What is the Difference Between Companies Act, 2013 and the Companies Act, 1956?

  • June 08, 2024
  • Dushyant Sharma
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Today, the company registration in India is done according to the provisions of the Companies Act, 2013. But before this act came into effect, the company registration was done according to the provisions of the Companies Act, 1956. 

 

Do you know why the erstwhile Companies Act, 1956 was replaced by the more recent Companies Act, 2013? What makes the former different from the latter? In this article, we will discuss exactly this i.e., what makes Companies Act, 2013 different from the Companies Act, 1956?

Companies Act, 1956 and Companies Act, 2013

A company is a legal entity formed by individuals so that they can engage in business activities and operations. Every country has its own legislation regarding company registration. In India, this legislation is known as the Companies Act, 2013. But before this act came into effect, Companies Act, 1956 was referred to for company registration and other company formalities in India. 

 

The Companies Act, 1956, remained in force for many decades and underwent various amendments over the years. The Companies Act, 2013 is a well-detailed legislation which governs the formation, management, and functioning of companies in India. To address emerging needs and promote ease of doing business, the current Companies Act has been amended multiple times. 

 

It is important to note that even though the 2013 Act is now in effect, businesses registered under the erstwhile Act are still considered as legal entities. 

Features of the Companies Act, 1956

Let’s understand the Companies Act, 1956 by learning about its features:

Independent Legal Entity

A new company has a legal structure which is distinct and clear from individuals making up its core. It is a self-regulating, independent and self governing entity having the right to distribute any form of property for which it is the owner in any manner it chooses. In addition to this, it has the authority to open a bank account, engage in business transactions, enter into shareholder agreements and file lawsuits against itself or its shareholders. 

Incorporated Association
Registration is a requirement for all Indian firms under the Companies Act of 1956. Formal documentation must be filed with the Registrar of the Companies in order for a company to be incorporated. The Memorandum of Association outlines the purposes for which a company is established.

Limited Liability
A business cannot use the personal assets of its shareholders to settle its debts because it has its own legal personality and cannot be claimed by its members.

Common Seal
An industry’s common seal serves as the legal representation for any choices taken on a firm's behalf that the firm is unable to make on its own. Companies Act, 1956 states that, “a company may, by writing under its common seal, empower any person, either generally or in respect of any specified matters, as its attorney, to execute deeds on its behalf in any place either in or outside India.” 

Perpetual Existence
A firm is an artificial entity that is free from status-unaffecting factors such as retirement, insolvency, death, and other restrictions associated with age. The duration of eternal existence is endless. The only authority capable of ending a company's existence is legislation. 

Transferability of Shares
A private company’s shareholders are unable to transfer their shares in the same way as those of a public limited company due to limitations. Because the public company’s shares are transferable, the owner can sell his interest in the business to a potential buyer. Shares of publicly traded firms are easily transferable.

Separations of management and ownership

The Companies Act, 1956, explains the steps which are involved in the formation of a company, including the company’s name, procedure, members, constitution, fees and the organizational goals and other factors involving the company, its directors, decision-makers, HOD, who handles the primary responsibility and makes decisions when it comes to the planning process and other tasks and liabilities pertaining to the company matters. It also discusses the winding up and liquidation of a company.

Types of Companies under Companies Act, 1956

There are various types of companies under the Companies Act, 1956.

  • Private company
  • Public company
  • Companies limited by shares
  • Companies limited by guarantee
  • Unlimited company
  • Section 25 company
  • Government companies
  • Foreign companies
  • Profitable or non profitable companies

