This article has been written by Vedanta Pai Diploma in General Corporate Practice: Transactions, Governance and Disputes from LawSikho.

Introduction

The attempt to decriminalize business law in India is not new. This process dates back to the liberalisation of the Indian economy in 1991. This is a part of the continuous efforts of the Government of India to improve the ease of doing business and unclog the burdened criminal justice system. The first commercial law that was decriminalised was the Imports and Exports (Control) Act, 1947; it was further replaced by the Foreign Trade (Development and Regulation) Act, 1992, which decriminalised most of the offences relating to imports and exports. Over the years, the government has  filed  numerous criminal cases for violation of provision under the Companies Act, 2013 (“the Act”).  Of almost 40,000 cases filed, more than 39000 did not involve  lapses of serious nature. The criminal courts were unnecessarily burdened and could not pay attention to matters of serious interest.

Brief Overview  

Ever since the onset of the Companies Act, 2013, the various government authorities in India have proposed and implemented various changes,  to enhance the ease of doing business for companies In India. One of the characteristics of the earlier  legislation was a criminal sanction for minor compliance requirements, which are unfortunately also carried onto this Act. Given this, sixteen offences were recategorized into civil defaults according to the enactment of the Companies (Amendment) Act, 2019 (“the C.A.A. 2019”) by the Indian legislature. Soon after the C.A.A. 2019 was notified, the government proposed further reforms in this direction as part of the Companies (Amendment) Bill, 2020 (the “C.A.B. 2020”), according to which it further decriminalizes fifty-four compoundable offences under the Act. C.A.B. 2020 is based on the recommendation of the committee headed by Mr Injeti Srinivas i.e., Secretary of the Ministry of Corporate Affairs (“M.C.A”) under the Company Law Committee Report published on November 18, 2019 (“the Committee”). The report of the committee was limited to compoundable offences. Section 441 of the Act defines compoundable offences as those that are not punishable with imprisonment only or punishable with imprisonment and fine. C.A.B. 2020 was tabled in the lower house of the Indian Parliament on March 17, 2020, although this session was adjourned sine die on March 23, 2020, consequent to the COVID-19 pandemic.

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In-House adjudication system 

The In-House adjudication mechanism (“I.A.M. System”) as given under section 454 of the Act, is one of the key amendments introduced by CAA 2019 concerning compoundable offences. The I.A.M. System is an online platform set up by the M.C.A to deal with certain offences, hence partially substituting the process of appeal and adjudicating before the National Company Law Tribunal (“NCLT”). The Adjudicating Officer (“AO”) has the power to settle offences by charging a certain penalty from the companies, officers in default or both. The I.A.M. System includes in its scope offences that attract a penalty of up to INR 2.5 million and include technical non-compliances such as accepting directorship beyond a specified limit, sending notices to shareholders, issuing of shares at a discount and so on. This entire process is conducted through an online platform and only in exceptional circumstances allows for physical attendance. Orders from an A.O. are appealable to the Regional Director. This has helped unburden the various benches of the NCLT, as previously the defaulting company and its employees would require filing applications of compounding before NCLT to escape criminal prosecution. As per data collected from the Registrars of Companies, more than 1,000 company law default cases have already been disposed of by the A.O. during the last three financial years (2018-19, 2019-20 and 2020-21) in a summary manner.

Rationale

Proving a criminal offence requires a higher threshold of the standard of proof i.e., beyond reasonable doubt while in a civil offence one simply requires a preponderance of probability. It often comes into question if criminal law is efficient enough in dealing with corporate misconduct. Some experts argue that a civil penalty will defeat the deterrent effect of this legislation as businesses will factor such civil penalties as the cost of running a business. In this context, it is advisable to strike a balance between civil and criminal sanctions. The underlying principle proposed under C.A.B. 2020 is objective determination versus a subjective assessment. Procedural defaults are void of any intention (mens rea) and hence don’t warrant long drawn adjudication. Such procedural violations could be recategorized as civil offences as they can be assessed objectively and rectified by payment of penalty.

The amendments proposed by C.A.B. 2020 to the Act in respect of decriminalization of compoundable offences can be listed as follows:

Categorizing of compoundable offences 

The committee has categorised compoundable offences into eight categories as follows-

  1. Omissions in respect of maintenance of particular records in the registered office of the company.
  2. Non-disclosure of interest of persons to the company, which in turn vitiates the record of the company.
  3.  Violations of substantial nature that may affect the company’s present value or are contrary to the public interest or are detrimental to the stakeholders.
  4.  Defaults that are in violation of liquidation proceedings.
  5. Defaults that  are made punishable through an omnibus clause.
  6. Non-compliance of orders of authorities, such as NCLT or Registrar of Companies (“R.O.C.”)
  7. Technical defaults relating to the intimation of certain information by filing forms with the R.O.C. or in sending notices to stakeholders.
  8. Defaults related to certain corporate governance norms.

