Committee Report to Review Offences under Companies Act, 2013 By CS Arundhuthi Bose


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Contents
 

Introduction
 
On the 14 August 2018, the Committee to Review Offences under the Companies Act, 2013 submitted its Report[1] to the Honourable Union Minister of Corporate Affairs. The prime aim of this Committee Report was to suggest the “re-categorisation of certain ‘acts’ punishable offences as compoundable offences to ‘acts’ carrying civil liabilities, improvements to be made in the in-house adjudication mechanism etc.
 
It has also been felt necessary that in order to ensure the serious offenders to be punished, the courts need to be freed from dealing with offences that are primarily procedural and technical in nature that may be rectified through an in-house adjudication mechanism. It has also been clarified that the extent of enforcement of serious offences need not be diluted, rather the noose should be tightened.
 
An attempt to declog the Tribunal by making suitable amendments has also been done that includes recommendations on significant reduction of compounding cases before the Tribunal.
 
This is not the first instance that modifications in the offences under the Companies Act have been attempted. The Joint Parliamentary Committee in the year 2002 had also noted that the penalties prescribed in the Companies ct, 1956 were nominal and that the offences were easily compoundable. This was taken into due consideration while framing the provisions under the extant Act. The offence of fraud was dealt with vide section 447, while an offence of fraud below a certain threshold not involving public interest was made compoundable through the Companies (Amendment) Act, 2017.
 
The Irani Committee constituted in 2005 had recommended the setting up of an in-house mechanism for levying penalties on account of technical defaults. The Vaish Committee constituted in the year 2005 recommended the withdrawal of cases that did not involve public interest at large.

Pursuant to these the Committee to Review Offences under the Companies Act, 2013 was formed under the Chairmanship of Shri Injeti Srinivas vide an office order dated 13 July 2018.[2]
 
Terms of reference of the Committee involved:-
 
  • Examine the nature of all acts categorised under compoundable nature and recommend if any such act may be re-categorised as ‘acts’ carrying civil liabilities wherein the ‘company’ and ‘officer in default’ are liable to the penalty
  • To review non-compoundable offences and see if they need to be reclassified as compoundable.
  • To examine existing mechanism of levy of penalty
  • To lay down broad contours of an in-house adjudicatory system where the penalty may be levied in MCA21 system driven manner to minimise discretion
  • Any other relevant matter.
Structure of the Report
 
The report has been mainly divided into Compoundable offences and non-compoundable offences in the first chapter. Compoundable offences have been further sub-categorised into 8 categories. The second chapter deals with the Adjudication of penalties. The third chapter involves declogging of the NCLTs and the last part deals with other relevant recommendations related to corporate compliance and corporate governance.
 
Primarily there are almost 33 proposed amendments suggested by the Committee in its Report which has been summarised in Annexure III of the Report.
 
Let us see through these chapters in detail below.
 
Chapter - I – Offences under the Companies Act, 2013
 
As per section 3(38) of General Clauses Act, 1897 "Offence" shall mean any act or omission made
punishable by any law for the time being in force.
 
They may be either compoundable or non-compoundable depending upon the nature of the offence. Compounding of an offence basically refers to doing good any default or non-compliance.
 
The compounding provision in the Companies Act, 1956 was inserted by the Companies Amendment Act, 1988 after the recommendations of the Sachar Committee (A Committee under the of Chairmanship of Justice Rajinder Sachar constituted in 1977)[3] as amended by the Companies (Amendment) Act, 2000. The Committee was constituted to consider and report on what changes were necessary in the Companies Act, 1956 and also the. 'Monopolies and Restrictive Trade Practices Act, 1969. It was felt that leniency is required in the administration of the provisions of the Act particularly penalty provisions because a large number of defaults are of technical nature and arise out of ignorance on account of the bewildering complexity of the provisions.
 
Compoundable Offences
 
In a gist, as per section 441(6) of the Companies Act, 2013, compounding of offences is possible for those offences for which the prescribed punishment is either imprisonment or fine, or with imprisonment or fine or with both (with the permission of Special Court). Which means that offences for which the prescribed punishment is imprisonment only, or imprisonment and fine do not come under compoundable offences.
 
Also, in the proviso to section 441(1)(b) it is stated that any offence covered under this sub-section by any company or its officer shall not be compounded if the investigation against such company has been initiated or is pending under this Act.
 
Under the Companies Act, 2013 section 441 deals with the compounding of certain offences. Whether to compound or not, the decision lies in the hands of the offender unlike criminal law, where the victim has a say on the decision to compound. It is primarily a settlement mechanism where the guilty admits to having done the offence and who is willing to settle the default suo moto. It should also be noted that most of the times these defaults are of technical nature and compounding serves as the best solution rather than going through the lengthy and cumbersome trials.
 
