Companies Act Section 393

Companies Act, Section 393: Effect of a Company’s Failure to Comply with the Provisions of this Chapter

Section 393 of the Companies Act, 2013 provides clarity regarding the legal consequences of a company’s failure to comply with the provisions of the particular Chapter in which the section appears (relating to companies incorporated outside India).

The section ensures that non-compliance with procedural or regulatory provisions by a company does not invalidate its business transactions, contracts, or dealings. In simpler terms, even if a company fails to follow the statutory requirements of this Chapter, the validity of its existing contracts, dealings, or transactions will remain unaffected.

However, while the law protects the interests of third parties dealing in good faith with the company, it also imposes a restriction on the non-compliant company itself. The company will not be allowed to:

Institute any suit or legal action, make any claim or set-off, or file any counterclaim or legal proceeding in respect of any such contract, dealing, or transaction until it has fully complied with the provisions of the Act applicable to it.

In effect, Section 393 strikes a balance between ensuring that the company’s failure to comply with procedural obligations does not harm third parties or disrupt business transactions, while at the same time compelling the company to fulfill its statutory duties before seeking relief or enforcement through legal means.

Key Implications:

1. Contracts and transactions entered into by the company remain legally valid despite non-compliance.

2. The company retains its liability and can be sued by others based on those contracts.

3. However, the company cannot enforce its rights under those contracts (e.g., by filing a lawsuit or counterclaim) until it achieves compliance with the Act’s requirements.

4. This provision upholds the integrity of commercial dealings and safeguards third-party interests, while reinforcing regulatory compliance obligations on companies.

Section 393A: Power of Central Government to Grant Exemptions under this Chapter.

Section 393A empowers the Central Government to grant exemptions from the application of any provisions of this Chapter to certain classes of companies, primarily foreign entities.

Under this section, the Central Government may, by issuing a notification, exempt any specified class of:

a) Foreign companies

b) Companies incorporated or to be incorporated outside India, regardless of whether such companies have already established or may in the future establish a place of business in India, from the applicability of some or all provisions of the Chapter.

Once such a notification is issued, a copy must be laid before both Houses of Parliament (Lok Sabha and Rajya Sabha) as soon as possible, ensuring transparency and legislative oversight over such exemptions.

Purpose and Significance:

This provision allows the Central Government to adapt the application of the law to various types of foreign companies, depending on the nature of their operations and their presence (or absence) in India.

It provides regulatory flexibility to accommodate different business structures and international commercial arrangements.

The requirement to lay the notification before Parliament ensures that the exemption power is not exercised arbitrarily, maintaining accountability to the legislature.