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Introduction
The Companies (Amendment) Bill, 2020 was introduced on the basis of a report submitted by the Expert Committee. The committee’s recommendations were incorporated as a part of the bill. It has introduced significant changes in Companies Act ranging from provisions governing producer companies to those governing corporate social responsibility. Along with these changes, it has brought changes in respect of offences under Company Law. It has sought to decriminalise compoundable offences under the Companies Act, 2013. However, serious offences such as the commission of fraud harm to the public interest and other forms of non-compoundable offences have been excluded from being decriminalised. In case where an offence is being committed as a result of technical issues or procedural delays or lapses, and in cases where the offence does not have any element that harms public interest at large and does not have a fraudulent intention, then in those cases, offences shall be decriminalised. This article seeks to discuss all the changes brought by Companies Amendment Bill, 2020 in respect of modifications on the structure of offence under the act and related punishments. It has proposed to change the very nature of punishment in certain offences depending on various factors such as the gravity of the offence and fraudulent and criminal intention of the defaulting party. The article shall discuss all these changes.
Basis for Decriminalising Offences under Companies Amendment Bill, 2020
The Expert Committee laid down its observations in its report and stated that civil wrongs such as those committed due to procedural or technical issues, do not have an element of mens rea, which means that these offences do not have an existence of an intention to cause harm. This intention also called the mens rea, is an important element of criminal offences. On the basis of this idea, it was proposed by the Expert Committee in its report that in case of commission of civil wrongs under company law, the offence should not be criminalised and payment of fine as a penalty should be imposed as a punishment, rather than imposing criminal punishment such as imprisonment. Thus, a new perspective was given, where offences under company law were divided as civil and criminal wrongs depending on the existence of fraudulent intent to cause harm to the public interest.[1]
Omission of Criminal Offences
The Expert committee brought attention to the problem that was created due to multiplicity of laws; it creates a confusion in the minds of the general public. So, the committee recommended that if any particular offence is being dealt by another legislation that is a specialised law in that case, then such offence and punishment related to the act must be removed from the Companies act. The special legislation must be allowed to deal with that offence. Abiding by the recommendation, Companies Amendment Bill, 2020 introduced such change in companies act and proposed the removal of nine offences, which govern cases in which National Company Law Tribunal’s orders are not being complied with. These offences pertain to matters in respect of winding-up of companies, when a company has committed a default in terms of the publication of order issued by National Company Law Tribunal, in respect of share-capital reduction, change in register containing names of shareholders, change in shareholder’s rights or interest payment by a company. It has also decriminalised offences that are committed as a result of failure by company liquidator in complying to requirements to conduct liquidation proceedings. All these offences were deleted from the ambit of company law and were to be governed by provisions of Insolvency and Bankruptcy Code, 2016 as with time, the code has come up as a comprehensive one in dealing with matters pertaining to winding-up and liquidation of companies. [2]
Omission of Imprisonment and Recategorisation of Offences
There is a list of 23 offences under company law, which earlier attracted criminal liability and payment of criminal fine, but now after amendment, it shall be changed to the civil penalty against a civil wrong. These 23 are compoundable offences. There are certain offences in which the punishment of imprisonment has been omitted, but the penalty has increased considering the gravity of offences. These are offences pertaining to failure in compliance with obligations imposed by provisions pertaining to the corporate social responsibility under company law and failure to submit required data and information to Central Government.
The main objective behind Companies Amendment, Bill, 2020 removing these offences from the list of criminal offences, was to eliminate the subjectivity of adjudicators while deciding on punishment for offences under company law., Earlier, the judges could decide between fine or imprisonment as a punishment or choose to award both. They had the authority to impose fine within the range depending on their own discretion. Thus, the amendments that are being brought in through the bill were aimed at eliminating this subjectivity. [3]
Rationalisation of amount of fine
The committee has proposed to reduce the amount required to be paid as a penalty, in case of commission of 22 offences, in Companies Amendment Bill, 2020. These offences are pertaining to matters such as improper maintenance of companies’ records when the Registrar of companies is not duly informed about alterations being made to company’s share capital when procedural requirements in respect of the transfer of securities is not met with when register containing names of members, shareholders and debenture holders is not properly maintained by the company, when the company has failed to duly file annual return, resolutions and other important agreement with Registrar of companies. In all these offences the quantum of penalty has been reduced through the 2020 amendment. [4]
Decriminalisation under key Provisions of the Act
Company Amendment Bill, 2020 seeks to bring a change in the following offences in terms of their nature and punishment associated with the offences.
