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Decriminalization of corporate offenses in India in the light of Companies (Amendment) Act, 2020



One of the salient features of a company is a separate legal entity. It means that the company is different from its members. This implies that both the company and its members have separate liability. However, the corporation could be held liable if its servant or member committed any crime due to the doctrine of vicarious liability. The corporations cannot be punished with death or imprisonment due to their corporate identity but their members can be punished with the same.

To promote the ease of doing business the government has revised the penalty provisions and decriminalized many offenses since the Companies Act, 2013 was enacted. If we will look into the past years, the various amendments have been brought to the Companies Act, 2013. But the 2019 amendment and 2020 amendment Act were brought up to decriminalize menial offenses which do not affect the public interest or society at large.


The Companies (Amendment) Act, 2019

On the recommendation of 'Report of the committee to review offenses under the Companies Act, 2013' the 2019 amendment recategorized some of the offenses as civil violations. Before this amendment, there were 81 compoundable offenses under the Companies Act, 2013 which were punishable either by fine or by imprisonment, or both. Out of these 81 offenses, 16 offenses were recategorized by this amendment Act, and instead of fine or imprisonment the penalties were imposed. Earlier, the fine and the tenure of imprisonment was computed by the courts or tribunals but now the penalties would be determined through the in-house adjudication mechanisms under section 454 of the said Act in which the adjudicating authority would be appointed by the Central Government to compute the penalties and to resolve the defaults and offenses.

The Companies (Amendment) Act, 2020

The 2020 amendment is based on the report of the Company Law Committee. Through this amendment Act, the second attempt has been made to decriminalize more corporate offenses which do not involve serious crimes and also do not affect the public interest. The Report in Chapter 1 dealt with the decriminalizing of certain compoundable offenses. This chapter also discusses that the offenses which shall be referred to in-house adjudication mechanisms. Further, certain sections were omitted from the Companies Act, 2013 because the committee thought that the offenses in such sections would have an appropriate remedy in other related laws. This chapter also provided the alternative mechanisms to achieve the intended aim of some provisions. The recommendations have also been made to restrict some of the offenses to fine only and to remove imprisonment as a punishment. This report has also mentioned that it is necessary to leave some of the offenses untouched. These are the offenses that involve fraud, wrongful dealings, deceit, etc. Hence, the punishments regarding these crimes are neither changed nor omitted.


The detailed discussion of this chapter is given below –

1) Provisions that are shifted to an in-house adjudication mechanism

The committee recommended shifting a total of 23 offenses in different provisions to an in-house adjudication mechanism. The committee categorized these offenses in different categories-

a) Category A – In this category, the offenses related to non-compliance with the order of authorities are dealt with-

Section 232 deals with compliance concerning mergers and amalgamation. The committee recommended removing the criminal liability for the non-compliance of the same from section 232(8) and directed to impose civil penalty through an in-house adjudication mechanism framework.

Section 405(4) deals with the punishment for the non-compliance of the orders of Central Government directing the corporates or class of corporates to furnish the necessary information. The Committee recommended changing the nature of liability under this section from criminal to civil.

b) Category B- in this category the offenses related to non-maintenance of records and registers at the Registered Office of a company are dealt with.

The offenses under section 56(1) to (5), 88(5), and 90(11) are related to the maintenance of registers in the prescribed format. The violation of these sections will now attract civil penalties instead of criminal liability.

Section 128(6) deals with the maintenance of financial statements and books of accounts which shows the true and fair picture of the company's affairs. The punishment for the violation of this section would be dealt with by imposing penalties by Adjudicating officer.

c) Category C- This category involves the offenses related to non-disclosure of the interests of the officers by the company.

The offense under section 90(10) should be dealt with by imposing a civil penalty which deals with the making of a declaration by a beneficial owner.

The criminal punishment for violating section 89(1)- 89(3) would be now dealt with through the in-house adjudication mechanism framework by imposing the civil penalty. This section deals with the making of a declaration in a prescribed form by the registered owner or beneficial owner.

The punishment under section 184(4) shall be substituted by the civil penalty which deals with the non-disclosure of interest by a director.

d) Category D – The offenses under this category i.e., offenses related to corporate governance have already been transferred to an in-house adjudication mechanism.

e) Category E- The offenses related to technical defaults in filing certain information with ROC have already been transferred to the in-house adjudication mechanism except sections 86(1) and 89(7). Section 86(1) deals with the punishments for violation of provisions given in Chapter VI of the Companies Act. Further sec 89(7) deals with the punishment in case of failure to file a return. Now through the 2020 amendment, the offenses under the said sections were made as civil default.

f) Category F- This category involves the offenses which affect the company's going-concern value or impact on public interest or stakeholder’s interest.

The amendment Act amended the punishment of offenses under Sections 92(6), 105(5), 124, 134(8), 143(15), 178(8), 187(4), 188(5), and 204(4). Section 92(6) provides punishment in case of wrongful certification of annual return by practicing company secretary. Section 105(5) provides punishment in case if the company acted as an agent of any member in appointing the proxy. Section 124 provided the requirements regarding the transfer of dividends and shares to Investor Education and Protection Fund Authority. Further, section 134(8) is related to the non-fulfillment of substantial compliances. Section 143(15) provides punishment on omission by the auditor to report fraud. Section 178 deals with the constitution of various committees. Section 187(4) provides punishment if investments are not held in the name of the concerned company. Section 188 deals with the related party transactions and 188(5) deals with the punishment if the transactions with related parties have not been made in compliance with section 188. Section 204 provides for the secretarial audit for the prescribed companies.

