Decriminalisation of compoundable company law offences

November 21, 2022

Introduction

Company law lays the basis of commercial guidelines by managing entry of corporate beings into the marketplace, regulating their procedures, carrying out accountability to their shareholders and passing corporate governance rules. There was a noteworthy change in the Indian corporate governance context in the previous few years. The Companies Act 2013, and numerous reforms in the arena of company law flagged the way for the founding of corporate entities involved in leading businesses in a reachable manner.

Government of India pursued decriminalisation of certain offences under the Companies Act 2013 on the way to increase the ease in doing businesses in the country, to guarantee smooth working of operations of companies along with reduction of protracted litigation.

Constitution of the Review Committee

The origins of necessity to decriminalise some compoundable offences are raised from the Ministry of Corporate Affairs vide order that is dated 13.07.2018, in which, the Ministry of Corporate Affairs established a Review Committee to:

Assess compoundable offences under the Companies Act 2013 and scrutinize if any of such offences could be decriminalised thus making the defaulting person liable to penalty in the place of imprisonment.
Assess if any of the non-compoundable offences under the Companies Act 2013 can be recategorized as compoundable offences.
Recommend improvements in the prevailing mechanism of imposing penalties.

The Review Committee had made the following prominent recommendations:

Re-categorizing 16 compoundable offences out of 81 compoundable offences to an in-house settlement framework in which defaults would be liable to penalty by the adjudication officer.
Establishing in-house adjudicating machinery with greater transparency and also making it extra technology driven by carrying proceedings online and issuing the orders on the website.
Broadening the authority of the Regional Director with regard to the compounding of offences under the Section 441 of the Companies Act 2013 in that way unburdening the National Company Law Tribunal.

In view of the above-mentioned recommendations, the Central Government introduced essential changes by passing the Companies (Amendment) Act 2019.

Constitution of the Company Law Committee

Even though the passing of the Companies (Amendment) Act, 2019 led to substantial ease in the penal pressure, but Government still sensed the necessity to liberalise and lessen the strict penal provisions of the Companies Act 2013 and this combined with the longing to increase the ease of doing business in addition to facilitate corporate progress, led to the formation of the Company Law Committee in the month of September 2019.

The Company Law Committee in its report noted that grave abuses of law, particularly wrongful conduct including fraudulent elements, ought to be dealt by means of criminal law whereas procedural, minor and technical non-compliances, particularly those not including subjective determinations, might be dealt through civil jurisdiction in place of criminal jurisdiction.

On the basis of the recommendations of Company Law Committee, many provisions in the Act were amended further by means of the Companies (Amendment) Act 2020 that sought to countermand earlier failings by linking fair and equitable liability depending on the seriousness of the offence.

Source of decriminalisation under Companies (Amendment) Act, 2020

The notion of corporate criminality has confirmed to be rather puzzling to the degree that commercial liability is concerned. A crime is needed to be proven beyond a reasonable doubt in order make a company criminally responsible for an offence. Therefore, the component of guilty mind or ‘mens rea’ should be involved to ascertain criminality. In the previous enactments, legislature gives the impression of having lost sight of the above, hence fastening criminal liability for the offences which are involving even slight digressions and omissions.

With the intention of avoiding the imbalance formed among civil liability and criminal liability of companies, decriminalisation of offences had been wanted for cases excluding those which are involving fraud.

The impact of the decriminalisation of offences

Ease of doing business

The compliances levied on Indian companies are far greater as compared to the companies in another place. There are quarterly, half-yearly, monthly, and yearly compliances underneath the myriad laws that rule our nation at the moment. Furthermore, every law holds a punishing provision for all sorts of non-compliance. Therefore, an enormous statutory burden is levied on companies regardless of their magnitude and scale of the operations.

Improved foreign investment

Foreign Direct Investment is the most important sources of capital for the Indian corporate segment. By eliminating imprisonment for breach of provisions concerning the foreign companies and restraining it alone to fine, it will encourage the creation of progressively more places of companies in India by the foreign corporations.

Better corporate governance

When pronouncing the penalty, Adjudicating Officer will work inside the parameters set in the Act itself, by this means guaranteeing improved compliance.

Relieved numerous benches of National Company Law Tribunal (NCLT)

On account of decriminalisation, the National Company Law Tribunal (NCLT) can use its time in providing respite to more grave cases by avoiding trivial offences which can be dealt by payment of fine.

Relaxations to the Officers in Default

On being protected from the chance of imprisonment for a trivial departure in process or procedural omission Officers in Default can let out an enormous exhalation of relief and it will likewise allow them to snooze well knowing that lapses will be observed only with the strictness that it warrants.

Drawbacks to decriminalisation of offences

Even though decriminalisation lessens the load on courts/ National Company Law Tribunal (NCLT) in large part, shifting the authority to adjudicating officers who are government servants might encourage dishonesty and political stimulus.
The defaulting corporation might take unwarranted advantage of the pecuniary penalties levied as they might not be an adequate deterrent and will only be well thought-out as a price of doing business.

Important concepts

With the purpose of understanding the necessity and rationale for the decriminalisation of the offences, following ideas ought to be understood:

Distinction between fine and penalty under the Companies Act 2013

Penalty: On every occasion the term penalty is used in a section, it indicates that the default is inside the purview of the in-house settlement mechanism, that is, the amount of the penalty shall be decided by the Registrar of Companies.

Fine : In case the term fine is used in any section, it is external to the scope of power of the Registrar of Companies and thus it implies that the settlement will be done by a court having competent jurisdiction.

Distinction between Cognizable and non-cognizable offences under the Companies Act 2013

Cognizable offences: All the offences which amount to fraud that is punishable under Section 447 of the Companies Act 2013 are cognizable offences.

Non-cognizable offences: All the other offences under the Companies Act 2013 other than those which amount to fraud are non-cognizable offences.

Distinction between Compoundable and non-compoundable offences under the Companies Act 2013

Compoundable offences: Compoundable offences refer to those that are punishable with either fine or imprisonment or both

Non-compoundable offences: non-compoundable offences refer to those that are punishable with either with fine in addition to imprisonment or Imprisonment only.

Conclusion

Overall, owing to the Amendment Act 2020, the commercial system has taken a progressive leap. The corporations can not only lessen their compliance expenses but can as well focus on their commercial activities.

References:

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November 21, 2022