The Companies Act, 2013 (“Act”) stands as a cornerstone of corporate regulation in India. It lays down a comprehensive compliance framework for body corporates as well as their officers to protect the rights and interests of shareholders and investors. In the first part of this two-part blog series, we seek to address the ambiguities pertaining to proactive rectifications of the non-compliances and contraventions under the Act. In the second blog, we will discuss the threshold for liability of “officers in default” under the Act.
Evolving regulatory threshold pertaining to breaches under the Act
Depending on the nature of the breach under the Act and its corresponding impact on different stakeholders, the Act categorizes non-compliances and contraventions into two broad categories: those which carry liability of merely a civil nature and those which carry liability of a criminal nature. It is pertinent to note that while originally i.e., when the Act was first passed in 2013 it placed varied non-compliances on different thresholds, majority of the non-compliances/contraventions were previously subject to criminal prosecution to ensure enhanced compliance with the framework. However, such a punitive approach even for technical or procedural non-compliance often created a climate of apprehension amongst corporate entities, thereby hindering entrepreneurial spirit.
To address these concerns, the Ministry of Corporate Affairs (“MCA”), by an order dated July 13, 2018, constituted a committee under the Chairmanship of Mr. Injeti Srinivas (“Committee”) to review compoundable and non-compoundable offences under the Act and recommend any re-categorisation of such offences[1] to evaluate the complexities and ambiguities surrounding corporate offences while promoting a business-friendly regulatory environment conducive to growth and compliance. In furtherance of the recommendations of the Committee,[2] the Legislature vide the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020 decriminalised various offences such as failure to file annual return or financial statements within prescribed time to civil defaults. While decriminalisation of the offences has been a welcome move, it has also created a grey area pertaining to consequences of violation of a provision that earlier envisaged imposition of fine but was subsequently decriminalised. Further, an increased vigilance by the Registrar of Companies (“RoC”). has been observed after the decriminalisation of offences. For instance, documents are subject to enhanced scrutiny and default in non-filing of details of beneficial owners or incomplete details in memorandum of association have also been observed and adjudicated upon. To this end it is imperative to understand the different mechanisms available to companies and their directors to remedy their wrongs suo moto and ex post facto.
In-House Adjudication Mechanism: Suo moto adjudications by companies
Background to the adjudication process under the Act
The Act has an in-house adjudication mechanism, which is detailed under Section 454 of the Act read with the Companies (Adjudication of Penalties) Rules, 2014 (“Adjudication Rules”). The MCA vide its notification dated March 24, 2015, appointed the RoC of respective jurisdictions to act as adjudicating officers. This in-house adjudication mechanism, however, can only be used for those non-compliances or contraventions under the Act for which there is merely civil liability i.e., a monetary penalty.
The principles of natural justice are enshrined in the adjudication process under the Act. Prior to the adjudication of any penalty, the adjudication officer is required to issue a show cause notice to the Company and its officers in default and afford them with an opportunity to be heard.[3] The Act also provides for an appeal mechanism to afford the aggrieved company and/or the officers with an opportunity to challenge the orders passed by the adjudication officer.[4] Additionally, while the Act and Adjudication Rules do not explicitly stipulate suo moto filing of an application for adjudication of penalties, there are many cases where the company and/ or its officers in default have approached the RoC and such applications have been entertained.
