India: Offences, Prosecution And Penalties Under The Companies Bill 2008

1. Introduction:

The Statement of Objects & Reasons appended to the Bill, inter alia, declares that:

1. Maximum and minimum quantum of penalties for each offence has been laid down with a suitable deterrence for repeated defaults;
2. Company is identified as a separate entity for imposition of penalties apart from the officers in default;
3. In case of fraudulent activities, provision for recovery and disgorgement have been provided;
4. Levy of additional fee in a non-discretionary manner for procedural non compliance, such as late filing of statutory documents will be provided through Rules to be prescribed. Defaults of procedural nature will be penalised by levy of monetary penalties by the adjudicating officers not below the level of Registrar. The appeal against the orders of adjudicating officers will lie with suitably designated authorities;
5. Special courts will deal with offences under the Bill.

The above declaration sums up the approach of the Central Govt in dealing with the offences under the Bill and the authorities who will be handling these offences. This is refreshingly a drastic departure from the existing practice under the company law. This is also a recognition of the fact that the existing system is not all that effective and it needs to be revamped in the context of changing economic scenario and the business environment in our country.

2. A few Highlights:

Corporate Offences are broadly classified as civil and criminal offences. The offences committed by the directors and officers of a corporate body, which is criminal in nature, also fastens on the corporate body, being an independent legal entity, in the same manner and to the same extent as the perpetrators of the offence. This brings us into sharp focus the fundamental legal relationship between the corporate body and those making use of corporate name for doing business. The offences under the Bill are broadly classified as falling under the following categories:

1. The concept of "Officer who is in Default" presently dealt with in Section 5 of the Companies Act, 1956 (the Act) has been shifted to the definition clause" in the Bill with enlargement of the scope of application. More of this provision has been discussed subsequently. A quick reckoning reveals that the words "Officer who is in Default" appears in about 32 Clauses in the Bill. Some of the provisions which fall under this category are (i) failure to comply with the direction of the Central Govt to rectify name of the company (Clause 15), (ii) allotment of securities by a company (clause 34(6), (iii) listing of securities, failure thereof (Clause 35) (iv) variation of shareholder‟s rights (Clause 42)(v) application of premiums received on issue of shares (Clause 46) (vi) transfer and transmission of shares (Clause 50), (vii) rectification of register of members (Clause 53), notice to be given to the Registrar regarding alteration of capital (Clause 57), (viii) restriction on purchase of its own shares and giving of loans by it for purchase of its shares subject to certain exemptions (Clause 60), (ix) failure to make repayment of deposits(Clause 67). In regard to these matters the whole time director, other key managerial personnel which includes the Managing Director, the Chief Executive Officer or the Manager, the Company Secretary, the Chief Financial Officer and a few other categories of persons are included. These categories of personnel are liable for prosecution by virtue of the positions they hold in a company though none of them may not be privy to the offence;
2. There are a few other provisions in the Bill which are outside the purview of what is stated above, as the consequences of default falls on the person(s) who is responsible for the offence. They are (i) Clause 68-failure to comply with the orders of the CLB granting extension of time for repayment of deposits, (ii) (Clause 31)–fradulently inducing persons to invest money, (iii) (Clause 117) failure to lay balance sheet& profit & loss account at the AGM (iv) Clause 116- failure to keep proper books of accounts. In regard to these and other matters, the key managerial personnel or any other person charged by the Board with the duty of complying with the legal requirement are liable for punishment.
3. There are a few other clauses in the Bill (illustrative in nature) where the offences are attributed to the company and the company are made fully responsible for the consequences of default and liable to pay fine. Such provisions are contained in Clause 10- failure to commence business, Clause 14-failure to note alterations in memorandum and articles of the company, Clause 16- failure to send, on request, copies of memorandum & articles to the member, Clause 28-failure to issue application form for securities, Clause 161-prohibition and restriction against political contribution, Clause 164- grant of loan and investment by company, Clause 168-Contract of employment with managing or whole-time director, Clause 171-Contract by One person company, Clause 178-appointment of key managerial personnel, etc.

3. The proposed changes:

The categorisation of offences contained in the Act is too archaic and unscientific and it calls for a new approach. There is heavy concentration of offences in the Act which are required to be decided by the Criminal Courts irrespective of the gravity of the offence. Fresh thinking appears to have gone into the restructuring mechanism for prosecution of offences under the Bill.

The provisions of the Bill in respect of the offences, defaults and non-compliance of the company law has been totally recast with enhanced monetary penalties and structural changes have been introduced to bring about speedy trail of offences. These changes indicate the intention of the government that the company law should be enforced in all its strictness so that a suitable environment is created for proper and adequate observance of law. Such observance of law protects the interests of all stakeholders in a company.

