This article has been written by Bhoomi Shekhar, pursuing Diploma in Corporate Litigation and has been edited by Oishika Banerji (Team Lawsikho).
This article has been published by Sneha Mahawar.
Indian billionaire businessman and the head of the Godrej Family once said “Corporate governance should be done more through principles than rules”. The manner, method and mode by which companies are directed and controlled is termed as corporate governance. The Companies Act, 2013 provides a robust framework for corporate governance. In order to promote better corporate compliance, facilitate ease of doing business, reduce encumbrance on the criminal justice system, avoid the backlog of cases, strict vigilance over grave offences and in addition to this, motivate corporate institutions to adopt neat and transparent business practices, maintain a balance between the companies’ interest and the public interest and also to reduce the compliance costs. The Ministry of Corporate Affairs (MCA) decriminalized various offences under the Companies Act, 2013 with the introduction of the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act 2020 with the belief that this will ultimately increase FDI and will motivate Indian businesses to flourish in India. As such, decriminalization will put a bar on the preconceived notion that the regulatory landscape of India is fluctuant, erratic and onerous. The Coronavirus pandemic brutally worsened the already parlous Indian economy. To cope with the economic hardships and to revive economic growth, decriminalisation of certain corporate offences was deemed to be one of the best options. This article discusses the need to decriminalize corporate offences owing to smoother facilitation of corporate governance.
An overview of changes introduced for governing corporate offences
- In July 2018, a committee was set up by the MCA to review offences.
- In August 2018, the committee submitted its report and recommended that the offences that are technical and procedural should adopt an in-house adjudication mechanism.
- In July 2019, Amendments were made accordingly and as a result, The Companies (Amendment) Act, 2019 was passed.
- In September 2019, the Government still felt the need to make the penal provisions lenient. Therefore, the Company Law Committee (CLC) was constituted.
- In November 2019, CLC released its report and marked the recommendations for further recategorization. The report was submitted to MCA.
- In March 2020, the Ministry of Finance introduced the Companies (Amendment) Bill 2020 proposing extensive and exhaustive amendments to the Companies Act, 2013.
- In September 2020, the bill was passed in both houses. Eventually, The Companies (Amendment) Act, 2020 received the assent of the President of India.
“For such business and economic legislations which fall within the domain of arbitration or civil courts, the government should consider decriminalising the laws, unless there is an intent of fraud or misdoings.”
-CII President Vikram Kirloskar
The identity and existence of a company are distinct from that of its members. Both have separate legal identities. However, with the lens of qui facit per alium facit per se, the corporation could be held liable for the acts of its employees.
The four facets or the prime principles underlying corporate offences
The four facets of decriminalisation as stated in the Amended Act are –
1. Re-categorisation of offences from compoundable offences to an in-house adjudication framework
The Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020 reorganised offences and eventually shifted 23 offences from compounding mechanism to in-house adjudication mechanism (IAM) and the committee further recategorized these offences into different categories, A-H namely. 16 offences had already been decriminalised after the Amendment Act of 2019.
- Category A: This category covers offences dealing with defiance of the order of authorities. Here the liability of penalty would amount to twenty thousand rupees and further, in case of continuity, it would be additional one thousand rupees for each day, subject to a maximum of three lakh rupees.
- Section 232 (8) – If a company fails to comply with (5) of the Merger and amalgamation of companies’ continuity.
- Section 405 (4) – If a company fails to comply with the orders of the Central Government.
- Category B: This category cover defaults concerning the maintenance of:-
- Section 56 (6) –Transfer and transmission of securities, the liability of penalty would amount to fifty thousand rupees.
- Section 88 (5) – Register of Members, the liability of penalty would amount to fifty thousand rupees and further, in case of continuity, it would be additional two hundred rupees for each day, subject to a maximum of five lakh rupees.
