Via the Companies (Amendment) Act, 2019, recommendations of the Committee to Review Offences under the Companies Act, 2013 (Committee) to re-categorise 16 out of 81 compoundable offences under the Companies Act, 2013 (Act) as civil liabilities were accepted. In a move to further relax the provisions, the Government has constituted a Company Law Committee to review aspects of criminalization in the remaining compoundable and non-compoundable offences under the Act.1
Report of the Committee and Decriminalization under the Companies (Amendment) Act, 2019
The Ministry of Corporate Affairs (MCA), by an order dated 13th July, 2018, constituted the Committee under the Chairmanship of Mr. Injeti Srinivas to review compoundable and non-compoundable offences under the Act and recommend any re-categorization of such offences. The Committee submitted its findings with recommendations to the MCA on 14th August, 2018.2 In summary, the recommendations, were:
- Re-categorizing 16 out of 81 compoundable offences under the Act to an in-house adjudication framework wherein defaults would be subject to a penalty levied by adjudicating officers.
- No re-categorization of non-compoundable offences under the Act.
- Instituting a transparent technology-driven in-house adjudication mechanism by minimising the physical interface, conducting proceedings on an online platform and publishing orders on the website.
- Necessitating a concomitant order for making good the default at the time of levying the penalty to further the ultimate aim of achieving better compliance.
- Declogging the National Company Law Tribunal (NCLT) by enhancing the jurisdiction of the Regional Director to compound offences up to the pecuniary limit of Rs 25,00,000.
The Government noted that the changes suggested by the Committee would fill critical gaps in the corporate governance framework under the Act while simultaneously promoting greater ease of doing business to law-abiding corporates. Accordingly, it was proposed to amend certain provisions of the Act. However, in view of the urgency, the Companies (Amendment) Ordinance, 2018 was promulgated on 2nd November, 2018. To replace this Ordinance, the Companies (Amendment) Bill, 2018 was introduced and passed in the Lok Sabha. However, the Bill could not be passed in the Rajya Sabha. In order to give continued effect to the Ordinance, the President promulgated the Companies (Amendment) Ordinance, 2019 and the Companies (Amendment) Second Ordinance, 2019 on 12th January, 2019 and 21st February, 2019, respectively. Finally, the Companies (Amendment) Act, 2019 was passed to replace the Companies (Amendment) Second Ordinance, 2019, with certain additional amendments.
Categories of Offences Under the Companies Act, 2013
On the basis of the nature of the penal provisions, offences under the Companies Act, 2013 can be categorised into the following categories:
1. Offences attracting only civil liabilities (penalties):
Section 454 of the Act provides that Central Government may appoint officers of the Central Government, not below the rank of Registrar, as adjudicating officers for adjudging penalties under the Act. Such adjudicating officers have been vested with the power to impose any penalty and direct the officer in default and the company to rectify such default.3
The Committee noted that only such offences that are procedural or technical in nature and where the public interest is not evident must be brought under this in-house adjudication mechanism of levying penalties.4 Accepting the Committee's recommendations, 16 such instances of compoundable offences have been re-categorized into this adjudication mechanism. Some of these defaults include issuance of shares at a discount and a failure to file annual returns. As a result, at present, there are 34 instances under the Act that are subject to civil liability by levy of a penalty.
2. Compoundable offences – Offences punishable with fine only or punishable with fine or imprisonment or both under the Act:
Section 441 of the Act provides the framework for compounding of offences that are not punishable with imprisonment only, or with imprisonment and also with fine. These offences are compoundable by either the NCLT, or the Regional Director, depending on the maximum amount of fine that can be imposed for the default. In order to reduce the burden on the NCLT, the jurisdiction of the Regional Director to compound offences has been increased up to the pecuniary limit of Rs 25,00,000 from Rs 5,00,000.5
The Committee identified certain categories of compoundable offences that must maintain their status quo and not be brought under the ambit of the in-house adjudication mechanism of levying penalties. For example – offences resulting from non-compliance of orders of statutory authorities, offences affecting rights and liabilities of members and offences pertaining to important disclosures vitiating the records of the company.
