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THE COMPANIES ACT, 2013 THROUGH THE JURISPRUDENTIAL LENS OF NATURALIST POSITIVISM
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THE COMPANIES ACT, 2013 THROUGH THE
JURISPRUDENTIAL LENS OF NATURALIST POSITIVISM
Abstract
The Companies Act, 2013 is the
foundational legislation which governs all companies in India. This paper aims
to study the jurisprudential foundation of this statute, mainly in light of the
concept of Naturalist Positivism which combines the two main Schools of Jurisprudence;
Natural Law School and Positive Law School. The paper shall focus particularly on
the most widely acclaimed, recognised and respected theories of some of the
most influential jurists of these respective schools. From Aristotle and Lon
Fuller in the Natural Law School, to John Austin, Hans Kelsen, Jeremy Bentham,
H.L.A Hart and John Rawls in the Positive Law School of Jurisprudence. While
conversations around jurisprudence and interpretations of the various theories
thereof are largely focussed on crimes and social behaviours, corporate actions
and behaviour are often overlooked and hence, this paper shall analyse the jurisprudence
underlying the foremost corporate legislation in India. This paper will focus
on the aspects of good corporate governance, shareholder interest, stakeholder
interests and the general public interests covered through the statutory
framework of the Companies Act, 2013. As this statute is a fairly young
legislation, drafted and enacted in the last decade, and is widely considered
one of the most well-framed legislations in the Indian Legal System, it forms
the perfect subject to be analysed from a jurisprudential point of view, in
order to identify and analyse how relevant and applicable the various theories
and Schools of Jurisprudence are, in the modern scenario, especially as most
widely accepted theories were promulgated centuries, if not millenniums ago.
1. Introduction
The Companies Act, 2013, acts as the
foundational statute governing and regulating all forms of companies in India,
be it Unlimited Companies, Guarantee Companies, Private Limited Companies including
One Person Companies, Unlisted Public Limited Companies or Listed Public
Limited Companies[2]; ever since its implementation in
2013[3] when it replaced the Independence
Era Companies Act, 1956. Through its 29 Chapters, the Companies Act, 2013 lays
down the statutory framework which governs inter alia the incorporation
of companies[4]; corporate governance including
appointment[5] and powers of the board of directors[6] and prevention of oppression and
mismanagement[7], the investigation into non –
compliance and breach of the legislative framework[8], adjudication of disputes[9] and the winding up of companies[10] – thereby regulating the entire lifecycle
and all the actions and procedures contained therein. Such corporate matters are
often left out of the realm of discussion and interpretation of Jurisprudence
and the theories thereof, as the focus is primarily on criminal action, social
behaviour, sovereign actions and fundamental rights. Therefore, studying the Jurisprudence
of the foundational corporate statute in India posits an intriguing
proposition. This study incorporates the two main schools of Jurisprudence,
Natural Law and Positive Law, under the integrated concept called Naturalist
Positivism.
2. Natural Law
Natural Law is dubbed the ‘god–given
law’ as it is largely perceived as the rules of society and mankind given by a supernatural
authority. Natural law is said to stand on the two pillars of morality and
justice while reason and common sense are the guiding principles.
These principles are fundamental to
the existence and operation of any law; as immoral law cannot be a law, one of
the key purposes of the law is justice and reasoning and common sense must be
applied in framing, enforcing and interpreting laws, for without them, the
purpose of law and the operation of society fails.
While Natural law is criticised for
being too vague, idealistic, and subjective, the basic principles are
interpreted in the same manner by the majority of humankind, which creates a
largely consistent body of principles and beliefs/morals which should be and
are reflected in the laws of most civilised nations. Morality, while subjective
to a large extent, is fundamentally based on what the majority of the concerned
people in the relevant society believe to be right and wrong, and therefore, is
likely to be fairly similar across the masses which the concerned legislation
impacts.[11] This view was originally expressed
by Plato in his philosophy wherein he believed that the
right thing will be the same everywhere.
1.1.Aristotle
The work of Aristotle can be applied
quite aptly to the Companies Act, 2013. His concept of two types of justice –
distributive and corrective, is reflected in the provisions of the Companies
Act, 2013. Distributive Justice, as presented by Aristotle, is concerned with
the distribution of honours/rights amongst everyone,[12] which in the context of companies,
would entail all shareholders. Corrective Justice, on the other hand, presents
a corrective principle in private transactions, voluntarily entered into, such
as contracts and the transactions one is subjected to involuntarily[13] such as embezzlement of shareholder/company
funds by the management of the company.
The aspect of Distributive Justice
can be seen through the legal requirement that all shareholders of the same
class have the same rights with regard to receiving dividends[14] and voting on company actions/decisions,
as per their shareholding[15]. Aristotle spoke about shares being
allotted to members of the community either equally or unequally, which carry
their rights.[16]
This can be interpreted quite
literally in regard to the shares of the company carrying the package of rights
and the inequality in shareholding represents the quantum of rights distributed
amongst the shareholders. The aim of Distributive Justice is to bestow rights
and protect such rights, which is precisely what shares of a company represent,
not just in terms of the shareholder’s right to dividends and voting powers,
but also in reference to the obligations of the company towards the
shareholders or the shares. These obligations extend uniformly across the board
irrespective of shareholding and include the facets of good and transparent
corporate governance, legally sound operations, protection of shareholder funds
and interests and proper management with a focus on shareholder profits and
company growth. Furthermore, the company has obligations towards the
government, particularly in regard to compliance filings, procedural aspects,
taxation etc.
