India: Highlights Of Companies (Amendment) Ordinance, 2018

Last Updated: 20 December 2018
Article by Anadi Saxena

Introduction

The much-awaited amendment to the Companies Act was recently introduced by means of an ordinance. The twin objective of this landmark amendment is promoting ease of doing business and ensuring better corporate compliance. Under this ordinance, 31 amendments are made to the Companies Act. This article will discuss the major changes introduced and expected impacts under this Ordinance. The amendments can be classified into four major heads:

  • Re-categorizing of Compoundable Offences
  • Ensuring compliances of the defaults and prescribing stiffer penalties in case of repeated defaults
  • De-clogging of the NCLT
  • Some other provisions related to corporate governance

Re-categorizing of Compoundable Offences

In the past, many committees from time to time, have suggested creation of a civil liability framework under the Companies Act for offences which are procedural or technical in nature. The committee on Companies Act, 2013, made an effort to analyze the nature of all compoundable defaults under the Companies Act. The Committee, in the process, realized that it is not practically possible to strictly define as to what constitutes a technical or procedural lapse. After a detailed analysis all the compoundable offences were classified into eight categories.1

  1. Those resulting from non-compliance of the order/ direction of the Central Government/NCLT/ Regional Director (hereinafter referred to as "RD") or Registrar of Companies (hereinafter referred to as "RoC");
  2. Those resulting from default in respect of maintenance of certain records in the registered office of the company;
  3. Those resulting from defaults on account of nondisclosures of interest of persons to the company, which vitiates the records of the company;
  4. Those resulting from defaults related to certain corporate governance norms;
  5. Those resulting from technical defaults relating to intimation of certain information by filing forms with the RoC or in sending of notices to the stakeholders;
  6. Those resulting from defaults involving substantial violation which may affect the going concern nature of the company or are contrary to larger public interest or otherwise involve serious implications in relation to stakeholders;
  7. Those resulting from default related to liquidation proceedings;
  8. Those resulting from defaults not specifically punishable under any provision, but made punishable through an omnibus clause.

The committee, after due consideration of the offences covered under these categories, concluded that out of the eight categories only the offences covered under category IV and category V were to be recommended for re-categorization. All the other offences were not subjected to amendment as they were serious in nature and if re-categorized (from compoundable to non-compoundable) it may affect the interest of the public/ stake holders at large. Moreover, the committee was of the view that almost all the offences covered under the 4th and the 5th category were merely technical in nature and should to be brought under the regime of in adjudication.2

Under this amendment 16 offences under these two categories were re-categorized. This was done by replacing the word "fine" or "imprisonment" under these sections with "penalty".

In common parlance the words "fine" and "penalty" are used interchangeably. However, under the Company's Law the word "Fine" is the amount of money that a court can order to pay for an offence after successful prosecution in a matter (the procedure for imposition of fine is covered under section 441 of the Companies Act). Whereas, "Penalties" do not require court proceedings and are imposed on failing to comply with a provision of an Act (the procedure for adjudication of penalty is covered under section 454 of the Companies Act 2013). Therefore, by replacing the word "fine" with the word "penalty" the nature of offence has changed.

Ensuring rectification of the defaults and prescribing stiffer penalties in case of repeated defaults

One of the major objectives of the Companies (Amendment) Ordinance, 2018, is to amend the sections in such a manner that the authorities not only levy penalties for defaults but ensure rectification of the defaults.

Under the latest amendment ordinance, section 454(3) of the act was amended. The amendment gives the adjudicating officer the power to give direction to the defaulter to rectify his default.

Apart from amending certain sections, a new sub section was also added. To curb repeat of the same defaults, a new provision, Section 454A has been introduced. Under this section where a penalty for a default has been imposed on a person and the person commits the same default within a period of three years from the date of order imposing such penalty (RD or adjudicating officer), such person will be liable for second and every subsequent defaults for an amount equal to twice the amount provided for such default under relevant provisions of the Companies Act. Now apart from only imposing penalty the adjudicating officer will also direct the defaulter to make good the default. Therefore, now the intention behind the section is not only to levy penalty but also to ensure compliance.

De-clogging of the NCLT

One of the main objectives of the amendment ordinance was to reduce the pressure on special courts and NCLT. Through re-categorizing of compoundable offences, burden on the NCLT has been reduced. Additionally, certain specific provisions have been inserted to further reduce the pressure on NCLT.

  • Section 441 dealing with compounding of offences has been amended.

    • Through amendment the pecuniary jurisdiction of the Regional Director has been increased from 5,00000/- to 25,00000/-. Through this amendment more cases will be adjudicated by the regional director instead of the NCLT.
  • Giving the power to the Central Government

    • The Central Government was vested with the power to approve the alternation in the financial year of a company under section 2(41) Under this section an Indian Company situated outside India, is allowed to change the financial year as per the approval of the NCLT. Through this ordinance power of the tribunal has been transferred to the Central Government. After the ordinance, financial year can be changed with the approval of the Central Government.
    • The Central Government was vested with the power to approve cases of conversion of public companies into private companies. Under section 14(1) a public company can be converted into private company. Before the amendment the power to amend was vested with the NCLT and now the power has been transferred to the Central Government.

Through this amendment it is expected that the pressure on the NCLT will be reduced by 60%. This step will make speedy redressal possible.

Expected Impact of the Amendment

  • This landmark amendment is expected to reduce the pressure on NCLT, as after this amendment NCLT will not adjudicate in the matters involving offences that have been re-categorized as non-compoundable. The government is expecting that more than 60% cases in different courts will be dropped as a result of this amendment.
  • The Government is expecting that this amendment is going to promote ease of doing business as entrepreneurs will no longer have to approach courts for minor violations under the Companies Act.
  • This amendment will make speedy redressal possible under Companies Act.

Footnotes

1. The Report of the Committee to review offences under Companies Act, 2013 http://www.mca.gov.in/Ministry/pdf/ReportCommittee_28082018.pdf

2. The Report of the Committee to review offences under Companies Act, 2013 http://www.mca.gov.in/Ministry/pdf/ReportCommittee_28082018.pdf

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