The Ministry of Corporate Affairs (MCA) had constituted the Company Law Committee (CLC) on September 18th, 2019, to make recommendations regarding the recategorization of certain offences to facilitate the ease of doing business. The CLC presented its report (“Report”) detailing said recommendations on November 14th, 2019, which was recently notified by the MCA. The MCA has sought comments by stakeholders on these recommendations.
The CLC has followed a principle-based approach to identify serious offences to be maintained as is, and those that could be decriminalized, to lighten the burden of courts while ensuring that the functioning of corporates in the country is simplified. The attempt has been to de-criminalize compoundable offences of minor, technical or procedural nature to ensure that functioning of ‘law-abiding corporates’ is eased. As per Section 441 of the Companies Act, 2013 (“Act”), compoundable offences are those that are punishable with fine only, with fine or imprisonment, or both. In whole, the Report has proposed amendments in 46 penal offences.
Background
By passing the Companies (Amendment) Act, 2019 (“2019 Amendment”), steps to decriminalize 16 offences under the Act have already been taken in the past. As per the 2019 Amendment, Adjudicating Officers (AOs) have been empowered under Section 454 of the Act to impose penalties upon defaulting companies, their officers or persons in default, for specific offences (“In-house Adjudication Mechanism” or “IAM”).The CLC took the view that the In-house Adjudication Mechanism would be a cost-effective and efficient process for dealing with corporate non-compliance while reducing the burden of special courts set up under the Act. Relying on the IAM, the CLC found it suitable to scrutinize other compoundable offences that had not been decriminalized by the 2019 Amendment.
Principles relied upon by the CLC
In analyzing a list of compoundable offences prepared by the CLC, it adopted the following principles:
a. Principle 1: Offences that relate to minor compliance issues, involving predominantly objective determinations, be dealt by the IAM, instead of being treated as criminal offences;
b. Principle 2: Offences that appeared to be more appropriate to be dealt with under other laws, be omitted from the 2013 Act;
c. Principle 3: Offences that did not seem fit for either of the above 2 principles, be dealt with by alternative methods of imposing sanctions.
d. Principle 4: For offences based on subjective determinations but not being very serious violations, punishment be limited to only fine.
e. Principle 5: For serious offences that may involve elements of substantive non-compliances requiring detailed adjudication, no change be made.
In-house Adjudication Mechanism
The IAM is a mechanism for the levy of civil penalties through proceedings to be conducted by AOs appointed by the Central Government. The orders of the AO may include penalties for default or non-compliance as well as directions to the company or its officers to rectify the default. These orders are appealable before the Regional Director having territorial jurisdiction and appointed under the Act.
The CLC observed that offences involving objective determinations, lacking exercise of discretion, or being easily determinable through the MCA21 system and those that did not affect substantial public interest, should be treated as civil wrongs instead of criminal offences. Accordingly, it proposed that appropriate amendments be made to the Act, to replace the current punishments with suitable amounts of penalty.
Key Recommendations
The CLC took note that the offences under the Act had been categorized into 8 (eight) categories by the Offences Committee that drafted the Act.
a. Non-compliance of orders passed by the authorities under the Act, such as the National Company Law Tribunal (NCLT), Regional Director (RD), Registrar of Companies (“RoC”)(“Category A Offences”);
b. Defaults in respect of maintenance of certain records, in the registered office of the company (“Category B Offences”);
c. Defaults on account of non-disclosure of interest of persons to the company, which vitiates the records of the company (“Category C Offences”);
d. Defaults related to certain corporate governance norms (“Category D Offences”);
e. Technical defaults relating to intimation of certain information by filing forms with the RoC or in sending notices to stakeholders (“Category E Offences”);
f. Substantial violations that could affect the going concern value of the company or were contrary to public interest or could involve serious implications for stakeholders (“Category F Offences”);
g. Defaults involved in liquidation proceedings (“Category G Offences”); and
h. Defaults not specifically punishable under any provision but made punishable through an omnibus clause (“Category H Offences”).