Need to reform the in-house adjudication process
The adjudicating officer has the discretion to determine the quantum of penalty capped at the maximum limit allowed for a specific breach under the Act. The adjudicating officer shall additionally consider the following when assessing the quantum of penalty to be imposed “(a) size of the company; (b) nature of business carried on by the company; (c) injury to public interest; (d) nature of the default; (e) repetition of the default; (f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and (g) the amount of loss caused to an investor or group of investors or creditors as a result of the default”.[5] Unfortunately, recent RoC orders are indicative of a trend where the adjudicating officers impose the maximum penalties, rarely exercising their discretion to consider a lower penalty. In some cases, the penalties imposed are disproportionate to the gravity of the offence and generally the highest fines permissible are levied, which could deter companies from availing the benefit that this process has to offer. For example, the ROCs of New Delhi[6], Jaipur[7], etc., have imposed the full extent of the penalty on companies that did not mention the date of signing the minute book, serial number of minute book, page numbers in the minute books. The Regional Director has more often than not allowed an appeal against such orders, arguing that imposing the maximum penalty dehors of the specific reasons for default and is excessively harsh and burdensome for the company and/or its officers.[8] The recent RoC order involving LinkedIn and Microsoft’s CEO Satya Nadella for alleged non-compliance of beneficial interest disclosures[9] is an example of such penalties.
While the in-house adjudication mechanism has been largely beneficial due to its time efficiency, it is imperative to take further, steps to ensure transparency in the adjudication process and establish accountability mechanisms. This will maximise the real benefits of this in-house adjudication system and promote its effective use in facilitating the ease of doing business.
Compounding of Offences: A chance at proactive rectification
Background to compounding under the Act
The Act permits companies and its officers in default to avoid protracted litigation and rectify inadvertent non-compliances by admitting to certain non-compliances and paying a compounding fee as may be directed by the Regional Director or the National Company Law tribunal (“NCLT”)[10] Pertinently, the Act qualifies different classes of non-compliances and contraventions under the Act as either compoundable or not. All those offences “whether committed by a company or any officer thereof” but “not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine” can be compounded basis an application to this effect by the company or officer concerned.[11] Below are some of the key features of the compounding process under the Act:
- Pre-requisites for initiating compounding: While Section 441 does not expressly stipulate any pre-requisites for initiating the process of compounding, it is necessary to consider whether any non-compliance/ contravention has been resolved or made good. For instance, an application for compounding for failure to hold the annual general meeting (“AGM”) within prescribed time ought to be preferred once such AGM is held and the default remedied. The application can be made before the RoC, which will then forward it together with its report, either to the Regional Director or the NCLT if the maximum fine exceeds INR 25,00,000.[12]
- Joint applications for compounding: It is trite law that in case of any non-compliance with the provisions of the Act, liability for the same is attributable to the company as well as its officers in default. The National Company Law Appellate Tribunal (“NCLAT”)[13] has clarified that under the Act, the company and its officers in default can file a joint application. Further, a joint application can also be made when the same offence has been committed over a span of different financial years.
- Computation of compounding fees: While compounding an offence, the Regional Director or the NCLT have been afforded with wide discretion to compute the amount of fine payable by the company and its officers in default. The amount of fine is determined by taking into consideration various factors such as the nature of offence, whether the default was intentional, maximum punishment prescribed under the Act, the period of default, whether the petition is filed suo moto, financial condition of the company, repetition of offence, and whether or not public interest is involved or not.[14]
Challenges under the extant procedure for compounding of offences
- Lack of statutory timelines: The Act does not affix any timeline for the RoC to either consider the application received for compounding or prepare its report and determine the maximum fine payable. It has been observed that the absence of stipulated timelines diminishes the overall efficiency of the mechanism since compounding applications are left unattended for a long time.
- Possibility for Inconsistent Interpretation: Given the subjective nature of the compounding process, there may be inconsistencies in the interpretation of provisions by different authorities leading to uncertainty for companies seeking to avail the compounding mechanism.
- No compounding for offence if repeated within three years: The Act expressly prohibits compounding of the same offence if it is committed within a period of three years since when such offence was previously compounded. Such a bar without any exception poses significant difficulty for companies that are unable to comply with the provisions of the Act on account of factors beyond its control subjecting them to increased liability under Section 451 of the Act.
