The President of India has, on 2nd November 2018, promulgated Companies (Amendment) Ordinance, 2018 ("Ordinance") to amend certain provisions of the Companies Act, 2013 ("Companies Act"). The Ordinance, which came into force on the same date, has made over thirty amendments to the Companies Act.
The amendments introduce changes to improve compliance and corporate governance, and have modified penalties leviable for various offences. One of the objectives is to reduce the burden of routine matters before national company law tribunals established under the Companies Act, and strengthen enforcement against serious offences.
The Ordinance puts into effect several recommendations made in the "Report of the Committee to Review Offences under the Companies Act, 2013", published in August 2018 by the Ministry of Corporate Affairs, Government of India. The Report had made an assessment of the existing regulatory framework under the Companies Act, and proposed amendments to improve corporate compliance.
This article highlights some of the key amendments made to the Companies Act with effect from 2nd November 2018:
1. Commencement of business: compliance requirement restored
Companies with share capital that are incorporated after the Ordinance came into effect, i.e. after 2nd November 2018, cannot commence any business or exercise their borrowing powers unless: (i) a declaration is filed by a director within 180 days of incorporation that all subscribers to the memorandum have paid the value of shares as agreed by them, and (ii) the company files a verification of the registered office as required under S.12(2), Companies Act.
This provision, which has been inserted by a new S.10A to the Companies Act, restores the requirement for commencement of business under the erstwhile S.11 of the Companies Act, that had been omitted by the Companies (Amendment) Act, 2015.
2. Additional grounds for removal of company from register
As noted above, the Ordinance has amended the Companies Act to prescribe certain compliances before a company can commence business. It has also empowered the Registrar of Companies to undertake physical verification of the registered office of a company if he has reasonable cause to believe the company is not carrying on any business.
In the event these conditions are not fulfilled, the Companies Act has been amended to empower the Registrar to remove the name of the company from the register of companies, after sending notice to the company and its directors.
S.248 (power of registrar to remove name of company from register of companies), Companies Act, which prescribes the grounds on which the Registrar can take steps to remove the company from the register, has been modified to include the following grounds for removal: (a) If the subscribers to the memorandum have not paid the subscription they had undertaken to pay at the time of incorporation and a declaration in this regard has not been filed within one hundred and eighty (180) days; or (b) If the company is not carrying on any business or operations, as revealed after physical verification of the registered office of the company.
These provisions will assist in weeding out of shell companies.
3. Disqualification from directorship
A person will not be eligible to be appointed as a director of a company if he holds directorships beyond the permissible limit under S.165(1), Companies Act. This change has been effected vide an amendment to S.164(1) (disqualification for appointment of director), Companies Act. This is expected to improve corporate governance.
4. De-clogging national company law tribunals
The Ordinance has made several amendments intended to reduce the burden of routine matters before national company law tribunals (NCLT):
- S.441(1)(b) (compounding of certain offences), Companies Act has been amended to increase the pecuniary jurisdiction of the Regional Director, such that he is now empowered to compound offences that are punishable with fine of up to Rs. 25,00,000/- (Rupees Twenty Five Lakh), as against the earlier limit of Rs. 5,00,000/- (Rupees Five Lakh).
- S.2(41) (definition of "financial year"), Companies Act has been amended to vest the Central Government with the power to approve the alteration in the financial year of a company, upon an application being made in prescribed form. Previously, change in financial year could be approved only by the NCLT.
- Similarly, S.14(1) (alteration of articles), Companies Act has also been amended, to vest the Central Government with the power to approve alteration of articles of association for conversion of public company into a private company. Previously, the NCLT had to grant any such approval.
5. Time period for registration of charges
The Companies Act mandates that particulars of charges created by a company be registered with the Registrar of Companies in prescribed format, within thirty days of creation of such charge. If the company could not register the charge within this period, it was given an additional time period of three hundred (300) days to make an application to the Registrar for the same.
The Ordinance has amended S.77 (duty to register charges etc.) of the Companies Act to provide that for any charge created by a company after the Ordinance came into effect, i.e. after 2nd November 2018, if the company fails to register the details within thirty (30) days of charge creation, then it will have only sixty (60) more days to apply to the Registrar for registering the charge upon payment of additional fee.
If the registration of charge is not undertaken during this extended period either, the Registrar may allow it on an application by the company within a further period of only sixty (60) days.
6. Adjudicating officers empowered to impose penalties and issue directions for rectification
The Ordinance amends S.454 (adjudication of penalties), Companies Act, to empower the adjudicating officers appointed by the Central Government to not only impose penalties for default on the company/ its officer in default/ any other person, but also issue directions for rectification of the default. This is expected to ensure better compliance.
7. Changes to penalties
Some examples of change in penalties prescribed under the Companies Act pursuant to the Ordinance, are as follows:
- Double penalty for repeat
A new S. 454A (penalty for repeated default) has been incorporated in the Companies Act, which provides for penalty in case of repeat default. The penalty for second or subsequent default by a company, its officer or any other person, committed within three years from order imposing penalty for first default, is an amount equal to twice the amount of penalty provided for such default under the Companies Act.
- Only penalty instead of
fine or imprisonment:
The Ordinance has amended S.92(5) (failure to file annual returns), S.117(2) (failure to file prescribed resolutions or agreement) and S.137(3) of the Companies Act (failure to file financial statements) to provide for a penalty in the event of default in compliance, instead of levy of fine and/or imprisonment prescribed earlier.
With respect to small companies and one person companies, consequent amendment has been made to S.446B, Companies Act, to provide that penalty for small companies and one person companies will be half of that applicable to normal companies for breach of S.92(5), S.117(2) or S.137(3).
- Fixed penalty prescribed
instead of providing range
While prescribing the fines payable for different offences, the Companies Act in various sections specifies the range of fine that may be levied. The Ordinance has amended some these provisions to provide for fixed penalty that may be imposed.
For example, S.165(6) has been amended to provide that if a person accepts directorship in contravention of limit prescribed under S.165(1), he shall be punishable with penalty of Rs. 5000/- for each day after the first during which contravention continues, while earlier fine of not less than Rs. 5000/- but which may extend to Rs. 25000/- per day was prescribed.
- Reduction in
S.197, Companies Act prescribes maximum managerial remuneration, and managerial remuneration in case of absence or inadequacy of profits, and in case of breach a person could be fined between Rs. 1 to 5 lakhs. The Ordinance has amended S.197(15) to limit the penalty for contravention of S.197 to Rs. 1 lakh in case of a person, and Rs. 5 lakhs in case of a company contravening.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.