The gargantuan changes occurred in the pretext of COVID-19 reiterated the need for harmonization of regimes with commercial realities of a sinking global economy. With a view to facilitate the 'ease of doing business', a new Companies Amendment Bill, 2020 (the Bill) was introduced in the Lok Sabha on 17th March and Company Law Committee (CLC) was constituted with the objective of decriminalizing some provisions of the Act to reduce the burden on the judicial bodies and to release companies from the redundant clutches of criminal law.
THE COMPANIES (AMENDMENT) BILL, 2020
In consonance with the Committee's recommendations, the government introduced 72 amendments in the Companies Act, 2013, thereby decriminalising minor, compoundable offences under the Companies Act in the following ways:
Firstly, the Bill re-categorised 23 compoundable offences such as failure to maintain company records at the registered office, non-issuance of statutory notices, non-compliance of disclosure obligations, etc. do not require any objective determination or exercise discretion and thus can easily be determined by the MCA21 system and may be treated as civil wrongs.
Secondly, the Bill proposes omission of 7 compoundable offences which can be dealt with through other laws and provisions. Offences like non-compliance with orders of the National Company Law Tribunal (NCLT) can be dealt under NCLT's contempt jurisdiction, instead of being treated as distinct offences. Similarly, non-compliance by company liquidators can be dealt with through the relevant provision of the Insolvency & Bankruptcy Code, 2016 (the Code).
Thirdly, the Bill proposes to limit 11 compoundable offences to imposition of fines, and eliminate associated criminal punishment. This can be done in particular cases where the compoundable offences do not involve substantial public interest.
Fourthly, the Bill proposes alternate framework for 5 offences that achieve the desired result as the penal provisions of original legislation such as non-cooperation by promoters with company liquidators for which the laws of Insolvency and Bankruptcy Code of 2016 can be invoked.
IMPACT OF DECRIMINALISATION
Evidently, the massive changes occurred in the context of COVID-19 are such that new directions more attuned to these commercial realities need to be explored by law reformers in developing and amending regimes. In particular, the pandemic has made traditional notions of corporate responsibility unrealistic and the government realized this need of urgent change.
At the outset, decriminalisation of corporate law is a preferred method to promote business and development in the economy. Promoting business is a multi-staged process which involves encouraging new organisations to set up, shop in the country, encouraging foreign investment and consolidating the existing operations. Naturally, the existence of criminal liabilities in corporate law is a deterrent to incorporation and inflow of foreign capital.
Moveover, the amendment seems to promote a compliance culture where the companies will be able to rectify the defaults and pay the penalties rather than fighting a criminal charge. Accordingly, decriminalization of compoundable offences that are technical or procedural in nature will prove cost-effective and time-efficient for the companies. In addition to this, when non-compliance of minor offences does not result into any criminal proceedings than it instils confidence in both domestic and global players and boosts foreign investments. There is no denying the fact that India's criminal justice system is overburdened, and typically takes several years to get a final outcome. In principle, any step taken by the Companies Amendment Act to de-clog the criminal justice system is a step in that won't only help the stakeholders but also the judiciary in general.
Further, certain provisions of amendment justify the above argument, as can be cited from the provision where offences relating to non-compliance with the order of NCLT are omitted from Act, 2013 and will now be dealt by the NCLT only. The said omission has made contempt jurisdiction of the Tribunal more transparent. Furthermore, providing an Alternate Framework to offences will harmonize the provisions with the intended aim of such provisions. For example, in the matter of winding of a company, promoters, directors, etc., can be punished for their non-cooperation with the Liquidator which may not aid the Liquidator in discharging his duties. Therefore, adopting a mechanism whereby the Company Liquidator may apply to NCLT for directing Cooperation may solve the dilemma and give necessary direction.
CRITICISM TO DECRIMINALISATION
On the flipside, the amendments in some provisions for shift of the offense from criminality to civility do not stand to be perfect for India Inc. It is important to note that for a country like India, where the rate of defaults by the companies in complying with the Companies Act is substantially high, decriminalization involves greater precautions and stricter civil impositions. The mere removal of the imprisonment clauses, without increasing the amount of the penalties will make the law lenient towards the companies which thereby will result in more failures. For instance, the present amendment bill like section 8(11), section 26(9), section 40(5) and others, it is important to note that the amendment in these sections include removal of the imprisonment clause, while keeping the limit of penalty same as before. Thus, with no imprisonment clause and same penalty fine, will emerge a legal system which is lenient towards the companies, and may subsequently witness a rise in misconduct by companies in light of such leniency with no fear of criminal prosecution.
Moreover, the amendments in section 59(5), section 66(11), section 71(11), section 242(8), section 302(4) state the punishment for the companies in case of not abiding by the orders of the Tribunal. Removal of the whole of the punishment clause under these sections goes against public interest at large and thus, non-compliance of Tribunal orders is equivalent to the non- compliance of the law.
CONCLUSION
The Companies Act is just like the Constitution for the corporate world. The sector follows the legislation in letter and spirit for solving all the disputes. A blanket decriminalisation of the legislation should not be brought about as it results in leniency and flouting of laws by companies. While decriminalisation of the Companies Act is essential, a more calibrated approach must be employed to ensure that the existing legislation is not rendered toothless.
It is imperative that an optimum balance be maintained between the goals of promoting greater ease of doing business and strengthening the corporate governance framework under the Companies Act, 2013. The proposed amendments should be made in a manner so as to give relief to the stakeholders on one hand while retaining the deterrent effect towards the wilful and intentional violations of the law involving matters of public interest and large amount of public money. Thus, decriminalization strategies aimed at achieving both deterrence and an improved ethical climate upon the part of corporate actors need to come to grips with these changes in the nature of corporate life itself if these remedies are to be perceived as being credible and effective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