When there is a breach of these duties/obligations
of the company towards its shareholders or the government, Aristotle’s Corrective
Justice comes into play. The shareholders and the Registrar of Companies, as
the Ministry of Corporate Affairs assignee to regulate the company on the
ground level,[17] have the right to seek restorative
and punitive action against the company upon breach of the duties, through the judicial
system and more specifically through the National Company Law Tribunal[18] and its appellate authority, the
National Company Law Appellate Tribunal[19], constituted under the Companies
Act, 2013.
The power vested with the
shareholders and government to hold the company liable for any wrongs it may
commit presents the corrective aspect of justice. This also brings into the picture
the principle of morality which underlies the Natural Law School’s theories.
The morality and ethics, which determine which actions by the company are right
and which are wrong, are empowered with the force of law through the Companies
Act, 2013, and therefore, going against these principles would enable the
aggrieved party to seek correction of the wrongs.
These rights are seen pertinently in
the provisions relating to oppression and mismanagement, where if any
shareholder or the government, believes the affairs of the company to have been/be
carried out in a manner detrimental to the interests of the concerned shareholder/group
of shareholders/public or the company itself; a whistleblower mechanism can be
triggered and proceedings can be initiated against the company and/or its
management to hold them accountable for their actions[20]. The bestowing of these procedural
rights and the formation of specific tribunals under the Companies Act, 2013,
to deal with these matters, represent Aristotle’s Corrective Justice concept.
1.2.Lon Fuller
Moving to from the ancient period to
the contemporary period of Natural law Jurisprudence, the ideologies of Lon
Fuller are resonated in the Companies Act, 2013. Specifically, his 8 Principles
of Rule of Law, which lay down the guiding principles for what law ought to be[21], in order to coincide with the
principles of morality, justice, reason and common sense. These rules elaborate
upon the four principles of Natural law, by providing concrete guidelines for
framing laws, which acts as a solution to the vagueness for which Natural law
is criticised. These principles are as follows:
This principle, through
its generality and the generality of which it speaks, is visible through the
bulk of legislations including the Companies Act, 2013. The very purpose of any
law is to permit and prohibit, and the Companies Act, 2013 permits and mandates
actions compliant with the statutory framework and prohibits actions detrimental
to the interests of any stakeholders[23].
The Indian Government has made great
strides in this arena in the past two decades, owing largely to the advent and
wide usage of the internet, which enables the statutory framework governing
companies to be accessible at ease through the Ministry of Corporate Affairs
portal[25] and other government websites as well
as private websites. This acts in addition to the official gazette
notifications and the publishing of the bare act and rules thereto, undertaken
by the government or by private entities under the license of the government. Furthermore,
to ease the understanding of older companies, the Ministry of Corporate Affairs
has provided a comparison of the Companies Act, 2013 with its corresponding
provisions in the Companies Act, 1956[26]; which goes to show the extent of
importance given to public access and understanding of the statute.
iii. Laws should be prospective,
specifying how entities ought to think and act in the future instead of
prohibiting past actions.[27]
the Companies Act, 2013 is an
entirely prospective legislation with no retrospective or retroactive
provisions. While the Indian Legal System does present retrospective and
retroactive laws, especially in the realm of taxation[28], the Companies Act, 2013 does not
fall within that category. All the provisions are prospective and govern the
actions of companies post the enactment and implementation of the statute. The
powers, rights, duties and obligations are all forward-looking and therefore do
not posit any complications or uncertainty with regard to ensure compliance of
past actions with the provisions of the Companies Act, 2013. Though, actions
predating the enactment would fall within the scope of the Companies Act, 1956
and be subject to repercussions thereunder.[29]
The Companies Act, 2013 is amongst
the most easily understandable statutes, detailing even the complex procedures
and requirements in a comprehendible manner, which is more than what can be
said for many other statutes in the Indian Legal System, especially the pre–independence
laws which are still in operation today. While certain ambiguity may exist in the
Companies Act, 2013, it is regularly clarified through the Rules framed under
the Act, the amendments to the Act and The Ministry of Corporate Affairs
notifications/informal guidelines/explanatory notes.
The Companies Act, 2013 provides a
cohesive framework of provisions which are interconnected and mutually
supportive.
Various legislations in India are
criticised for being too idealistic, but the Companies Act, 2013 is very practical
in its approach and imposes logical rights and corresponding liabilities/obligations
upon the company and its management, which is essential to be met in the
interest of upholding the four principles of Natural law.
