By Pramod S. Prabhudesai
Chartered Accountant
BACKGROUND
The Companies Act, 2013 (CA 2013) was enacted with a view to consolidate and amend the law relating to companies and it is now six years since its notification. However, it was observed that a large numbers of cases concerning compoundable offences are pending in the trial courts. Various settlement schemes were introduced in the past (in 2000, 2010 and 2014) to reduce the pendency of cases. The Vaish Committee constituted in 2005 even recommended withdrawal of cases where larger public interest was not involved. It was noted at that time that pendency every year was steadily increasing by about 2,000 cases, the average period of disposal of cases was five years and the average cost awarded per case to the government was alarming – Rs 5731.
It was further noted that under CA 2013 there are 18 instances where defaults are subject to civil liability by levying penalties through the adjudication mechanism. These broadly relate to technical non-compliances. It was then felt that this list was not exhaustive and there are other defaults which are also procedural / technical in nature and these can be rectified by levy of penalty instead of prosecution in the courts. This would incentivise enhanced compliance. In this backdrop, a committee was constituted in July, 2018 under the chairmanship of Injeti Srinivas (at present Secretary in the MCA).
The terms of reference of the committee were:
(i) Examine the nature of all acts categorised as compoundable offences (those which are punishable with fine only or with fine or imprisonment, or both) and recommend whether they can be re-categorised as acts which attract civil liabilities and thus be liable for penalty;
(ii) To review non-compoundable offences and recommend whether they can be re-categorised as compoundable offences;
(iii) Review the existing mechanism of levy of penalty under CA 2013 and suggest improvements therein;
(iv) To lay down the broad contours of an in-house adjudicatory mechanism wherein penalties can be levied in a non-discretionary manner;
(v) Suggest changes in the law and matters incidental thereto.
The said committee, after taking the views of several stakeholders, submitted its report in August, 2018. However, in view of the urgency, the Companies (Amendment) Ordinance, 2018 was promulgated on 2nd November, 2018. To replace the aforesaid Ordinance, a bill, namely, the Companies (Amendment) Bill, 2018, was introduced in the Lok Sabha and passed in the said House on 4th January, 2019. However, the Bill could not be taken up for consideration in the Rajya Sabha. In order to give continued effect to the Companies (Amendment) Ordinance, 2018, the President promulgated the Companies (Amendment) Ordinance, 2019 and the Companies (Amendment) Second Ordinance, 2019 on 12th January, 2019 and 21st February, 2019, respectively. The Companies (Amendment) Bill, 2019 was passed by the Rajya Sabha on 30th July, 2019 and by the Lok Sabha on 27th July, 2019.
Besides the terms of reference which are listed above, the objective of the committee was to unclog the trial courts of routine cases so that cases of more serious nature could be pursued with enhanced rigour. The committee had noted that as on 30th June, 2018, the total cases pending was as under:
| Regional Directors |
Compoundable |
Non-Compoundable |
| All 7 Regional Directors |
32,602* |
1,055 |
| Pending applications for withdrawal |
6,391 |
0 |
| Total |
38,993 |
1,055 |
| *Eastern Region (out of the total above) |
18,292 |
268 |
The committee had classified the nature of defaults under CA 2013 and after detailed analysis it was noticed that compoundable offences under the CA 2013 could be classified as under:
| Categories |
Type of offence under CA 2013 |
No. of offences |
Recommendation and rationale |
| I |
Non-compliance of the orders of statutory authorities and courts, etc. |
15 |
Defiance will not be considered to be procedural lapse and shall continue with criminal action.
