- Author: Shikha, LLB student of Chandigarh University
ABSTRACT
“A company as long as incorporated in compliance with the provisions of the Companies Act, is a separate legal entity/person and not the agent of its controller(s).” – Salmon Vs. Salmon & Co. Ltd. (1897) AC 22
A company can gain the recognition of a distinct legal personality by adhering the due process of law for its formation and establishment. In India, the Companies Act, 2013 deals with the incorporation process of a company which involves some key steps like the type of company (private, public, or others), registration of company’s unique name with the Registrar of Companies (ROC), drafting of Memorandum of Association (MOA) and Articles of Association (AOA), and attaining a Certificate of Incorporation. This process of incorporation ensures compliance with statutory laws and provisions. The framework for incorporation is also determined by international practices and ensures compliance to corporate governance and regulatory norms. However, after the incorporation there are certain legal compliance that a company must adhere as to avoid legal liabilities which arise due to non-compliance of statutory provisions and regulatory frameworks. These legal compliances can be found both at domestic and global level (specifically for companies operating globally) such as labour laws, taxation and environmental regulations. Internationally, compliance becomes more complex, involving compliance with global trade regulations, cross-border taxation provisions, and international human rights standards. This paper examines these compliances along with the recent regulatory changes and also explores the risks associated with non-compliance.
INCORPORATION OF A COMPANY
The formation of a company in India is mainly governed by the Companies Act, 2013, which highlights the procedures, requirements, and legal provisions for the incorporation a company. However, it also involves compliance with other laws and regulations depending on the nature and scope of such corporate entity. There are mainly three types of Companies under the Companies Act, which can be incorporated based on their nature, size, and purpose. Firstly, Private Limited Company which requires at least two members and restricts the transfer of shares. Secondly, Public Limited Company which contains at least seven members and allows the free transfer of shares. Thirdly, One Person Company (OPC) which only contains a single entrepreneur in the company.
Selection of Company Structure
A company’s structure determines its compliance and obligations under the respective laws such as the Companies Act, Limited Liability Partnership Act, Income Tax Act, 1961, and other sector-specific laws. Section 2 of the Companies Act, 2013 deals with the definition of various types of companies, including private companies, public companies, and One Person Companies (OPCs). In case of LLPs the Limited Liability Partnership Act, 2008 comes into play.
Name Approval
After the selection of the structure of a company to be formed a unique name to that entity is provided to give it a separate identity. Section 4 of the Companies Act, 2013 mandates that the company’s name should be unique and not identical or resemble the name of an already existing company. There is a detailed procedure for name reservation through the RUN (Reserve Unique Name) service under the Companies (Incorporation) Rules, 2014. Here the Trademarks Act, 1999 also plays a crucial role to ensure that the company’s name does not infringe on existing trademarks.
Drafting Key Documents
After finalizing the outer structure of a company there are some essential documents needed for establishing the operating mechanism of a company. Section 10 of Companies Act, 2013 establish the binding effect of the Memorandum of Association (MOA) and Articles of Association (AOA) of the company. Section 7 of Companies Act, 2013 mandates the formation of required documents like MOA, AOA, and declarations for the incorporation of a company. Moreover, taking into consideration the recent trends of online transactions the Information Technology Act, 2000 governs the use of Digital Signatures required during electronic filing.
Filing with the Registrar of Companies (ROC)
The Registrar of companies is the regulatory authority under the Companies Act. The Companies Act mandates under section 7 to submit the documents of incorporation with the registrar of companies. There is certain amount of fee or stamp duty for the incorporation as well that varies from state to state. Therefore, these Stamp Duty Laws is governed by each respective state laws for document registration.
Attaining Incorporation Certificate
The final stage in the incorporation process is obtaining the incorporation certificate which is comes under Section 7(2) of the Companies Act, 2013. After the satisfactory verification, the ROC issues a Certificate of Incorporation, which ensures the establishment of the company’s legal existence. However, the incorporation of the company comes with certain compliances such as under Section 12 of the Companies Act, 2013 requires for the company to establish its registered office within 30 days of incorporation i.e., after receiving the certificate of incorporation. Another provision requires the appointment of the first directors and first auditor of the company under section 152 and 139 respectively.