The Committee in order to have concrete understanding and findings on compoundable offences categorised them into 8 parts considering the heterogeneous nature of the defaults involved. The categories are as follows:-
 
Category I – Those resulting from the non-compliance of the order/direction of the Central Government/NCLT/RD or ROC

Category II – Default in the maintenance of certain records at the registered office of the company

Category III – Defaults on account of non-disclosure of interest of persons in the company, which viciates the records of the company

Category IV – Defaults related to corporate governance norms

Category V - Technical defaults relating to the intimation of certain information to ROC by form filing or sending notices to the stakeholders

Category VI – Defaults involving substantial violation which may affect the going concern nature of a company or is contrary to public interest at large

Category VII – Default related to Liquidation Proceeding

Category VIII – Defaults made punishable through an omnibus clause
Understanding the recommendations for each of the categories we deduce the following:-
 
Category I – Those resulting from the non-compliance of the order/direction of the Central Government/NCLT/RD or ROC.
Defiance of orders or directions by statutory authorities cannot be considered as ‘procedural lapse’. The non-compliance of even the adjudicating authority is not unlikely. Hence, due to the serious nature of the default involved, these offences should not be brought under in-house adjudication by levying the penalty.
 
Sections covered – 16(3), 48(5), 59(5), 66(11), 71(11), 99, 206(7), 221(2), 222(2), 232(8), 242(8), 243(2), 405(4), 441(5), 454(8)
 
Category II – Default in the maintenance of certain records at the registered office of the company
 
Default in the maintenance of certain records gives rise to civil liabilities under the extant law framework. Due to the serious nature of the default involved, these offences should not be brought under in-house adjudication by levying penalty as they cover defaults which affect the rights and liabilities of the members as well as the other stakeholders.
 
Sections covered – 56(6), 88(5), 90(11), 128(6)
 
Category III – Defaults on account of non-disclosure of interest of persons in the company, which viciates the records of the company
 
Timely disclosure of interest by various parties is the bedrock of any trust-based regulatory framework. Any default pertaining to these disclosures not only viciates the records of the company but also taints the underlying transaction. Considering the serious implications associated with non-disclosure of certain facts and figures no change was recommended in such cases.
 
Sections covered – 89(5), 90(10), 184(4)
 
Category IV – Defaults related to corporate governance norms
 
Defaults pertaining to corporate governance involve a mix of major and technical defaults. Hence it was recommended that all offences under Category IV be brought under in-house adjudication which involves imposition of penalties.
 
Sections covered – 53(3), 165(6), 191(5), 197(15), 203(5)
 
Category V - Technical defaults relating to intimation of certain information to ROC by form filing or sending notices to the stakeholders
 
These kind of offences may be brought under in-house adjudication which involves penalty in case of default.
 
Sections covered - 64(2), 86, 89(7), 92(5), 102(5), 105(3), 117(2), 121(3), 137(3), 140(3), 157(2), 159, 238(3). Here, except for sections on charge and significant beneficial ownership {section 86, 89(7)}, it was recommended for the other defaults to be brought under the purview of in-house adjudication.
 
Category VI – Defaults involving substantial violation which may affect the going concern nature of a company or is contrary to public interest at large
 
It was observed that these defaults are of serious nature and that rigours of criminal trial is called for in these cases. These defaults are broad-ranging and affect public interest, shareholder’s interest, credito’s interest at large and may also affect the going concern nature of the company. An element of deceit or the intention of siphoning of funds may not be considered as ‘technical’ defaults. Hence, these offences should not be brought under in-house adjudication system as it involves offences of serious nature.
 
Sections covered - 8(11), 26(9), 40(5), 68(11), 74(3), 76A,92(6), 105(5), 124(7), 129(7), 134(8), 143(15), 147(1), 147(2), 148(8), 166(7),167(2), 178(8), 185(4), 187(4), 188(5), 204(4), 247(3), 249(2), 392, 447, 451, 452(1), 464(3).
 
Category VII – Default related to Liquidation Proceeding
 
In the case of defaults related to Liquidation proceedings the NCLT has powers of contempt to enforce orders passed by it. Hence, any adjudication in cases will impede the proceedings and be counterproductive. It was felt that there was no need to replace fine with penalty.
 
Sections covered – 274(4), 284(2), 302(4), 342(6), 344(2), 347(4), 348(6), 348(7), 356(2).          
 
Category VIII – Defaults made punishable through an omnibus clause
 
Due to the wide ranging nature of the defaults involved and to avert any unintented consequence it was recommended that these offences need to be brought under in-house adjudication.
 