The benefit of a well-drafted
legislation is that it does not require constant modification, which is the
case with the Companies Act, 2013. However, a law cannot be stagnant and needs
to learn from the dynamic market scenario in order to remain efficient and
effective. Since its enactment in 2013, it has been amended four times, each
with very minor alterations for the purpose of eliminating any difficulties
that may arise, or clarifying any confusion in the interpretation[34]. The changes brought in through the
amendments were largely related to definitions and terminology changes in the
provisions[35], while some significant changes
included change in certain time frames[36] and penalties.[37]
Proper enforcement of legislations is
essential to the operation of an efficient legal system. Inconsistency usually
arises out of vagueness which leaves room for interpretation by the enforcement
authorities, which if inconsistent can lead to inefficiency and unwarranted uncertainties
and difficulties for the subjects of the legislation. The provisions of the
Companies Act, 2013 are constructed in such a way that they leave very little
room for interpretation if at all, the enforcement authorities like the Registrar
of Companies etc. are bound to follow the law as is, owing to the clarity of
the framework. Therefore, the companies are benefited from a solid and unwavering
framework which has to be and is enforced uniformly.
1.3.Evaluation of Natural Law Applicability
The application of Natural law
principles is visible in the Companies Act, 2013, insofar as the four
principles of morality, justice, reason and common sense are concerned. The
application of specific theories promulgated by respected jurists, is limited
as these theories are focussed on civil rights, political systems and rules of
society primarily[39], and do not speak about corporate
law, largely owing to the fact that most of these theories were proposed prior
to the existence of the concept of a company or an artificial legal entity.
3. Positive Law
Positive Law or Positivism, rejects
the postulate of Natural law that law is given by a supernatural authority and
is derived from a superior power which guides our intrinsic belief system and
decisions. Rather, Positivism postulates that law is the outcome of the
sovereign or controlling political authority ruling/governing the concerned
State, be it a monarch, democratically elected parliament, president (in a
Presidential form of government) or dictator. As the father of Positivism John
Austin said, “the existence of law is one thing, its merit and demerit
another”, which suggests that law exists as it is, regardless of its
merits.[40] Therefore, in the Indian context,
Positivism states that the source of law is the Parliament which draft and
enacts and therefore legislates any law. Ergo, Positivism states that law is
the unwavering and enforceable body of rules backed by the power and authority
of the sovereign/political entity creating it, thereby binding the people to
it. It can be summed up rather crudely in the line, ‘law is law because it
is the law.’
The ideology is, as was defined by
Austin, “Law is a rule laid down for the guidance of an intelligent being,
by an intelligent being having power over him.”[41] This statement posits that the
political authority is a superior being in terms of knowledge and power and
hence the subordinate being must adhere to the instructions of the superior,
for the superior knows better.
This ideology is reflected across
societal relationships and interactions, be it an employer and an employee, a
parent and a child, a teacher and a student or a ruler/political authority and
its subjects/subordinates.
With regard to the Companies Act,
2013, it creates a binding set of rules laying down rights, obligations and
penalties for contravention, as it has been enacted by the parliament and
therefore has the sanction of the political authority. Companies are bound to
follow the Companies Act, 2013 as it is the body of rules promulgated by the
political authority having power over the companies, and is hence the superior
to which companies are subordinate.
a. Austin
Austin defined law as “the general
command of the sovereign, issued to those in subjectivity and enforced by the
physical powers of the State.”[42] The Companies Act, 2013 can be dissected to reveal the
application of this definition. the Companies Act, 2013 is the foremost
legislation for companies, enacted by the democratically elected and
constitutionally empowered parliament and is therefore, “the general command
of the sovereign”. The application and extent of the Companies Act, 2013
covers the entire territorial jurisdiction of the political authority, i.e.,
all of India and therefore, all companies existing within India[43]; thereby constituting the aspect of
“those in subjectivity”. The power of the Registrar of Companies and the
National Company Law Tribunal/National Company Law Appellate Tribunal to impose
severely burdensome fines/penalties and award terms of imprisonment[44] create the “physical powers of
the State”. This is the most crucial part of this definition, is the aspect
of the physical power of the state. No law will be effective if it does not
present sanctions and punitive effects for contravention, and such power needs
to be exercised in the physical realm in order to create fear in the minds of
the subjects, forcing them to adhere to the law.
For example, car loans would become a
free-for-all method of purchasing cars simply by paying the minimal down
payment, if it weren’t for the power of the lender to repossess the car if the loan
instalment is not paid, and this power is backed by the legally enforceable
loan agreement and the hypothecation of the title of the car.
In the context of the Companies Act,
2013, there would be no incentive for companies and their management to adhere
to the provisions of the Act, if there were no sanctions and punitive
consequences that could be enforced against them in the physical world, by the
government or the aggrieved party[45]. If shareholders and the government
did not have the power to hold the company and its management pecuniarily and
criminally liable for their actions, there would be no inclination for the
company and its management to adhere to the compliance framework, to ensure
proper management of funds and returns to shareholders, to disclose true
information etc. and such actions could lead to the collapse of the economy and
by extension society. The force of physical power to enforce laws and punish
contraveners is imperative for the effective operation of law.