Conclusion
While decriminalisation of offences under the Act is a welcome move and has ushered a new regulatory paradigm in India’s corporate landscape, there is lack of clarity on how the same shall be implemented. Also, it is unclear whether a default that was considered an offence prior to decriminalisation could be subject to adjudication of penalties or would have to be subject to prosecution or compounding of offences. Moreover, while the inhouse adjudication mechanism has proven to be a more time-effective tool owing to the guardrails placed under the Act, the imposition of maximum penalty has proven to be a deterrent for the companies and its officers to seek suo moto adjudication of its defaults. Similarly, while the compounding procedure offers a promising alternative for minor offences, its effectiveness is limited by several practical procedural challenges. The industry is expecting more decriminalisation of corporate laws[15], and if the same structure is followed for such provisions, then there should be clearer and simpler processes to move to the fine-only consequence. Additionally, it must ensure that the fine for non-compliance is appropriate given the facts of the case and the default position is not always apply the maximum fine amount, which would unsettle businesses and adverse impact ‘ease of doing business in India’.
Simplifying the process, ensuring clarity and uniformity, reducing delays, and improving accessibility are essential steps towards enhancing the system’s utility and scaling proactive rectification of breaches by companies and their officers. Addressing these issues with targeted regulatory reform is crucial to realise its full potential. While the MCA has taken a lot of steps towards promoting ease of doing business, for instance if a default is committed by a one person company, small company, startup company or producer company, the penalty should not exceed half of the penalty specified under the Act and also be subject to an overall cap of INR 2,00,000 for the company and INR 1,00,000 for the officer in default[16]. Striking a delicate balance between the ease of doing business and maintaining regulatory rigor is essential to achieve long-term objectives without compromising on regulatory thresholds for upholding corporate governance standards.
For further information, please contact:
Ankoosh Mehta, Partner, Cyril Amarchand Mangaldas
ankoosh.mehta@cyrilshroff.com
[1] To read more about the decriminalization of offences under the Act, please refer to our blog on Decriminalising Companies Act Offences – Striking a Balance Between Ease of Doing Business and Corporate Governance | India Corporate Law (cyrilamarchandblogs.com)
[2] Report of the Committee to Review Offences under the Companies Act, 2013, Ministry of Corporate Affairs, August 2018.
[3] Rule 3(2) of the Adjudication Rules.
[4] Section 454(5) of the Act read with Rule 4 of the Adjudication Rules.
[5] Rule 3(12) of the Adjudication Rules.
[6] ROC Order dated June 18, 2023 in the matter of Teleone Consumers Products Private Limited, Ref No 2422 (https://www.mca.gov.in/bin/dms/getdocument?mds=%252BugNHzYS7ko5BMTg8NCRqw%253D%253D&type=open)
[7] ROC Order dated September 22, 2022 in the matter of M/s Starnet Breeding and Research Farms Private Limited, Ref No 2520. (https://www.mca.gov.in/bin/dms/getdocument?mds=V3oMqGOUUJqXRuR7vEnTtg%253D%253D&type=open)
[8] In the matter of Stanley Lifestyles Limited, order passed by the Regional Director, South East Region, order dated February 01, 2024.
[9] Please refer to our blog Ultimate parent’s professional CEO a Significant Beneficial Owner: Do companies have to re-evaluate their corporate approval process and reporting line structures? | India Corporate Law (cyrilamarchandblogs.com)
[10] Section 441 of the Act.
[11] Section 441(1) of the Act.
[12] Section 441(3)(a) read with Section 441(1) of the Act.
[13] Pahuja Takii Seed Limited & Ors vs. Registrar of Companies, NCLT of Delhi & Haryana and Ors, 2018 SCC Online NCLAT 553.
[14] Viavi Solutions India Private Limited and Others vs. Registrar of Companies, NCT Delhi and Haryana, 2017 SCC Online NCLAT 856
[15] Govt likely to decriminalise 14 provisions in Companies Act, IBC, (https://www.moneycontrol.com/news/business/budget/govt-likely-to-decriminalise-14-provisions-in-companies-act-ibc-competition-act-12770967.html)
[16] Section 446B of the Act.