Listing compoundable offences under Annexure II of the Report, the CLC proposed that offences under 23 provisions be dealt under the IAM framework, 7 provisions be omitted, offences under 11 provisions be limited to fine only, and 5 of the provisions be dealt with under an alternate mechanism to be proposed by the CLC.
Offences to be dealt by the IAM framework
A list of offences to be dealt with under the IAM framework has been prepared by the CLC and attached as Annexure III to the Report.
Category A Offences
With the exception of offences specifically stated below, the CLC did not consider the Category A Offences to be the right fit for the IAM framework, as cases of non-compliance with orders of the NCLT could be resolved through the NCLT’s contempt powers, while in other cases, a precedent of disobeying with orders being passed by an authority, demonstrated that the defaulters would most likely not comply with the order of an AO under this mechanism.
Where an application is made to the NCLT under Section 230 of the Act for sanctioning a compromise or arrangement scheme, Section 232 lays down the powers of the NCLT for which it may pass orders and obligations that may be imposed upon the company, its officers etc. It was observed that no such sanctions were imposed for non-compliance with similar obligations under the Companies Act, 1956, though the failure to furnish a certified copy of the NCLT order to the RoC was criminalized. The CLC, not finding the need to have criminal sanctions in such a situation, proposed that the provision be amended to merely retain a civil penalty to be imposed on such failure to furnish the certified copy within 30 days of its passing.
Category B Offences
This category consists of 4 offences relating to maintenance of records of the company at its registered office. The CLC observed that these provisions did not involve subjective determinations and constituted violations of clearly laid down legal obligations. Given that these offences did not require subjective determinations, criminal offences under Section 56(6) (Transfer and transmission of securities), Section 88(5) (Register of Members etc.) and Section 90(11) (Register of significant beneficial owners in a company) were proposed to be amended to reflect only civil penalties to be administered under the IAM framework.
On the other hand, the offence of failure of companies to maintain books of accounts as per the provisions of Section 128 of the Act could entail a subject evaluation given that it required that the accounts represent a “true and fair view of the state of affairs of the company”. Hence, the CLC concluded that this offence would not be appropriate for the IAM framework, and be retained as is.
Category C Offences
Observing that obligations imposed under this category were straightforward and could be verified through company records, the CLC stated that these offences were appropriate for the IAM system. Section 90(10) subjects a significant beneficial owner (“SBO”) who fails to make a declaration as per sub-section (1) to a fine. However, under sub-section (7) the company may approach the NCLT to impose restrictions on the assets of a SBO defaulting on these disclosure obligations. Finding this to be sufficient sanction upon the SBO, the CLC proposed that the offence under sub-section (10) be made a civil penalty (and not a criminal offence) to be administered by the IAM framework.
Section 89 lays down obligations on a registered owner and a beneficial owner of shares of a company to make disclosures as per the prescribed form. If said person fails to make these disclosures, she is disqualified from enforcing any of her rights in relation to such shares. Similar to the above justification, the CLC proposed that this disqualification be replaced with a civil penalty to be adjudicated upon by an AO.
Section 184 mandates the disclosure of interest by a director in specific cases mentioned there under and failure to comply with the same would result in automatic vacation of the director’s office (Section 167). Finding that this would constitute sufficient sanction upon the director, the CLC proposed the removal of the power to impose a sentence for imprisonment and only the civil penalty be retained.
Similar proposals have been made by the CLC to shift offences where failure to disclose information is brought under the IAM framework to promote quick and speedy disposal of cases.
Category D and E Offences
All the offences under these categories have been moved to the IAM framework by the 2019 Amendment, with the exception of Section86 (1) (Punishment for contravention) and Section 89(7), which have been proposed to be included under the IAM framework. Section 86 is an omnibus provision allowing the imposition of penalties for contravention of offences committed by companies and/or their officers for violation of provisions under Chapter VI (Registration of Charges) of the Act.
