Analysis of Companies (Amendment) Bill 2020: Reasons for Decriminalization & Intent Behind Proposed Relaxations

INTRODUCTION

The Company Law Committee (hereinafter referred to as ‘CLC’) was constituted on 18th September 2019 in the backdrop of the government striving hard in its endeavour to facilitate ease of living for corporates in India, and for making some critical changes for the decriminalization of certain offences in furtherance of a similar step taken through the Companies (Amendment) Act 2019 (hereinafter referred to as ‘CAA 2019’). The CLC consisted of representatives from the Ministry, noted luminaries from the legal fraternity, professional institutes, industry players, etc. and it submitted its report on 14th November 2019. The Companies (Amendment) Bill 2020 (hereinafter referred to as ‘CAB 2020’) was introduced in the Lok Sabha on 17th March 2020, which has proposed certain amendments in the Companies Act 2013, primarily with a two-fold objective of:

1. Decriminalizing certain defaults into civil wrongs and adopting a principle-based approach to remove the element of criminality from these defaults.

2. Providing relaxation to corporates to enhance the ease of living.

Amidst the outbreak of COVID-19 pandemic, the parliament was adjourned sine die on 23rd March 2020, so the bill is yet to be passed, but it has been reported through recent news reports and other credible sources that if need be, the government is zealous for promptly implementing the proposed changes through an ordinance. Whether the fundamental changes proposed in CAB 2020 is a step in the right direction needs to be seen by critically analyzing the proposed amendments.

CRITICAL ANALYSIS

Decriminalization of certain offences 

Under the Companies Act 2013, the offences can be classified into three types on the basis of penal provisions prescribed for them. The categories are; offences attracting only civil liability, compoundable offences and non-compoundable offences. CLC was appointed with the objective of reviewing the compoundable and non-compoundable offences and propose re-categorization for the purpose of removing the element of criminality from offences in which public interest is not harmed. The CAA 2019 re-categorized 16 offences into civil defaults to rationalize the punishments prescribed under the Act as the original Act had provisions to impose criminal sanctions even for minor, technical or procedural non-compliances, which was problematic. Pursuant to this reform, CAB 2020 has proposed to decriminalize 54 compoundable offences. The vision behind this is a ‘test of objective determination’. Also, when there is no fraud and when the public interest at large is not affected at all, a criminal sanction might not be at par with the gravity of the offence.In the cases of the first category, i.e. offences attracting only civil liability, the default or the wrong is devoid of intention (mens rea), which is a necessary element for the ascertainment of criminality. So the offences which can be prima facie tested by objective evaluation should not attract criminal liability and must be re-categorized as civil offences. The punishment for the same must also be rationalized, and it is also an objective of CAB 2020. The punishment of imprisonment has been proposed to be omitted in relation to 23 compoundable offences, and the monetary amount has been changed from a ‘criminal fine’ to a ‘civil penalty’.

Although the punishment of imprisonment has been proposed to be omitted, but due regard has been given to the gravity of offences as a subsequent increase in the amount of ‘civil penalty’ has been provided for offences relating to contribution to corporate social responsibility fund (CSR), related party transactions and data submission to the central government as given under sections 135(7), 188(5)(i) and 405(4) respectively. In addition to this, 5 minor offences such as those related to delay in filing, etc. have also been proposed to shift to a punishment of just a monetary fine. These offences are provided under sections 86(1), 89(5), 90(10), 167(2) and 184(4) of the Act. Furthermore, the bill has also proposed the complete omission of 9 offences because of the problems created due to multiplicity of laws in India, as these offences can be resolved by NCLTs appellate or contempt jurisdiction. These 9 offences relate to non- compliance with orders of the NCLT and are provided under Sections 48(5), 59(5), 66(11), 71(11), 284(2), 302(2), 342(6), 348(6) and 356(2) of the Act. Decriminalization has also been proposed in cases related to ‘oppression and mismanagement”, one of the significant aspects of Company Law. As of now, under sections 242(8) and 243(2), imprisonment upto a period of 6 months has been prescribed for contraventions of certain orders of tribunals, but now this has been proposed to be done away with. Also, the lower threshold of INR 25000 for civil penalty related to these particular sections has been removed.

