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DECRIMINALIZATION OF OFFENCES UNDER COMPANIES ACT

Author: Chaitanya Kedia, V year of B.A., LL.B. from DES's Shri Navalmal Firodia Law College, Pune


Introduction

Company law regime in India has been continuously evolving over the past few years and becoming stricter and penal. Looking at the nature of the sections of the Companies act 1956 and the Companies Act 2013, which repealed the Companies Act 1956, there has been a significant change in the stringency of the Companies Act. The legislature has been leaning forward to decriminalize various offences under Companies Act 2013 to increase foreign investment in India.


One of the major drawbacks of Companies Act 2013 is that it has criminal penalties for minor acts of default and technical compliance which is completely against the spirit of promoting the ease of doing business in India. To align the objectives of promoting ease of doing business with Companies act 2013, the legislature has enacted the Companies Amendment Act of 2020. This would not only encourage the homegrown startups to set up business in India but also prevent them from flipping their businesses offshore.


Categorization

1. Non-compliance of orders of authorities [the Central Government, NCLT, Registrar of Companies (RoC)]

2. Defaults in maintaining proper records, in the registered office of the company.

3. Defaults regarding non-disclosure of interest of any related person to the company.

4. Defaults related to certain corporate governance norms.

5. Non-intimation of certain information to ROC by filing prescribed forms resulting in technical defaults.

6. Substantial violations that may affect the going concern value of the company or are contrary to the larger public interest or with serious implications to stakeholders.

7. Defaults related to liquidation proceedings.

8.Defaults not specifically punishable under any provision, but made punishable through an omnibus clause.


Impact of the Companies Amendment Act 2020

Decriminalization of the offences is the main feature of the Companies Amendment Act 2020.


Removing criminal offences

This measure is aimed to avoid overlapping of offences punishable under different specialized legislation and also to avoid conflict of jurisdiction. It deals with removing offences related to non-compliance relating to:-

  • The winding-up of companies

  • Correcting the registers of security holders; and

  • The redemption of debentures.

Reconsidering fine amounts

The Companies Amendment Act 2020 has also reduced the quantum of monetary penalty levied on various offences. It also takes into account the type of company before determining the amount of penalty. For example, if non-compliance occurs within a one-person or start-up company, the penalty imposed may be reduced to half of the prescribed penalty. A maximum limit of Rs200,000 has also been stated for such companies.

This provision will help the new establishments to prosper as they would be required to pay the fine for non-compliance according to their paying capacity.


Introducing in-house adjudication mechanism

The civil offences that are compoundable will be first referred to an in-house adjudication mechanism rather than court. It would be headed by an adjudicating officer that would be Registrar of company, any party aggrieved by the order of adjudicating authority can prefer an appeal to Regional Director.

This will not only provide a speedy and efficient justice delivery mechanism but also an alternate mechanism for the resolution of a dispute without approaching the court.


Benefit to Independent Directors (ID)

Till now Independent Directors were held liable for various corporate lapses and violations. This Act will help them to dissociate them from personal liabilities of the operational lapses and violations, especially when the offence has been committed without any evidence attributing knowledge, lack of diligence, approval, or consent of the IDs.

- Expanding the jurisdiction of regional directors for entertaining compounding applications.

- The object of ensuring better corporate compliance by mandating the timely compliance of the act and disallowing benefits to defaulting companies.


Comments

One of the basic motives behind the decriminalization of offences under the companies act is to promote ease of doing business in India and avoid criminal charges against not so serious offences like technical defaults and non-filing of prescribed forms. It would be beneficial especially in the post COVID era as it would increase the trust of the investors and would lead to increased foreign investment in India.


Due to the decriminalization of certain offences, various measures such as the conversion of imprisonment in civil wrong, removal of criminal offences and introduction of in-house adjudication mechanism have been brought into effect. This will not only help to reduce the burden on the company courts but also resolve the issue of a huge backlog already existing in the judicial system resulting in boosting the confidence of the investors. This would be an effective step to ease the highly regulated corporate regime of India.


Companies act is treated like the Constitution of India for the corporate world. Adherence to its provisions in true letter and spirit is of paramount importance to all stakeholders. Looking at the current scenario of the economy, the time is ripe for a concentrated change in punishment regime for procedural, technical and minor non-compliances. This proposal will attract the investors and encourage them to infuse funds into businesses thereby boosting the business sentiments.