Maharashtra National Law University, Aurangabad

Project on

“Decriminalising Companies Act Offences – Striking a Balance Between Ease of Doing

Business and Corporate Governance”

Submitted under the guidance of

Prof. Dr. Kondaiah Jonnalagadda

Professor of Law

Submitted by:

Abhishek Jha

2017/BALLB/54
 Acknowledgement

This work is a product of teachings and guidance imparted by , Prof. Dr. Kondaiah Jonnalagadda
guiding me about the Corporate Law and its importance while reading and researching about this
project. I would , through this statement of acknowledgment would like to thank and acknowledge
the efforts of the non-teaching staff of the library for providing me with the necessary tools and
resources , I would also like to thank my colleagues for providing assistance when required .
 TABLE OF CONTENTS

INTRODUCTION

Categories of Offences Under the Companies Act, 2013

Plans to Further Withdraw Criminalization Under the Act

Implications and Conclusion

 INTRODUCTION

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 constituted a Company
Law Committee to review aspects of criminalization in the remaining compoundable and
non-compoundable offences under the Act1.

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, 20182.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.

1
  https://economictimes.indiatimes.com/news/economy/policy/govt-constitutes-company-
law-committee-to-improve-ease-of-doing-business/articleshow/71188848.cms (Last accessed
31-10-2019) ;
2
Report of the Committee to Review Offences under the Companies Act, 2013, Ministry of
Corporate Affairs, August 2018.
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 default3.

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 penalties4. 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 5,00,0005.

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
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
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

6
Report of the Committee to Review Offences under the Companies Act, 2013, Ministry of
Corporate Affairs, August 2018, page 4.
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 Act7.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 harmed8.

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 CSR9.

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.
 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.

The changes are expected to lead to greater compliance by companies, de-clogging of the
NCLT and provide effective enforcement. Statistics show that around 60% of the 40,000
cases are pending in courts regarding sections with respect to procedural lapses 10that are
proposed to be shifted to in-house adjudication mechanism which would incentivise
compliance for companies. Therefore, the compounding cases load on the NCLT may come
down significantly.

10
http://pib.nic.in/newsite/PrintRelease.aspx?relid=188765 (last accessed 31-10-2019 )