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Decriminalization of various offences under Companies Act, 2013

September 24, 2021

In order to promote better corporate compliance and facilitate ease of doing business in India, the Ministry of Corporate Affairs (“MCA”) has decriminalized various offences under the Companies Act, 2013 (hereinafter referred as “Act”) by introducing the Companies (Amendment) Act, 2019, and the Companies (Amendment) Act, 2020. The brief timelines are as follows:

 

The aspects of decriminalization of various offences under the Act are as follows:

The above mentioned aspects are discussed in detail below:

A. Re-categorizing of offences from compoundable offences

Compounding is a settlement mechanism by which, the offender is given an option to pay money in lieu of his prosecution. Section 441 of the Act, provides for the provisions pertaining to the compounding of an offence

As per section 441 of the Companies Act, the following offences can be compounded:

  • Offences which are punishable with only fine.
  • Offences which are punishable with fine or with imprisonment.
  • Offences which are punishable with fine or with imprisonment or with both.

Authority for Compounding: Where maximum amount of fine for an offence does not exceed Rs. 25 Lakhs it shall be compounded by Regional directors whereas for fine exceeding Rs. 25 Lakhs shall be compounded by The Tribunal I.e. National Company Law Tribunal (NCLT) Important terms:

  • Fine – Monetary charges imposed upon individuals who have been convicted of a crime or a lesser offence. A fine is a criminal sanction. Fine imposed when any application/ petition is filed with any court (like: NCLT, High Court)
  • Penalty - In general language a penalty is imposed by an appropriate authority when a person has not complied with the law.
  • In-house adjudication Mechanism (IAM) - The provisions of IAM is provided under Section 454 of the Act. Pursuant to the IAM Framework, an adjudicating officer ("AO") has the power to settle offences by charging the relevant penalty from the defaulting companies and/or the officers-in-default. Orders of the AO are appealable to the Regional Director ("RD") of the MCA.

The below mentioned 16 compoundable offences were shifted to an IAM (i.e. replacement of the word fine or Fine/Imprisonment with Penalty) through Companies (Amendment) Act,2019:

  1. Section 53(3) Prohibition of issue of shares at a discount
  2. Section 64(2) Notice to be given to Registrar for alteration of share capital
  3. Section 92(5) Annual return
  4. Section 102(5) Statement to be annexed to notice
  5. Section 105(3) Proxies
  6. Section 117(2) Resolutions and Agreements to be filed
  7. Section 121(3) Report on annual general meeting
  8. Section 137(3) Copy of financial statement to be filed with Registrar
  9. Section 140(3) Removal, resignation of auditor and giving of special notice
  10. Section 157(2) Company to inform Director Identification Number to Registrar
  11. Section 159 Punishment for Contravention – in respect of DIN
  12. Section 165(6) Number of Directorships
  13. Section 191(5) Payment to Director for Loss of Office, etc., in connection with transfer of undertaking, property or shares
  14. Section 197(15) Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits
  15. Section 203(5) Appointment of Key Managerial Personnel
  16. Section 238(3) Registration of the offer of scheme involving transfer of shares

Further the below mentioned 18 compoundable offences were shifted to IAM by The Companies (Amendment) Act,2020.

  1. Section 56(6) Transfer and transmission of securities
  2. Section 86 Punishment for contravention
  3. Section 88(5) Register of members, etc.
  4. Section 89(5) & (7) Declaration in respect of beneficial interest in any share
  5. Section 90(11) Register of significant beneficial owners in a company
  6. Section 124(7) Unpaid Dividend Account
  7. Section 134(8) Financial statement, Board’s report, etc.
  8. Section 135(7) Corporate Social Responsibility
  9. Section 143(15) Powers and duties of auditors and auditing standards
  10. Section 172- Punishment
  11. Section 178(8)- Nomination and Remuneration Committee and Stakeholders Relationship Committee
  12. Section 184(4) Disclosure of interest by director
  13. Section 187(4) Investments of company to be held in its own name
  14. Section 188(5) Related party transactions
  15. Section 204(4) Secretarial audit for bigger companies
  16. Section 232(8) Merger and amalgamation of companies
  17. Section 405(4)- Power of Central Government to direct companies to furnish information or statistics
  18. Section 450- Punishment where no specific penalty or punishment is provided

 

B.  Removing imprisonment under listed sections and subjecting the offences to fine alone

Through the Companies (Amendment) Act, 2020, the imprisonment provision was removed while retaining the criminal liability to payment of fine alone for the offences under below mentioned sections:

  1. Section 8(11) - Formation of companies with charitable objects, etc.
  2. Section 26(9) - Matters to be stated in prospectus
  3. Section 40(5) - Securities to be dealt with in stock exchanges.
  4. Section 68 (11) - Power of Company to purchase its own securities
  5. Section 128(6) - Books of Account, etc., to be kept by Company
  6. Section 147(1) -  Punishment for contravention
  7. Section 167(2) - Vacation of office of Director
  8. Section 242(8) - Powers of Tribunal
  9. Section 243(2) - Consequence of termination or modification of certain agreements
  10. Section 347(4) - Disposal of books and papers of company
  11. Section 392  -  Punishment for contravention

 

C. Provision of alternate mechanism for the offences and removal of penal provisions from particular sections:

  The Companies (Amendment) Act, 2020 has provided alternate mechanism for the supervision of certain offences. Further omitted offences mentioned below (from point ii to vii) from the Act and provided NCLT to exercise its contempt jurisdiction in relation to these offences that related to non-compliance with orders of the NCLT. Section 425 of the 2013 Act lays down the powers of NCLT in relation to contempt.

