This article is written by M.S.Bushra Tungekar from the University of Mumbai Law Academy. The author in this article discusses the purpose and impact of the decriminalization of compoundable offences under the Companies Act.
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The COVID-19 pandemic has taken a toll on the overall economy. It has forced every aspect of the human being to acclimate to the changing dynamics. Similarly, the companies also face trouble keeping up with the regulatory and procedural aspects of the Companies Act.
To adapt to the changing situation, the Indian government has announced to decriminalize certain offences that are compoundable under the company law. It is to ease the business or the functioning of the companies and to seduce the burned on the litigation.
The Indian government has always taken efforts to facilitate doing business in India starting with the liberalization of the Indian economy back in the year 1991.
What are compoundable offences under company law?
In case of a default or non-compliance or breach of the provisions of the Companies Act, the Act imposes liability or a penalty or punishment of imprisonment. Offences under the Companies Act are classified as compoundable and non-compoundable offences.
Compounding is a process whereby the company admits to an offence committed by it and to make allowances for. It is a settlement mechanism whereby the offender pays a certain amount of money instead of prosecution. The registrar of companies has been given power under the Companies Act to start prosecution against any defaulter be it a company, or an officer, or any of its directors. This mechanism is used to avoid long and expensive litigation.
Therefore in case of a default, the directors instead of contesting the prosecution apply to get the offences compounded provided the offence in question is a compoundable offence. Section 441 of the Companies Act 2013 deals with the compounding of offences.
As per section 441 of the companies Act, the following offences can be compounded:
- Offences which are punishable with only fine.
- Offences which are punishable with fine or with imprisonment.
- Offences which are punishable with fine or with imprisonment or with both.
However, offences falling under sub-points b and c, are to be compounded with the permission of National Company Law Tribunal (NCLT).
Offences that cannot be compounded under section 441 are:
- Offences which are punishable with the only imprisonment.
- Offences which are punishable with fine along with imprisonment.
Ministry of corporate affairs in July 2018, set up a company law committee to review and assess the regulatory framework under the companies Act. The company law committee was constituted under the chairmanship of Mr Injeti Srinivas. The committee was asked to make recommendations regarding certain acts under the company law and make recommendations to declutter and reduce the burden on the criminal justice system.
The company law committee submitted its report in August 2018. Based on the recommendations mentioned in the report, certain amendments were brought about in the Companies Act, 2013 especially concerning compoundable offences i.e the committee recommended decriminalization of certain minor compoundable offences and the committee also regarding Corporate social responsibility.
The purpose of the company law committee was as follows:
- Analyze the offences of compoundable nature and make recommendations for such offences. With the intent of easing the burden of the criminal justice system and easing the conduct of business in India. The committee would further review whether certain acts under the company law can be reclassified as “civil wrongs”.
- Analyze the viability of the introduction of a settlement mechanism.
- Recommend measures to improve the functioning of the NCLT.
- Examining the existing framework under the Limited Liability Partnership Act, 2008, and make recommendations for the same.
- And any other recommendations.
What were the recommendations made by the company law committee?
The pertinent recommendations of the company law committee for compoundable offences under company law are as follows:
- There are overall 81 offences which are compoundable under the Companies Act, 2013. The company law committee recommended recategorizing 16 out of the 81 offences. The recategorizing of the offences would be done to an in-house adjudication framework, wherein the adjudicating officer would levy a heavy penalty in the event of a default.
- Constitution of an in-house adjudication system. The in-house adjudication mechanism must be driven by technology and must minimize physical interference by the way of conducting proceedings using online platforms and publication of notices and orders on the website.
- Strengthening the in-house adjudication system by entailing an accompanying order for making good the default to help to promote the ultimate aim of improved and better compliance.
- Declogging the national company law tribunal by extending the jurisdiction of the regional director (RD). The jurisdiction of the regional director was extended by the way of increasing the pecuniary limit under section 441 of the Companies Act, 2013.
- As for non-compoundable offences, no change was recommended.
The company law committee for the ease of making recommendations felt the need to group the offences into 8 categories. The categories are as follows:
- Category I – Defaults resulting from non-compliance of any order or direction given by National Company Law Tribunal (NCLT) or the union government or regional director (RD) or Registrar of companies (ROC).
- Category II – Offences resulting from defaults concerning the maintenance of records in the registered office of the company.
- Category III – Offences arising from defaults because of non-disclosure of interests of persons to the company.
- Category IV – Offences arising from defaults for certain corporate governance rules.
- Category V – Offences arising from defaults which are technical defaults such as intimation of information to the ROC by the way of filing forms or sending notices to the stakeholders of the company.
- Category VI – Offences arising from defaults for substantial violations which may have an effect on the going concern value of the company or are conflicting with the public interest and would have serious implications for the other stakeholders of the company.
- Category VII – Offences arising from defaults for liquidation proceedings of the company.
- Category VII – Offences arising from defaults which are not specifically punishable under the provision, but are made punishable under the omnibus clause.
Why was there a need to decriminalize the compoundable offences?
It is not unknown that the criminal justice system is heavily burdened with the amount of pending litigation in the courts. It is not the first time the Indian government has taken steps to decriminalize the laws in the corporate sector. Earlier criminal offences under Foreign Trade (Development and Regulation) Act, Imports and Exports (Control) Act 1947, and under the Foreign Exchange Management Act 1999 have been decriminalized.
