This article has been written by Sharanya Ramakrishnan, pursuing a Diploma in General Corporate Practice: Transactions, Governance and Disputes from LawSikho. It has been edited by Ruchika (Associate, LawSikho).
It has been published by Rachit Garg.
Table of Contents
Introduction
Corporate laws form the foundation of commercial regulation by administering entry of corporate entities into the market, regulating their operations, effecting accountability to their stakeholders and enacting corporate governance norms. There was a significant shift in the Indian corporate governance framework in the past few decades. The enactment of the Companies Act, 2013, and various reforms were undertaken since then in the field of company law paved the way for the establishment of corporate entities engaged in conducting business in an accessible manner.
To further the ease of doing business in India, the government of India sought to decriminalise certain offences under the Companies Act, 2013 (hereinafter referred to as “the Act”) to ensure smooth functioning of operations of companies as well as reduce protracted litigation.
This article aims to analyse the basis of decriminalisation of offences under the Act and its positive and negative impact on the corporate sector.
Basic concepts
In order to understand the need and rationale for the decriminalisation of offences, the following concepts must be understood:
1. Difference between penalty and fine under the Act
| Penalty | Fine |
| Whenever the word “penalty” is used in a section, it implies that the default is within the purview of the in-house adjudication mechanism, i.e., the amount of penalty will be adjudicated by the Registrar of Companies. | If the word “fine” is used in a section, it is outside the scope of power of the Registrar of Companies and it means that the adjudication will be done by a court of competent jurisdiction. |
2. Cognizable and non-cognizable offences under the Act
| Cognizable offences | Non-cognizable offences |
| All offences that amount to fraud (punishable under Section 447 of the Act) are cognizable offences. | All other offences under the Act other than those amounting to fraud are non-cognizable. |
3. Compoundable and non-compoundable offences under the Act
| Compoundable offences | Non-compoundable offences |
| Compoundable offences are those punishable with: Fine or imprisonment or both | Non- compoundable offences are those punishable with: Fine and imprisonment or Imprisonment only |
Background
- Constitution of the Review Committee
The roots of necessity to decriminalise certain compoundable offences are elevated from the Ministry of Corporate Affairs (MCA) vide order dated 13.07.2018, wherein, the MCA established a Review Committee under the chairmanship of Mr. Injeti Srinivas to:
- Review compoundable offences under the Act and examine if any of such offences can be decriminalised thereby making the defaulting party liable to penalty in lieu of imprisonment.
- Review whether any of the non-compoundable offences under the Act can be recategorized into compoundable offences.
- Suggest any improvements to the existing mechanism of levying penalties.
The Committee made the following notable recommendations:
- Re-categorizing 16 out of 81 compoundable offences to an in-house adjudication framework wherein defaults would be subject to penalty by an adjudication officer.
- Constituting the in-house adjudicating mechanism with increased transparency and making it more technology driven by conducting proceedings online and publishing orders on the website.
- Widening the jurisdiction of the Regional Director (RD) with respect to the compounding of offences under Section 441 of the Act thereby unburdening the NCLT.
Considering the aforesaid recommendations, the Central Government introduced necessary changes by enacting the Companies (Amendment) Act, 2019.
Constitution of the Company Law Committee
Although the enactment of the Companies (Amendment) Act, 2019 brought about considerable ease in the penal pressure, the Government still felt the need to liberalise and relax the harsh penal provisions of the Act. This clubbed with the desire to enhance the ease of doing business and facilitate corporate growth, led to the establishment of the Company Law Committee (CLC) in September 2019.
The CLC in its report observed that serious violations of law, especially wrongful conduct involving fraudulent elements, should be dealt with under criminal law while procedural, technical and minor non-compliances, especially the ones not involving subjective determinations, may be dealt with through civil jurisdiction instead of criminal.
Based on the recommendations of CLC, various provisions of the Act were further amended by way of the Companies (Amendment) Act, 2020 which sought to countermand past failings by associating just and equitable liability based on the gravity of the offence.
Basis of decriminalisation under Companies (Amendment) Act, 2020
The concept of corporate criminality has proven to be quite puzzling as far as corporate liability is concerned. To make a corporation criminally liable for an offence, a crime needs to be proved beyond a reasonable doubt. Consequently, the element of ‘mens rea’ or guilty mind needs to be involved to determine criminality. In the earlier enactments, the legislature seems to have lost sight of the above, thus fastening criminal liability for offences involving even minor digressions and omissions.