 

S. No Section Pre-amendment Post Amendment
i. Section 16 (3) Rectification of name of company If a company makes default in complying with any direction given under section, the company shall be punishable with fine of one thousand rupees for every day during which the default continues and every officer who is in default shall be punishable with fine which shall not be less than five thousand rupees but which may extend to one lakh rupees.

 

If a company is in default in complying with any direction given under section, the Central Government shall allot a new name to the company in such manner as may be prescribed and the Registrar shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name, which the company shall use thereafter

 

ii. Section 48 (5) Variation of shareholders’ rights Where any default is made in complying with the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both

 

Omitted

(Now NCLT has discretion on the punishment to be levied)

 

iii. Section 59 (5) Rectification of register of members If any default is made in complying with the order of the Tribunal under this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every OID who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both

 

Omitted

(Now NCLT has discretion on the punishment to be levied)

 

iv. Section 66- Reduction of share capital If a company fails to comply with the provisions of sub-section (4), it shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees.

 

Omitted

(Now NCLT has discretion on the punishment to be levied)

 

v. Section 71(11) Debentures If any default is made in complying with the order of the Tribunal under this section, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both.

 

Omitted

(Now NCLT has discretion on the punishment to be levied)

 

 

vi. Section 302 (4) - Dissolution of company by Tribunal If the Company Liquidator makes a default in forwarding a copy of the order within the period specified in sub-section (3), the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.

 

Omitted

(Now NCLT has discretion on the punishment to be levied)

 

vii. Section 342 (6) - Prosecution of delinquent officers and members of company If a person fails or neglects to give assistance required by sub-section (5), he shall be liable to pay fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupee

 

Omitted

(Now NCLT has discretion on the punishment to be levied)

 

>viii. Section 348 (6) - Company Liquidator to deposit monies into scheduled bank If a Company Liquidator contravenes the provisions of this section, the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the failure continues Where a Company Liquidator, who is an insolvency professional registered under the Insolvency and Bankruptcy Code, 2016 is in default in complying with the provisions of this section, then such default shall be deemed to be a contravention of the provisions of the said Code, and the rules and regulations made thereunder for the purposes of proceedings under Chapter VI of Part IV of that Code
ix. Section 356 (2) - Powers of Tribunal to declare dissolution of company void It shall be the duty of the Company Liquidator or the person on whose application the order was made, within thirty days after the making of the order or such further time as the Tribunal may allow, to file a certified copy of the order with the Registrar who shall register the same, and if the Company Liquidator or the person fails so to do, the Company Liquidator or the person shall be punishable with fine which may extend to ten thousand rupees for every day during which the default continues The Tribunal shall—

(a) forward a copy of the order, within thirty days from the date thereof, to the Registrar who shall record the same; and

(b) direct the Company Liquidator or the person on whose application the order was made, to file a certified copy of the order, within thirty days from the date thereof or such further period as allowed by the Tribunal, with the Registrar who shall record the same.

 

D. Reduction in penalty under the listed sections

  Through Companies (Amendment) Act, 2020, the amounts of penalties on a Company and Officers in default (“OID”) have been reduced to a greater extent in the sections mentioned below:

 

S. No. Section Offences Changes
I Section 64 - Notice to be given to Registrar for alteration of share capital In case a company fails to file a notice of alteration or increase or redemption, of share capital with the Registrar within 30 days. ·    Reduction in the amount of penalty on company and every OID from Rs. 1,000 to Rs. 500 for each day during which default continues.

·    Further, reduction in the maximum amount of penalty on OID from Rs. 5 lakhs to Rs. 1 lakh.

II Section 92- Annual return In case a company fails to file its annual return within specified period (i.e. 60 days from AGM). ·    Reduction in the amount of penalty on company and OID from Rs. 50,000 to Rs. 10,000

·    Further, reduction in the maximum amount of penalty from Rs. 5 lakhs to Rs. 2 lakhs in case of a company and Rs. 50,000 in case of OID

III Section 117- Resolutions and agreements to be filed In case any company fails to file the resolution or the agreement with the Registrar within specified time (i.e. 30 days from the date of passing the resolution). ·    Reduction in the amount of penalty on company from Rs. 1 lakh to Rs. 10,000, in case of continuing failure, each day penalty from Rs. 500 to Rs. 100 and maximum amount of penalty from Rs. 25 lakhs to Rs. 2 lakhs.

·    Reduction in the amount of penalty on OID from Rs. 50,000 to Rs. 10,000, in case of continuing failure, each day penalty from Rs. 500 to Rs. 100 and maximum amount of penalty from Rs. 5 lakhs to Rs. 50,000.

IV Section 137- Copy of financial statement to be filed with Registrar In case a company fails to file the copy of the financial statements with the Registrar within the time specified therein (i.e. within 30 days from the date of AGM). ·    Reduction in the amount of penalty on company from Rs. 1,000 to Rs. 100 for each day during which the failure continues and maximum amount of penalty from Rs. 10 lakhs to Rs. 2 lakhs.

·    Reduction in the amount of penalty on MD. CFO/ directors from Rs. 1 lakh to Rs. 10,000 and maximum amount of penalty from Rs. 5 lakhs to Rs. 50,000.

V Section 140- Copy of financial statement to be filed with Registrar In case the auditor fails to file his resignation with the Registrar within the time specified therein (i.e. 30 days from the date of resignation). ·    Reduction in the maximum amount of penalty on auditor from Rs. 5 lakhs to Rs. 2 lakh.
VI Section 165- Number of directorships In case a person holds office as a director in more than the limit specified therein ·    Reduction in the amount of penalty on such person from Rs. 5,000 to Rs. 2,000 for each day after the first during which such violation continues and maximum amount of penalty restricted to Rs. 2 lakh.

Disclaimer: The entire contents of this document have been developed based on relevant provisions and are purely the views of the authors. Though the author has made utmost efforts to provide authentic information, however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.

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