b. Hans Kelsen
Hans Kelsen’s Pure Theory of Law
posits that law is an independent body, uninfluenced by extrinsic factors such
as economic, sociological, political and historical facts. Kelsen isolated law
as a solitary field of study which is derived from itself, not a supernatural
authority or a political power. Further, he classified law into two categories,
‘Is Law’ and ‘Ought Law’. ‘Is Law’ refers to the reality of a situation, a pure
and unbiased existence of law as it is; whereas ‘Ought Law’ refers to an
idealistic situation detailing how law should be and how society should
function on the basis of the law. ‘Is Law’ takes a direct approach wherein it
studies and applies law as it is and ‘Ought Law’ leaves room for interpretation
and inference, enabling the judiciary to interpret and apply laws as per the
varying circumstances of the case at hand. As per Kelsen, only ‘Is Law’ is
valid and should be followed as the law is a pure and unbiased body.[46]
Ironically, Kelsen’s theory is in
itself idealistic if not impractical, as nothing in society or humankind exists
independent of other factors and law is no exception. Law is based on past
experiences in history, the ideologies and political situation at present, the
needs of society and the functioning of economics. Law is not and cannot be a rock-solid
impenetrable fortress, there has to be room for manoeuvrability and
interpretation to serve the interests of justice, as no two situations are ever
the same. For example, a person who steals from the poor and a poor person who
steals from the rich to feed his family, cannot be viewed in the same light
even though the offence committed by both is theft.
The Companies Act, 2013 is operating
in real society and hence is influenced by extrinsic factors. The very purpose
of the statute is to regulate commercial entities which invariably brings in
the power and influence of economics. The Companies Act, 2013 cannot exist
independent of economics. Furthermore, it aims to protect the interests of
society, specifically the shareholders of the company, which brings in the
aspect of sociological influence. It could be argued that the fundamental
purpose of the Companies Act, 2013 is to prevent any wrongful practices or
actions by the company and its management detrimental to public interests and
shareholder interests, as explicitly provided for in the provisions on
oppression and mismanagement in the Companies Act, 2013[47]. Therefore, the sociological
influence is phenomenal.
That being said, the Companies Act, 2013,
as a norm, deriving its power from the grundnorm of the Constitution of
India, under Schedule 7, List I, Entry 43[48], is in consonance with Kelsen’s
Normative Theory[49]. Further, the Rules framed under the
Companies Act, 2013, can also be viewed as sub-norms deriving their authority
from the explicit provisions of the Companies Act, 2013[50], as the norm (or comparative grundnorm)
Additionally, the internal rules of the company, through their Articles of
Association etc. are also sub norms deriving their power and authority from the
norm (comparative grundnorm) of the Companies Act, 2013[51]. Only if the Companies Act, 2013
permits and empowers the company to frame certain rules and regulations, are
such rules and regulations valid and binding upon the company and its
stakeholders.
Furthermore, the Companies Act, 2013 is
an ‘Is Law’ as it is pragmatic and realistic, and the subject matter it
regulates is fairly well carved out with little need or scope for
interpretation in the application by the subjects of the statute. But it is not
entirely exempt from interpretation by the judiciary, as disputes arising under
the Companies Act, 2013 are complex and as with any case, present varying
factors which do call for individualistic interpretation and application by the
adjudicating authority, be it the NCLT/NCLAT or any other conventional court.
Therefore, the work of Kelsen is
applicable to the Companies Act, 2013 in a very limited scope, as the theory
itself is too idealistic for any statute or body of laws. It can be used as a
theoretical yardstick to study law but cannot be applied in reality. Therefore,
the few principles of his theory that do carry into the reality of the
Companies Act, 2013, are the fact that the Companies Act, 2013 is an ‘Is Law’
and is therefore valid, and it is a subordinate norm to the superior grundnorm
of the Constitution.
c. Herbert Lionel Adolphus Hart (H.L.A. Hart)
H.L.A Hart presented 5 fundamental
human conditions which influence and guide law. These are;
As discussed hereinabove with respect
to Aristotle, Fuller and Kelsen, one of the fundamental purposes
of the Companies Act, 2013 can be isolated to protecting the interests of the
public and the shareholders, with regard to the actions of the company and its
management. This is built on the foundational principle that the shareholders
and the public are vulnerable to the actions of the company and its management
and can therefore be severely detrimentally affected in the absence of law
safeguarding their interests.
Hart spoke about all being inherently
equal, which is not the reality, as discussed by Thomas Hobbes
with regard to individuals. In the perspective of interactions between people
and an artificial entity like a company, the company is stronger even though it
is a front backed by people, who are inherently stronger by virtue of their
position, again tying in with the principle of Thomas Hobbes.
The public and the shareholders are seemingly weaker entities as compared to
the powerful company and management. This is derived from the facts of the
equation which are that the shareholders simply invest money with the hope of
getting a return from the company which uses their money to operate, and these
operations affect the public at large by virtue of their nature.
Further, this is reflected in the
various provisions dictating disclosure of information by the company to the
shareholders, the government and the public at large through prospectuses for
potential investors[54], annual reports for shareholders and
the government[55], form filings with the Registrar of
Companies[56] and publications/advertisements for the
government and the public at large[57], with the aim of eliminating
information asymmetry.[58] Additionally, to combat this imbalance
of power, the supposedly weaker entities in the transaction are empowered with
the force of law, providing for them to be protected and impose consequences
for violating their interests, through the penal provisions[59] and adjudicating authorities[60] under the Companies Act, 2013.
Hart rightly stated that as human
beings we have a limited sense of altruism, as selfish interests taking
priority is human nature, but for society to survive and thrive, humans need to
look beyond their selfish interests and towards the greater objectives of society
as a collective singular entity. The Companies Act, 2013 reflects this ideology
through the fact that the companies’ interests are subordinate to that of the
general public and the government; the larger interests of the company are put
before the interests of the management or any individual/group of shareholders,
and the fact that all shareholders are given equal rights and protection of
their interests[62], as a unified body of entities.
