Companies (Amendment) Ordinance, 2019 -A move towards decriminalization of offences under Companies Act, 2013

Companies (Amendment) Ordinance, 2019 -A move towards decriminalization of offences the Companies Act, 2013

The Government of India Promulgated the Companies (Amendment) Ordinance, 2019 on January 12, 2019 to give continuing effect to the Companies (Amendment) Ordinance, 2018 and to amend the Companies Act, 2013. This is notable that the companies (Amendment) Ordinance, 2019 has a significant difference its precursor.

As an Ordinance comes with an expiry date i.e. 6 weeks from the re-assembly of the Houses of the Parliament, it was necessary to pass the Ordinance by the Houses of the Parliament in order to imbibe the amendments in the Act. The re-assembly of the Houses of the Parliament started from December 11, 2018 and continued till January 08, 2019 and the Ordinance got its approval from the House of People on January 04, 2019 but considering other exigent matters, it could not be taken up for passing by the Council of States.

Therefore, as the Ordinance will cease to operate on January 21, 2019, so in order to have a continued effect of the amendments brought in by the Ordinance, the Ordinance have been repealed by Companies (Amendment) Ordinance, 2019 on January 12, 2019.

The write-up covers the snapshot of the changes brought in the Companies Act, 2013 by the Ordinance which is subsequently repealed and replaced by Ordinance, 2019.

♦ The main reforms undertaken through the Ordinance include the following:

• Re-categorizing of offences which are in the category of compoundable offences to an in-house adjudication framework. However, no change has been made in respect of any of the non-compoundable offences.
• Ensuring compliance of the default and prescribing stiffer penalties in case of repeated defaults
• De-clogging the NCLT by:
• enlarging the jurisdiction of Regional Director (“RD”) by enhancing the pecuniary limits up to which they can compound offences under section 441 of the Act.
• vesting in the Central Government the power to approve the alteration in the financial year of a company under section 2(41); and
• vesting the Central Government the power to approve cases of conversion of public companies into private companies.
• Other corporate governance related reforms include re-introduction of declaration of commencement of business provision; greater accountability with respect to filing documents related to creation, modification and satisfaction of charges; non-maintenance of registered office to trigger de-registration process; holding of directorships beyond permissible limits to trigger disqualification of such directors.

 THE AMEDMENTS AND ITS INFLUENCE

Section 2(41): Definition of “financial year”

• As per the existing section, the application for adopting a different financial year was to be made to “Tribunal” which shall henceforth be made to the “Central Government”.

Section 10A: Commencement of Business, etc.

• This seems to be a reinstatement of the provisions of the erstwhile Companies Act, 1956 under Section 149 thereof though the same was applicable only to public companies. However, the Ordinance puts the restriction on every company having share capital (incorporated post commencement of the Ordinance), to not to commence its business or exercise borrowing powers unless the directors file a declaration within a period of 180 daysfrom the date of incorporation in a prescribed form to the effect that every subscriber to the memorandum has paid the value of the shares as agreed for and the registered office is verified by filing necessary returns with the Registrar. Failure to comply with this Section may be an additional ground for Registrar to strike off of the name of the company.

Section 12: Registered office of company

• The Registrar is now empowered vide a new sub- section i.e. sub- section (9) to physical verification of the registered office on reasonable cause to believe that no business or operations is being carried out by the company. In case of any non- compliance of sub- section (1) in respect of having such an office in place is found, the same may also be an additional ground for Registrar to strike off of the name of the company. The Ministry shall prescribe the relevant rules in this regard.

Section 14: Alteration of Articles

• Existing provisions required the application for alteration of Articles to give effect to conversion of a public company to a private company to be made to the Tribunal which has now been shifted to the Central Government though the pending applications will be disposed off by the Tribunal.

Section 77: Duty to register charges, etc.

• This is one significant amendment brought in by the Ordinance. Henceforth, the creation of charges has to be registered within 30 days of creation which, on an application, may be extended by the Registrar to additional 30 days (existing provisions provided 270 days on payment of additional fee). In case of failure to register within the additional time of 30 days, the Registrar may, on an application, allow an additional period of 60 days from the date of application for which an ad valoram fee shall be levied. The relevant rules awaited in this regard. Further, the existing charges pending registration shall get a timeline of 6 months from the effective date of the Ordinance to register on payment of additional fees. The amendment has significantly reduced the time line which is a major change.

Section 86: Punishment of contravention

• Apart from the existing penal provisions on any contravention of the provisions of the chapter, any wilful furnishing of false or incorrect information or knowingly suppressing any material information pertaining to registration of charges shall tantamount to be a fraud and shall attract action under Section 447.

Section 87: Rectification by Central Government in register of charges

• The Section has been re-drafted and merely a straightening of the language.

Section 90: Register of significant beneficial owners in a company

• The limitation period of 1 year has been prescribed for the aggrieved party to make an application to the Tribunal against an order passed by the Tribunal restricting the rights attached to the relevant shares to relax or lift of such restrictions.  In case of failure to file the application within such timeline, then such shares shall mandatorily be transferred to IEPF.

Section 164: Disqualification of director

• A new clause has been inserted under the Section linking Section 165 which shall be a ground for disqualification of a director, if he/ she breaches the limits of maximum directorship allowed thereunder. It is pertinent to note that falling under any of the clauses of Section 164 leads to automatic vacation of office that too, from all the existing companies. This is one of the significant provisions which needs immediate attention.

Section 197: Overall maximum managerial remuneration in case of inadequacy of profits

• Sub- section (7) of the Section has been removed which pertained to a prohibition on entitlement of stock option by independent directors. However, this omission shall not have any impact as Section 149 (9) also provides similar prohibition.
• Further, the existing penal provision of payment of fine has been replaced with penalty of the equivalent amount of fine as provided in the existing provisions.

Section 248: Power of the Registrar to remove the name of the company

• In view of the newly inserted provisions of Section 10A and 12(9) as discussed aforesaid, the relevant amendments have been made in Section 248 of the Act in order to provide a reference to the aforesaid new Sections.

Section 441: Compounding of offences

• The Ordinance has increased the limit of offence for compounding before the Regional Director from 5 Lakhs to 25 Lakhs.

Section 454- Adjudication of penalties;

• The existing section empowered the adjudicating officer to impose penalty, by an order, on the company and the officer who is in default in case of any non- compliance or default of the provisions of the Act. Such an order may henceforth be included any other person too, hence the same expands the power of the adjudicating officer. Further, the order of the adjudicating officer may also provide for rectification of the default by the concerned person. The penal provisions as provided in sub- section (8) shall apply to violation in compliance of the said order also.

Section 454A: Penalty for repeated default

• The newly inserted section provides for penalty of twice the amount of penalty in case of repeated defaults by companies or any person who had already been subjected to penalty under the Act. However, the subsequent default has to be repeated within 3 years from the date of order imposing penalty for earlier default.

 CHANGES IN THE PENAL PROVISIONS 

To conclude it may be said that the amendments introduced in the Ordinance are primarily to re-categorize the existing penal provisions as civil defaults for those provisions which are more likely of administrative nature as recommended by the Injeti Srinivas Committee. In view of the amendments, it is definitely a welcome step towards ensuring corporate compliance in a systematic manner.