Status quo be maintained |
| II |
Those resulting from non-maintenance of certain records in registered office of the company |
4 |
The defaults involve public interest therefore the same were not brought under the regime of
in-house adjudication |
| III |
Defaults on account of non-disclosures of interest of persons to the company, which vitiates the records of the company |
3 |
Any non-disclosure of interest of persons in the company shall result in serious implications to the public and hence should not be brought under
in-house adjudication by levying penalties |
| IV |
Defaults related to corporate governance norms |
5 |
Offences under such category are technical and can be penalised by initiating in-house adjudication proceedings. Hence, such offences should be shifted to in-house adjudication |
| V |
Technical defaults relating to intimation of certain information by filing forms with ROC or in sending of notices to the stakeholders |
13 |
11 out of these 13 offences should be brought under in-house adjudication |
| VI |
Defaults involving substantial violations which may affect the going concern nature of the company or are contrary to larger public interest or otherwise involve serious implications in relation to the stakeholder |
29 |
These defaults are substantial violations which directly affect the status of the company, therefore involve large public interest. Hence these cannot be brought under the regime of in-house adjudication |
| VII |
Default related to liquidation proceedings |
9 |
Offences under these sections shall not be replaced with penalty as the same are placed before the NCLT and the Tribunal shall be the decision-making authority. Hence there shall be no change |
| VIII |
Defaults not specifically punishable under any provision but made punishable through an omnibus clause |
3 |
Due to the wide-ranging nature of defaults and unintended consequences, should not be brought under the in-house adjudication regime |
| |
Total |
81 |
|
(A) Amendments carried out to CA 2013 vide Companies Amendment Act, 2019
Based on recommendations of the committee2 (refer para 1.5 of Chapter I of the report), the following offences are re-categorised as defaults carrying civil liabilities which would be subject to an in-house adjudication mechanism. Amendments made along with the pre-amendment punishment in each case are as under:
| Clause of the Bill |
Section amended/ inserted |
Nature of default |
Before |
Now |
| 9 |
Section 53(3)
Fine or imprisonment or both |
Prohibition of issue of shares at a discount |
Fine or imprisonment or both |
Non-compliance shall result in the company and officer in default being liable to a penalty of amount raised or Rs 5 lakhs whichever is less. Besides, amount to be refunded with interest @ 12% per annum |
| 10 |
Section 64(2)
Notice to be given to Registrar for alteration of share capital
(Form SH 7) |
Failure / delay in filing notice for alteration of share capital (alteration includes changes in authorised capital, etc.) |
Fine only |
Non-compliance shall result in the company and officer in default being liable to a penalty of Rs 1,000 per day or Rs. 5 lakhs, whichever is less |
| 14 |
Section 90
Register of significant beneficial owners in a company
(Form BEN 2 and related forms)
|
Failure / delay in making a declaration to the company and company has to maintain a register |
Fine only |
If any person fails to make a declaration as required, he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 10 lakhs, or with both, and where the failure is a continuing one, with a further fine which may extend to Rs. 1,000 for every day after the first during which the failure continues.
If a company, required to maintain register (and file the information) or required to take necessary steps under sub-section (4A) fails to do so or denies inspection as provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10 lakhs but which may extend to Rs. 50 lakhs, and where the failure is a continuing one, with a further fine which may extend to Rs. 1,000 for every day after the first during which the failure continues.
If any person wilfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under section 447 |
| 15 |
Section 92(5)
Annual return
(Form MGT 7) |
Failure / delay in filing annual return |
Fine or imprisonment or both |
Non-compliance shall result in the company and its every officer who is in default to be liable to a penalty of Rs. 50,000 and in case of continuing failure, with further penalty of Rs. 100 for each day during
which such failure continues, subject to a maximum of Rs. 5 lakhs |
| 16 |
Section 102(5)
Statement to be annexed to notice (explanatory statement)
|
Attachment of a statement of special business in a notice calling for general meeting |
Fine only |
Non-compliance with the section shall result in every promoter, director, manager or other key managerial personnel who is in default being liable to a penalty of Rs. 50,000 or five times the amount of benefit accruing to the promoter, director, manager or other key managerial personnel or any of his relatives, whichever is higher |
| 17 |
Section 105(3)
Proxies
|
Default in providing a declaration regarding appointment of proxy in a notice calling for general meeting |
Fine only |
Non-compliance shall result in every officer in default being liable to a penalty of Rs 5,000 |
| 18 |
Section 117(2)
Resolutions and agreements to be filed
(Form MGT 14) |
Failure / delay in filing certain resolutions |
Fine only |
Non-compliance shall result in the company being liable to a penalty of Rs. 1 lakh and, in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 25 lakhs, and every officer of the company who is in default, including liquidator of the company, if any, shall be liable to a penalty of Rs. 50,000 and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 lakhs |
| 19 |
Section 121(3)
Report on annual general meeting (Form MGT 15 applicable to listed companies)
|
Failure / delay in filing report on AGM by public listed company |
Fine only |
Non-compliance shall result in the company being liable to a penalty of Rs. 1 lakh, and in case of continuing failure with a further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 lakhs, and every officer of the company who is in default shall be liable to a penalty which shall not be less than Rs. 25,000, and in case of continuing failure, with a further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 1 lakh |
| 21 |
Section 135 |
Failure / delay in complying with CSR (Corporate Social Responsibility) |
Fine or imprisonment or both |
If a company contravenes the provisions, the company shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 25 lakhs, and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 lakhs,
or with both |
| 22 |
Section 137(3)