Features of Companies Act, 2013

  • Class action lawsuits for a company’s shareholders
    A brand-new idea of class action lawsuits was introduced by the Companies Act of 2013 to create awareness of shareholders’ and other stakeholders’ rights.
  • Shareholders get more power
    For a number of big transactions, the Companies Act, 2013 mandates approval of shareholders.
  • Empowerment of women in the business sector
    At least one female director must be appointed to the board of directors, for certain classes of companies, according to the 2013 Companies Act.
  • Corporate Social Responsibility (CSR)
    As per the Companies Act of 2013, several classes of Companies are required to invest a certain amount of money on an annual basis in projects and activities to showcase their commitment to CSR.
  • National Company Law Tribunal
    The Companies Act, 2013 led to the establishment of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) to take the position of the Company Law Board and the Board for Industrial and Financial Reconstruction. Since then, these two tribunals have delivered specialized justice while easing the burden of the Courts.
  • Fast Track Mergers
    Governed by Section 233 of the Companies Act, 2013, fast track merger is a streamlined process which is aimed at accelerating the merger of certain classes of companies. It provides a cost-effective solution with shorter timelines and avoids NCLT’s involvement.
  • Cross Border Mergers
    A foreign business may combine with an Indian firm and vice versa, according to the Companies Act of 2013. However, it is only possible with a prior approval of the RBI.

Types of Companies under Companies Act, 2013

There are various types of companies under the Companies Act, 2013.

  • Private limited companies
  • Public limited companies
  • One person company
  • Section 8 company
  • Nidhi company
  • Producer companies
  • Dormant Company
  • Associate Company
  • Holding Company
  • Subsidiary Company
  • Small Company
  • Government Company
  • Companies limited by guarantee
  • Companies limited by shares

Key Differences between Companies Act, 1956 and Companies Act, 2013

The key difference between Companies Act, 1956 and Companies Act, 2013 are represented in the table below:

Companies Act, 2013

Companies Act 1956

A single individual can form a company under the Companies Act, 2013.

A single person cannot form a company under Companies Act, 1956.

The maximum number of members allowed in a private company is 200 members.

The maximum number of members permitted in a private company used to be 50 members.

Articles may contain provisions pertaining to entrenchment.

Entrenchment Articles were not contained in enabling provisions. 

Notice to ROC about a change of address to be given within 15 days since the change has taken place.

Notice to ROC about a change of address, under the erstwhile act, had to be given within 30 days since the change took place.

To convert a public company into a private company, approval is required from the Tribunals (NCLT and NCLAT).

Earlier, when this act was still in force, the central government’s approval was required for a public company’s conversion into a private company.

Electronic mode of sending documents to the company are recognized by the Companies Act, 2013.

The electronic mode of sending documents to the company was not recognized under the erstwhile companies act.

As part of Board’s report, an extract of annual return in prescribed format is to be given.

Extract of return wasn’t required to be given as Board’s report when the companies act of 1956 was still in effect.

A person can become a proxy for a maximum of 50 members.

The 1956 Act had no such restriction.

A postal ballot is applicable to all companies under the latest companies act.

A postal ballot was not applicable when this act was still in effect.

Past losses do not need to be set off before the dividend’s declaration.

Before the declaration of the dividend, past losses had to be set off.

Under the latest Companies Act, there is no compulsion to transfer profits to the company’s reserves.

It was mandatory to transfer at least 10% of profits to the company’s reserves under this act.

The company is allowed to keep a book of accounts in digital mode under the companies act still in force.

The company wasn’t required to keep a book of accounts in electronic mode when this act was still in force.

CSR spending of at least 2% of average net profits is a mandatory requirement during 3 preceding years.

CSR spending wasn’t a compulsion under the erstwhile act.

Certain classes of companies mandatorily appoint a woman director.

It was not compulsory to appoint a woman director under the Companies Act of 1956.

The maximum number of directors in public and private companies, according to the Companies Act, 2013, is 15.

The maximum number of directors in a public company was 12 under the erstwhile Companies Act, 1956.

Conclusion

It is clear that the Companies Act, 1956 and Companies Act, 2013 were introduced by GOI to provide rules and regulations related to company registration, compliances, etc. However, Companies Act, 1956, is an outdated act and is no longer applicable. It had to be replaced by the recent Companies Act, 2013 because of the changing needs and trends in the business world. Companies Act, 2013 introduced the business model of One Person Company (OPC) which was not a part of the earlier Companies Act, 1956. If you need assistance in Company Registration, get in touch with Registrationwala Company Registration Consultants.


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Dushyant Sharma
Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.

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