Sections covered – 172, 450, 469(3).
 
Thus, a list of the offences that were recommended to be recategorised which would be subject to both in-house adjudication and the present punishment prescribed is given below:-
 
  • 53(3) – Prohibition on the issue of shares at a discount [Fine/Imprisonment/Both]
  • 64(2) – Failure/delay in filing a notice for alteration of share capital [ Fine]
  • 92(5) – Failure /delay in filing annual return [Fine/Imprisonment/Both]
  • 102(5) – Attachment of a statement of the special business in the notice of general meeting [Fine]
  • 105(3) – Default in providing declaration regarding the appointment of proxy in a notice for general meeting [Fine]
  • 117(2) – Failure/ delay in filing certain resolutions [ Fine]
  • 121(3) – Failure/delay in filing report on AGM by a public listed company [ Fine]
  • 137(3) – Failure/delay in filing financial statement [Fine/Imprisonment/Both]
  • 140(3) – Failure/delay in filing a statement by auditor after resignation [Fine]
  • 157(2) – Failure/delay by the company in informing DIN [Fine]
  • 159 – Contravention related to DIN [Fine/Imprisonment/Both]
  • 165(6) – Accepting directorship beyond specified limit [ Fine]
  • 191(5) – Payment to the director not to be made on the loss of office [Fine]
  • 197(15) – Managerial remuneration [Fine]
  • 203(5) – Appointment of KMP in a certain class of companies [ Fine]
  • 238(3) – Registration of the offer of a scheme involving the transfer of shares [Fine]
12 out of the above 16 offences have been recommended to be brought under in-house adjudication, i.e, being punishable with fine only.
 
Non-Compoundable Offence
 
At the time of formulating the new legislation for replacing the Companies Act, 1956 it was ensured that offences of a serious nature were made non-compoundable. Section 447 is an overarching provision which lays down punishment for fraud in relation to the company or a body corporate. Further, the Companies (Amendment) Act, 2017 brought in changes in the powers of Special Courts allowing for speedy trial of all offences under the Companies Act, 2013. Earlier, Special Courts were limited to conducting a trial of serious offences.
 
Explanation to section 447 defines the following:-
  1. “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
  2. “Wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;
  3. “Wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.”
This sub-part of Chapter I of the Report basically deals with section 447, which is the penal provision for the cases of fraud. ‘Fraud’ as defined above typically for a company or body corporate includes act, omission or concealment of any fact or abuse of position with an intent to deceive or to gain an undue advantage from, or to injure the interest of the company or its shareholders, or its creditors irrespective of any wrongful gain or loss.
 
Companies (Amendment) Act, 2017 introduced a proviso stating that an offence below Rs. Ten Lakh or 1% of the turnover of the company (lower of the two) without public interest being involved, be made compoundable. [Imprisonment extending to a maximum of 5 years, or fine which may extend to Rs. Twenty Lakh or both]
 
Sections covered – 7(5) & (6), 8(11), 34, 36, 38(1), 46(5), 66(10), 76A, 90(12), 140(5), 148(8)(b), 206(4), 213, 229, 251(1), 339(3), 448.
 
It was observed that current penal provisions with regard to these kinds of offences need not be changed. The current mechanism is apt to tackle these offences and these need not be brought under the in-house adjudication system.

Chapter – II – Adjudication of penalties
 
One of the basic benefits of civil proceedings over criminal proceedings is the requirement to prove the existence of mens rea. Hence, a blameworthy conduct is enough to initiate a civil proceeding. Section 454 of the Companies Act, 2013 deals with the adjudication of penalties. Here the adjudicating officer is required to give a reasonable opportunity of being heard to the accused to defend himself before being imposed with a penalty.
 
Here, it was recommended that the physical presence of the parties must be an exception, if at all, and not the rule. It must be required for the adjudicating officer to record the reason for requiring the presence of defaulting officer as a part of the order. However, if any party on its own accord solicits its presence, they may be allowed to do so for the adjudication. The adjudicating officer should also record the reasons for summoning attendance of a person acquainted with the facts of the case.
 
To ensure robust repository, it was also suggested that a system to issue e-notices should be created against which responses may also be filed online itself. The issue of physical notice should be initiated only when a reply to the e-notice is not received within a stipulated time.
 
In the case where the representatives of the company or officer in default wish to make an oral representation, they may be permitted to do so after filing their online reply. Also, for the sake of transparency, the proceeding must be video-graphed.
 
The orders must be published on the website to create awareness among stakeholders. Also, in the case of defaults determinable through the MCA21 system, an auto-populated list should be generated in a random manner.
 
The above recommendations would require suggested changes in the rules through amendments and an up-gradation in the online platform.
 