Category F Offences
Substantial violations that may affect the going concern value of the company or are contrary to public interest or otherwise involve serious implications for the stakeholders, fall under this category. Most offences hereunder are serious in nature, but some of the offences are based on objectively determinable factors. These have been proposed to be moved to the IAM framework. For instance, some of these provisions are Section 92(6) and Section 134(8). Section 92(6) provides for punishment in case of wrongful certification of annual return by a company secretary in practice. Section 134(8) relates to default regarding substantial compliances in respect of approval of financial statements, attachment of Board’s report, statements to be provided in the Board’s report, etc. As the format for these compliances are clearly laid down in the 2013 Act i.e., are objectively determinable. Therefore in the interest of swift adjudication, it was proposed that these be amended to civil penalties to be dealt with under the IAM framework.
The CLC also observed that criminal punishments for some of the offences under this category were too onerous and proposed changes to them. For instance, Section 124 of the Act requires the transfer of dividends and shares to the Investor Education and Protection Fund Authority (“IEPFA”) if they remain unclaimed and unpaid for more than 7 years. The obligation hereunder entails specific disclosures to be made by the company and its non-compliance, and in the opinion of the CLC, this should not warrant the imposition of a sentence for imprisonment. Such lapses may be verified by looking into the company’s records and a civil penalty may be imposed for its non-compliance. The CLC also appreciated the recommendations of the High Level Committee on Corporate Social Responsibility in its 2018 Report wherein they suggested providing penal sanction for non-compliance with Section 135, but not imprisonment.
For obligations imposed upon Registered Valuers under Section 247 (Valuation by Registered Valuers) of the Act, if failure to fulfill the obligations as per the provisions implies intent to defraud, circumstances would justify warranting a criminal penalty.
Category G Offences
In such offences, adjudication would entail an analysis within the framework of the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”), also, hence the same would not be appropriate for adjudication under the IAM framework.
Category H offences
These include defaults not specifically punishable under any provision, but made punishable through an omnibus clause. The CLC concluded that some of the lapses, such as those under Section 172 (Punishment for offences relating to appointment and qualifications of directors) and Section 450 were not of a serious nature and could be moved to the IAM. Section 450 lays down the punishment where no specific penalty or punishment is provided for contravention of any provision of the Act or the rules made thereunder. Regarding Section 469(3), the CLC concluded that the enabling power of the Central Government to prescribe rules and appropriate punishments for violation of such rules shouldn’t be amended.
Offences to be omitted
The CLC discussed that certain offences under the Act may be omitted as they may be dealt with under other laws. For instance, offences related to non-compliance with orders of the NCLT passed in specific instances may be dealt with through the contempt jurisdiction of the NCLT, instead of being treated as separate offences under the Act. Section 425 of the Act lays down the powers of NCLT in relation to contempt. It also highlighted that in case any vacuum is created through the deletion of these offences, the residuary powers inherent in authorities under the Act under Section 450 (Appointment and powers of provisional liquidator) may be utilized.
Section 71(11) penalizes officers in charge of companies who fail to comply with an order passed by the NCLT in relation to the failure of the company to redeem debentures or pay interest on them. The CLC added that affected debenture holders (or debenture trustee) may also consider utilizing other laws, such as Section 7 (Incorporation of a company) of the IBC for the initiation of corporate insolvency resolution process by a financial creditor, in relation to default in payment. If the debentures were issued with an apparent intent to defraud, separate criminal proceedings could be initiated against the company and its officers in default. Other offences that the CLC has proposed to be omitted have been discussed in detail in Section 3 of the Report.
Offences to be dealt with under alternate mechanisms
To simplify the processes laid down under the Act, in some provisions, the CLC has provided for an alternative mechanism to replace the existing one provided under the Act.
For instance, Section 16 (Rectification of name of company) of the Act lays down provisions for the rectification of name by a company where it is found to be too similar to the name of a company already in existence, or a registered trademark. If the company fails to comply with a direction of the RD passed hereunder to change its name, a penalty may be imposed on it under sub-section (3). However, noting that in practice there have not been many such instances, the CLC has proposed that the penalty provision be removed and the default not be made a criminal or civil offence. Instead, an auto-generated neutral name should be allotted to the company if it fails to comply with such direction for more than a period of 3 months, which the company will be entitled to change by following due process.
