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In this article, Shreyas Chandrashekar discusses Decriminalizing of Offences Under the Indian Companies Act.

Introduction

The Ministry of Corporate Affairs vide its order dated 13/7/2018 had constituted a 10 member panel to be headed by the Corporate affairs Secretary Injeti Srinivas in order to review the penal provisions under the Companies Act of 2013. The ten-member panel, which submitted its report on 21st August of 2018, comprised of members such as noted banker Uday Kotak, former Lok Sabha Secretary General T K Vishwanathan, Shardul Amarchand Mangaldas’ Executive Chairman Shardul S Shroff and AZB & Partners’ Founder Managing Partner Ajay Bahl.

Need for re-look at the penal provisions under the Companies Act vis-à-vis decriminalization of certain offences.

Such a need arose as a result of the hurdles and challenges posed as a result of the penal provisions in the Companies Act of 2013, which came into force as a result of the various high-end financial and corporate frauds and scams which had taken place in India due to ailing standards of corporate governance. Therefore, the new Companies Act, 2013 introduced more stringent punishments and penalties for non-compliance of various provisions and rules under the Act as compared to the former Companies Act, 1956. However noble the intentions may have been, these regulations have created numerous prohibitions and command structures, wherein a mere violation of them would incur criminal liability and increase the burden of the Courts as they would have to deal with every single instance violation, however trivial such matter may be.  Thus, these penal provisions which are meant to create a stringent regulatory regime and promote a discipline in this domain of private laws, have ultimately ended up being roadblocks in the path of doing business with ease in India.

This dire situation was the catalyst behind such a move whose aim was to ensure that the efficiency of the courts while dealing with matters under the Companies Act would be much enhanced if the Court were to deal only with matters only of a serious nature and not otherwise be hindered by complaints that are less serious in nature. This would not only ensure speedy disposal of cases due to their being fewer in number but also increase the ease of doing business as under the proposed framework, most of the less-serious offences would be dealt by an in-house framework.

The panel took into consideration three types of offences under the Companies act in order to under understand the penal nature of the act. The first was offences wherein imprisonment was mandatory, the second type involved offences wherein imprisonment was optional and depended on the discretion of the authorities and the final categories were for which no imprisonment was provided for. Further, such offences were classified into both compoundable and non-compoundable in nature.

The rationale behind such a move was to ensure a widespread check of imposition of penal provisions under the Act, if certain classes of offences could be decriminalized.  The first class regards offences which are punishable with imprisonment mandatory, which can be categorized into offences in which imprisonment be optional or some additional fine in consonance with imprisonment;  whereas the second class would comprise of offences for which Imprisonment is a mere option,  could be categorized into such offences that impose only fine as a penalty. In furtherance of this, the panel has recommended the re-categorization of 16 of the 81 compoundable offenses by shifting them to an in-house e-adjudication framework wherein the adjudicating officer at the Registrar of Companies would levy a penalty on defaults, with the penalties for the remaining compoundable offences and non-compoundable offences of serious nature remaining the same, which is tune with the aim of the panel to reduce the burden of the courts to decriminalize the other small and non-serious offences.  Offences such as making certain disallowed payments to directors for loss of office, breach of overall managerial remuneration limit and non-appointment of key managerial person in case of companies are among the offences proposed to be dealt with by the in-house regulatory authority.

Advantages behind the decriminalization of offences

With regards to the advantages provided under this Act, the often cited advantage is the fact that it seeks to lessen the burden on the Adjudicating Authority if it were to simply deal with matters of only the most important and not deal with every single violation of the act, some of which are so trivial that it is better to be taken care of by an in-house mechanism or a small fine. Such a move, it has been argued will unclog the Tribunals which are overburdened with plenty of pending cases, and enable it to focus on more serious violations.

Another often cited reason is the nature of criminal law and its interplay with the company law, which is a private law by nature and the fact that their characteristics stand in stark contrast with each other. Criminal Law is primarily a stigma and censure move and deals with only conduct unacceptable to society and that company offence, at least the minor ones, although not condonable, do not fall under the umbrella of crimes that are so moralistic wrong so as to be anti-society in nature.

Another argument that is put forth against decriminalization of offences is the fact that is the penal provisions are used indiscriminately, as they are being done so today, convictions will may generate little stigma, little by way of deterrence may be achieved, and little by way of punishment may be justified and even undermine the rationale of it being a punishable offence.

From the above grounds it can be easily seen that there exists a wide prevalence regarding the fact that criminalization of Company offences should be used very sparingly and only as a last resort.

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However, such a move is not without its critics. The detractors behind such a move argue that it opens the door for potential rise in violations of the Act as those who are able to afford such in house penalties may view such a penalty as a mere slap on the wrist or the cost of doing business and view such penalties with mere indifference, which would take away the main purpose of those acts existing as offences and lead to a similar situation pre-2013 which necessitated such heavy penalizing provisions in the Companies Act.

Conclusion

In conclusion, it can be stated that the decriminalization of minor offences under the Companies Act is indeed the way forward. Various other countries like the United Kingdom as well as the United States have adopted this approach. The penal provisions must be used only as a last resort to severely punish if there has been a large scale offence or a fraud and not to regulate the behaviour of personnel. The present scenario, which for a hierarchy of offences wherein civil penalties deal with non-serious behaviours will indeed help to increase the efficiency of the Act as well as the adjudicating authority as the Tribunal today is being swamped with cases beyond its capacity. It is indeed hoped that the Government would adopt the recommendation of the panel and allow the decriminalization of certain offences under the Companies Act.

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