In order to avoid the imbalance created between civil liability and criminal liability of corporations, decriminalisation of offences was sought for cases other than those involving fraud. In light of the same, the Companies (Amendment) Act, 2020 (hereinafter referred to as “the Amendment Act, 2020”) classifies decriminalisation into the following parts:
Omission of certain compoundable offences
The following offences were omitted:
| S No. | Section | Provisions of the Amendment Act |
| 1 | 16(3) | Default in complying with the Central Government’s directions for rectifying the name of the company |
| 2 | 48(5) | Default in complying with provisions pertaining to variation of shareholders’ rights |
| 3 | 59(5) | Default in compliance with the Tribunal’s order with regard to rectification of register of members |
| 4 | 66(11) | Default in compliance with the Tribunal’s order with regard to the publication of the order for a reduction of share capital |
| 5 | 71(11) | Default in complying with provisions pertaining to the redemption of debentures, payment of interest, etc |
| 6 | 342(6) | Provisions pertaining to non-cooperation of liquidator or officers of the company |
Eliminating imprisonment and subjecting the offences to fine only
There are certain listed offences wherein the legislature has done away with imprisonment while retaining the liability to pay a fine alone. Although violations arising out of the said offences can for all intents and purposes be considered to be serious in nature, imposition of fines was found to be appropriate as they do not involve public interest at large. The element of ‘fine’ was thus regarded as a suitable deterrent to ensure compliance for the following offences:
| S No. | Section | Offence |
| 1 | 8(11) | Failure of the company to comply with the requirements of special license given to Section 8 companies |
| 2 | 26(9) | Contravention of matters prescribed to be stated in the prospectus |
| 3 | 40(5) | Default in complying with the requirements of the public offer |
| 4 | 68(11) | Default in complying with the requirements for buy-back of shares |
| 5 | 128(6) | Default in complying with the provisions dealing with the maintenance of books of accounts of the company |
| 6 | 167(2) | Contravention of provisions relating to the vacation of directors |
| 7 | 243(2) | Default in compliance with the Tribunal’s directions regarding termination or modification of certain agreements. |
| 8 | 147 | Contravention of provisions of Chapter X (Audit and Auditors) |
| 9 | 392 | Punishment for contravention of provisions relating to foreign companies |
Re-categorization of offences
Taking into account the overall pendency of cases in courts and in an attempt to mitigate the burden on such courts, the Amendment Act, 2020 seeks to administer and adopt a principle-based approach to eliminating the imposition of penal consequences in case of minor and technical defaults. As a result, in addition to the 16 offences being decriminalised under the Companies Amendment Act, 2019, more offences have been decriminalised and reclassified by replacing criminal fines with civil penalties under the Amendment Act, 2020.
The levying of such monetary penalties can now be adjudicated by an In-house Adjudication Mechanism (IAM) as provided under section 454 of the Act, without having to approach criminal courts.
- Examples of offences decriminalised by substituting a fine with a penalty
| S No. | Section | Offence |
| 1 | 56(6) | Default in transfer and transmission of securities |
| 2 | 86(1) | Punishment for contravention of the chapter on registration of charges |
| 3 | 88(5) | Failure in maintaining Register of Members/ Debenture Holders / other Security Holders |
| 4 | 89(5) | Failure of any person in making a declaration in respect of a beneficial interest in any share |
| 5 | 89(7) | Failure of a company to file the return for declaration in respect of a beneficial interest in any share. |
| 6 | 90(10) | Failure of any person in making a declaration of Significant Beneficial Owners in a company |
| 7 | 90(11) | Failure of a company to maintain Register of Significant Beneficial Owners in a company |
| 8 | 92(6) | Non conformity of Certification of Annual Return by Company Secretary in practice, as per the Act and rules made under the Act |
| 9 | 124(7) | Failure to comply with the requirement for payment of dividend and transfer to Unpaid Dividend Account |
| 10 | 134(8) | Contravention of provisions with respect to Financial Statement, Board’s Report, etc. |
| 11 | 135(7) & (8) | Default in compliance with respect to Corporate Social Responsibility |
| 12 | 143(15) | Non-compliance by auditors with reference to reporting of fraud |
| 13 | 184(4) | Contravention of provisions related to disclosure of interest by director annually and in the meeting where contract or agreement is discussed |
| 14 | 232(8) | Contravention of provisions by either transferor company or the transferee company with respect to merger and amalgamation of companies |