Public offer and offer document
After the Companies Amendment Bill, 2020 is enacted, if any company does not duly perform all the formalities that are required to be performed as per Company law, then now concerned persons of such companies are not required to undergo any imprisonment as the new amendment has proposed for the omission of imprisonment as punishment in contravention of provisions laid down under sections 26(9) and 40(5) of the act. These sections broadly deal with matters that pertain to the treatment of money received through the application of shares differently and prospectus that is required to be issued before making a public offer of shares. Though a part of imprisonment has been removed from punishment in such offences still a civil penalty has to be paid, the amount of which has not been amended. However, in order to fall within this ambit, it is required that the concerned persons in the company should not have any fraudulent intention in not complying with the said provisions. However, apart from the application of amended provisions, the rules and regulations as framed by the Securities Exchange Board of India will continue to apply in these situations. [5]
Buy-back of securities
The manner in which companies have to carry out a buy-back of shares is laid down under section 68 of Companies Act, 2013 and the punishment for non-compliance under sub-section 11 of the same section. After the Companies Amendment Bill, 2020 it is being proposed in the bill that imprisonment associated with above offence be done away with and the concerned defaulters of the defaulting company be required to pay a civil penalty only as punishment. The enactment of the said amendment will decriminalise the offence and thereby omitting the punishment of imprisonment.
Significant beneficial owners
As per section 90(10) of Companies Act, 2013 the significant beneficial owners in a company have to necessarily disclose their interests in the company, and if they fail to disclose this information, then the concerned persons had to undergo punishment for their default. The act had provided imprisonment as punishment but Companies Amendment Bill, 2020 proposes to bring a change and thereby remove imprisonment as a punishment for default and at the same time also recommends that civil penalty being imposed in case of such default be rationalised. Thus, the change was proposed, which seeks to reduce the initial penalty to Rs 50,000 and Rs. 1000 be imposed as a penalty for each day if the default is not corrected.
The companies are also required under section 90(4) of Companies Act, 2013 to inform the Registrar of companies about details or information as received from significant beneficial owners. If there is any default by the company in complying with these provisions, then it has to undergo a punishment for default. Earlier the company, as well as officers who defaulted, had to pay Rs 500,000 as a penalty but after 2020 amendment being enacted it will be required for the company to pay a penalty of Rs. 5,00,000 whereas the officers can be imposed with a penalty amounting to Rs 2,50,000 only. This change has been brought by the expert committee recognising the differences between the penalty of a company as a whole and the defaulting individual officers. The penalty of individual officers who defaulted has been duly reduced through the amendment. [6]
Financial statement of companies
As per section 135(5) of Companies Act, 2013, the companies are required by law to contribute some funds towards fulfilling their corporate social responsibility. The companies are required to use at least 2% of their net profits, towards discharging their responsibility towards society. This is known as the Corporate social responsibility fund. Any amount that is not spent from such funds has to be transferred and cannot be used for any other purpose. If there is any default in above respect the earlier the defaulters could be imprisoned to a maximum period of three years, but after Companies Amendment Bill, 2020 will be enacted the nature of punishment in such case shall be changed from a criminal to a civil one. Thus it will omit imprisonment as punishment. The defaulters are still required to pay a civil penalty which shall amount to either double the amount required by the company to be spent towards corporate social responsibility or Rs. 1,00,00,000 whichever is lower, this shall be a penalty for company. The defaulting officers have to either pay an amount that is one-tenth the amount required by the company to spend towards fulfilling its corporate social responsibility or Rs. 2,00,000, whichever is lower value. [7]
Appointment and qualification of directors
When a director becomes disqualified from being a director of a company due to any reason, then such director is required to vacate his position under the act. And if such director still continues to hold his office even after being disqualified the, he can be punished under section 167(2) of Companies Act, 2013 with imprisonment and fine. Companies Amendment Bill, 2020 seeks to change the nature of the offence in this case as well from criminal to civil and thereby leading to the omission of imprisonment of defaulting person. However, the penalty has been increased for such director’s default from Rs. 1,00,000 to Rs. 5,00,000.
Oppression and mismanagement
As per section 242(8), an officer can be imprisoned for a period of up to 6 months if such person contravenes the order issued by National Company Law Tribunal, and makes an amendment to the constitutive documents. This offence has now been decriminalised through Companies Amendment Bill, 2020 and the officer who made default will be liable to pay Rs 1,00,000 as a civil penalty, however, the punishment of companies in terms of penalty remains same as before.
As per section 243(2) of the Companies Act, 2013, in case if a director had been removed by National Company Law Tribunal but still continues to hold an office that is in contravention to orders issued by the Tribunal, then such defaulting officer could be punished with maximum six months imprisonment. But after the amendment being made, i.e. Companies Amendment Bill, 2020 offence has become civil in nature and thereby does not attract imprisonment but the defaulting officer has to pay a civil penalty of Rs. 5,00,000 keeping the penalty of company same as before amendment. [8]
Conclusion
The changes being introduced through Companies Amendment Bill, 2020 are a step towards benefitting the companies and their stakeholders as it aims to ensure ease in doing business. It will encourage the companies to expand themselves more, thereby ensuring economic growth for our country. The Companies Amendment Bill, 2020 has decriminalised marginal lapses and technical issues which used to constitute a criminal offence earlier and it thereby reduced chances of companies losing their goodwill because of minor errors. Since when criminal punishment is imposed on companies, then it tarnishes the image of the company.
