident Fund or EPF is a kind of savings scheme, wherein a part of the employees’ salary is deducted and saved for retirement or any future emergency that may arise. It is a mandatory scheme for every salaried employee, also it is mandatory for every company to provide the benefit of Employee Provident Fund to their employees. A part of the salary which is deducted to be kept aside for this scheme is maintained and overseen by Employees Provident Fund Organization of India. Any company having more than 20 employees is mandated by law to register with the Employees Provident Fund Organization of India.
 

As per rules, any salaried employee having an income of less than Rs 15,000 must mandatorily be a part of the Provident fund Scheme, however an employee having an income more than Rs 15,000 can open a Provident Fund account with either the consent of the employer or the approval of the Assistant PF Commissioner. 


The amount contributed to the Employees Provident Fund is divided into two categories-:


Contribution by the employee:

Every person must contribute some part of their income to the Provident Fund Scheme. The rate of amount is decided by the Employees Provident Fund Organization of India. The rate of interest differs from. For men the rate of interest is 12 percent of its basic salary. For women initially its 8 percent for first 3 years and later 12 percent.  

 

Contribution by the employer:

The amount contributed by you must be contributed by the employer as well. That is the amount that is contributed the employee, the equal amount must be contributed by the employer. However, the amount paid by the employer is divided into various schemes such as Employee’s Pension Funds, Employee’s Pension Scheme, Employee’s Deposit Link Insurance Scheme, EPF Administration, EDLIS Administration charges.


Withdrawal of Funds from Employee Provident Fund:

A person can withdraw up to 50 percent of the amount collected, provided that he has deposited the amount for 7 years. But the reason for withdrawing the amount needs to be mentioned. For purposes such as marriage, education, construction or purchase of house, purchase of land, renovation of home, home loan repayment money can be withdrawn from the Provident Fund Account. 


What is a company’s liability for non-payment of EPF?

The payment to the provident fund for a month must be made at the 15th of the next month. However, if the employer fails to make the payment to the provident fund account of an employee then he is liable to pay penalty. Penalty is given under two instances-:

 

EPF Interest for Late Payment under Section 7Q:

When an employer misses the deadline for the payment to the Provident Fund account, the employer must pay 12 percent for every single day, wherein the delay is caused. 

 
Penal Damages for Late Payment under Section 14B:

After a certain period of time when the period of time increases of the non-payment of the provident fund amount the rate of interest also increases. The Employment Provident Fund Organization informs the employer of the amount of penalty that has accumulated on his part to be paid to the employee through notices.
 
 
The employer has to pay the Employees Provident Fund Interest and the penal damages for delayed payment of provident fund through the website of Employment Provident Fund Organization. Even after providing several notices to the employer to make the payment of the provident fund and the interest and penal damages if the employer refuses to do so then Either the Central Provident Fund Commissioner, or any Additional Central Provident Fund Commissioner, or any Deputy Provident Fund Commissioner, or any Regional Provident Fund Commissioner or any Assistant Provident Fund Commissioner may, by order, may decide the dispute and ascertain the amount due on part of the employer. The Officer in-charge has powers similar to the ones vested with the court under Code of Civil Procedure, 1908. 

 

 

Conclusion

EPF Scheme is a social welfare scheme. Non-payment of EPF, is an extremely critical issue as it attracts heave penalties. Hence, it is advised, that a startup should register as soon as the number of employees reaches the required threshold and hire a payroll executive or outsource the EPF contribution to a third party payroll service provider to ensure that EPF compliance is done in a proper and timely manner.

How to Close a Business
Company

How to Close a Business

Closing a business is tougher than starting a business. The process of closing a business in India is referred to as Winding Up. At the commencement of Winding Up process, the business ceases to carry out any sort of business activity and the management of the company is transferred from the Director to the freshly appointed ‘liquidator’. Liquidator performs all the necessary tasks to wind up a company like realizing its assets, paying off the debts and distributing the surplus left among the people who are entitled to have it. Dissolution is the last stage of winding up and after this, the company ceases to exist. During the winding-up process the company remains a legal entity with rights, duties, and obligations but after dissolution, the company’s name is struck off the Register of Companies by the Registrar.

 

 

Modes of Winding Up


Section 270 of the Companies Act, 2013 lays down the modes of winding up and prescribes two methods of closing a company. A company can be wound up either voluntarily or by the National Company Law Tribunal. The term winding up includes winding under the Companies Act and liquidation under the Insolvency Code.

 

Winding up by the Tribunal

The Tribunal is empowered to wind up a company if a petition is put forth before it as per Section 272 of the Companies Act. Section 271(1) of the same Act contains the grounds based on which a company may be wound up and these grounds inter alia include winding up if it is unable to pay debts, has passed special resolution for winding up the company and has acted contrary to the interests of the sovereignty, integrity and security of India. With the coming of the Insolvency and Bankruptcy Code, typically, a company which is unable to pay its debts, resorts to insolvency resolution under the Code. This has made the provisions pertaining to winding up on account of inability to pay debts under the Companies Act, defunct.