Scarcity is the fundamental economic
problem, too few resources to meet unlimited wants and desires[64]. From a sociological perspective, nobody
can have everything, be it a real person or an artificial person like a
company. The Companies Act, 2013 acknowledges this fact and sets reasonable
limits on certain actions and operations, such as the rights of shareholders,
the strength and powers of the board of directors etc.
Hart postulated the paternalistic
view that persons do not know the full extent of their strength and needs, and
therefore, it is the prerogative of the government to protect persons through
the law, as the government as the superior political authority knows better.[66] Through the Companies Act, 2013, the
legislature has imposed curbs on the powers of the company, its management and
even its shareholders and has empowered these same entities with rights to
correspond with the liabilities towards each other. The need for a statute to
regulate companies is, because unchecked, there is a massive potential for
abuse and misuse.
As Hart himself stated, these five
principles correlate with the doctrines of Natural law, morality, justice,
reason and common sense, and therefore, together, provide for a holistic
framework of law.[67]
In addition to these five principles,
Hart classified law in a manner similar to that of Aristotle’s concept of
justice. Hart considers law as a body of rules, which he divided as follows;
i.
Primary
rules which regulate conduct through rights, duties and obligations, similar to
that of Aristotle’s Distributive Justice;
ii.
Secondary
rules, which he further divided into
a. Rules of Adjudication to resolve
disputes, which links up to Aristotle’s Corrective Justice,
b. Rules of Change to allow the
legislature to make changes in the law whenever required as law cannot stagnate
for it will then fail, as discussed hereinabove with regard to Fuller’s
7th Principle of Rule of Law,
c. Rules of Recognition which provide
for the interpretation and application of law by the judiciary to the cases
before it, as per the circumstances presented, as discussed hereinabove with
regard to Kelsen’s Pure Theory of Law.[68]
Hart posited that secondary rules are
integral and imperative for the existence and operation of primary rules and to
enable enforcement via an authoritative statement[69], which ties up to Austin’s
definition of law highlighting the importance of the physical power of the
state, as discussed hereinabove. Furthermore, his theory answered
the question of why people follow the law, with three crucial factors; the non–optional
character of law, the pre-declaration of law and the compliance required for
the compulsory membership of the state. He also highlighted the importance of
clarity of primary rules, in order to prevent uncertainty about obligations,
powers and jurisdiction,[70] which links up to Fuller’s
3rd principle of Rule of Law discussed hereinabove.
When these ideologies are applied to the
Companies Act, 2013, it is evident that the Companies Act, 2013, when viewed
jointly with the Rules framed thereunder[71], is a combination of primary and
secondary rules, which lays down rights, duties and obligations as well as
rules for adjudication of disputes[72] and provides for the interpretation
and application of the primary rules by the adjudicating authority[73]; while the powers to change the law
are embedded in the grundnorm of the Indian Constitution[74].
Companies and their management have
to follow the Companies Act, 2013 as it is non–optional by nature and is a
fundamental essential to exist as a company or retain the post of management/exist
as a free individual respectively. Non – Non-compliance results in punitive
consequences and eventual disbarment from operating as a company[75] or managerial personnel[76] and hence the law is a binding
framework.
d. Jeremy Bentham
Jeremy Bentham was the creator of the
concept of utilitarianism, which simply put, prioritises the maximum happiness
or benefit of the maximum number of people. It posits that maximising utility
is the ultimate aim of law.[77] This principle is glaringly
prominent in the Companies Act, 2013 as already discussed hereinabove.
The maximum benefit of the majority
is the determining factor in the law and is what guides the actions of the
company as per the law. The needs of the government and the public at large,
trump the needs of the company; the happiness/satisfaction of the needs of the
shareholders trumps the needs of the management and the desires of the majority
shareholders, generally trumps that of the minority as the decisions of the
company are made on the basis of a board of directors’ vote[78] and a shareholders’ vote which works
on the principle of majority shares’ votes. Every share gets a vote and the
vote of the majority of the shares, regardless of the number of shareholders,
creates a decision.[79]
Furthermore, the required quorum for a
meeting of the board of directors is atleast 2/3rd of the Board[80], and for the shareholders' meetings,
a substantial number of members need to be present.[81] Throughout the Companies Act, 2013,
this principle of majority is seen, which reflects Bentham’s principle of
maximum benefit of the majority of people.
To further safeguard the interest of
the majority, against the actions and motivations of the company, the Companies
Act, 2013 mandates the appointment of 1/3rd of the board as
independent directors[82] who are completely devoid of any
additional relationship with the company outside the realm of their
directorship[83], to ensure the elimination of any
bias or prejudice that may arise in the management out of their personal
interests. This links up to John Rawls’ concept of
separating the body from the people behind it as discussed hereinbelow.
