It seems that 2020 has been the year of amendments for the corporate sector. With amendments brought under the provisions of Corporate Social Responsibility, Incorporation of companies, CARO 2020 etc., the Central Government (CG) has again laid down another set of amendments before the Lok Sabha on 17th March, 2020 by way of Companies (Amendment) Bill, 2020 (“CAB, 2020”).The same has now been passed by the Lok Sabha on 19th September, 2020 and by Rajya Sabha on 22nd September, 2020. The bill comes at a time when companies are reeling under stress due the coronavirus pandemic.
The finance minister of India, Smt. Nirmala Sitharaman tabled the Companies (Amendment) Bill, 2020 (the “Bill”) before the Lok Sabha on March 17, 2020, to introduce certain modifications to the Companies Act, 2013 (the “Act”) with a view to promote ease of doing business and ease of living to corporates in India. The proposed amendments under the Bill are based on the recommendations submitted by the Company Law Committee (the “Committee”), which was formed with representatives from the industry chambers, professional institutes and legal fraternity. The mandate of the Committee was relatively wide-ranging including envisaging various reforms to the Act such as reviewing offences, introducing mechanisms to reduce burden on courts, ensuring effective disposal of cases, improving functioning of various authorities under the Act and suggesting other changes with the objective of promoting ease of doing business in India. The Committee submitted its report to the union minister, Ministry of Corporate Affairs (MCA) on November 14, 2019.
The recommendations of the Committee were largely based on re-categorization of certain criminal compoundable offences into civil wrongs carrying civil liabilities, rationalization of penalties, mechanisms for reducing the overall pendency of disputes and certain other ancillary changes to address emerging issues impacting the working of corporates in the country.
The proposed amendment will be carried out in Section 23 of the Companies Act.
The CAB, 2020 has been based on the Company Law Committee (“CLC/Committee”) which was set up under the Chairmanship of Shri Injeti Srinivas in September, 2019. The CLC was constituted with a view to decriminalize offences and provide ease of doing business to the corporates and other stakeholders. The Committee presented its Report in November, 2019 which provided for de-clogging 46 penal provisions in the following manner:
- Re-categorising of 23 offences out of 66 compoundable offences to an in-house adjudication framework wherein penalty will be levied by an adjudication officer
- Omitting 7 compoundable offences
- Limiting 11 compoundable offences to fine only (by removing imprisonment part)
- Recommending 5 offences to be dealt with in an alternative framework
The CAB, 2020 based on the CLC Report provides majorly for the following:
- decriminalise certain offences under the Companies Act, 2013 in case of defaults which can be determined objectively and which otherwise lack any element of fraud or do not involve larger public interest;
- to empower the CG to exclude, in consultation with the SEBI, certain class of companies from the definition of “listed company”, mainly for listing of debt securities;
- to make provisions for allowing payment of adequate remuneration to non-executive directors in case of inadequacy of profits, by aligning the same with the provisions for remuneration to executive directors in such cases;
- to exempt any class of persons from complying with the requirements of section 89 relating to declaration of beneficial interest in shares;
- to reduce timelines for applying for rights issues so as to speed up such issues under section 62;
- to extend exemptions to certain classes of non-banking financial companies and housing finance companies from filing certain resolutions under section 117;
- to further amend provisions relating to CSR;
The Bill aims to overhaul the penalty regime for various non-compliances, as currently contemplated under the Act in a 3 (three) fold manner:
(a) Removal of imprisonment and/or substitution with monetary penalty
The Committee recommended omission of certain offences under the Act as it was felt that such offences can be sufficiently dealt with under other prevailing laws such as the Insolvency and Bankruptcy Code, 2016 (the “Code”). It was also highlighted by the Committee that in the event any vacuum is created because of the deletion of an offence from the relevant Section of the Act, Section 450 of the Act (which deals with punishments where no other penalty is prescribed), can always be resorted to. Accordingly, certain offences contemplated under the Act, such as defaults in relation to: (i) compliance with the provisions of the Act dealing with variation of shareholders rights (ii) publication of the order of the National Company Law Tribunal (“Tribunal”) for reduction in shares ; and (iii) compliance with the orders of the Tribunal in respect of debentures , amongst others, have been proposed to be omitted from the Act. Additionally, with respect to certain other non-grave offences punishable with imprisonment and/or with monetary penalty, the Bill has proposed substitution of such offences with monetary penalty only. In this respect, offences such as default in compliance by a company: (i) while purchasing its own securities ; (ii) for registration of charges; (iii) in maintaining registers, filing returns or taking other necessary steps regarding declaration of significant beneficial ownership; and (iv) in maintaining books of account to be kept by the company , which currently contemplate imprisonment and/or monetary penalty for defaults, are proposed to be substituted solely with monetary penalties, as applicable. The rationale for introducing such modifications is to decriminalise minor procedural or technical lapses under the Act into civil wrongs and reduce the overall pendency of the courts by removing the criminality in case of defaults, the commission of which is not linked with any mala fide intention on the account of the wrong-doer and/or does not involve larger public interest.
(b) Reduction in amount of penalty
The Bill also aims to reduce the penalties for certain offences such as non-maintenance of register of members, failure to file annual return within the prescribed timelines, failure to file resolutions and agreements in terms of the Act and non-compliance of provisions relating to unpaid dividend account17 and such modifications to the Act have been proposed as a part of providing a further ease of living to corporates living in the country
(c) Dealing with certain offences in an alternate framework
The Committee was of the view that for certain offences under the Act, the proposition of replacing such offence with monetary penalty and/or mere rationalization of penalties may not achieve the intended result.
Therefore, the Committee perceived that it may be worthwhile to device an alternate mechanism to address the concerns created by such offences in order to better achieve the desired objective of such provisions. Based on such suggestions of the Committee, an alternate framework for certain offences has been proposed to be introduced. For instance, one such proposed amendment relates to a situation where, if a company fails to abide by the order of the Regional Director under Section 16(1) of the Act, (requiring rectification of the name of the company on the grounds that such name is identical or similar to an existing company, or a registered trademark), within 3 (three) months of passing of such order, then in place of imposing civil liability on the company, an auto-generated name shall be assigned to such company, which name the company shall be bound to use until it gets it changed through due process as per the provisions of the Act.
The other provisions of the Act where such alternate mechanisms have been proposed, include provisions relating to non-compliance with order of compounding of the Tribunal or the Regional Director, non-cooperation of promoters, directors and employees with the company liquidator and company liquidator not serving the order of dissolution to Registrar of Companies (“RoC”).
The Lok Sabha passed the Companies (Amendment) Bill, 2020, by voice vote without any debate or discussion due to the situation arising out of the Coronavirus pandemic. The (4th amendment) Bill was introduced in the lower house in May, 2020. there are currently around 124 penal provisions compared to 134 in 2013 under the Companies Act. The proposed amendment will be carried out in Section 23 of the Companies Act. The bill removes the penalty, imprisonment for 9 offenses which relate to non-compliance with orders of the national company law tribunal (NCLT), and reduces the amount of fine payable in certain cases.