This proposal of decriminalization will help the companies save their goodwill which can get affected negatively when an element of criminality is attached to certain minor and technical defaults as aforementioned. It will also help in reducing the burden on special courts which have to deal with these cases. The negative effect it can have is that it can encourage the companies to take a less vigilant approach and not give due regard to the importance of these compliances. If this happens and the culture of defaulting in respect of these compliances is fostered, the legislative intent behind this bill will fail. Moreover, it is not entirely right to say that certain compliance does not affect the general public just because it is minor and technical.

Ease of living to corporates

The CAB 2020 has proposed an exhaustive list of amendments in the existing Companies Act in order to further its objective of enhancing the ease of living to law-abiding corporates. It takes into consideration the current issues faced by corporates due to existing compliance and other procedural requirements and proposes to provide relaxations on that front. Some of the major proposed amendments are discussed below:

• As discussed above, CAB 2020 provides for relaxation in the punishment for various offences by altering their nature, nature of punishment and penalty imposed. This shall reduce the fear of new entrants and provide impetus to businesses.
• The CAB 2020 contains a special chapter to be inserted for Producer Companies (companies involved in sale, manufacture and marketing of agriculture and cottage industry produce). The different characteristics of nature of these companies require a special set of regulations for them which has been done in the impugned bill. The relaxed procedural requirements dealing specifically with these companies and other associated benefits provided for them will enhance the agrarian economy.
• It also proposes the setting up of benches of NCLAT at places apart from Delhi along with doing away with the upper limit of 11 members. Two appellate tribunals (one recently established in Chennai) in the entire country leads to various practical problems and impediments in getting timely legal recourse. Setting up of additional NCLATs spread across the country will facilitate easy access to courts and reduce the burden, leading to speedier decisions and lesser pendencies.
• It provides for set-off for the amount which has been spent in excess of the amount required to fulfill its Corporate Social Responsibility, in the subsequent years.It proposes a strict penalty for non-compliance with the CSR requirements. However, the CAB 2020 does away with the requirements of setting up a CSR committee wherein the amount to be spent is below Rs 50 lakhs. In such cases, the functions of the committee are supposed to be discharged by the directors of the company itself.
• It further proposes relaxations on arising of any dispute of trademarks on substantially similar names or trademarks of the companies. The CAB 2020 though reduces time period to do so from 6 months to 3 months, now proposes to decriminalize the offence by the provision of a new alterable name by the Central Government on the advice of the ‘ROC’ followed by the issuance of a fresh certificate of incorporation on failure on the part of the company itself.
• It proposes to extend the payment of remuneration bestowed upon the executive directors by the Companies Act 2013, to include non-executive and independent directors leading to higher productivity due to the enhanced incentives.
• It proposes to exempt non-other banking and housing finance companies from the requirement of filing resolutions like for the granting of loans and security of loans. This is currently provided only to banking institutions.
• The CAB 2020 bestows numerous discretionary powers in the hand of the Central Government. The Central Government has the power to grant certain public companies permission to list certain securities in a foreign jurisdiction. This step can help the growth of start-ups. It can also, in consultation with SEBI, exclude companies from the category of “listed companies”. It also has been enshrined with the power to require certain unlisted companies to submit financial results for audit and review. Such discretionary powers leave scope for the arbitrary partisan actions on the part of the Central Government which is contrary to the objective of the CAB 2020.

CONCLUSION

In a time when India is making its mark on the economic vanguard, the proposals in this bill, if implemented, will surely help in forming a more structured corporate governance framework. It will help in boosting the confidence of stakeholders as they will not have to worry about the criminal sanctions; however, this will prove beneficial only if a culture of respecting and adhering to these compliances is maintained in good faith. The bill has very intelligently proposed to re-categorize only those compoundable offences in which mens rea is not there, and the test of objectivity is fulfilled, efficaciously leaving the (non-compoundable) offences in which decriminalization would not have been a smart move. The relaxations proposed for corporates, as discussed above, will definitely help in enhancing and scaling up the ease of living thereby resulting in inclusive growth. The final form might also include various further amendments due to the change of situation in the wake of COVID-19 pandemic, and it will only be clarified when the parliament takes it up again or if an ordinance is promulgated in this regard.

Authors:

Renuka Mishra : Law student, Year III, B.A LL.B. (Hons.), Symbiosis Law School, Pune; Founder and Managing Editor at Law et Justicia Law Review.

Aakash Batra: Law student, Year III, B.A LL.B. (Hons.), Symbiosis Law School