This article is written by Vaibhav Chauhan, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. 

Introduction

Indian company law has evolved over the years and now there has been a paradigm shift in the thinking of the legislature due to dynamism in the corporate world. Companies Act always has been very stringent pertaining to the penal provisions for violations and non-compliances, be it under erstwhile Companies Act, 1956 and the Companies Act, 2013 (hereinafter referred to as the Act) at present.

Saying about the dynamism of the foreign investment in India is the primary focus especially after the COVID-19 pandemic. To ameliorate the strictness in the penal provisions of the Act recently, on 23 March 2020, certain amendments (hereinafter referred to as the Companies Amendment Act, 2020 or the CAB 2020) were approved by the Union Cabinet relying upon the Srinivas Committee Report 2019, to decriminalise the minor offences with procedural or technical lapses under the Act. However, the implementation of these amendments has been delayed because of the COVID-19 pandemic.

It is pertinent to mention here that CAB, 2020 was the second attempt of the Ministry of Corporate Affairs (hereinafter referred to as the MCA), as the first successful attempt to ameliorate the strictness was the Companies Amendment Act, 2019 by which 16 out of 18 offences under the Act were decriminalised and now CAB 2020 was placed before the Lok Sabha to decriminalise 46 offences out of remaining 66 penal provisions of the Act.

This article will provide you with the analysis of CAB 2020 by providing the snapshot of arguments in favour and against the same along with possible suggestions as a way forward. 

Proposed changes under CAB, 2020

The recommendations of the Srinivas Committee that is, Company Law Committee (hereinafter referred to as the CLC) established by MCA leads to the constitution of clauses in the CAB, 2020:

• Referring to the cases before the In-house Adjudication Mechanism (hereinafter referred to as the IAM): 

23 (Twenty Three) offences pertaining to minor offences or fewer compliance issues should be referred to the IAM meaning thereby these minor offences will now not be adjudicated by the National Company Law Tribunal (NCLT). IAM will comprise the adjudicating officer who will determine the penalty in these 23 compoundable civil offences and if the aggrieved is not satisfied by the decision of the adjudicating officer then an appeal can be filed against the same before the Regional Director.

Now, this mechanism would provide justice effectively and efficiently without prolonged litigation and ultimately reduce the burden of the NCLT and Courts in handling these picayune matters.

• Omitting the 7 (Seven) offences from the Act because the same can be a deal better in other laws:

The illustration is provided to provide a better understanding of the above-proposed amendment:

If there is an offence due to non-compliance of the NCLT order then the same shall be dealt with by the NCLT having contempt jurisdiction to try the matter. Now, this non-compliance of order instead of being treated as a separate offence should be dealt in an efficacious manner by the NCLT. Moreover, if any non-compliance is done on part of the company liquidators then the same be dealt under Insolvency and Bankruptcy Code, 2016.

• Alternative form of the framework has been proposed for the five offences to dealt with the offences effectively: 

CAB, 2020 proposed that in order to achieve the aim of the certain penal provisions it is crucial to adopt the alternate framework because by doing this it can serve the purpose better. For example: An additional provision can be inserted in the Insolvency and Bankruptcy Code, 2016 to deal with the cases involving non-cooperation done by the promoter of the company with the liquidator of the company. 

• Eleven (11) offences which do not imbibe very serious considerable violations will be punishable with fine:

Because these offences do not affect the substantial public interest being a compoundable offence. 

For the purpose of clarification, one can give a simmer reading to Section 320 of Criminal Procedure Code, 1973 (hereinafter referred to as the Crpc) to get the idea of compoundable offences. (Note: Section 320 Crpc is provided for providing additional view only).

• Rationalising the fines pertaining to 22 (Twenty) provisions of the Act:

CAB 2020 proposes a reduction in penalties of the 22 offences. It further proposes that monetary fines imposed in these 22 offences will be changed from the criminal fine to a civil penalty. The penalty imposed related to non-compliance might get reduced or get increased because in cases like failure to file the annual return, failure w.r.t. compliances before the registrar of the companies etc. has been reduced.

CAB 2020 has also considered the amount penalty imposed upon one-person companies, start-ups, small companies etc. should be reduced to halved and the maximum monetary limit for INR 2,00,000/- (Indian National Rupees Two Lakhs Only) has been prescribed. This can be seen in the amended Section 446B of the Act.