 

The petition can be filed by the company, trade creditors, contributors, the government or the registrar of the company and if must be accompanied by the Statement of Affairs prepared by the auditor. Part I of Chapter XX of the Companies Act contains the law governing winding up by tribunal. After petition if the Tribunal is satisfied that there is an apparent case for winding up then it shall direct the company to file objections within 30 days of such order. A liquidator is appointed who supervises the whole process of winding up and then submits a report to the tribunal within sixty days from the order. When the business activity of the company ceases completely then the liquidator files an application before the Tribunal and if the Tribunal is of the opinion that it is reasonable to wind-up the company then it may pass the order of dissolution, the copy of which shall be forwarded to the Registrar by the liquidator within 30 days from the date of order.

 

Voluntary Winding Up

The other mode of winding up a company is voluntary without any intervention of the Company Law Tribunal. Section 304 of the Companies Act lays down the condition in which a company can be wound up voluntarily and they are, firstly, if a resolution is passed in the general meeting to wind-up due to expiry of the period mentioned in Articles of Association or any other reason mentioned in the Articles. Section 59 of the Insolvency and Bankruptcy Code contains the procedure for winding up voluntarily and another law that is relevant in this regard is the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulation, 2016. The first step of this process requires the Director of the company to declare winding up of the company at the general meeting following which a special resolution approving the same has to be passed. Then a meeting with creditors is to be conducted and consent of 2/3rd of the creditors is to be obtained. After the publication of the resolution, a liquidator is appointed and after the activities of the company are absolutely wound up then the liquidator prepares an application of winding up and sends it to NCLT for dissolving such company.

 

 

Conclusion

The process of winding up is a complicated one and is laden with a number of technicalities. With the introduction of Insolvency and Bankruptcy Code, the law in this regard has become even more complex. It is advised to engage an Insolvency Expert to do the winding-up proceedings.

How To Increase Authorised Share Capital?
Company

How To Increase Authorised Share Capital?

Each company is comprised of shares. An authorised share capital is the maximum number of shares which a company is authorised to issue. A company in India is empowered to increase its authorised capital prior to issuing shares to retail investors. It is also called nominal capital. In other words, authorised capital is essentially the limit to which an enterprise could be expanded. While, authorised share capital is the upper limit of the number shares a company may issue, its paid-up capital is the sum total of shares it has already issued. Therefore, paid-up capital can never exceed the authorised capital.

 

How To Increase Authorised Share Capital?

Following steps may be taken to increase the authorised share capital of a company:

Step 1: Verification of Articles of Association: The first step towards increasing an enterprise’s authorised capital is the verification of Articles of Association (AoA) to check if there is necessary authority to increase the authorised share capital, if not then the Articles of Association are to be accordingly changed which can be done by passing a Special Resolution as per Section 14 of the Companies Act.

Step2: Convening a Board Meeting: The next step is to convene a Board Meeting which can be done by providing of the notice of the same to the Director at least 7 days prior to the meeting and at the Board Meeting itself, approval is to be obtained the Board of Directors in order to increase the authorised share capital. Following this an Extraordinary General Meeting (EGM) is to be conducted and the date, time and venue of such meeting is to be fixed at the Board meeting. Other things that are required to be done during the Board meeting include issuing the notice of Extraordinary General Meeting to all the shareholders, auditors and directors of the enterprise.

The purpose of holding an EGM in this process is to obtain the assent of the shareholders. The approval of the shareholders is required to be in the form of an ordinary resolution authorising increasing of authorised share capital. It is to be noted here that if the Annual General Meeting (AGM) is to be conducted in the near future then this issue can be present before the shareholders under ‘Special Business’ and their assent can be obtained for the purpose of increasing share capital. The notice of a general meeting is to be issued at least 21 days prior to the meeting along with an Explanatory Statement as per Section 102 of the Companies Act. If there is a need to amend the Articles of Association then the company must file the form MGT-14 within 30 days after passing the Special Resolution at the General Meeting. Filing of form MGT-14 is a necessary step is Article of Association does not allow increasing of authorised share capital.

Step 3: Filing of Form SH-7: After conducting the EGM and obtaining the consent of shareholders the company is required to file form SH-7 within 30 days of passing the ordinary resolution at the general meeting. A certain amount of fee is to be paid while filing form SH-7 and along with filing the form, the company is required to attach and submit a copy of the Board Resolution, the notice concerning the EGM along with the explanatory statement, an authorised true copy of the ordinary resolution passed in the general meeting and an altered version of Memorandum of Association which has the new higher limit of authorised share capital.

Step 4: Increase in the Authorised Share Capital: if the procedure for increasing the authorised share capital is followed properly then the Registrar would authorise the request to increase the authorised share capital and the updated authorised share capital will be reflected on the Ministry of Corporate Affairs’ online portal. Following this, the company can increase its paid-up capital by attracting more investors to purchase their equity shares.

 

 

Conclusion

As the company grows and expands, or for the purposes of raising capital through an IPO, or to attract investors, an increase in the authorised share capital becomes essential. It is pertinent to know the procedure by which the same can be done. It is always preferable to obtain legal advice before you decide to increase the authorised share capital of your company.

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