The following reasons are the main reasons for the decriminalization of company law offences.
Unclogging the criminal justice system
According to the National Judicial data grid, in India, a total of 3,45,87,387 cases are still pending out of which 2,51,18,909 are criminal cases and 94,68,478 are civil cases. It is seen that the number of criminal cases is more than that of civil cases.
The criminal justice system in Indian has a huge backlog of cases and is overburdened. To ease the burden on the Indian judiciary, the government has been making efforts to decriminalize offences which can be dealt with in some other way. There are many offences which can be put to an end by imposing fines or penalties and do not require to be prosecuted. These offences are not serious and are mostly defaults for unintentional omissions.
Encouraging and improving ease of doing business in India
Decriminalizing the company law offences are likely to encourage more foreign investments in India. The Indian government also kept in mind the need and importance of promoting homegrown start-ups to establish their business in India only. If there are reasonable relaxations and no unnecessary regulatory control it will discourage Indian startups, micro, small, and medium-sized enterprises from seeking new and foreign markets.
As it has been seen that many startup founders or entrepreneurs were preferring foreign jurisdictions due to the stringent and burdensome Indian regulatory frameworks. By promoting ease of doing business in India the Indian economy will not retain business but also encourage more foreign capital.This would have not been difficult to attain if the provisions of the company remain stringent and onerous.
What amendments have been brought about relating to the compoundable offences?
The Companies Amendment Bill 2020 was introduced in the Lok sabha in March 2020. The bill had its genesis in the recommendations made by the Company law committee. The Rajya Sabha passed the bill in September 2020, and the bill also received the assent of the president in the same month.
Decriminalization of offences being the main highlight of the amendment. It removed punishment of imprisonment for certain offences, there are reductions made in fines and penalties that are liable to be paid. There have been amendments made for the declogging of the national company law tribunal. There have also been amendments for corporate social responsibility.
Clauses relating to compoundable offences
Reclassification of 23 compoundable offences
23 offences that are minor in nature such as minor non-compliance issues will be forwarded to in-house adjudication mechanisms as per section 454 of the Companies Act 2013. These minor offences would be those offences that can be objectively dealt with.
The adjudicating officer of the in-house adjudication mechanism would determine the penalties of these 23 compoundable offences. The appeal from such orders will lie with the regional director.
The omission of offences having remedy under other laws
The offences that are capable of being dealt with using other Acts will be excluded from the Companies Act, 2013. 7 such offences will be excluded.
Restricting compoundable offences to the imposition of fine only
11 offences are not like any grave violation and involve subjective determination will be liable with the punishment involving the imposition of a fine only.
There are 5 offences for which the company law committee had recommended the constitution of an alternate method of imposing sanctions.
Amendments for corporate social responsibility (CSR)
Earlier, the Companies Act, 2013 did not impose any penalty or fine under section 135 that deals with corporate social responsibility. However, in the amendment of 2020, a fine has been imposed in case the company makes any defaults concerning corporate social responsibility.
According to the amendment in the case where a company fails to comply with the provisions of subsection 5 and 6 of section 135 of the Companies Act, then the company is liable to twice the amount specified. Although not notified but the bill recommended that every officer liable for such default be punishable with imprisonment.
In-house adjudication mechanism
The in-house adjudication mechanism is supposed to replace the process of adjudication and appeal before the national company law tribunal. It is one of the highlighted features of the Companies Amendment Act of 2020. Section 454 of the Companies Act deals with the framework of the in-house adjudication mechanism.
The adjudicating officer has the authority to impose a penalty on the company or the officer or any person responsible for the default. Not only that the adjudicating officer also has the authority to direct the defaulter to rectify the default.
The amendment also provides that in case of repeated defaults (within three years), the defaulter shall be liable for a penalty twice the amount of the penalty provided under the provision of the Act for the said offence. The appeal from the orders passed by the adjudicating officer lies with the regional director.
The entire process is to be conducted using online platforms and publications of notices and orders on the website. Physical appearances are to be made only under exceptional circumstances or exceptional cases. The introduction of an in-house adjudication mechanism would unclog the National company law tribunal by removing the burden of dealing with minor or technical offences.
Drawbacks of decriminalizing company law offences
- The act of decriminalization of these offences takes away the power of the courts to punish and hands over the power to the government servants. Therefore it would increase the chances of corruption in the mechanism and the political influence.
- The defaulter may take advantage of the penalties imposed as the loss they suffer due to the penalty might be way less than their gain by default. The penalty or a fine would not have the same effect as that of stringent punishment.
What will be the impact and conclusion?
The decriminalization of compoundable offences that are technical and procedural will have a positive impact on all the stakeholder. It will not only unclog the NCLT and reduce their burden but it will also help the litigators as the in-house adjudication mechanism is cost and time effective. The adjudication process under the in-house adjudication mechanism does not require the establishment of a mens rea which is the crux of any criminal offence. Therefore, making the entire process of imposition of penalties quick and efficient.
This will help national company law tribunal to focus on matters which are affecting the public interest. The government will also benefit from the penalties collected for such defaults. The decriminalization of offences attracts potential investors as it indicates the ease of doing business. All in all, keeping everything in mind it will be fair to conclude that the step of decriminalisation of offences is in the correct direction. And one can hope for it to result in better corporate governance.
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