e. John Rawls
John Rawls’ philosophy spoke about
justice as an essential fundamental of society and he postulated that those
creating the laws should be rational individuals acting from behind a ‘veil of
ignorance’ with regard to their personal interests, with a focus on equal
rights being bestowed upon all, leaving any inequalities to the responsibility
of the individual’s utilisation and exercise of such rights.[84]
Furthermore, he built upon Aristotle’s
concept of Distributive Justice by applying it through the social
contract theory, which states that persons exist in harmony and hence must act
with regard to each other and living in society. [85] This view was diametrically opposite
to that of Bentham, who spoke about the purpose of law as
ensuring maximum benefit of maximum people[86], as compared to social contract
theory which promotes maximum self-benefit without detrimentally affecting the
rest of society. Social contract theory acknowledges the differences in values,
morals, ethics and desires but allows the peaceful coexistence of different
groups by enabling each to prioritise themselves in a manner that does not harm
the interests of others.[87]
Applying this concept to the
Companies Act, 2013, the principle of a separate corporate entity can be seen
as reflecting Rawls’ principle of separation. While Rawls spoke about
separating the lawmaker from the law, which is undoubtedly present in the
Companies Act, 2013, it can be further interpreted to mean separating the
interests of the promoter and management from that of the company. Similar to
Rawls’ ‘veil of ignorance’, companies are said to exist with a ‘corporate veil’,
which means the company and the people behind it, be it promoters, management
or shareholders, are separate legal entities, with separate interests.[88] Interpreting this concept further,
the management of the company is mandated to act in the best interest of the
company and its shareholders, independent of their personal interests.
Pursuant thereto, whenever the
company is entering into a Related Party Transaction, i.e., a transaction with
an entity related to the management of the company, be it through an actual
relationship with the person or through a business or pecuniary interest in the
artificial entity[89]; the doctrine of ‘Arm’s Length
Basis’ is applied which states that discussions of the board of directors
revolving around the concerned transaction, should exclude the related director
and the business should be carried out in the same manner as if the related
party were any other non – related entity, with no additional benefits.[90] The Doctrine of ‘Arm’s Length Basis’
with regard to Related Party Transactions of the company, is a projection of
Rawls’ concept of separating the person behind the creation, from the purpose
of the creation. As per Rawls, this creation is the law, and in this
interpretation, it is the company. The management of the company must carry out
the business of the company without any regard to their personal interests in
consonance with the principles of good corporate governance. This ties in with
Rawls’ philosophy of the laws being created without any regard for the personal
interests of the lawmaker.
In addition thereto, the idea of
eliminating bias and framing laws from an entirely neutral standpoint links up
with Kelsen’s Pure Theory of Law, as he too spoke about
the law existing independently, free from the influence of extrinsic factors.
Rawls’ ideology of equal rights and
opportunities is also seen in the Companies Act, 2013 insofar as the
legislation, while protecting the interests of the shareholders and the
government, is by no means a social legislation, as it is simply regulating the
company by giving it rights and imposing upon it, liabilities which do restrict
their operations but not their business. This means that all companies of the
same type are treated equally by the regulator and are given equal rights and
liabilities, but how they utilise such rights and honour such liabilities in
the pursuit of business growth and success, is entirely dependent upon the
company and its management. As Rawls said, rights and opportunities should be
equal in a manner that any inequalities that arise should be the product of the
subjects’ own making.[91] The Companies Act, 2013 does not
impose any curbs on the nature, volume and extent of business, companies can
grow as much as they want to, can generate the maximum revenue and
profitability possible etc. and hence the disparity in the size and success of
different companies, if of their own making.
Therefore, the application of Rawls’
theory is fairly significant with regard to the Companies Act, 2013, admittedly
so, with a liberal but not overreaching interpretation.
4. Analysis
There remains the undeniable
perspective that the law is not the final limit on guiding behaviour, there
exists morality over and above that. While all laws should be morals, all
morals cannot be the law but that does not mean morals should not be adhered
to. This was a crucial point of view presented by many jurists, but more
notable so, by Aristotle, who stated that law is not the
limit to restrict actions, morals set a limit higher than law.[92]
In the perspective of the Companies
Act, 2013, while the actions and decisions of companies and their management
are restricted by the law in the bigger picture, the ground-level operations
are regulated by the morality of the management. It is their moral and ethical
belief system which shapes the nature of their actions, as the world operates
in the grey and there are always means and methods to circumvent the law and
furthermore, not all actions are regulated by the law. These facts bring into the
picture the Naturalist view of the imperative of morality in guiding actions,
be it of a person or a company. This concept of morality is ignored by the Positivist
School for the most part, but clearly, in reality, morality does play a crucial
role in the existence, operations and actions of companies.
Prima facie, Positivism seems to have a far
greater impact on the Companies Act, 2013 than Naturalism. The scope of
application is wide, varied, creative and coherent. However, the everlasting
argument surrounding Positivism sustains – Positivism is not itself self-sustaining
and independent. While Positivism does acknowledge the source of law as the
statute, the statute itself stems from individuals, it does not exist on its
own. These individuals are guided by their own morality, ethics, beliefs etc.
which brings in the aspect of Naturalism. As evidenced by the discussions
hereinabove, the influence of Naturalism in the Positivist theories, confirms
the idea that Positivism cannot exist without Naturalism.