Section 284(2) (Promoters, Directors, etc. to cooperate with Company Liquidator) penalizes noncooperation of promoters, directors, etc. with the liquidator of a company being wound up. The CLC proposed that instead of criminal liability, a mechanism, whereby the Company Liquidator may apply to the NCLT for directing cooperation, may be provided for in case of non-cooperation, in line with Section 19 (Personnel to extend interim cooperation to interim resolution professional) of the IBC.
Offences to be restricted to fine only
The CLC observed that the imposition of a sentence for imprisonment for certain violations was not required, but the imposition of a penal fine would be an appropriate deterrent. It also lay emphasis that a punishment for imprisonment in case of compoundable offences ought to be restricted only to such offences which involve substantial public interest.
Examples of such offences are as follows:
· Section 243 (2) (Consequence of termination or modification of certain agreements) makes it a criminal offence to default on compliance with the directions of the NCLT regarding termination or modification of certain agreements executed by the company. The CLC observed that though this would constitute a serious offence, the punishment should be restricted to fine only, since imprisonment would be excessive.
· Section 128 (Books of account etc. to be kept by company) imposes criminal liability for failure to maintain the books of accounts of the company at its registered office as per the provisions of this section. The CLC proposed that the punishment to be imposed on persons in the company in charge of ensuring compliance of the obligation laid down hereunder should be restricted to fine only.
· The imposition of a sentence upon defaulting officers of a company in violation of the provisions of Section 8 (Formation of companies with charitable objects, etc.) was found to be unnecessary and the same was proposed to be reduced to a fine. The CLC justified its recommendation by pointing out the other sanctions available against non-compliant companies such as the revocation of license granted under this section or the initiation of action under Section 447 (Punishment for fraud) of the Act.
· Liability under Section 40 (Securities to be dealt with in stock exchanges) for contravention of the obligation to comply with the requirements of a public offer, has been proposed to be reduced to a fine, subject to consultation with the SEBI. The CLC justified its recommendation by pointing out that the action for such default would also be taken by the Securities Exchange Board of India (“SEBI”), and the inclusion of a criminal sanction here would be unnecessary.
· Section 167 (Vacation of office of director) imposes a punishment for a term of imprisonment upon a director who continues in office while having knowledge of his disqualification from such office. In line with the underlying narrative, the CLC has observed that a fine would be adequate to deal with such violations.
Offences where status-quo is to be maintained
The CLC concluded that some offences were not suitable to be brought under the IAM framework and it considered it to be best to not interfere with offences involving an element of fraud, deceit, and wrongful dealing. For instance, this includes provisions regarding contravention of duties by directors and auditors (Section 147)/ cost auditors (Section 148(8)(b)), punishment for fraud (Section 447) and repeated default (Section 451) etc. The CLC has recommended no dilution of the punishment under certain offences involving a larger public interest, such as announcement of liquidation, imposition of restriction on transfer securities and assets, non-compliance during investigative processes, etc.
Quick View
The CLC has recommended the aforementioned amendments, in line with the global practice of treating minor white-collar crimes as compoundable, settled with a fine. Additionally, this is part of the larger government initiative to encourage and protect businesses and investors and promote ease of doing business. As stated by Narendra Modi in his Independence Day speech, “The need of the hour is to recognize and encourage the wealth creators of our nation”. This will also free up judicial space from dealing with offences, which are merely procedural in nature.
The CLC has adopted a principle-based approach to remove criminal liability in case of defaults, which can be determined objectively, do not involve larger public interest or the element of fraud. The status quo has been maintained only with respect to non-compoundable offences involving serious frauds.
Further, observing that the element of mens rea or guilty mind and knowledge are prerequisites for establishing guilt in a criminal case, the CLC has stated that the imposition of criminal sanctions on corporates could reduce the chances of having successful prosecutions, as proving the existence of these elements entailed a time-consuming subjective analysis. In this manner, the CLC has attempted to achieve a balance between civil and criminal sanctions.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.