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DECRIMINALISATION OF OFFENCES UNDER THE COMPANIES ACT, 2013

Date | Version July19, 2022| 1.0
Keywords ‘Decriminalisation of Offences under the Companies Act, 2013’, ‘Review Committee’, ‘Company Law Committee’, ‘In-house adjudication’.
List of Legislation Referred.
  1. Companies Act 2013
  2. Companies (Amendment) Act, 2019
  3. Companies (Amendment) Act, 2020
Jurisdiction India

Abstract: This article examines the rationale for the decriminalisation of offences under the Companies Act, 2013 by the Ministry of Corporate Affairs and its effects on the corporate sector.

 

INTRODUCTION:

In addition to regulating corporate entry and operations, enacting corporate governance norms and ensuring accountability to stakeholders, corporate laws are the foundation of

commercial regulation. Over the past few decades, Indian Corporate governance has undergone significant changes. Following the 2013 enactment of the Companies Act, various reforms in company law have been undertaken, paving the way for corporate entities to conduct business efficiently.

One such reform is the decriminalisation of offences under the Companies legislation. The Government of India has attempted to decriminalise certain offences under the Companies Act, 2013 (hereinafter referred to as “the Act”) to facilitate the smooth functioning of businesses as well as minimise lengthy litigation.

Report of the Committee to Review Offences under the Companies Act, 2013

The Government constituted this Committee to review offences under the Companies Act, 2013 under the chairmanship of Mr Injeti Srinivas vide order dated 13.07.2018 of  the Ministry of Corporate Affairs 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 place of imprisonment.
  • Review whether any non-compoundable offences under the Act can be recategorized into compoundable offences.
  • Suggest any improvements to the existing mechanism of levying penalties.

The main recommendations of the Committee to Review Offences in the report are as follows:

  • Re-categorization 16 out of 81 compoundable offences, to an in-house adjudication framework wherein defaults would be subject to penalty by an adjudication officer.
  • Instituting a transparent and technology-driven in-house adjudicating mechanism and increasing transparency in the in-house adjudicating mechanism by minimising physical interface, conducting proceedings on an online platform and publishing orders on the website.
  • Strengthening the mechanism by necessitating a concomitant order for making good the default at the time of levying penalty to subserve the ultimate aim of achieving better compliance.
  • Declogging the NCLT by widening the jurisdiction of the Regional Director (RD), vesting in the Central Government the power to approve the alteration in the financial year of a company, and vesting in the Central Government the authority to approve cases of conversion of public companies into private companies.

Considering the recommendations above, the Central Government introduced necessary changes by enacting the Companies (Amendment) Act, 2019.

Report of the Company Law Committee

The Committee narrowed its focus to the decriminalisation of compoundable offences under the 2013 Act and certain urgently needed structural changes, along with specific changes to the compliance and governance framework.

In three respects, this Committee’s approach to assessing offences under the 2013 Act has evolved from the Review Committee’s methodology. First, to increase overall compliance, the Committee took note of alternative mechanisms or frameworks (as opposed to imposing criminal or civil liability). Second, the Committee looked at the justification for maintaining criminal culpability in situations where thorough adjudication is unnecessary. Third, the Committee looked at the severity of the penalties and attempted to rationalise them in light of the type and seriousness of the default.

The main recommendations of the Company Law Committee in the report are as follows:

  1. Re-categorization of 23 offences out of the 66 which are in the category of compoundable offences to an in-house adjudication framework wherein defaults would be subject to a penalty levied by an adjudicating officer;
  2. Omitting 7 compoundable offences, limiting 11 compoundable offences to fine only(i.e. removing the imprisonment part) and recommending 5 offences to be dealt with in an  alternative framework (including through the exercise of contempt powers by the National Company Law Tribunal);

Considering the recommendations mentioned above, the Central Government introduced necessary changes by enacting the Companies (Amendment) Act, 2020.