Analysing of this proposed amendment portrays that altering of the levied penalty will increase and promote instituting of such aforementioned companies as penalties would be imposed in light of their capacities which will be safeguarding their interest.

Is it right to decriminalise corporate offences

Our Indian Government at present is having very bold way ameliorating the hurdles in the growth of our economy and it has not only to decriminalise the commercial in the Act but in past, it has already set the benchmark by decriminalising the certain offences governed by Imports and Exports (Control) Act 1947, Foreign Trade Act, 1992. Moreover, recently on 09.09.2020, a circular has been issued by the Central Board of Direct Taxes in which it has done away with the criminal prosecution in the delay of depositing the tax deducted at source and filing the Income Tax Returns (ITR). But this relaxation is subjected to certain conditions as prescribed in the issued circular.

Further, the reasons, as well as the advantages of this proactive amendment by MCA, are provided below:

• Relaxing the criminal justice system:

It is a well-known fact about our judiciary that it is overburdened with the plethora of criminal cases due to which it is difficult for the aggrieved to get the relief immediately and have to go through the prolonged litigation. There are offences in the Act which can be resolved by the adjudicator appointed by the concerned government but the same has been referred to the special tribunals for adjudication which is not serving the purpose. So, now to accomplish the desired result certain offences are now administered by the IAM system rather than burdening the special courts because such offences do not require any subjective evaluation by the special courts. Therefore, this will help to get away with the prolonged clogging in the justice delivery system and special courts can focus on more pertinent matters.

For the sake of brevity and a ready reference point (1) under the proposed changes mentioned above should be read part and parcel with the present point.

• Essential elements of criminal liability are not meted out:

It is the cardinal principle as well as a condition under the criminal trial that presence of criminal mind that is mens rea and wrongful act that is actus reus is must make the alleged accused liable, meaning thereby, no one should be held liable for his act is he is not having a guilty mind at the time of the commission of the offence.

Hon’ble Supreme Court in its celebrated judgement titled Director of Enforcement v. MCTM Corporation, 09-01-1996 held that blameworthy conduct is the sine qua non in civil liability and guilty mind is not be considered as the essential precondition because in civil cases it is not required to prove the guilt beyond a reasonable doubt rather it is essential to prove the guilt upon a preponderance of liability.

Further, CLC in CAB 2020 clearly highlights that effectiveness of criminal law upon corporate misconduct would get questioned because criminal prosecution is prolonged and time exhausting due to which it is suggested that corporate criminal offences should be wholly replaced by civil prosecution because it is about the preponderance of probability involving less cost and regulatory burden. So, in the light of this reasoning provided above, CAB 2020 appropriately recommends for the decriminalising the picayune and technical non-compliance offences, but the criminal prosecution is still saved for the serious and fraudulent offences which would prejudice the interest of public and nation.

• Ease of doing business will get improve:

Another positive aspect of decriminalisation is that it will boost the domestic as well as the global players in the market and also enhance the corporatisation in the ventures of small business players. It is pertinent for the growth of Indian corporate market including the growth of the nation as a whole and for that it will be very much required to support the Indian based start-ups to establish their business in India rather than approaching the outside India market for investment purposes.

After the great hit by COVID-19 on India’s economy, India’s prime focus is to increase the manufacturing of the home-based industries because at present there is growth in the economy but without a job and the requirement is growth with the job which can be achieved by CAB 2020. It is a very much known fact that Indian companies ranging from small to start-ups to big giants prefer overseas investment because of the strict regulatory framework of Indian laws and the compliance requirement imbibed in our law, that’s why our Act is very much stringent in itself. This step from MCA is hit on the nail at the right time when our economy is facing such a downfall in GDP and lowest ever dip in the private sector investment due to tax authorities etc.

Thus, considering the present economy it would be difficult to retain the business including the boosting of foreign capital with such criminal provisions of the Act and thus decriminalisation is needed for the hour for promoting the ease of doing business and boosting other prospects of the economy as mentioned above.

Decriminalisation of corporate offences: cons along with suggestions

Now, after considering the arguments in favour of the decriminalisation let’s see the other side of the coin that is a shortfall of CAB, 2020. The cons of CAB 2020 and suggestion to make to tackle its shortcomings is provided below:

Impractical to adopt the proposed formula for determining fine for all companies:

Word Impractical is used because there are diverse types of companies established in India varying from their sizes to the set of operations they carry and adopting such a formula for determining the fines for all types of companies is impractical on the face of it because there might be a possibility that this formula would not impact much big corporate giants but on the other hand, affect the small companies or start-ups up to a larger extent.

