India: Companies (Amendment) Ordinance, 2019

Last Updated: 12 February 2019
Article by Sawant Singh and Shraddha Desai

Companies Amendment Ordinance 2018 ("Ordinance 2018") issued on November 2, 2018 by the Ministry of Law and Justice brought about significant changes to 31 provisions of the Companies Act, 2013 ("Act"). While Ordinance 2018 got approval from Lok Sabha, it could not be taken up by the Rajya Sabha due to other exigent matters. In an attempt to keep alive, the amendments introduced by Ordinance 2018, which was due to expire on January 21, 2019; it was re-promulgated by another ordinance namely Companies Amendment Ordinance 2019 ("Ordinance 2019") on January 12, 2019 with effect from November 2, 2018. Ordinance 2019 is reflective of the Ministry of Corporate Affair's intention to bring about more transparency and enhance corporate governance.

Some of the principal amendments introduced by Ordinance 2019 are as follows:

Any application in relation to the either adopting a different financial year1 or changing the articles of a company for conversion from public to private company2 shall now be made to the "central government" as opposed to the tribunal earlier. However, any pending application for conversion with the tribunal as on the date of commencement of Ordinance 2019 shall be disposed of by the tribunal in accordance with the provisions applicable earlier.

Section 10A inserted by Ordinance 2019 also mandates that a declaration be made by the director of a company incorporated post the commencement of Ordinance 2019 within 180 days of its incorporation to the effect that all the subscribers to the memorandum have paid agreed value of the shares and the registered office of the company so incorporated, has been verified by filing requisite returns. The Ministry of Corporate affairs has released INC 20A3 for such declaration. The company shall not commence its business or exercise borrowing of any kind unless such declaration has been filed by the director of such company. Failure to comply with this section shall qualify as a ground for striking off the name of the company from the register of companies by the registrar. This is essentially done to ensure that companies having no business of their own, do not function and moreover refrain from engaging in borrowing of any kind before a physical verification of its registered office is conducted and a declaration in respect of the same is filed with the registrar.

By virtue of sub-section (9) of section 12, the registrar has also been granted the power to physically verify whether or not the company is carrying on business from its registered office. Rules setting out the manner in which the physical verification is to be conducted shall also be made. This is an attempt to curb the number of shell companies that are incorporated to facilitate money laundering.

Any charge created by the company shall be registered within 30 (thirty) days of its creation.4 Ordinance 2019 has substituted the first and second proviso to Section 77(1) of the Act, by virtue of which the timeline for registration of charges is broadly divided into those created before Ordinance 2019 and those created post Ordinance 2019. The timeline for registration of charges created post Ordinance 2019, has been reduced from 300 days to a maximum of 120 days (i.e. 60 days from creation of charge and further period of 60 days granted by way of application to the registrar and payment of prescribed advalorem fee). However, the savings provision with regard to charges created before Ordinance 2019 have certain ambiguity with respect to the timeline.

The timeline for registration of charges created before Ordinance 2019 is 300 days from the date of creation of such charge.5 While clause (a) of the second proviso intends to give a period of six months in addition to such 300 days, the manner in which it is worded would lead to unintended consequences whereby the time limit actually being extended will not be available. This is so because the additional period of six months is linked to the date of ordinance commencement as opposed to the date of completion of 300 days.

Sub-section (5) of section 92 has been substituted to include a further penalty of Rs. 100 for each day during which failure to submit annual return continues in addition to the initial penalty of Rs. 50,000 payable by the company and every officer of the company in default. While the maximum penalty limit of Rs. 5,00,000 has been retained, the substituted sub-section does away with imprisonment of 6 months for the company's officers in default. Ordinance 2019 has tried to balance non-compliance by increasing the penalty for every day of continued failure and eliminating the earlier provision which included imprisonment of officers in default for such corporate non-compliance.

Ordinance 2019 has also enhanced the penalty for various instance of corporate non-compliance by the companies in an attempt to bring about more vigilance and accountability. Keeping in view the fact that the aforesaid amendments have been brought by Ordinance 2019 which by nature would remain valid only for some time, the parliament shall have to consider approving it as a priority. If Ordinance 2019 fails to be approved by the parliament, it may not be legislatively sound to re-promulgate the same. The Supreme court in the case of Krishna Kumar Singh and Another Vs State of Bihar and Others6 held that:

"Legislation by ordinance is not an ordinary source of law making. Repeated re-promulgation of an ordinance by an executive is over-stepping constitutional boundaries and the court can strike down such ordinance."

Ordinance 2019 is a positive development as it does away with the imprisonment of officers in default for corporate non-compliance in non-key areas and allows the tribunal to address more serious offenses. It can also be seen as a step forward in tackling the menace of shell companies.

Footnotes

1 Section 2(41) of the Act

2 Section 14 of the Act

3 Available on MCA21 Company Forms Download page

4 Section 77 of the Act

5 Clause (a) of first proviso to Section 77(1)

6 MANU/SC/0009/2017

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