Bibliography
- Abhishek Iyer, Re-categorization of offences and Indian companies under foreign stock exchanges: The Companies (Amendment) Bill, 2020, Bar and Bench (26 March 2020), https://www.barandbench.com/apprentice-lawyer/companies-second-amendment-bill-2019-decriminalizing-companies-for-enhanced-ease-of-living.
- 2. Anupriya Saxena, Companies Amendment Bill 2020: Proposed changes in Corporate Social Responsibility,CAclubindia (19 March 2020), https://www.caclubindia.com/articles/companies-amendment-bill-2020-proposed-changes-in-corporate-social-responsibility–40774.asp.
- P.P.S. Gogna, Textbook of Company Law 48 (11th ed. S. Chand & Co, 2015).
- Prachi Goel, The Companies (Amendment) Bill, 2020: Decriminalising Offences Under The Companies Act, 2013, Mondaq (29 May 2020), https://www.mondaq.com/india/corporate-governance/944056/the-companies-amendment-bill-2020-decriminalizing-offences-under-the-companies-act-2013#:~:text=The%20amendments%20proposed%20by%20CAB%202020%20to%20the%20Act%20in,its%20recategorization%20as%20a%20civil.
- Renuka Mishra, Analysis of Companies (Amendment) Bill 2020: Reasons for Decriminalization & Intent Behind Proposed Relaxations, Taxguru complete tax solutions (15 June 2020), https://taxguru.in/company-law/analysis-companies-amendment-bill-2020-reasons-decriminalization-intent-proposed-relaxations.html.
- https://blog.ipleaders.in/csr-laws-india/.
- https://www.mondaq.com/india/corporate-and-company-law/928620/the-companies-amendment-bill-2020-a-welcome-change-to-business-and-commerce
References:
[1] Renuka Mishra, Analysis of Companies (Amendment) Bill 2020: Reasons for Decriminalization & Intent Behind Proposed Relaxations, Taxguru complete tax solutions (15 June 2020), https://taxguru.in/company-law/analysis-companies-amendment-bill-2020-reasons-decriminalization-intent-proposed-relaxations.html.
[2]Divesh Goyal, Key Takeaways from Companies (Amendment) Bill, 2020, Taxguru complete tax solutions (17 March 2020), https://taxguru.in/company-law/key-takeaways-companies-amendment-bill-2020.html.
[3] Renuka Mishra, Analysis of Companies (Amendment) Bill 2020: Reasons for Decriminalization & Intent Behind Proposed Relaxations, Taxguru complete tax solutions (15 June 2020), https://taxguru.in/company-law/analysis-companies-amendment-bill-2020-reasons-decriminalization-intent-proposed-relaxations.html.
[4] Abhishek Iyer, Re-categorization of offences and Indian companies under foreign stock exchanges: The Companies (Amendment) Bill, 2020, Bar and Bench (26 March 2020), https://www.barandbench.com/apprentice-lawyer/companies-second-amendment-bill-2019-decriminalizing-companies-for-enhanced-ease-of-living.
[5] Prachi Goel, The Companies (Amendment) Bill, 2020: Decriminalizing Offences Under The Companies Act, 2013, Mondaq (29 May 2020), https://www.mondaq.com/india/corporate-governance/944056/the-companies-amendment-bill-2020-decriminalizing-offences-under-the-companies-act-2013#:~:text=The%20amendments%20proposed%20by%20CAB%202020%20to%20the%20Act%20in,its%20recategorization%20as%20a%20civil.
[6]Shubhangi Pathak, India: The Companies (Amendment) Bill 2020 – A Welcome Change To Business And Commerce?,Mondaq (5 May, 2020), https://www.mondaq.com/india/corporate-and-company-law/928620/the-companies-amendment-bill-2020-a-welcome-change-to-business-and-commerce
[7]Anupriya Saxena, Companies Amendment Bill 2020: Proposed changes in Corporate Social Responsibility, CAclubindia (19 March 2020), https://www.caclubindia.com/articles/companies-amendment-bill-2020-proposed-changes-in-corporate-social-responsibility–40774.asp.
[8] Prachi Goel, The Companies (Amendment) Bill, 2020: Decriminalizing Offences Under The Companies Act, 2013, Mondaq (29 May 2020), https://www.mondaq.com/india/corporate-governance/944056/the-companies-amendment-bill-2020-decriminalizing-offences-under-the-companies-act-2013#:~:text=The%20amendments%20proposed%20by%20CAB%202020%20to%20the%20Act%20in,its%20recategorization%20as%20a%20civil.
