India – Decriminalizing Our Company Law – Has The Pendulum Moved Too Far?

 

7 December, 2019

 

 

In line with the government’s stated goal of promoting Ease of Doing Business, the Company Law Committee (CLC), set up by the Ministry of Corporate Affairs (MCA), has recently submitted its report to the MCA, recommending decriminalisation of 46 compoundable offences under the Companies Act, 2013 (the Act). This list is in addition to the 16 compoundable offences already decriminalised by the Companies (Amendment) Act, 2019.

 

To put things into perspective, attempts to decriminalise business laws is not new to India. This process began with liberalisation of the Indian economy in 1991. The first commercial law that was decriminalised was the Imports and Exports (Control) Act, 1947. It was replaced by the Foreign Trade (Development and Regulation) Act, 1992, which decriminalised most of the offences relating to imports and exports. The most fundamental step in this direction was the replacement of draconian Foreign Exchange Regulation Act (FERA), 1973, by Foreign Exchange Management Act (FEMA), 1999 which decriminalized offences relating to foreign exchange regulations.

 

There is no denying the fact that India’s criminal justice system is badly choked, and it typically takes several years to get a final outcome. So, in principle, any step taken by the MCA to de-clog the criminal justice system is a step in the right direction.

 

Moreover, proving a criminal offence requires the standard of proof to be beyond reasonable doubt, a much higher threshold than the balance of probabilities standard adopted for civil wrongs. Many critics have, therefore, questioned the efficiency of criminal law in dealing with corporate misconduct. The opponents of decriminalisation have argued that businesses may treat civil penalties as part of cost of running a business, which consequently will not prove to be much of a deterrent.

 

Hence, in the Indian context, it is advisable that the law strike a healthy balance between civil and criminal corporate sanctions. Offences that involve misuse of substantial amount of public money must be dealt with under regular criminal justice system.

 

CLC has recommended decriminalising only compoundable offences under Section 441 of the Act. The said section defines compoundable offences as those which are not punishable with imprisonment only or punishable with imprisonment and also with fine. Offences which are non-compoundable will be dealt with under the regular criminal system and as per the provisions of Code of Criminal Procedure, 1973.

 

For the compoundable offences, which are proposed to be decriminalised, a new in-house adjudication mechanism (IAM) has been proposed under Section 454 of the Act. The MCA has notified the rules for adjudication of decriminalised offences by the officers appointed by MCA. Such Adjudicating Officers (AO) have the authority to impose penalty on the company, the officer in default or any other person and direct them to rectify the default. The AOs are also required to give affected parties’ reasonable opportunity of being heard, and follow the principles of natural justice in adjudication process.

 

Any person aggrieved by the order of an AO may then appeal to the Regional Director (RD), who is also an officer appointed by the MCA. Currently, the law does not provide for a further appeal to the NCLT. CLC has deferred its recommendation to make a suitable amendment to the Act to introduce further appeal to NCLT for the next phase.

 

The CLC has categorised all compoundable offences in 8 categories, as under:

 

1. Category A: Non-compliance of orders of authorities, such as NCLT/RoC.
2. Category B: Defaults in respect of maintenance of certain records, in the registered office of the company.
3. Category C: Defaults on account of non-disclosure of interest of persons to the company, which vitiates the record of the company.
4. Category D: Defaults related to certain corporate governance norms.
5. Category E: Technical defaults relating to intimation of certain information by filing forms with the RoC or in sending notices to stakeholders.
6. Category F: Substantial violations that may affect the going concern value of the company or are contrary to larger public interest or with serious implications to stakeholders.
7. Category G: Defaults involved in liquidation proceedings.
8. Category H: Defaults not specifically punishable under any provision, but made punishable through an omnibus clause.

 

The CLC has adopted principle-based approach to decriminalisation of offences, as under:

 

1. Principle 1: 23 offences that are minor – less serious compliance issues, and which can be objectively determined, will be transferred to internal adjudication mechanism provided in Section 454 of the Act.
2. Principle 2: 7 offences that can be appropriately dealt with under other laws will be omitted from the Act.
3. Principle 3: 11 offences which do not fit into 1 and 2 above, the CLC has provided an alternative method of imposing sanctions.
4. Principle 4: 5 offences that involve subjective determination but are not very serious violations, will be punishable with fine only.
5. Principle 5: For 20 serious offences that may involve elements of substantive non-compliance requiring detailed adjudication, the CLC has recommended no change.

 

The CLC has also recommended penalty rationalisation in respect of 6 provisions.

 

It is important to note that CLC carried out this entire exercise in less than two months and over just 3 meetings. One wonders if the CLC had adequate time to carefully evaluate the gravity of the offences before recommending decriminalisation.

 

There are also very sharp ‘U-turns’ by the CLC with respect to certain provisions. E.g. provision relating to Corporate Social Responsibility (CSR) under Section 135 of the Act, where originally no penalty was prescribed. By 2019 Amendment, a provision for imprisonment up to 3 years and a fine was introduced (though yet not notified). It is now proposed to decriminalise this offence. Similarly, provisions relating to declaration of Significant Beneficial Owner (SBO) under Section 90 of the Act originally attracted only civil penalties. It was amended in 2019 to treat it as a ‘fraud’ under Section 447 of the Act under certain situations. Now, within a matter of few months, CLC has recommended decriminalisation of this offence.

 

2019 amendments to the Act have introduced a new Section 454A to deal with a situation where the offender has committed the same default within a period of 3 years from the date of order imposing a penalty. In such cases, the law provides for twice the amount of penalty for every second or subsequent default. However, many believe that simply doubling the amount of penalty is not adequate for habitual offenders. Repeat offenders should be dealt with under regular criminal law, with a provision for imprisonment.

 

It is astonishing to see how CLC has recommended that company (which is primarily incorporated for charitable and other social purposes, under Section 8) that violate the requirements imposed on such companies will be punishable with fines only. Similarly, offences under Section 26(9) of the Act, relating to contravention of matters prescribed to be stated in prospectus, and under Section 188 of the Act, relating to related party transaction are also very serious offences, affecting larger public interest, should not have been decriminalised.

 

There is also a view that adjudication of penalty is a quasi-judicial function and hence best handled by persons with judicial background. It is now proposed to entrust this responsibility to the officers appointed by the MCA. Even appeal lies to the RD, another layer in the bureaucracy.

 

Concluding Thoughts – Companies Act is like the Constitution of India for the corporate world. Adherence to its provisions in letter and in spirit is of paramount importance to all stakeholders. Wholesale decriminalisation should not result in companies looking at the provisions of the Act very lightly. While no one is disputing the principle of decriminalisation, one needs to adopt a more calibrated approach to ensure that the Act does not become a ‘toothless’ legislation. There is also a view that CLC should have suggested measures for strengthening Special Courts established under Section 435 of the Act.

 

Presently, most states have not established any new courts, but designated one of the existing criminal courts as ‘Special Court’ and its functioning does not inspire any confidence, neither have the Special Courts made any significant improvement in the rate of disposal of cases. While the recommendations of CLC are likely to find its place in a legislation to be tabled in the on-going winter session of the Parliament, it is sincerely hoped that a more calibrated approach is adopted for regulating corporate conduct. Otherwise, there is a possibility that the pendulum of decriminalisation may just move too far.

 

 

For further information, please contact:

 

Bharat Vasani, Partner, Cyril Amarchand Mangaldas

bharat.vasani@cyrilshroff.com