Enforcement of penal provision is proposed to be enforced in the following manners:

1. "Officer who is in Default"- There are many clauses which refer to the Officer who is in Default‟ as the officers who are statutorily recognized as responsible for compliance of law and for the contravention and non-compliance of which they are punishable, whether they are privy to the offence or not. Definition of the 'Officer who is in Default' has been recast in the bill. There is also an enlargement of the definition so as to include:-

2. That the Company is also liable for punishment, in addition to the Officer in Default;
3. Heavy monetary penalty ranges from Rs. 5,000 to Rs. 50,000 in many cases and Rs. One lakh to Rs. 10 lakhs in some other cases. The quantum of penalty ranging from one to ten crores (Clause 67(3), have been proposed. In some other cases the per day fine of upto Rs. 1,000 to Rs. 15,000 has been envisaged in the case of continuing defaults.
4. Punishment by way of imprisonment has been liberally provided in a number of Clauses, in addition to fine on the company and the Officers who are in Default. In a quick reckoning, punishment by way of imprisonment ranging from six months to three/five years has been provided in about 24 Clauses(excluding winding up provision).
5. The reference to "Officer who is in Default" appears in about 32 Clauses, excluding winding up provision.
6. Directors and key managerial personnel‟s personal liability is envisaged in Clauses like 162 (4) & (5),ranging from Rs. 50,000 to Rs. 1 lakh. 173 (2) provides for insider trading of securities and the penalty ranges from Rs. 5 lakhs to Rs.1 crore, etc.

4. Enforcement Mechanism for Trial of Offences:

1. Adjudication of procedural offences:

   The innovative provision in the Bill relates to adjudication of procedural non-compliance (clause 413). The central government will publish in the official gazette the status of adjudication officers, not below the rank of Registrar who will be empowered to impose penalty on the company and the Officer who is in Default, following the principles of natural justice. The aggrieved party may appeal against the order of the adjudicating officer, to the Regional Director within 60 days. As both are officers of the department, there shall be an appeal to National Company Law Tribunal (NCLT) which is a quasi judicial body.

2. Constitution of Special Courts:

   Another novel feature envisioned in the Bill relates to constitution of Special Courts for speedy trail of offences (clauses 396 & 397). It will consist of a single judge appointed by the Central Government, with the concurrence of the Chief justice of High Court within whose jurisdiction the judge will be working. The judge of the Special Court should, immediately before such appointment, be holding the office of a Session‟s Judge or an Additional Session‟s Judge, who alone can impose punishment by way of imprisonment, provisions of the Bill that falls within the jurisdiction of Special Courts are clause 4(ii)- failure to comply with the incorporation of companies with charitable purpose, clause 7(ii)- furnishing false or incorrect particulars or suppression of facts in relation to incorporation of companies, clause 23(7)-matters to be stated in the prospectus and contravention thereof. . All these clauses prescribe monetary fine on the company and the Officer in Default and imprisonment for varying periods. Clause 397 states that all offences under this Act shall be liable to be tried only by the Special Court established for the area in which the registered office of the company in relation to which the office is committed, is situate, under section 167(2) or (2A) of the Criminal Procedure Code, 1973.

5. Compounding of offences:

The Act by Section 621A provides for compounding of offences. This is a shortcut to avoid or cut short to litigation as it is not only time consuming but also unduly divert the attention of the companies. Compounding of offence is subject to certain regulations. Similar facility is proposed to be continued in the Bill by clause 402.Only those offences, not being an offence punishable with imprisonment only or with imprisonment and also with fine, either before or after the institution of any prosecution, may be compounded, with the permission of the Court having jurisdiction to try the offence, subject to the regulations to be prescribed by the rules.

Compounding is permitted on payment of additional fine which should not exceed the quantum of fine prescribed by law in respect of any particular offence. On acceptance of compounding proposal, no prosecution will be launched .and if the prosecution case is already before the Court, the Courts‟ permission is requested by the prosecuting authority for withdrawal of the case. However, an offence is not compoundable if it is punishable with imprisonment only or with imprisonment and also with fine.

6. Conclusion:

1. Minor non-compliances like failure to file every resolution or agreement (Clause 106), failure to furnish information about DIN (Clause 138) etc are proposed to be brought within the purview of the Special Court, involving imprisonment. Such minor offences should be kept out of the Special Court jurisdiction and brought within the purview of adjudication proceedings.
2. There is an urgent need to review the nature of offences which should go to Special Court. Only serious offences should go to Special Court, as appearance before the Court involves a lot of time and expense and it diverts the attention of the company concerned from their business.
3. There is considerable hike in the monetary penalties imposable on the Company and the Officers in Default. These increases are on top of the increases which have already been made by the last two amendments to the Act. Imposition of heavy and disproportionate fine (disproportionate to the nature of offence) will only impoverish the company and it will drain out the productive resources of the company. These heavy penalties will in turn affect shareholders value. The better way to tackle such serious offences is to deal with the promoters of such companies who are behind the show. They control the company and at their behest other directors including independent directors join the board.
4. The definition of the Officer in Default‟ has been unduly enlarged. Those who are service providers like Share Transfer Agents, Bankers, Merchant Bankers, have been included. The definition clause is a re-enactment of Section 5 of the Act and service providers cannot fit into the scheme. Such a definition clause only defines the concept and it cannot be a charging section.
5. Enlarged definition of 'Officer in Default' will scare the talented people from joining the corporate boards, particularly those directors who are in receipt of board proceeding or participate in such meetings. At a time when the role of independent directors has come in for a critical review in the context of Satyam's revelations, a provision such as above will not make the present position any better. Why ordinary directors are held responsible, when the 'Key Managerial Personnel' as defined in the Bill are held responsible by virtue of the positions they hold in a company?

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