The Ministry of Law and Justice has come out with an Ordinance dated 2nd November 2018, amending some provisions of the Companies Act, 2013 (“Act”) based on the recommendations of the Committee formed by the Ministry of Company Affairs (“MCA”) to review the offences under the Act.
The amendments have been made effective from 2nd November 2018 and focus on the current prosecution structure under the Act and re-categorization of offences which are technical defaults or procedural lapses as civil default and shift or transfer the proceedings of such case to in-house adjudication.
The Companies Amendment Ordinance, 2018 provides relief to the Corporates and professionals by decriminalising a number of offences. Considering re-categorization of certain `acts’ punishable as compoundable offences to `acts’ carrying civil liabilities, the Ordinance also helps furthering the Indian Government’s intention to promote ease of doing business.
Some of the main reforms undertaken through the Ordinance are given below:
With the object to ease the NCLT’s caseload, the Central Government has been vested with the power to authorize the following, which may be further delegated to the Registrar of Companies or the Regional Director (RD):
The pecuniary jurisdiction of the Regional Director for compoundable offences has been increased from INR 5 lakh to INR 25 lakh.
Earlier, the permission of the Special Court was required to compound offences where imprisonment was a discretionary component of the punishment. As punishment for many such offences has now been confined to financial penalty, Section 441(6) has been amended to clarify the principle that offences where imprisonment is a mandatory component of the punishment (with or without fine) are not compoundable.
There has been re-categorising of offences which are in the category of compoundable offences to an in-house adjudication framework. However, no change has been made in respect of any of the non-compoundable offences.
Some of the key offences that remain not compoundable are contraventions of Section 447 which deals with punishment for fraud; Section 8 which deals with formation of companies with charitable objects; Section 40 pertaining to Securities to be dealt with on stock exchange; and Section 90 which deals with register of significant beneficial owners.
This has been a reinstatement of the provisions of the erstwhile Companies Act, 1956 under Section 149 thereof though the same was applicable only to public companies. However, the Ordinance puts a restriction on every company having share capital (incorporated post commencement of the Ordinance).
a director files a declaration within 6 months of incorporation stating that every subscriber to the memorandum has “paid the value of shares to be taken by him”; and a verification has been filed by the Company of its registered office within 30 days of incorporation in terms of Section 12(2) of the Act.
In the event, a director fails to file a declaration, the registrar, has been empowered to initiate the process for striking the name of the company off the register.
The Registrar is now empowered vide subsection (9) to conduct physical verification of the registered office on reasonable cause to believe that no business or operations are being carried out by the company. The new Section 12(9) has been inserted. Where a registrar has reasonable cause to believe a company is not carrying on business at its registered office, he may carry out an inspection and initiate the process for striking the name of the company off the register.
This is one significant amendment brought in by the Ordinance. Charges created on assets of a company are to be mandatorily registered within 30 days of their creation. As per the new provisos to Section 77, for charges created and not duly registered before 2 November 2018, an additional period of six months for registering the same with additional fees is made available. Also, a 60 days’ additional period is made available for charges created after 2 November 2018 and not duly registered, on payment of ad valorem fees. Further, Section 87 has been rewritten and the powers of the Central Government to rectify the register of charges have been restricted to situations where there is an omission or misstatement in respect of the intimation of payment or satisfaction of charge.
Section 90 was revamped by an amendment to the Act last year and the new concept of ‘significant beneficial owner’ and related reporting requirements (by companies and shareholders) was introduced.
A duty was cast on natural persons being significant beneficial owners to disclose the nature of interest and register themselves with the company. The duty has also been cast on each company to give notice to persons whom it has reason to believe to be significantly beneficial owners to come forward and register themselves. Where a response was not forthcoming, companies were empowered to apply to the NCLT, for an order seeking restrictions on transfer and suspension of all rights attached to the shares by such unregistered beneficial owners.
Aggrieved persons were given an open-ended right to approach the NCLT for relaxation or lifting of the restrictions. The Ordinance has curtailed this right. Where no person approaches the NCLT within one year, the shares will now be automatically transferred to the Investor Education & Protection Fund. In addition, noncompliance of Section 90 now carries a year’s imprisonment as a discretionary component of the punishment.
As per Section 149(6)(c) of the Act, an ID’s entire remuneration (including sitting fees, expenses, and commission) are excluded from the ambit of pecuniary relationships. The Committee observed that the proportion of pecuniary rewards in an ID’s overall annual income could compromise his independence and that only sitting fees and expenses incurred should be exempted. The Committee also had recommended that the pecuniary relationship limit of an ID with the company be hiked to 20% of his total annual income with a sub-limit of 10% for professional fees received.
The new section has been inserted to provide where a penalty in relation to a default has been imposed on a person under the provisions of Companies Act 2013, and the person commits the same default within a period of three years from the date of order imposing such penalty, passed by the adjudicating officer or RD as the case may be, he shall be liable for the second and every subsequent defaults for an amount equal to twice the amount provided for such default under the relevant provision of Companies Act 2013.
The amendments introduced in the Ordinance are primarily to re-categorize the existing penal provisions as civil defaults for those provisions which are more likely of administrative nature. In view of the amendments, it is definitely a step towards ensuring corporate compliance in a systematic manner.
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