Copy of financial statement to be filed with Registrar
(Form AOC 4)
|
Failure / delay in filing financial statement |
Fine or imprisonment or both |
Non-compliance shall result in:
(i) the company being liable to a penalty of Rs. 1,000 for every day during which the failure continues but which shall not be more than Rs. 10 lakhs, instead of being punishable with fine; and
(ii) the managing director and the chief financial officer of the company, if any, and, in the absence of the managing director and the chief financial officer, any other director who is charged by the board of directors with the responsibility of complying with the provisions of section 137 and, in the absence of any such director, all the directors of the company, being liable to a penalty of Rs. 1 lakh, and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 lakhs |
| 23 |
Section 140(3)
Removal, resignation of auditor and giving of special notice
(Form ADT2
and ADT3) |
Failure / delay in filing statement by auditor after resignation |
Fine only |
Non-compliance shall result in the auditor being liable to a penalty, he or it shall be liable to a penalty of Rs. 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 lakhs |
| 24 |
Section 157(2)
Company to inform Director Identification Number to Registrar
(Form DIR 3C) |
Failure / delay by company in informing DIN of director |
Fine only |
Non-compliance shall result in the company in default being liable to a penalty of Rs. 25,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 1 lakh, and every officer of the company who is in default shall be liable to a penalty of not less than Rs. 25,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 1 lakh |
| 25 |
Section 159
Punishment for contravention – in respect of DIN
|
Contraventions related to DIN |
Fine or imprisonment or both |
Non-compliance shall result in any individual or director of a company in default being liable to a penalty, which may extend to Rs. 50,000, and where the default is a continuing one, with a further penalty which may extend to Rs. 500 for each day after the first during which such default continues |
| 27 |
Section 165(6)
Number of directorships
|
Section 165(6)
number of directorships
|
Fine only |
If a person accepts appointment as a director in contravention, such person shall be liable to a penalty of Rs. 5,000 for each day after the first during which such contravention continues |
| 28 |
Section 191(5)
Payment to
director for loss of office, etc., in connection with transfer of undertaking, property or shares |
Payment to director not to be made on loss of office |
Fine only |
Non-compliance shall result in such director being liable to a penalty of Rs. 1 lakh |
| 29 |
Section 197(15)
Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits |
Managerial remuneration |
Fine only |
Non-compliance shall result in any person in default being liable to a penalty of Rs. 1 lakh and where any default has been made by a company, the company shall be liable to a penalty of Rs. 5 lakhs |
| 30 |
Section 203(5)
Appointment of key managerial personnel |
Communication of appointment of KMPs in certain class of companies |
Fine only |
Non-compliance shall result in the company who is in default being liable to a penalty of Rs. 5 lakhs and every director and key managerial personnel of the company who is in default shall be liable to a penalty of Rs. 50,000, and where the default is a continuing one, with a further penalty of Rs. 1,000 for each day after the first
during which such default continues, but not
exceeding Rs. 5 lakhs |
| 31 |
Section 238(3)
Registration of the offer of scheme involving transfer of shares |
Registration of the offer of scheme involving transfer of shares |
Fine only |
Non-compliance shall result in the
director being liable to a penalty of Rs. 1 lakh |
Note: In the process of re-categorisation of the offences and making them liable for civil liabilities, some unintended hardships are likely to be caused, especially to the smaller companies who do not have much professional assistance available. In such cases, it would have been better if penalty was imposed linked to slabs of paid-up capital instead of flat penalties.
(B) Serious offences: Pay more or suffer more
In case of repeated defaults, the habituated defaulter will now have to pay twice. To achieve the said objective, the Ordinance has modified sub-sections (3) and (8) of section 454 and also introduced a new section 454A as follows:
| Section |
Title |
Post-Ordinance impact |
| 454(3) |
Adjudication of penalties |
Opportunity be given to make good the default. Not to initiate action unless such opportunity is given |
| 454(8) |
Adjudication of penalties |
Default would occur when the company or the officer in default would fail to comply with the order of the adjudicating officer or RD as the case may be |
| 454A |
Penalty for repeated default |
Under this newly-inserted section it is provided that in case a penalty has been imposed on a person under the provisions of CA 2013 and the person commits the same default within a period of three years from the date of order imposing such penalty, he shall be liable for the second and every subsequent default for an amount equal to twice the amount provided for such default under the relevant provision of CA 2013 |
(C) De-clogging the NCLT: More powers to Regional Directors
| Section |
Title |
Post-Ordinance impact |
| 441(1)(b) |
Compounding of certain offences |
Power of Regional Director to compound offence punishable increased up to
Rs. 25,00,000
Pre-amendment, where the maximum amount of fine which may be imposed for such offence did not exceed Rs. 5 lakhs, such offence was compounded by the Regional Director or any officer authorised by the Central Government
Through the amendment, where the maximum amount of fine which may be imposed for such offence does not exceed Rs. 25 lakhs, such offence shall be compounded by the Regional Director or any officer authorised by the Central Government |
| 441(6)(a) |
Compounding of certain offences |
Section 441(6)(a), which requires the permission of the Special Court for compounding of offences, being a redundant provision, is omitted |
(D) Other Amendments
Vesting in the Central Government the power to approve the alteration in the financial year of a company u/s 2(41):
| Section before amendment |
After amendment |
Remarks |
| First Proviso:
In case of associate companies incorporated outside India and required to follow different financial years, such companies were required to approach the Tribunal |
First Proviso:
After amendment this power is now given to Central Government
|
Post-amendment, holding company or a subsidiary or associate company of a company incorporated outside India can apply to the Central Government for a different financial year.