• Suggestions:

So, rather going for the single infallible formula MCA can determine the fine on the basis of proportionality test which would be depending upon the size of the company, its impact upon the same, turnover of the company etc. Adopting the proportionality test might not be the bulletproof test but will be considered as reasonable, efficient and efficacious because fines are imposed upon different fines on different companies as per their size and operations.

Why the method of proportionality test is being suggested over the MCA proposed method because the purpose and policy is to impose the fine, not to convict the wrongdoer as the cost of the amount utilised upon the convicted are much more than that of the fine collected from the corporates. Further, when we impose the fine depending upon the above suggested test it would lessen the burden upon government exchequer as the amount government spending upon maintaining the convicted would now be used for other pertinent causes and the fines collected from the corporates will be used for the socio-economic development as well as transform the society.

Power to punish or impose fines can be better exercised by the person with judicial background:

CAB 2020 proposed that power of imposing fines would be now transferred from the courts to the Adjudicating Authority (hereinafter referred to as the AO), which is a non-judicial body. As per the CAB, 2020 Adjudicating Authority can be Registrar of Companies (hereinafter referred to as the ROC) or the Regional Director (hereinafter referred to as the RD) and Central Government will exercise the control upon AO offices. 

• Suggestions:

A suggestion would be to transfer this power to that person with the judicial bent of mind meaning thereby retired judicial officers of High Courts or the Supreme Court or the Special Tribunals rather than the AO as proposed in CAB, 2020 because the person with judicial bent can better serve the purpose than those who do not hold the interpretational skills like that of the retired judicial officer. If this suggestion is considered then there would be no arbitrariness in the proceedings meaning thereby neutrality in the proceedings can be ensured more efficiently than the proposed AO.

Penalty imposed may be picayune in comparison to the gain through violation, unfortunately.

The imposition of the penalties as per CAB, 2020 needs a relook because there is a possibility that the fine imposed would be much lesser when compared to the benefit that was reaped by the companies by violating the provisions of the Act, meaning thereby at the time of imposing the fine AO should consider the profits/benefits that was reaped by the company in order to ensure the effectiveness of imposing the penalty.

• Suggestions:

It is pertinent to mention here Section 11B of the Securities Exchange Board of India Act (hereinafter referred to as the SEBI), 1992 which governs the power of the SEBI to issue directions, therefore, in the spirit of section 11B, SEBI is empowered to direct any person to disgorge the wrongful gain which he has made indulging into the activity in violation of the SEBI Act, 1992. (Note: Please remember that SEBI, Ac 1992 is applicable upon the listed companies). Act also prescribes such provision that is Section 38, 212 and 224 of the Act, which deals with a disgorgement of amount consisting of wrongful gain arrived from the activities in violation of the Act.

In the light of imposing of penalty, recently Supreme Court in its judgement titled SEBI v. Bhavesh Pabari Civil Appeal No(S).11311 Of 2013 held that Section 15J of the SEBI Act, 1992 vests the discretionary powers in AO to decide the quantum of the penalty and while deciding the same AO shall take the relevant mitigating factors of the case in consideration. Thus, such vested discretion in AO can ensure that ill-gotten benefits should not exceed the penalty imposed and it is recommended as mentioned before to opt the proportionality test or discretionary power to impose the penalty to ensure that unlawful benefit is not reaped by the companies. 

Conclusion

At last, after considering both the sides of the coin it can be said that CAB, 2020 is a much-needed step to ease the stringent regulated corporate legislation in India. This step will make India a much-favoured investment destination and will ensure effective corporate governance along with ease of doing business which will ultimately help the economy to catch up like the pre-COVID-19 time.

However, the application of CAB 2020 might create some hindrances but, the above-mentioned suggestions should be applied upon the proposed amendment to curb the same. Further, offences including but not limited to fraud, wilful default, repeated offence etc. should not be decriminalised and should always be covered under the ambit of criminal sanction.

Thus, after analysing the economic activities, CAB, 2020 and CAA, 2019 I can say that we cannot solve one problem without creating the other problem, it is the way how our economy works, thus perfect engineering of balancing the certain decriminalised offences must be ensured with other offences to see the impeccable application of CAB 2020.

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