Now in case of violations under these sections, the cases would be adjudicated through an in-house adjudication mechanism by imposing civil penalties. Section 147(2) used to contain punishment for contravention u/s 143(15) hence, this section was also amended.

g) Category G- This category involves the offenses related to liquidation proceedings. None of the offenses under this category were transferred to an in-house adjudication mechanism.

h) Category H- This category contains the provisions which state the punishment for various non-compliances. Such sections are 172 and 450 and hence punishment under these sections will now be adjudicated through an in-house adjudication mechanism.

2) Sections that have been omitted

i) This amendment Act omitted some offenses under sections 48(5), 59(5), 66(11), 71(11). The NCLT would exercise its contempt jurisdiction if non-compliances are seen under these sections.

ii) The offenses under sections 342(6), 348(6), and 348(7) used to attract a criminal liability in the Companies Act, 2013. After this amendment, the offenses under the above-mentioned section would be dealt with in other relevant laws. These sections deal with the offenses related to non-compliance by the liquidator of the company so, the punishment under alternate laws would be applied in the event of any non-compliances by them.

3) Alternate Framework for certain offenses

The Amendment Act removed the criminal liability from the following sections and introduced alternative frameworks to determine the liability-

i) Section 16(1) - This section is used to attract a fine if the company uses the same name as the existing company. But now, an alternative framework has been introduced in which the company will be given an auto-generated name and this auto-generated name should be used by the company until it changes its name.

ii) Section 284(2) - The non-cooperation with the liquidator by the employees, directors, or promoters used to attract fine under this section but now the company liquidator has empowered and he can approach NCLT and the instead of imposing a fine, the NCLT will issue directions to the company.

iii) Section 302(4), section 356(2) – under this section the failure to forward a copy of the NCLT to the Registrar of companies regarding the dissolution of the company within prescribed time used to attract fine. This Act removed the imposition of such a fine and introduced a process where the NCLT will forward a copy of its order to the ROC and provide instructions to the liquidator of the company regarding the forwarding of a copy to the ROC. A similar alternative framework has been introduced in section 356(2)

4) Offences from which the imprisonment has been removed

The punishment for offenses under sections 8(11), 26(9), 40(5), 68(11), 128(6), 147(1), 167(2), 242(8), 243(2), 247(3), 347(4), 392 was made restricted to fines only. This amendment Act just removed the punishment of imprisonment keeping the rest of the provision unaffected. This implies that even the quantum of fine remains unchanged.


Relaxations under section 135


Sec 135 deals with constituting the corporate social responsibility (CSR) Committees in companies on reaching certain threshold limits concerning the turnover, profits, and net worth. The said amendment Act brought some relaxation regarding this section. The company law committee discussed these relaxations in the second chapter of its report and this chapter is titled EASE OF LIVING RELATED CHANGES. Further, the criminal liability (i.e., fines and penal liability) used to be imposed in case of any non-compliance under sub-section 5 and 6 of section 135. However, this Act has decriminalized the offenses under said sections with only fines to be paid both by the company and the officer in default as specified.


Reasons to decriminalize the corporate offenses

The following are the reasons to decriminalize the corporate offenses under the Companies Act, 2013-

1) It will be more convenient for the corporates to rectify their defaults in case of any non-compliance within the framework of in-house adjudication mechanisms (IAM).

2) To promote the ease of doing business.

3) The decriminalization of some offenses was necessary to boost the confidence of the officers, directors, members who are running the company, and now they will be able to run the company without any fear of the lengthy court procedures for trivial matters.

4) Already the National Company Law Tribunals are overburdened by the numerous cases. So, it was recommended that instead of approaching courts the matters should be resolved outside the courts.

5) It was important to maintain the balance between the protection of the interest of companies and the interests of the public at large.

Conclusion

If we analyze, the amendment Act of 2020 was passed in less than a year since the amendment Act of 2019 was passed. The aim of both the Amendments Acts is almost the same.

The Amendment Acts of 2019 and 2020 have decriminalized offenses under various sections, as we have seen. The step towards decriminalization of corporate offenses has been rightly taken by the ministry of corporate affairs. This step will help the corporates to grow as it has reduced the compliance costs for the companies. Only those offenses have been decriminalized which does not affect the public at large under this amendment Act. The status quo has been maintained for serious non-compoundable offenses. Though it was said that strict laws help in reducing corporate crimes but excessive punishment may affect the interests of corporates. In the author's point of view, this strive will not help in promoting the ease of doing business in these tough times but also help the State. The court may now able to focus on more serious cases instead of trivial non-compliance cases.


Endnotes

https://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf

https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf

https://www.mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf

https://www.irccl.in/post/decriminalisation-of-corporate-offences-in-india-should-it-be-permitted


-Divyanshi Singhal

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