Scheme of decimalization of offences 

The Commission has proposed the following scheme –

  1. The internal adjudication mechanism will objectively determine Twenty-three (23) offences that include simple compliance issues.
  2. Seven (7) offences that can be dealt with by specialised legislation to be omitted from the Act.
  3. Eleven (11) offences that don’t fit the above specifications must be dealt with through an alternate sanction mechanism.
  4.   Five offences (5) that are to be determined subjectively but not grave will be punishable only with a fine.
  5. Twenty (20) offences that are serious and may involve matters of substantive non-compliance requiring detailed adjudication, no changes are suggested by the Commission.

Avoiding multiplicity of legislations

The Committee report highlights the nuisance created by multiple legislation dealing with an offence. The committee has suggested the omission of offences from the Act dealt by specialised legislation. C.A.B. 2020 has proposed removing offences related to liquidation from the Act. Rather, such non-compliances are to be resolved according to the Insolvency and Bankruptcy Code, 2016 (“I.B.C.”). I.B.C. is emerging as a comprehensive code in matters of insolvency, liquidation and bankruptcy. Further, it is recommended that defaults dealt with by the NCLT should be omitted from the Act. Accordingly, omission of nine offences which relate to non-compliance with orders of the NCLT has been proposed i.e., matters relating to-

  1. rectification of registers of security holders;
  2. matters relating to winding-up of companies;
  3. variation of rights of shareholders;
  4. payment of interest and redemption of debentures;
  5. default in the publication of NCLT order relating to the reduction of share capital.

Rationalisation of fines

C.A.B. 2020 proposes reducing the quantum of fines associated with 22 offences. This amendment is concerning provisions relating to maintenance of records by the companies, for example. non-compliance with the procedural requirements for the transfer of securities, failure to maintain registers of members, debenture holders and other security holders, failure to notify the R.O.C. of alteration of share capital and so on. The nature of monetary levy to be changed from a criminal “fine” to a civil “penalty. The committee has proposed an increase in the penalty for three offences where the punishment of imprisonment is foregone. These offences relate to non-compliances with provisions relating to-

  1. contribution toward Corporate Social Responsibility (“C.S.R.”) Fund;
  2. related party transaction;
  3. submission of material data.

C.A.B. 2020 has distinguished between the liability of a company and its officers and determined that the financial liability of an officer-in-default should be less than that of the company.

Decriminalization of key provisions such as-

  1. Buy-back of Securities;
  2. Significant beneficial owner;
  3. Corporate social responsibility;
  4. Related Party Transactions;
  5. Public offer and offer documents:
  6. Financial statement of companies.

Fresh Start Scheme 

Governmental authorities have been implementing measures such as the Fresh Start Scheme that are consistent with the spirit of C.A.B. 2020. This scheme was rolled out by the M.C.A. for a limited time i.e., is between the dates of April 1, 2020, and September 30, 2020, which provided relief to companies by allowing them to correct their defaults related to the filing of documents without incurring any fine. To avail such condonation of delay in filing of various statutory forms, the companies have to simply make a corrective filing together with payment of one-time filing fee. This scheme is also available in cases where the R.O.C. has already launched a prosecution against a company or has sufficient cause to do so. More than four lakh companies used the Companies Fresh Start Scheme to rectify filing defaults and avoid penalties under the Act. This, in turn, has helped create an atmosphere of trust.

Critical evaluation

The committee has deliberated such changes to the Act within two months and three meetings. Objectively this is not adequate to make serious decisions regarding the decriminalization of offences. C.A.B. 2020 has been proposed less than a year after C.A.A. 2019 was amended, hence not providing  enough time for effective changes to be made and percolate to the beneficiaries. C.A.B. 2020 is also a sharp turn from some of the amendments made by C.A.A. 2019, for example, Provisions relating to C.S.R. under section 135 of the Act where no such penalty was prescribed initially, although under C.A.A. 2019, a provision for imprisonment up to 3 years and a fine was introduced. Now under C.A.B. 2020, it is proposed to decriminalize this offence. C.A.A. 2019 introduced section 454A which provides that if the offender has committed the same default within three years from the date of the order imposing a penalty, then the law provides for twice the penalty for every subsequent default. This may not be adequate punishment for a repeat offender, rather a criminal liability will be better suited. Further, it is astounding how the committee has recommended that Section 8 companies, specifically incorporated for charity and other social purposes, be only monetarily fined for non-compliance with provisions under the Act. Certain offences which affect public interest have been wrongfully decriminalised, for example, matters related to the prospectus or related party transactions. The AO and the appellate authority of the In-House adjudicating system are non-judicial persons appointed by the M.C.A., hence making this system subject to bias.

Conclusion 

The changes proposed by C.A.B. 2020 will definitely benefit companies by making it easier for them to do business. This will, in turn, encourage Foreign Direct Investment as well as budding entrepreneurs. The decriminalization of offences will help protect the goodwill of companies, attracting civil liabilities instead of criminal sanctions. The cost of such civil penalties may be absorbed as part of running a business in the ordinary course. C.A.B. 2020 proposed a reduction of penalties for officers in default of provisions of the Act. This relaxation could encourage executives to take an active part in the daily matters of the companies without being exposed to the risk of criminal prosecution. However, this legislation mustn’t become a toothless tiger and hence, an active balance needs to be struck between incentivising companies and the deterrent effect of the legislation. Substantive compliances should not be taken lightly, otherwise, the very purpose of the Act will be defeated.

References

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