While naturalism largely presents that
morality stems from a supernatural authority and is hence ‘god-given’ so to
speak, in reality, the influences on the thinking of the legislators are
varied. These influences can of course be resultant of their belief system in a
supernatural authority or the principles of their religion, or they may be the
past experiences, both negative and Positive, their own and that of humankind
and society as discussed in the Historical School of Jurisprudence
or through judicial pronouncements on similar matters, as spoken about in the Realist
School of Jurisprudence; they may be derivations from the needs of
society, as posited by the Sociological School of Jurisprudence
or they may be the inspiration of existing statutes in other States or the predecessor
statute which the current statute is replacing.
Each of these influences can be traced
back further to the people behind them and their moral and ethical belief
system, which can again be scrutinised in the same manner detailed hereinabove,
and so on and so forth. The chain of backtracking is endless and leaves one
with the question of where it all really began, which has been the criticism
for most theories under most Schools of Jurisprudence. The fundamental question
of where it all began, remains largely subjective and uncertain, if not
unintelligible, and hence the constant subject of debate.
5. Naturalist Positivism
Hence, it is fair to conclude that the
Companies Act, 2013 bears significant influence of both Naturalism and Positivism,
though the balance tilts further in favour of Positivism. But as discussed
hereinabove, Positivism cannot be viewed in isolation, as behind Positivism,
there lie the principles of Naturalism. Yet Naturalism is definitely not the
sole pillar upon which the Companies Act, 2013 stands. Therefore, merging and
marrying the two ideologies, under the nomenclature of Naturalist Positivism,
tends to present a more rounded and wholesome analysis of the Companies Act,
2013. Naturalist Positivism refers to the integrated view of combining the
morality and ethical belief system from Naturalism, along with the other core
principles of justice, reason and common sense, with the structured legislative
framework of Positivism.
Companies are regulated by the
Companies Act, 2013, which is a statute enacted by a competent political
authority and is, therefore, the outcome of Positivism, however, the competent
political authority derived the provisions of this statute from the Naturalist
principles of their own moral and ethical belief system, in the interest of
promoting and protecting justice, by applying reason and common sense and
urging the companies to do the same.
There is ofcourse the undisputed fact
that the Companies Act, 2013 adopts and builds upon the provisions of its
predecessor legislation, the Companies Act, 1956, which brings in the aspect of
the Historical School of Jurisprudence, however, if one takes a step further
back, the predecessor legislation was also enacted by the same competent political
authority and ergo would have reflected the moral and ethical belief system of
the members of the legislature at that point of time.
Moving down the hierarchy, on a
ground level with the company, it and its management are bound by the Companies
Act, 2013, which empowers them to form their own binding internal rules through
their Articles of Association etc. which are based on the moral and ethical
belief system of the founder and/or the management and shareholders. Building
upon that, the actual actions of management and the company are guided by the
binding nature of the Companies Act, 2013 and their Articles of Association
etc. but the application and daily operations are dependant upon the actions of
the management which are guided by their own personal morality.
6. Conclusion
Evidently, the principles of Naturalism
and Positivism, or Naturalist Positivism is laced through the entire Indian
legal system and specifically so through the Companies Act, 2013 and the
operations of the company. Therefore, it all boils down to the same
fundamental, the Companies Act, 2013 is empowered and binding due to its codified
nature under the Positivist School, but this codification is based on the principles
of Naturalism; and these same principles trickle down through the hierarchy of
legal power, to the company and its management. Therefore, the Companies Act,
2013 is a prime example of Naturalist Positivism.
[1] 4th Year Student at MIT
WPU School of Law, Pune
[2] The Companies Act, 2013, S.3
[3]“The Ministry of Corporate Affairs
– Companies Act, 2013, https://www.mca.gov.in/mca/html/mcav2_en/home/actsandrules/companies+act++2013/companiesact2013.html#:~:text=The%20Companies%20Act%2C%202013%20has,1956%20is%20still%20in%20force.,” accessed 22 April 2023
[4] The Companies Act, 2013, Chapter
II
[5] The Companies Act, 2013, Chapter
XI
[6] The Companies Act, 2013, Chapter
XII
[7] The Companies Act, 2013, Chapter
XVI
[8] The Companies Act, 2013, Chapter
XIV
[9] The Companies Act, 2013, Chapter
XXVII; The Companies Act, 2013, Chapter XXVIII
[10] The Companies Act, 2013, Chapter
XX
