This article is written by Ms. Kashvi Rajvansh, a first-year law student of Faculty of Law, Delhi University, Delhi
ABSTRACT:
In this paper we will discuss about the fundamentals of corporate Aviation. We will analyse the meaning of corporate Aviation, the rules that governs it in India as well as the regulations that ought to be followed. We will understand the rules and terms of Companies Act and establish a link between Companies Act as well as Corporate Aviation.
INTRODUCTION:
The pervasive influence of private corporations, particularly aviation corporate entities, on our economy and society has reached a point where they significantly shape our collective mindset. Aviation Corporate Law governs the establishment and functioning of corporations and is closely linked to commercial and contract law. A corporation is a legal entity established under the laws of the state in which it is incorporated. State-specific laws oversee the establishment, structure, and dissolution of corporations. By creating a legal entity, a corporation establishes a separate entity capable of legal action, such as entering into contracts and participating in legal proceedings, distinct from its shareholders.
BODY:
The aviation industry in India has undergone a significant transformation since 2004, moving away from being tightly regulated and poorly managed to becoming more open, liberal, and attractive to investment. Just like any other business sector, aviation businesses are governed by a range of corporate laws that regulate their operations. These laws provide a legal framework for businesses, giving them certain fundamental characteristics. By offering an accessible and user-friendly legal structure, corporate law facilitates transactions for entrepreneurs through corporate entities, reducing the costs associated with doing business. The influence of private corporations, including those in aviation, on our economy and society has become so significant that they greatly shape our perceptions and behaviors. Aviation Corporate Law specifically deals with how corporations in the aviation industry are formed and operate, and it is closely linked to commercial and contract law. A corporation is essentially a legal entity established under the laws of the state where it is incorporated. State laws, which can vary, govern the establishment, structure, and dissolution of corporations. Through this legal entity, known as an “artificial person,” a corporation has the ability to engage in legal actions, such as entering contracts and participating in legal proceedings, separate from its shareholders.
The Companies Act 2013 provides for classification of companies on the basis of its members and it states:
- The concept of One Person Company (OPC) has been introduced in India under Section 2 (62) of the Companies Act, 2013, allowing entrepreneurs operating as sole proprietors to transition into a corporate framework. While OPC is a new concept in India, it is already established in various other countries like China, Australia, Pakistan, and the UK. According to the Act, an OPC is a company with only one person as a member and can be formed as a company limited by shares, guarantee, or unlimited. OPC acts as a hybrid between a sole proprietorship and a company, enjoying relaxed requirements under the law. Features of OPC include having only one shareholder, who must be a natural person and an Indian citizen residing in India, and the requirement for a nominee shareholder in case of the original shareholder’s death or incapacity. Additionally, an OPC must have a minimum of one director, and the sole shareholder can also act as the sole director, with a maximum of 15 directors permitted.
- According to Section 2 (68) of the Companies Act, 2013, a ‘private company’ is defined as a company with a minimum paid-up share capital as prescribed, and its articles must restrict the right to transfer shares and limit the number of members to two hundred, except in the case of a One Person Company. The Act also prohibits any public invitation to subscribe for the company’s securities. The Companies (Amendment) Act, 2015, has removed the requirement of a specific paid-up share capital from the definition of a Private Company, allowing for the formation of a private company with a minimal paid-up capital of just two rupees, with each subscriber contributing one rupee. This change also affects public companies, allowing them to be formed with a paid-up capital of just seven rupees.
- According to Section 2 (71) of the Companies Act, 2013, a ‘public company’ is defined as a company that is not a private company and has a minimum prescribed paid-up share capital. Additionally, a public company must have seven or more members to be formed. It’s worth noting that a subsidiary of a non-private company is also considered a public company under this Act, even if it remains a private company in its articles. The Companies (Amendment) Act, 2015, has removed the requirement of a specific paid-up share capital from the definition of a Public Company, effective from May 25, 2015. This change allows for the formation of public companies with minimal paid-up capital.
- As per Section 2 (85) of the Companies Act, 2013, a ‘small company’ refers to a company, excluding public companies, meeting certain criteria. Firstly, its paid-up share capital should not exceed fifty lakh rupees or a higher amount as prescribed, not exceeding ten crore rupees. Alternatively, its turnover in the immediate preceding financial year should not exceed two crore rupees or a higher amount as prescribed, not exceeding one hundred crore rupees. However, certain entities such as holding companies, subsidiaries, Section 8 companies, or those governed by special Acts are exempt from these criteria. Small companies enjoy certain advantages, including the requirement to hold only two board meetings annually instead of four and being exempt from presenting cash flow statements with financial statements.