Decriminalisation under Companies (Amendment) Act, 2020

Legislations on company law allow entry into the market through corporate structures and regulate corporate conduct after such entry. While it was always recognised that corporates might commit wrongs, categorising such wrongdoings as ‘criminal offences’ was established much later.. One of the reasons for such delay was the individualistic nature of criminal law, for instance, the determination of ‘guilty mind’ or mens rea. Though civil law was the primary tool to regulate corporate conduct, there has been a shift towards utilising criminal law for this purpose after recognising the possibility of criminal conduct by corporates. However, even after its establishment, the concept of corporate criminality has been subject to great debate, with views ranging from ample support to staunch scepticism..

Decriminalisation of offences was sought for situations other than those involving fraud to prevent the imbalance between corporate criminal and civil culpability. Due to this, decriminalisation is divided into the following categories under the Companies (Amendment) Act, 2020 (“the Amendment Act, 2020”).

OMISSION OF THE FOLLOWING COMPOUNDABLE OFFENCES:

S No. Section Key features of the Provisions of the Amendment Act, 2020.
1 48(5) Variation of the rights of shareholders of any class with consent of three-fourths of the holders
2 59(5) Grievance before NCLT regarding entries in the register of members

 

3 66(11) Publication of order of the NCLT confirming reduction of share capital

 

4 71(11) Non-compliance with the order of the NCLT regarding failure to redeem debentures on maturity or in payment of interest

 

5 342(6) Prosecution of delinquent officers and members of the company

 

 

ELIMINATING IMPRISONMENT AND SUBJECTING THE OFFENCES TO FINE ONLY: 

S No. Section Key features of the Provisions of the Amendment Act, 2020.
1 242(8)

 

Powers of NCLT to pass an order when an application has been made under Section 241 for relief in a case of oppression and mismanagement.
2 243(2) Default in complying with the directions of the NCLT regarding termination or modification of certain agreements.
3 128(6) Maintenance of the books of accounts of the company at its registered office and its inspection thereof by any director.
4 8(11) Failure of the company to comply with the requirements imposed on Section 8 companies.
5 26(9) Contravention of matters prescribed to be stated in prospectus.
6 40(5) Default in complying with the requirements of the public offer.
7 68(11) Default in complying with the requirements for buy-back of shares.
8 147(1) Default in complying with provisions of Chapter X.

 

9 167(2) Vacation of office of director.
10 392 Punishment for contravention of provisions relating to foreign companies.
11 347(4) Disposal of books and papers of company.

 

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 to maintain 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 a 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 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 the 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) Failure/delay in filing a notice for alteration of share capital

 

Where any company fails to comply with the provisions of sub-section (1), such company and every officer who is in default shall be liable to a penalty of five hundred rupees for each day during which such default continues, subject to a maximum of two lakh rupees in case of company and fifty thousand rupees in case of an officer in default.

 

2 92(5) Failure/delay in filing an annual return.

 

If any company fails to file its annual return under sub-section (4) before the expiry of the period specified therein, such company and its every officer who is in default shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees in case of company and fifty thousand rupees in case of an officer in default.

 

3 117(2) Failure/ delay in filing certain resolutions. If any company fails to file the resolution or the agreement under sub-section (1) before the expiry of the period specified therein, such company shall be liable to a penalty of ten thousand rupees and, in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees and every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.
4 137(3) Failure/ delay in filing financial statements  If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the period specified in section 403, the company shall be punishable with fine of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees, and the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.

 

5 140(3) Failure/delay in filing statement by the auditor after the resignation

 

If the auditor does not comply with the provisions of sub-section (2), she or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.

 

6  165(6)

 

Accepting directorships beyond specified limits

 

If a person accepts an appointment as a director in contravention of subsection (1), she shall be liable to a penalty of

one thousand rupees for each day after the first during which such contravention continues, subject to a maximum of two lakh rupees.

7 446B Lesser penalty for one-person companies, small companies, producer companies and start-ups

 

 Notwithstanding anything contained in this Act, if the penalty is payable for non-compliance of any of the provisions of this 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, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.