[11] “Mark Murphy, ‘The Natural Law
Tradition in Ethics’, (The Stanford Encyclopedia of Philosophy, Summer
2019 Edition), https://plato.stanford.edu/archives/sum2019/entries/Natural-law-ethics,” accessed 22 April 2023
[12] “David Miller, ‘Justice’, (The
Stanford Encyclopedia of Philosophy, Fall 2021 Edition), https://plato.stanford.edu/archives/fall2021/entries/justice,” accessed 22 April 2023
[13] Ibid
[14] The Companies Act, 2013, S.123(5);
The Companies Act, 2013, S.127
[15] The Companies Act, 2013, S.47(1)
[16] Supra Note 12
[17] The Companies Act, 1956, S.609
[18] The Companies Act, 2013, S.408
[19] The Companies Act, 2013, S.410
[20] The Companies Act, 2013, S.241
[21] “Lon Fuller, ‘The Morality of Law:
Revised Edition.’ (Yale University Press, 1969), http://www.jstor.org/stable/j.ctt1cc2mds,” accessed 22 April 2023
[22] Ibid
[23] The Companies Act, 2013, S.450
[24] Supra Note 21
[25]“The Ministry of Corporate Affairs
– Companies Act, 2013, https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/acts.html?act=NTk2MQ==,” accessed 22 April 2023
[26] Ibid
[27] Supra Note 21
[28] “Harish Salve, ‘Retrospective
Taxation – The Indian Experience’, (British Institute of International and Comparative
Law), https://www.biicl.org/files/6722_panel_two_harish_salve.pdf,” accessed 22 April 2023
[29] Supra Note 3
[30] Supra Note 21
[31] Supra Note 21
[32] Supra Note 21
[33] Supra Note 21
[34] “The Ministry of Corporate Affairs
– Companies Act, 2013 – Amendments, https://www.mca.gov.in/content/mca/global/en/acts-rules/companies-act/companies-act-2013.html,” accessed 22 April 2023
[35] The Companies (Amendment) Act,
2017, S.2
[36] The Companies (Amendment) Act,
2020, S.4
[37] The Companies (Amendment) Act,
2020, S.20
[38] Supra Note 21
[39] Supra Note 11
[40] “Green, Leslie and Thomas Adams,
"Legal Positivism", (The Stanford Encyclopedia of Philosophy,
Winter 2019 Edition), https://plato.stanford.edu/archives/win2019/entries/legal-Positivism,” accessed 22 April 2023
[41] “John Austin, ‘The Provenance of
Jurisprudence Defined’, (1832)”
[42] Ibid
[43] The Companies Act, 2013, S.1(2); The
Companies Act, 2013, S.1(4)
[44] The Companies Act, 2013, S.42(10);
The Companies Act, 2013, S.26(9); The Companies Act, 2013, S.424
[45] Supra Note 20; The Companies Act,
2013, S.424
[46] “Hans Kelsen, ‘Pure Theory of Law’,
(1934)”
[47] Supra Note 20
[48] The Constitution of India,
Schedule 7, List I, Entry 43
[49] Supra Note 46
[50] The Companies Act, 2013, S.469
[51] The Companies Act, 2013, S.5
[52] H.L.A Hart, ‘The Concept of Law’,
(1961)
[53] Ibid
[54] The Companies Act, 2013, S.26
[55] The Companies Act, 2013, S.92
[56] The Companies (Incorporation)
Rules, 2014, S.12 (INC-32)
[57] The Companies Act, 2013,
S.12(3)(c)
[58] Supra Note 54
[59] The Companies Act, 2013, S.26(9)
[60] The Companies Act, 2013, S.408; The
Companies Act, 2013, S.410
[61] Supra Note 52
[62] The Companies Act, 2013, S.47
[63] Supra Note 52
[64] “Daniel M. Hausman, ‘Philosophy of
Economics’, (The Stanford Encyclopedia of Philosophy, Winter 2021
Edition), https://plato.stanford.edu/archives/win2021/entries/economics,” accessed 23 April 2023
[65] Supra Note 52
[66] Supra Note 52
[67] “William C. Starr, ‘Law and
Morality in H.L.A Hart’s Legal Philosophy’, (Marquette Law Review, Volume
67, Issue 4, Summer 1984), https://scholarship.law.marquette.edu/cgi/viewcontent.cgi?article=1941&context=mulr#:~:text=Hart%20stated%20that%20law%20and,desirable%20in%20any%20legal%20system.,” accessed 23 April 2023
[68] Ibid
[69] Supra Note 52
[70] Supra Note 67
[71] The Companies Act, 2013, S.469
[72] The National Company Law Tribunal
Rules, 2016
[73] Ibid; The Companies Act, 2013,
Chapter XXVII
[74] The Constitution of India, Article
245(1)
[75] The Companies Act, 2013, S.248(1)
[76] Companies (Appointment and
Qualifications of Directors) Rules, 2014, R.11
[77] “Jeremy Bentham, ‘An Introduction
to the Principles of Morals and Legislation’,” (1789)
[78] The Companies Act, 2013, S.179
[79] The Companies Act, 2013, S.114
[80] The Companies Act, 2013, S.174(1)
[81] The Companies Act, 2013, S.103
[82] The Companies Act, 2013, S.149(4)
[83] The Companies Act, 2013, S.149(6)
[84] “John Rawls, ‘The Theory of
Justice’, (1971)”
[85] “Leif Wenar, John Rawls, (The
Stanford Encyclopedia of Philosophy, Summer 2021 Edition, https://plato.stanford.edu/archives/sum2021/entries/rawls,” accessed 24 April 2023
[86] Supra Note 77
[87] “Fred D’Agostino, Gerald Gaus, and
John Thrasher, Contemporary Approaches to the Social Contract, (The Stanford
Encyclopedia of Philosophy, Winter 2021 Edition, https://plato.stanford.edu/archives/win2021/entries/contractarianism-contemporary,” accessed 24 April 2023
[88] The Companies Act, 2013, S.9
[89] The Companies Act, 2013, S.2(76)
[90] The Companies Act, 2013, S.188
[91] Supra Note 85
[92] Supra Note 12
Article Information
THE COMPANIES ACT, 2013 THROUGH THE JURISPRUDENTIAL LENS OF NATURALIST POSITIVISM
Authors: HRISHI KAPADIA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/02
- Issue 7
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International Journal for Legal Research and Analysis
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