| 15 | 452(2) | No imprisonment for wrongful possession or withholding of property of the company by any officer or employee, if he has not been paid provident fund, pension fund, gratuity fund or other Employees Welfare Fund and compensation under the Workmen’s Compensation Act,1923 |
- Examples of offences where the penalty is reduced
| S No. | Section | Offence | Change in penalty |
| 1 | 64(2) | In case a company fails to file a notice of alteration or increase or redemption, of share capital with the Registrar within 30 days. | Reduction in the amount of penalty on company and every officer who is in default from Rs. 1,000 to Rs. 500 for each day during which default continues. Further, reduction in the maximum amount of penalty on every officer who is in default from Rs. 5,00,000 to Rs. 1,00,000. |
| 2 | 92 | In case a company fails to file its annual return within a specified period (i.e. 60 days from AGM). | Reduction in the amount of penalty on company and every officer who is in default from Rs. 50,000 to Rs. 10,000. Further, reduction in the maximum amount of penalty from Rs. 5,00,000 to Rs. 2,00,000 in case of a company and Rs. 50,000 in case of an officer who is in default. |
| 3 | 117 | In case any company fails to file the resolution or the agreement with the Registrar within a specified time (i.e. 30 days from the date of passing the resolution). | Reduction in the amount of penalty on the company from Rs. 1,00,000 to Rs. 10,000, in case of continuing failure, each day penalty from Rs. 500 to Rs. 100 and maximum amount of penalty from Rs. 25,00,000 to Rs. 2,00,000. Reduction in the amount of penalty on the officer who is in default from Rs. 50,000 to Rs. 10,000 in case of continuing failure, each day penalty from Rs. 500 to Rs. 100 and maximum amount of penalty from Rs. 5,00,000 to Rs. 50,000. |
| 4 | 137 | In case a company fails to file the copy of the financial statements with the Registrar within the time specified therein (i.e. within 30 days from the date of AGM). | Reduction in the amount of penalty on the company from Rs. 1,000 to Rs. 100 for each day during which the failure continues and maximum amount of penalty from Rs. 10,00,000 to Rs. 2,00,000. Reduction in the amount of penalty on MD. CFO/ directors from Rs. 1,00,000 to Rs. 10,000 and maximum amount of penalty from Rs. 5,00,000 to Rs. 50,000. |
| 5 | 140 | In case the auditor fails to file his resignation with the Registrar within the time specified therein (i.e. 30 days from the date of resignation). | Reduction in the maximum amount of penalty on auditor from Rs. 5,00,000 to Rs. 2,00,000. |
| 6 | 446B | In cases of non-compliances of any of the provisions of the Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officers in default, or any other person in respect of such company. | Reduction in a penalty amounting to not more than 1/2 of the penalty specified in such provisions subject to a maximum of: Rs 2,00,000- in case of a company Rs 1,00,000- in case of an officer in default or any other person. |
- Increase in penalty for certain offences
Although criminal liability has been extinguished in the aforesaid provisions, to deter non-compliance, there has been a significant increase in the amount of penalty in a few strategic provisions of the Act as given below:
| S No. | Section | Punishment under Companies Act, 2013 | Punishment under Companies (Amendment) Act, 2020 |
| 1 | 135- Corporate Social Responsibility | Company- fine between Rs 50,000 and Rs 25,00,000 Officer in default- imprisonment up to 3 years or with a fine between Rs 50,000 and Rs 5,00,000, or with both | Company- penalty fixed to twice the amount unspent/not transferred or Rs 1 crore, whichever is less Officer in default- penalty fixed to 1/10th of the mount unspent/not transferred or Rs 2,00,000, whichever is less. |
| 2 | 188- Related Party Transactions | Director/Employee: 1. Listed company imprisonment up to 1 year or fine between Rs 50,000 and Rs 5,00,000, or with both 2. Other companies- with fines between Rs 25,000-50,000 | Director/Employee: 1. Listed company- a penalty of Rs 25,00,000 2. Other companies- a penalty of 5,00,000 |
| 3 | 405- Submission of information and statistics to Central Government | Company- fine up to Rs 25,00,000 Officer in default-imprisonment up to 6 months or with a fine between Rs 25,000- Rs 3,00,000 or with both | Company and Officer in Default- a penalty of Rs 20,000 and in case of continuing failure, with a further penalty of Rs 1,000 for each day during which such failure continues, subject to a maximum of Rs 3,00,000 |
Offences to be dealt with under an alternative framework or mechanism
The Amendment Act, 2020 has introduced an alternative framework for the supervision of certain provisions instead of resorting to change in the nature of such offences therein. This can be understood by the examples given below:
- In case of non-compliance with the order of the Regional Director directing change in the name of the company, the criminal fine stated in Section 16(3) is substituted by empowering the Central Government to allot a new name to the defaulting company and directing the Registrar of Companies to enter the new name in the Register of Companies and issue a new Certificate of Incorporation.