Let us now take a look into the Vijay Mallya Case:
- Following the grounding of Kingfisher Airlines, it was found that the company had breached multiple provisions of the Companies Act 2013.
- One violation involved the failure to convene an annual general meeting (AGM) for two consecutive years, as mandated by Section 96 of the Act.
- Another breach pertained to the delay in submitting audited financial statements to the Ministry of Corporate Affairs, as required by Section 129 of the Act.
- Section 96 mandates that all companies must hold an AGM annually, and non-compliance constitutes a serious offense.
- Similarly, Section 129 stipulates the preparation and submission of financial statements within a specified timeframe, and failure to adhere to this requirement undermines transparency and accountability.
- As a result of these breaches, Vijay Mallya faced significant repercussions, including his resignation as chairman of Kingfisher Airlines. Additionally, he faced numerous criminal charges pertaining to financial misconduct and money laundering.
- Kingfisher Airlines suffered dire consequences, ultimately leading to its bankruptcy declaration. This left thousands of employees unemployed and creditors with substantial amounts of unpaid debt.
Let us now shed a light on the Jet Airways case:
- Unrestricted Authority Granted to Promoters: The Board of Directors (BOD) is established to supervise daily operations, yet its autonomy is often undermined when it aligns with the interests of the promoter-led board. In the case of Jet Airways, where the Promoter held over 50% of shares, decision-making power was heavily skewed. The promoter’s actions, disregarding the concerns of other shareholders, led to violations of regulations. For example, Regulation 4(2)(c) of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015, mandates equitable treatment for all shareholders, including minorities and foreigners. Despite advice against it, such as the acquisition of Air Sahara in 2006, the promoters proceeded without due consideration, further exacerbating the situation.
- The Challenges Faced by Independent Directors: Independent Directors play a vital role in implementing corporate governance policies within a company. According to Section 149 of the Companies Act, 2013, every listed company must appoint at least one-third of its directors as independent directors (ID). Despite the provisions of the Companies Act, 2013 and SEBI Regulations, the influence of independent directors in promoter-led companies often gets sidelined. Schedule IV of the Companies Act, 2013 outlines the Code of Conduct for Independent Directors, emphasizing their crucial role in overseeing company affairs. In the case of Jet Airways during 2018-19, when the company was grappling with significant losses, Tata proposed an acquisition deal to revive it. However, the Board overlooked the recommendations of the independent directors regarding the deal’s importance for Jet Airways’ recovery. As a result, several independent directors resigned due to dissatisfaction with the company’s approach, especially when the deal failed to materialize.
- Safeguarding the Interests of Stakeholders: A corporation relies on various stakeholders who contribute to its business activities and influence its overall development. These stakeholders include suppliers who support product sales and employees who serve the company’s clients. The Board and majority shareholders bear the responsibility of protecting the interests of these stakeholders. However, in the case of Jet Airways under the leadership of Mr. Goyal, the promoter-led board failed to consider the concerns of other stakeholders involved in the airline’s operations. Despite nearing bankruptcy, the board overlooked opportunities to revive Jet Airways, resulting in the cessation of airline services in 2019 and the termination of numerous employees.
- The Board neglected the rights of stakeholders outlined in Regulation 4(2) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015, and did not adequately address their concerns. This failure to safeguard the interests of employees and other stakeholders could have been prevented if the promoter prioritized the collective interests of all stakeholders instead of solely focusing on his own interests, and if the Board had taken a more proactive stance rather than simply agreeing to everything.
CONCLUSION:
The Companies Act, 2013 is an essential act that helps to improve transparency as well as define and analyse the threats that a company can face. Each company should follow the rules and guidelines duly provided by the Act. Additionally, the companies shall work towards increasing their accountability with regards to the companies act in all spheres of their operations. One company shall learn from the mistakes of the others and understand the essentials of complying with the act in order to safeguard a better working of the company. This will help ensure no companies falling in troubles for the violation of such act. All aviation companies in India such as Indigo, SpiceJet and Vistara are private companies covered under the companies act.
REFERENCES USED:
Paper on Corporate Laws and Compliance by The Institutes of Cost Accountants of India and the link is
Course Material on Aviation Corporate Laws compiled by Dr. V. Balakista Reddy and the link is
Article on Fall of Kingfisher Airlines by Taxguru and the link is
Article on Fall of Jet Airways due to poor corporate governance by ipleaders and the link is
https://blog.ipleaders.in/fall-jet-airways-due-poor-corporate-governance/
Article on The Murthy Case of Insolvency in India by IndiaCorpLaw and the link is
https://indiacorplaw.in/2019/08/murky-case-aviation-insolvency-india.html
Article on Indigo dispute: How can shareholders’ agreement clauses create a rift between founders? By ipleaders and the link is