- Section 90 (11) – Register of significant beneficial owners in a company, liability would amount to one lakh rupees and further, in case of continuity, it would be five hundred rupees for each day, subject to a maximum of five lakh rupees and every OID shall be liable to pay rupees twenty-five thousand as a penalty and further penalty in case of continuing failure would be two hundred rupees for each day subject to a maximum of one lakh rupees.
- Category C: This category cover cases dealing with default in the declaration:-
- Section 90 (10) – By a significant beneficial owner, here liability of penalty would amount to fifty thousand rupees and further, in case of continuity, it would be additional one thousand rupees for each day, subject to a maximum of two lakh rupees.
- Section 89 (5) – In respect of a beneficial interest in any share, here liability of penalty would amount to fifty thousand rupees and further, in case of continuity, it would be additional two hundred rupees for each day, subject to a maximum of five lakh rupees.
- Section 184 (4) – About disclosure of interest by a director, here liability of penalty would amount to one lakh rupees.
- Category D: This category deals with the defaults concerning corporate governance and such offences have been transferred already.
- Category E: This category deals with the defaults concerning:-
- Section 86 (1) – registration of charges, here the company would be liable to pay five lakh rupees and in case of OID liability would amount to fifty thousand rupees.
- Section 89 (7) – filing a return, here the liability would arise of rupees one thousand in case of continuing failure, subject to a maximum of rupees five lakhs in case of a company and rupees two lakhs in case of every OID.
- Category F: This category deals with defaults affecting the company’s going concern value or impact on public interest or stakeholder’s interest.
- Section 92(6) – Incomplete or wrong certification of annual return by the CS, a penalty of rupees two lacs would arise.
- Section 105(5) – When a company is acting as an agent in appointing the proxy, a penalty of rupees fifty thousand would arise.
- Section 124(7) – Essentials regarding the transfer of shares and dividends to Investor Education and PFA, here liability of penalty would amount to one lakh rupees and further, in case of continuity, it would be additional five hundred rupees for each day, subject to a maximum of ten lakh rupees. And in the case of OID, the liability of penalty would amount to twenty-five thousand rupees and further, in case of continuity, it would be additional one hundred rupees for each day, subject to a maximum of two lakh rupees
- Section 134(8) – Non – Fulfilment of substantial companies, the liability of a company would amount to three lakh rupees and in case of OID liability would amount to fifty thousand rupees.
- Section 143(15) – The auditor failed to report fraud and relatedly section 147(2) was also amended. Liability would arise of rupees five lakhs in the case of a listed company and a penalty of one lakh rupees in the case of any other company.
- Section 178(8) – Constitution of various committees, here the company would be liable to pay five lakh rupees and in case of OID liability would amount to one lakh rupees.
- Section 187(4) – when investments are not held in the name of the company, here the company would be liable to pay five lakh rupees and in case of OID liability would amount to fifty thousand rupees.
- Section 188(5) – related party transactions that are not made in compliance with the section, Liability would arise of rupees twenty-five lakh in the case of a listed company and a penalty of five lakh rupees in the case of any other company.
- Section 204(4) – Secretarial audit for prescribed companies, liability would arise of rupees two lakhs.
- Category G: This category covers defaults concerning liquidation proceedings. Although none of the offences was transferred from this category to IAM.
- Category H: Defaults that are
- Section 172 – related to the appointment and qualifications of directors and are not specifically punished under the act, in such cases the liability would arise of rupees fifty thousand and in continuing failure, it’d be a penalty of five hundred rupees for each day, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an OID.
- Section 450 – not explicitly made punishable under the act but punishable outside the ambit of the Companies Act, 2013 (an omnibus clause). Here the liability would arise of rupees ten thousand and in continuing failure, it’d be a penalty of one thousand rupees for each day, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an OID.
Section 441 and Section 454 of the Companies Act explicitly covers the concept of compounding and in-house adjudication. Here, the former is a settlement mechanism in which the felon is given the option to settle the matter by monetary payment and in the second-mentioned concept, an Adjudication Officer holds the authority to settle the offences by charging reasonable and relevant penalty from the defaulting party.