- In case of non-compliance with the compounding order issued by the Regional Director or NCLT under Section 441 of the Act, punishment of imprisonment and criminal fine is removed and, in its place, the maximum compounding fee for the initial offence for which compounding application is made has been doubled.
Impact of decriminalisation of offences
Ease of doing business
The number of compliances imposed on Indian corporates are far more as compared to corporates elsewhere. There are quarterly, monthly, half-yearly and yearly compliances under the myriad statutes that rule our country today. In addition, every statute contains a penal provision for any kind of non-compliance. Consequently, a huge statutory burden is imposed on corporates irrespective of their size and scale of operations.
Decriminalisation of offences would lead to a positive impact on business decisions of Indian as well as foreign investors and ultimately will foster the growth of corporates in our country.
Increased foreign investment
Foreign Direct Investment (FDI) is one of the major sources of funding for the Indian corporate sector. By providing civil liability for the majority of offences, the Indian Companies Act has aligned itself to corporate law provisions prevailing in several other countries. As a result, it boosts the confidence of major FDI players and enables them to opt for various investment opportunities in India. Additionally, by removing imprisonment for contravention of provisions relating to foreign companies and limiting it to fine alone, it will promote the setting up of more and more places of business in India by foreign companies.
Improved corporate governance
The scope IAM Framework has increased as a result of decriminalisation, thereby enabling the Adjudicating Officer to take action against wilful defaulters, impose penalties and make good the offence. While adjudging the penalty, the Adjudicating Officer has to work within the parameters set out in the Act itself, thereby ensuring better compliance.
Improved Corporate Social Responsibility (CSR) efforts from corporates
The Act of 2013 mandated compliance with CSR provisions for certain classes of companies thereby increasing the social consciousness among corporates to a certain extent. However, the penal provisions in this regard were highly stringent providing for imprisonment of up to 3 years for not making adequate expenditure on CSR activities as mandated by the Act. This was highly discouraging to the corporates as the law did not provide any flexibility for corporates with a genuine plan of action for making a difference in society.
Being so, it is a welcome measure to remove the provision for imprisonment up to 3 years and substitute the same with an enhanced penalty, with respect to non-compliance with CSR provisions of the Act. Furthermore, the Act also prescribes an option for transferring unutilized funds to a separate account for use within the subsequent 3 years. All this will definitely go a long way in setting up a conducive environment for Indian corporates to conduct CSR activities and contribute effectively to societal development.
Unburdened various benches of NCLT
As a result of decriminalisation, the NCLT can utilise its time in affording relief to more serious cases by bypassing minor offences that can be dealt with by payment of a fine.
Relaxations to Officers in Default
The Officers in Default can heave a huge sigh of relief on being saved from the fate of imprisonment for a minor departure in procedure or technical omission. It will also allow them to sleep better knowing that transgressions will be viewed only with the severity that it deserves.
Drawbacks to the decriminalisation of offences
- Although decriminalisation reduces the burden on courts/NCLT to a great extent, shifting the power to adjudicating officers being government servants may encourage corruption and political influence.
- The defaulting company may take undue advantage of the monetary penalties imposed as they may not be a sufficient deterrent and would only be considered as a “cost of doing business”. Such penalties may be biased towards companies with large turnovers and substantial cash reserves. Imposition of fixed penalties can have varied consequences, for some, it may be considered as a “fee” to earn their desired profits due to their large turnover, while for others, it may cost them their total annual earnings.
Conclusion
To summarise, due to the Amendment Act, 2020, the corporate regime has taken on a progressive turn. The companies can not only reduce their compliance costs but can also focus on their business activities. Due to the decriminalisation of offences, it becomes easier for companies to rectify their defaults, pay the stated penalty and become compliant. It brings efficiency and expediency into the system by reducing the burden on courts. It also enables ease of doing business and ease of living for corporations. Consequently, the Amendment Act, 2020 can be said to be a step in the right direction by the Government.
References
- https://www.legalserviceindia.com/legal/article-440-difference-between-fine-and-penalty-companies-act-2013-and-company-ordinance-2018.html
- https://ca2013.com/439-offences-to-be-noncognizable/
- https://www.mca.gov.in/Ministry/pdf/ReportCommittee_28082018.pdf
- https://www.mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf
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