LEGAL COMPLIANCE
The incorporation of a company leads to the compliance of several statutory provisions and regulatory frameworks for its working and carrying out its operations especially at domestic level and for global companies both at national and international levels. Legal compliance for companies, whether domestically or globally, is crucial for maintaining operations within the provisions of the law, avoiding penalties, and encourage trust with stakeholders. In India, companies must comply to a certain laws and regulations under several legal frameworks. At the national level, the Companies Act, 2013 deals with the incorporation, management, and dissolution of companies. Sections 3 to 12 of the act deals with the incorporation process, which also includes the drafting of the Memorandum of Association (MOA) and Articles of Association (AOA), along with the registration with the Registrar of Companies (ROC), and obtaining the Incorporation Certificate. However, after the incorporation, companies must adhere with Section 134, which requires the preparation of financial statements, board reports, and disclosures, and Section 138, which requires the appointment of an internal auditor in order to ensure governance. Apart from these there are other legal compliances as well which are further explained in detail.
Compliance to Corporate Governance
Corporate governance involves the provisions containing rules and practices that ensures how a company is directed and managed. In India, it is the Companies Act, 2013 which serves as the primary legislation to governs the corporate governance. Provisions related to Companies Act has already been discussed above. Moving forward let’s examine the other legal compliances.
Taxation Compliance
Adhering to Taxation laws and regulations ensures that companies meet their obligations under the provisions of income tax, indirect taxes, and customs laws. The Income Tax Act, 1961, requires the periodically filing of income tax returns, precise information of revenue, and deduction of Tax Deducted at Source (TDS). For companies which deals in goods and services, the GST Act, 2017, requires the registration for GST and regular filing of monthly, quarterly, and annual returns and compliance with the other such provisions when required. An example of non-compliance of taxation laws is the Vodafone International Holdings v. Union of India (2012) case, where Vodafone had to pay a tax demand of ₹20,000 crore for acquiring Hutchison Essar. The dispute emerge due to a lack of clarity in the tax laws and regulations concerning cross-border transactions, highlight the importance of accurate compliance in international taxation laws.
Compliance to Labor Laws
The compliance to labor laws ensures not only the welfare and safety of the employees but also highlight the rights and liabilities of employees. Key legislations in labor laws include the Factories Act, 1948, which ensures workplace safety, and the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, governs contributions to employee retirement funds. Adherence with these laws reduces the workplace accidents and ensures employee satisfaction. For example, companies which fails to provide safe working conditions to the employees can face serious consequences, as evident by the 2019 fire at a garment factory in Delhi. The incident underscored the importance of complying with safety standards for the protection of employees and avoid legal repercussions. Hence, for maintaining labor law compliance regular audits, employee training, and compliance to safety standards are crucial.
Compliance to Environmental laws
Environmental compliance includes the adhering to laws that regulate environmental impacts, which includes pollution, waste management, and resource conservation. The Environment Protection Act, 1986, mandates industries to obtain environmental clearances and comply with pollution control legal frameworks. For instance, in the case of Union Carbide Corporation v. Union of India (1989), derive from the Bhopal gas tragedy, is a grim reminder of the consequences of non-adherence with environmental safety norms. Due to negligence the thousands of lives were lost as well as the environment suffered irreparable damage. This case demonstrates the need for strict compliance to environmental framework and regular monitoring of industrial activities.
Cross-Sectoral Compliance
Some of the companies face unique compliance challenges due to the difference in their nature and structure. For example, pharmaceutical companies must comply to Good Manufacturing Practices (GMP) and legal framework by authorities like the Food and Drug Administration (FDA) along with the World Health Organization (WHO). For instance, in the case of, Ranbaxy Laboratories in 2013 faced a $500 million penalty for forged test results and non-compliance with the GMP standards, highlighting the need for stringent compliance. In the similar manner, the management of financial sector is governed by the provisions and legal framework established under the SEBI (Securities and Exchange Board of India) Regulations, which ensures transparency in stock market transactions and operations. The evident case law in such trading matters, can be the case of Rajat Gupta case (2012), the case highlights the essential need of adhering to the legal frameworks in maintaining investor trust and market integrity.
International Compliance
Internationally, especially for global companies or for companies which deals in cross-border transactions, compliance involves adhering to laws and provisions such as the Foreign Exchange Management Act (FEMA), 1999 for cross-border transactions and the General Data Protection Regulation (GDPR) for managing personal data. For example, a multinational company operating in the EU must ensure compliance with the provisions of GDPR, as non-compliance or violations can lead to severe penalties, as demonstrated in the case of Google v. CNIL (2019). global companies also face anti-corruption laws like the Foreign Corrupt Practices Act (FCPA) in the U.S., illustrated by Siemens AG’s 2008 bribery case, which resulted in consequential penalties.