3. Non-compoundable offences – Offences punishable with only imprisonment or a fine and imprisonment:
These are offences that may involve an element of fraud. Section 447 of the Act defines and lays down the punishment for fraud. By the Companies (Amendment) Act, 2017 an offence of fraud below a specified financial threshold and not involving public interest was made compoundable. Further, several other penal provisions involving an element of fraud under the Act make a reference to section 447. In respect of such provisions, the Committee has clarified that the cross-cutting liability under section 447 remains irrespective of the provision under which an offence is committed and the primary liability it attracts.6 A core principle followed by the Committee was to ensure that for grave and serious offences, strong deterrence of the law must continue.
Plans to Further Withdraw Criminalization Under the Act
On September 18, 2019, the Government announced the constitution of a Company Law Committee to look at the re-categorization of the remaining provisions of compoundable and non-compoundable offences under the Act.7 This committee will work in two phases. In the first phase, the committee would study the provisions of compoundable offences to review whether a mechanism of compromise can be introduced for the same. In the second phase, the committee would cover the non-compoundable offences. For such offences, the Government may introduce a system of deferred prosecution or compromise settlement, provided public interest is not harmed.8
De-criminalization of CSR
While the Companies (Amendment) Act, 2019 de-criminalized 16 compoundable offences under the Act, corporate social responsibility (CSR) violations under the Act were made a criminal offence by insertion of sections 135(6) and 135(7). Section 135(6) requires the qualifying companies to transfer any unspent CSR amount to a specified fund and section 135(7) penalises the company and every officer in default with imprisonment or fine or both. This move received strong criticism from the corporates.
On August 24, 2019, addressing industry concerns and in line with the recommendations made by the High Level Committee on CSR chaired by Mr. Injeti Srinivas, the Finance Minister announced that CSR violations will be treated only as a civil liability and not as a criminal offence. The MCA would review the CSR provisions under the Act. In this regard, the High Level Committee on CSR observed that the CSR provisions were introduced as a means to partner with corporates to promote social development and any penal provisions are not in harmony with the spirit of CSR.9
Implications and Conclusion
Decriminalisation of compoundable offences that are technical or procedural in nature is inherently beneficial to all stakeholders involved. Imposition of penalties by the Adjudicating Officer do not require them to establish the element of mens rea, making the process of imposition of penalties faster than a criminal prosecution. This move also helps direct the NCLT's focus and resources only on defaults involving elements of public interest. At the same time, the company or officer in default involved is not made subject to a criminal proceeding for a technical or procedural lapse. Decriminalisation of such offences also promotes the ease of doing business for corporates and makes them more attractive to any potential investors.
The Company Law Committee must consider relaxing the provisions under the Act that do not directly affect the rights or liabilities of members or the public interest at large. For such provisions, an additional window to comply with the default along with imposition of a penalty can be considered. Only on failure to comply with the relevant provisions even in such an extended window, may criminal proceedings be initiated.
However, the provisions relating to non-compoundable offences and other provisions relating to fraud must not be diluted any further. It is imperative that an optimum balance be maintained between the goals of promoting greater ease of doing business and strengthening the corporate governance framework under the Act.
1 Govt. constitutes Company Law Committee to improve ease of doing business, The Economic Times, September 18, 2019; https://economictimes.indiatimes.com/news/economy/policy/govt-constitutes-company-law-committee-to-improve-ease-of-doing-business/articleshow/71188848.cms.
2 Report of the Committee to Review Offences under the Companies Act, 2013, Ministry of Corporate Affairs, August 2018.
3 Section 454(3), Companies Act, 2013.
4 Report of the Committee to Review Offences under the Companies Act, 2013, Ministry of Corporate Affairs, August 2018, page 15.
5 Companies (Amendment) Act, 2019.
6 Report of the Committee to Review Offences under the Companies Act, 2013, Ministry of Corporate Affairs, August 2018, page 4.
7 Supra, note 1.
8 Govt. moves to decriminalize non-serious offences under Companies Act, Business Today, August 19, 2019 https://www.businesstoday.in/current/economy-politics/corporate-affairs-ministry-moves-to-decriminalise-non-serious-offenses-under-companies-act/story/373609.html.
9 Report of the High Level Committee on Corporate Social Responsibility 2018, Ministry of Corporate Affairs, August 2019, Page 6.
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