In the case of continuing defaults, the penalty for each day’s delay was recommended.

In order to ensure compliance, it was suggested that while levying penalty the adjudicating officer, wherever he considers fit, also direct the defaulter to make good the default. The intention must not be of levying the penalty, but to ensure compliance. Hence amendment to section 454 was recommended. Also, a recommendation to insert a new section 454A was made that would deal with repeated offenders.

Chapter – III – De-clogging of the NCLT
 
Cases which would aid in the de-clogging of the NCLTs:-
 
  • Change of financial year of a company – It was suggested that section 2(41) be amended suitably to provide the power to dispose cases with regard to changing of the financial year and pass pass suitable order thereon to the Central Government. The Central Government may delegate it to any other authority if required. In the case of body corporates other than a company, the Central Government may take a view to delegate the same to the NCLT.
  • Conversion of the public to a private company – It was recommended that the power to approve conversion of public companies under section 14 be vested with the Central Government, which may delegate the same to the RD or ROC if deemed necessary. It may also delegate the same to NCLT in case of certain class of companies having higher turnover or significant amount of debt.
  • Compounding of offence – It was recommended that the pecuniary jurisdiction of the RD under section 441(1)(b) be increased to Rs. Twenty-Five Lakh from Rs. Five Lakh. It was also recommended that the maximum fine which may be imposed be increased from Rs. Twenty Five Lakh to Rs.Fifty Lakh. If implemented, the compounding applications other than section 8, 40, 90, 447 will be done at the level of RD hence de-clogging the NCLT.
  • Omission of section 446(1)(a) – Section 446(1)(a) which requires permission of Special Court for compounding of offence is a redundant provision and should be omitted.
  • Measures to bring transparency in compounding proceedings - It was recommended that clarification with regard to minimum amount imposed during compounding and adjustment of fees and additional fees from amount of sum levied at the time of compounding must be provided. It may also be clarified that the adjustment be made in relation to the sum levied on the company and not the officers in default.
  • Voluntary revision of financial statement or Board’s report – It was expressed by Shri Amarjit Chopra that only in those cases where revision of the financial statements or the Board’s Report is material, only those cases be filed before the NCLT. This is with reference to section 131.
Chapter – IV - Other relevant recommendation related to corporate compliance and corporate governance
 
  • Declaration before the commencement of business – It was suggested that section 11 may be restored after removing requirement related to minimum paid-up capital and consequential omission to section 248 in respect of section 11 be restored. This was recommended considering the fact that it would be of a major assistance during cases of strike-off. 
  • Maintenance of a registered office – It was recommended that non-maintenance of registered office must be made one of the grounds to strike off companies under section 248.
  • Raising of public deposit – The decision of omitting section 76 may need greater consultation, but an eform may be introduced wherein the companies may be required to provide details of transactions which are excluded from the purview of ‘deposits’ under the rules.
  • Registration of charges – It was recommended that the period of 300 days for filing of creation and modification of charge under section 77 be reduced to 60 days, i.e. 30 days normal filing time and 30 days for additional. An ad-valorem fees be levied for filing of creation or modification of charge beyond 60 days but within 120 days, after which the charge will not be registered. Wilful suppression with respect of reporting of creation or modification of charge should attract section 447.
  • Significant Beneficial Ownership – A person aggrieved with restrictions imposed on shares under section 90(7) may approach the NCLT for lifting such restrictions. It was recommended that if no person files any application to lift the restriction within 1 year, such shares be transferred to the IEPF without any restrictions. Considering the importance of disclosures under section 90, it was recommended that the punishment is enhanced to fine or imprisonment or both instead of only fine.
  • Independent Director – It was recommended that for an independent director, sitting fees and expenses incurred for participation in meetings of Board and Committees not be considered for the purpose of assessing pecuniary relationship. The sum total of the pecuniary relationship of an ID excluding sitting and participation expenses should not exceed 20% of his total income of which professional or Board related services shall not exceed 10%.
  • The maximum number of directorships – It was recommended that if the number of directorships exceeds beyond number provided in section 165, such individual should be subject to disqualification under section 164(1) read with section 167(1). It was also recommended that exemption to section 8 companies in this regard be withdrawn.
The above was a synopsis of the changes and amendments recommended by the Committee in their Report. These amendments have been suggested to strengthen the Companies Act, 2013 as a whole and to refine and develop the penal provisions to be made more effective.

 

Extract from the Report – Summary of Proposed amendments [Annexure III of the Report]
 
The extract of the proposed amendments, as summarized in Annexure III of the Committee Report, has been given below for the convenience of reference. 

     
 
         
   
   
 

 

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