2. Eliminating imprisonment under listed sections and subjecting them to fines alone
Punishment of imprisonment was removed from a few of the sections but offenders are still liable to pay a fine if they committed these offences.
|S.No.||Section||Offence||Omission of punishment with imprisonment||Fine|
|8(11) When the companies are formed with the intent of social welfare or charity||Default in complying with the requirements||Up to 3 years||10,00,000 – 1,00,00,000(company)250000 – 25,00,000 (OID)|
|26(9) Areas to be discussed in the prospectus||Contravention of related provisions||Up to 3 years||50,000 – 3,00,000|
|40(5) Stock Exchange Securities||Default in complying with the related provisions||Up to 1 year||5,00,000 – 50,00,000 (company)50,000 – 3,00,000 (OID)|
|68(11) Company’s power to purchase its securities||Default in complying with the related provisions or any regulation made by SEBI||Up to 3 years||1,00,000 – 3,00,000|
|128(6) Relevant books and papers and financial statements to be kept by the company||Contravention of related provisions by MD, WTD in charge of finance, CFO or any other person of a company||Up to 1 year||50,000 – 5,00,000|
|147(1) Punishment for contravention||Contravention of provisions of sections 139 to 146 (related to audit and auditors)||Up to 1 year||25000 – 5,00,000 (company)10,000 – 1,00,000 (OID)|
|167(2) When the office of a director becomes vacant||If a person functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified.||Up to 1 year||1,00,000 – 5,00,000|
|242(8) powers of tribunal||Contravention of the order of NCLT relating to alterations in MOA or AOA||Up to 6 months||1,00,000 – 25,00,000 (company)25,000 – 1,00,000 (OID)|
|243(2) Consequence of termination or modification of certain agreements||Any person or director who knowingly acts as an M.D. or other director or manager of a company in contravention of 243 (1) (b) or 243 (1A)||Up to 6 months||Up to 5,00,000|
|347(4) Disposal of books and papers of the company in case of winding up and dissolution of the affairs of the company||Contravention of any rule framed or an order made by the central government under 347 (3)||Up to 6 months||Up to 50,000|
|392 Punishment for contravention||Contravention of the provisions of Chapter XXII: COMPANIES INCORPORATED OUTSIDE INDIA by a foreign company||Up to 6 months||1,00,000 – 3,00,000 + 50,000 (company)25,000 – 5,00,000 (OID)|
3. Reduction in penalty
The number of penalties on a Company and officers in default (OID) was also altered to a greater extent.
|S.No.||Section||Penalty in case of a company||Penalty on every OID|
|64 (2): When the company files a notice to the registrar regarding alteration of share capital and fails to comply with the requisites mentioned in sub-section (1) like prescribed format, specific period etc.||Rs. 500 to 1,00,000||Rs. 500 to 1,00,000|
|92 (5): Failure in filing a copy of the annual return to a registrar before the expiry of the period under sub-section (4)||10,000 + 100 but the maximum of Rs. 2,00,000||10,000 + 100 but the maximum of Rs. 50,000|
|117 (2): Failure in filing resolution or agreement following the requisites stated in sub-section (1) such as annexures, specific timeline, etc.||10,000 + 100 but the maximum of Rs. 2,00,000||10,000 + 100 but the maximum of Rs. 50,000|
|137 (3): Failure in filing a copy of the financial statement under sub-section (1) or (2)||10,000 + 100 but the maximum of Rs. 2,00,000||10,000 + 100 but the maximum of Rs. 50,000|
|140 (3): The auditor who has resigned from the company failed to comply with the requisites mentioned under sub-section (2) such as filing a statement to the company and the registrar etc.||Rs. 50,000 or the amount equal to the remuneration of the auditor, whichever is less + 500 but the maximum of Rs. 2,00,000|
|165 (6): If a person accepts a designation of a director in violation of the parent section||Rs. 1000 but the maximum of Rs. 2,00,000|
|446B: If the penalty is payable for non-compliance with any of the provisions of this act by a One Person Company, start-up company, small company, producer company||One-half of a penalty specified but upto a maximum of 2,00,000 rupees||Maximum of 1,00,000 rupees|
4. Omission of penal provisions from particular sections and provision of an alternate mechanism
After the brainstorming sessions, Sections 48 (5), 59 (5), 66(11), 71 (11), and 342 (6) have been omitted where the aforementioned sections talked about the variation of shareholders’ rights, the rectification of register of members, reduction of share capital, debentures and prosecution of delinquent officers and members of the company respectively. Now, National Company Law Tribunal (NCLT) would exercise its competent jurisdiction in case of non-compliances in these sections. Along with these, information as to pending liquidations, Sections 348 (6) and 348 (7) were omitted and other relevant laws would be applied in case of any non-compliances.