Application pending before the Tribunal shall be
disposed of by the Tribunal |
Requirements related to Commencement of Business (newly-inserted section 10A):
| Section before amendment |
After amendment |
Remark |
| – |
(1) A company incorporated after the commencement of the Companies (Amendment) Ordinance, 2018 and having a share capital shall not commence any business or exercise any borrowing powers unless:
(a) a declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber
to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such
declaration;
and
(b) the company has filed with the Registrar a verification of its registered office as provided in sub-section (2) of section 12
(2) If any default is made in complying with the requirements of this section, the company shall be liable to a penalty of Rs. 50,000 and every officer who is in default shall be liable to a penalty of Rs. 1,000 for each day during which such default continues, but not exceeding an amount of Rs. 1 lakh |
Re-introduction of section 11 omitted under the Companies (Amendment) Act, 2015 (after doing away with the requirements of minimum paid-up capital) to provide for a declaration by a company having share capital before it commences its business or exercises borrowing power
Non-compliance of section 11 by an officer in default shall result in liability to a penalty instead of fine |
Inspection of Registered Office of the Company and consequent removal of the name of the company (section 12):
| Section before amendment |
After amendment |
Remark |
| |
If the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may cause a physical verification of the registered office of the company in such manner as may be prescribed, and if any |
This provision is introduced to curb shell companies |
| – |
default is found to be made in complying with the requirements he may, without prejudice to the provisions, initiate action for the removal of the name of the company from the
register of companies |
|
Vesting in the Central Government the power to approve cases of conversion of public companies into private companies (section 14):
| Section before amendment |
After amendment |
Remark |
| Third Proviso:
Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days |
Second Proviso:
Provided further that any alteration having the effect of conversion of a public company into a private company shall not be valid unless it is approved by an order of the Central Government on an application made in such form and manner as may be prescribed
Third Proviso:
Every alteration of the articles under this section and a copy of the order of the Central Government approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days |
Any application pending before the Tribunal shall be disposed of by the Tribunal in accordance with the provisions applicable to it before these amendments.
The power has been shifted from Tribunal to Central Government |
Registration of charges (Section 77):
Clause 11 of the Bill seeks to amend the first and second proviso of sub-section (1) of section 77 of the Act to provide that the Registrar may, on the application made by a company, allow registration of charge, in case of charges created before the commencement of the Companies (Amendment) Act, 2019, within a period of 300 days, or in case of charges created after the commencement of the said Act, within 60 days, on payment of additional fees. The additional period of 60 days within which the charges are required to be registered is also provided. In such case, an ad valorem fee will be charged which will be prescribed later.
Corporate Social Responsibility (Section 135):
The Bill seeks to amend sub-section (5) of section 135 and insert sub-sections (6), (7) and (8) in the said section of the Act to provide, inter alia, for (a) carrying forward the unspent amounts to a special account to be spent within three financial years and transfer thereafter to the fund specified in Schedule VII, in case of an ongoing project; and (b) transferring the unspent amounts to the fund specified under schedule VII, in other cases.
DISQUALIFICATION OF DIRECTORS (SECTION 164)
| Section before amendment |
After amendment |
Remark |
| – |
Insertion of Clause (i):
He has not complied with the provisions of sub-section (1) of section 165 |
A new clause (i) after clause (h) in section 164(1) inserted, whereby a person shall be subject to disqualification if he accepts directorships exceeding the maximum number of directorships provided in section 165 |
CONCLUSION
The Companies (Amendment) Bill, 2019 was introduced to replace the Companies (Amendment) Second Ordinance, 2019 with certain other amendments which were considered necessary to ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in the corporate sector.
