[Arun Kumar is a 4th-year student of NLIU Bhopal]
The Company Law Committee (CLC) in its November 2019 report (CLC Report) to the Ministry of Corporate Affairs (MCA) has recommended amendments to 46 penal provisions in the Companies Act, 2013 (CA, 2013). This is in addition to the 16 offences already decriminalised by the Companies (Amendment) Act, 2019 (CAA, 2019). India is making rapid strides in improving its ease of doing business, and decriminalisation of corporate transgressions is a step in the right direction. This move, if implemented, will align with the Government’s aim to boost investor sentiments and increase the inflow of foreign direct investment. It will also encourage home-grown start-ups to set up shop in India instead of flipping their businesses offshore. Many businesses founded by Indian citizens are incorporated in overseas jurisdictions because of the perception that the regulatory landscape of India is uncertain and onerous.
Imposition of civil liability for procedural defaults not only benefits companies but also the regulators, since it would remove the requirement of proving mens rea which is a precondition in criminal trials. In Director of Enforcement v. MCTM Corporation, the Supreme Court held that civil liability is imposed for ‘blameworthy conduct’ and that guilty intention is not a sine qua non. In addition, the threshold for burden of proof is higher for criminal offences, which must be proved ‘beyond all reasonable doubt’ whereas it is sufficient to establish ‘preponderance of probability’ for imposing civil liability. The proposed reforms are also a shot in the arm for special courts, clogged with cases dealing with defaults under CA, 2013.
Several committees have been set up in the past to rationalise the compliance system of the Companies Act and reduce the burden on companies. The Standing Committee on the Companies Bill, 2009 had stated: “transgressions, purely procedural or technical in nature, should be viewed in a broader perspective, while serious non-compliance or violations including fraudulent conduct should invite stringent /deterrent provisions like imprisonment”. The CLC in its report submitted to the MCA in 2016 had also recommended rationalisation of criminal offences. However, it would be unwise to replace all criminal offences with civil liability, and regulators need to walk a tightrope and strike an appropriate balance. This is precisely what the CLC has attempted to do by reviewing only compoundable offences under CA, 2013. Section 441 of the CA, 2013 defines compoundable offences as those offences that are not punishable with imprisonment only, or punishable with imprisonment and also fine.
In-House Adjudication Mechanism
Section 454 of the CA, 2013 states that “the Central Government may, by an order published in the Official Gazette, appoint as many officers of the Central Government, not below the rank of Registrar, as adjudicating officers for adjudging penalty under the provisions of this Act.” The CA, 2013 was amended on July 29, 2019 to incorporate the proposals in the report submitted by the Committee to Review the Offences under the CA, 2013 (Offences Committee) to the MCA last year. Sixteen offences were re-categorised as defaults carrying civil liabilities, which would be subject to an in-house e-adjudication mechanism (IAM). These offences have been shifted from the jurisdiction of civil courts to the IAM wherein an adjudicating officer (AO) appointed by the Central Government shall adjudge the defaults and levy the penalty. The proposed IAM will enable the company and its officers to communicate with the AO and rectify defaults without requiring their physical presence.
The recommendations in the CLC Report builds on this foundation by examining 66 compoundable offences under CA, 2013, out of which 23 offences are proposed to be shifted to an IAM, wherein default would be subject to a penalty levied by an AO. Seven offences shall be omitted and 11 offences shall be limited to a fine and 5 offences shall be dealt with by an alternative framework. For instance, it is proposed that the contempt power of National Company Law Tribunal (NCLT) under section 425 of the CA, 2013 may be used for offences relating to non-compliance of orders of the NCLT instead of treating it as a separate offence under the CA, 2013.
The Offences Committee had categorised the compoundable offences under CA, 2013 into 8 categories:
1. Category A Offences: Non-compliance of orders of authorities [the Central Government, NCLT, Registrar of Companies (RoC)]
2. Category B Offences: Defaults regarding maintenance of certain records, in the registered office of the company.
3. Category C Offences: Defaults on account of non-disclosure of interest of persons to the company, which vitiates the record of the company.
4. Category D Offences: Defaults related to certain corporate governance norms.
5. Category E Offences: Technical defaults relating to intimation of certain information by filing forms with the RoC or in sending notices to stakeholders.
6. Category F Offences: Substantial violations that may affect the going concern value of the company or are contrary to larger public interest or with serious implications to stakeholders.
7. Category G Offences: Defaults related to liquidation proceedings.
8. Category H Offences: Defaults not specifically punishable under any provision, but made punishable through an omnibus clause.
The CLC Report adds to this by adopting a principle-based framework to deal with defaults.
1. Principle 1: 23 Offences that relate to minor/ less serious compliance issues, involving predominantly objective determinations, have been recommended to be shifted to the IAM framework instead of being treated as criminal offences.
2. Principle 2: 7 Offences that are more appropriate to be dealt with under other laws have been proposed to be omitted from the CA, 2013.
3. Principle 3: Alternative methods of imposing sanctions are proposed for 5 offences which do not fall in either of the two above categories.
4. Principle 4: 11 Offences that involve subjective determination but are not very serious violations will be punishable with fine only.
5. Principle 5: No changes have been proposed in the 20 offences that may involve elements of substantive violations requiring detailed adjudication.
Corporate Social Responsibility
Section 135 of the CA, 2013 provides that 2 percent of the average net profits during the 3 immediately preceding financial years shall be spent on corporate social responsibility activities by all companies that meet the minimum specified thresholds (net profit, net worth and turnover). The Government’s policy steered off-course when section 135 was amended vide CAA, 2019 that made non-compliance with this section a criminal offence attracting imprisonment. These penal provisions have not been notified yet, and it is proposed to rectify this error by decriminalising this offence.
An opportunity has been missed to bring in a differentiated compliance regime (and differentiated reporting requirements), wherein smaller companies are treated more liberally. Internationally, this approach has worked well in many jurisdictions, but such a change requires careful consideration and the CLC had submitted its report in less than two months. This reveals the intention to roll out these proposals as soon as possible.
Reforms in corporate law are the best method to promote business and development of a nation’s economy. Promoting business is a three-pronged approach which involves encouraging new organisations to set up shop in the country, encouraging foreign investment and consolidating the existing operations. The existence of criminal provisions in the corporate law of a nation is a deterrent to incorporation and inflow of foreign capital. However, there are certain defaults which make it incumbent for the regulators to impose criminal sanctions. Offences that involve an element of fraud, deceit or wrongful dealing must be criminalised. The CLC has recommended that the status quo should be maintained for such offences and those relating to financial indiscipline. There are no changes in the provisions regarding contravention of duties by directors, auditors and cost auditors and in offences related to acceptance and repayment of public deposits, financial statements, etc. A balancing act was needed to ensure compliance as well as reduce compliance costs and burden of corporates. The CLC’s report strikes a perfect balance and should be speedily implemented.
– Arun Kumar