An alternative framework was made available in the following sections-
- Section 16(3), The company is in default in following the directions provided for the registration of a company– A new name will be given to the company by the central government and the Registrar will carry out necessary changes in the place of the old name.
- Section 284(2). If the person (promoters, directors, officers and employees) fails to assist or cooperate with the company liquidator – The company’s liquidator can now approach NCLT for directions.
- Section 302 (3). Dissolution of company by Tribunal – NCLT will now provide instructions to the liquidator regarding forwarding a copy of its order to the registrar of companies.
- Section 356 (2). Powers of the tribunal to declare dissolution of company void – NCLT will now provide instructions to the liquidator regarding forwarding a copy of its order to the registrar of companies.
Two sides of decriminalization of corporate offences
Apart from the already mentioned positive consequences, a few more benefits arising out of Decriminalisation are: –
- As the defaults are now being handled by IAM, the burden on special courts has been substantially reduced.
- This a stepping stone towards the accomplishment of ‘Sabka Saath, Sabka Vikas and Sabka Vishwas’.
- The focus of criminal courts is now more inclined towards serious offences. Various branches of NCLT have also been alleviated with work; now, the seriousness, time and urgency can be devoted to major offences.
- Motivate budding entrepreneurs by easing their way for the conduct of the business. Because every entrepreneur before taking the first step thinks twice about the idea due to lengthy procedures and wealthy costs.
- Hike in Foreign Direct Investment, 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.
- Drawing companies towards social consciousness and making them public-spirited.
- The Adjudicating Authority is a non–judicial body that also covers the offices which are directly under the supervision of the Central Government. The power is now vested in civil servants that are synonymous with Red Tapism, bureaucracy, corruption and political influence. And sometimes lack of judicial exposure can also become a reason for weak judgements.
- The financial penalties imposed may not be a sufficient deterrence and may just be seen as a “cost of doing business”. Penalties imposed would impact each firm differently, depending upon their financial status.
As per data collected from the Registrars of Companies, more than 1,000 company law default cases have already been disposed of by the Adjudicating Officers (Registrars of Companies) during the last three financial years (2018-19, 2019-20 and 2020-21) in a summary manner. More than 1,000 default cases were decided post-reform without resorting to court cases. Companies Fresh Start Scheme 2020 was further launched, for companies to rectify old defaults without any extra fees. More than 4,00,000 companies used the Companies Fresh Start Scheme to rectify filing defaults and avoid penalties under the Companies Act. More than 1,55,000 companies were registered in India in the financial year 2020-21 which is almost 3 times more than the average number of companies registered annually, seven years ago. The perfect balance can be seen between decriminalising certain offences and leaving a few untouched. The corporate regime has evolved in a liberal direction. The businesses can concentrate on their core business operations while also lowering their compliance expenditures. Apart from easing the burden on the judiciary, it has improved the efficiency, effectiveness and speed of businesses. Thus ease of doing business and ease of living must exist simultaneously.
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