Importance of Compliance Management Systems
Given the intricacy of legal compliance or adherence to legal laws and regulations, there is a need for an effective compliance management system. Although almost every statute and legal frameworks has this compliance management system so it is essential to implement those provisions and monitoring those compliances. These systems must involve certain regulations or practices such as regular audits which includes periodic reviews to identify and address gaps in compliance, for educating staff on legal necessities and ethical practices there should be regular employee trainings and awareness programs, there can be the provision of engaging legal counsel or legal experts to interpret and implement regulations along with the provisions related to technology integration in order to use software to monitor compliance deadlines, generate reports, and manage risks, etc.
Consequences of Non-Compliance
The legal compliances of all related laws and legal frameworks ensure transparent and smooth operation or working of corporate entities however, the non-compliance can give rise to severe consequences such as legal liabilities, disputes, damage to reputation, and disruptions in general working or operations of the company. For example, the Enron Scandal (2001), derived from financial mismanagement and non-adherence with accounting provisions, resulted in the company’s bankruptcy and the introduction of the Sarbanes-Oxley Act, 2002 in the U.S., which necessitates stringent corporate governance norms.
CONCLUSION
To sum up the above mentioned, the incorporation of a company (in India) mandates the compliance to the Companies Act along with the additional or other supplementary laws and regulations in order to ensure a proper construction, compliance and operation. The process is established to facilitate ease of operating business and meanwhile ensuring accountability, sustainability and transparency. Similarly, legal adherence is the compliance of the companies to not only the laws and regulations but also ethical and operational standards applicable to their working and operations. Therefore, the non-compliance to these obligations can result in penalties, legal disputes or liabilities, and reputational damage, making it essential for companies to establish robust compliance management systems. Which may include regular audits, staff training, and engaging legal professionals to ensure the compliance of all national and international requirements laws and regulations. This ensures that the businesses operate in accordance with the legal framework established by government and other international bodies. The legal compliance is not limited to escape legal penalties but also establishes corporate credibility, reduces risks and also helps securing the stakeholder’s trust.
CASE LAWS
- Salomon v. Salomon & Co. Ltd. (1897) AC 22
In this case, it was recognized that a company is a separate legal entity which is distinct from its shareholders. This principle, codified under Section 9 of the Companies Act, 2013, and forms the foundation of corporate existence in India. Indian courts have followed this principle in cases involving the corporate veil and legal liability of companies.
- Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1964 AIR 40)
The decision of the case established the company as a distinct legal entity and recognised it as a separate entity from its directors and members. The case reinforced the doctrine of a company’s legal personality under the Companies Act.
- State of Uttar Pradesh v. Renusagar Power Co. (1988 AIR 1737)
This case introduced the doctrine of lifting the corporate veil to expose or deal with fraud or non-compliance. It was highlighted that legal compliance includes transparency and accountability to prevent misuse of corporate personality.
- SR Bommai v. Union of India (1994 AIR 1918)
The case while not directly related to companies, this case upheld the importance of compliance to constitutional and legal principles in governance. The case ensures that the companies operating under state licenses must comply with both central and state regulations, ensuring adherence to federal and constitutional requirements.
- Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965 AIR 1535)
The case is focused on compliance with corporate governance rules and the rights of shareholders. This case established the principle that acts of oppression and mismanagement must be resolved through adherence to statutory remedies under Sections 241–244 of the Companies Act, 2013.
FAQs:
- What is the incorporation of a company?
- It involves a legal process for the registration of a business as a separate entity in accordance with the laws and regulations such as Companies Act, 2013 in India, which provides it a separate legal identity.
- What are the necessary steps for incorporation of company in India?
- Choosing the type of the company.
- Reserving a name with the registrar of companies (ROC)
- Submitting the required documents such as MOA, AOA, and other required forms via the MCA portal.
- Attaining the certificate of incorporation.
- What does legal compliance mean for a company?
- The legal compliance for a company means adhering to the laws, regulations and ethical standards applicable to corporate entities both at national and international levels such as corporate governance, taxation laws, labour laws, environmental regulations, etc.