 

 

INCREASE IN PENALTY FOR CERTAIN OFFENCES

S No. Section Existing Provision under the Companies Act, 2013 Provision under Companies (Amendment) Act, 2020
1 135(7)-

Contravention of provisions of corporate social responsibility and manner of dealing with any unspent amount under it.

 

If a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be punishable with a fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

 

 

In case of default, the company shall be levied a penalty equal to twice the unspent CSR amount which is required to be transferred to the Account under subsection (6) or one crore rupees, whichever is lower, whereas the officer in default shall be levied a penalty equal to one-tenth of the unspent CSR amount which is required to be transferred to the Account under sub-section (6) or two lakh rupees, which is lower.

 

 

2 188(5)-

Punishment for contravention of provisions regarding related party transactions by a director or employee of the company

 

Any director or any other employee of a company who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall,— (i) in case of a listed company, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both; and (ii) In case of any other company, be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

 

 

In case of default, the director or employee shall be levied a penalty of twenty-five lakh rupees in the case of a listed company and five lakh rupees in the case of an unlisted company.

 

3 405(4)- Punishment for non-compliance with orders of the Central Government to direct companies to furnish certain information.

 

 

If any company fails to comply with an order made under sub-section (1) or subsection (3) or knowingly furnishes any information or statistics which is incorrect or incomplete in any material respect, the company shall be punishable with a fine which may extend to twenty-five thousand rupees and every officer of the company who is in default, shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to three lakh rupees, or with both.

 

 

In case of default, a penalty of twenty thousand rupees shall be levied on the company and on every officer who is in default shall be liable to and in case of continuing failure, a further penalty shall be levied, of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of three lakh rupees.

 

 

 

OFFENCES TO BE DEALT WITH UNDER AN ALTERNATIVE FRAMEWORK OR MECHANISM

Pursuant to the recommendations of the Offences Committee in its reportThe 2013 Act was amended to change the nature of 16 non-compliances from criminal to civil. Therefore, Adjudicating Officers (“AOs”), now have to adjudicate these 16 non-compliances through the in-house adjudication (“IAM”) framework instead of Special Courts.

Positive Impact of decriminalisation:

  • 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.
  • The increased number of minor procedural and technical defaults being handled by IAM indicates that decriminalising the provisions has already started to dramatically reduce the number of prosecutions brought before the special courts.
  • Decriminalisation has expanded the IAM Framework’s scope, allowing the adjudicating officer to take action against willful defaulters, apply sanctions, and rectify the offence. The Adjudicating Officer must adhere to the restrictions outlined in the Act itself when determining the punishment, improving compliance.
  • 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.
  • One of the main sources of finance for the Indian corporate sector is Foreign Direct Investment (FDI). By providing civil liability for most offences, the Indian Companies Act has aligned itself to corporate law provisions prevailing in several other countries.   Additionally, by eliminating imprisonment and only imposing fines for violations of laws pertaining to foreign corporations, it encourages the foreign companies to set up business in India..
  • Decriminalisation allows the NCLT to use its time more effectively by avoiding minor offences that can be resolved by paying a fine.
  • The Act of 2013 required certain classes of companies to comply with CSR provisions, which to some extent raised social consciousness among corporates. However, the legal guidelines in this area were very strict, with a maximum sentence of three years in prison for failing to spend enough money on CSR initiatives as required by the Act. In light of this, it is a commendable effort to replace the punishment from three-year imprisonment with a more severe penalty..

Drawbacks to decriminalisation:

  • Although decriminalisation substantially lessens the workload for courts and NCLT, transferring authority to adjudicating authorities who are government employees may promote political influence and corruption.
  • The financial penalties imposed may not be a sufficient deterrence and may just be seen as a “cost of doing business”; therefore, the defaulting company may unfairly benefit from them. These penalties can favour businesses with high turnover and sizable cash reserves. 

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