The Companies Act, 2013 (‘the Act’) forms the bedrock of commercial regulation by governing entry of corporates into the market, regulating their functioning, ensuring accountability to their shareholders, as well as laying down corporate governance norms. Owing to the economic slowdown in the country coupled with large scale unemployment, the Government of India is inclined to improve the ease of doing business in India. Accordingly, a Company Law Committee (CLC) was formed on September 18, 2019 for recommendation of measures geared to ensure promotion of ease of doing business in India. The report in this regard dated November 14, 2019 contains recommendations to decriminalize 46 compoundable offences under the Act. Thereafter, The Companies (Amendment) Bill, 2020 introduced in the Lok Sabha on March 17, 2020 aimed at reclassification of 23 compoundable offences to be dealt with by an alternative In-house Adjudication Mechanism (IAM), omission of 7 compoundable offences & restriction of 11 compoundable offences merely to a fine. A similar indication was shown by the Finance Minister in the fifth tranche of her speech vis-à-vis Atmanirbhar Bharat with a view to de-clog criminal courts and National Company Law Tribunal (NCLT) by way of enhancing the compounding powers of the Regional Director. This paper focuses squarely on the rationale behind such recommendations and determination on whether this measure is a step in the right direction or not.
Indisputably, the Indian judiciary has an enormous backload of criminal cases which remain unresolved for decades. In this regard, any attempt aimed to reduce the burden of the judiciary is highly commendable. Additionally, the threshold of proving a crime beyond reasonable doubt is substantially high and therefore time-consuming. The Supreme Court, in the matter of Director of Enforcement v. MCTM Corporation, held that civil liability is imposed for ‘blameworthy conduct’ and that guilty intention is not a sine qua non (i.e. an essential condition) in such cases. Despite this, it must be noted that the credibility of any punishment prescribed by the law is measured by the deterrent effect it creates in ensuring that the wrongdoer does not commit the same crime again.
The CLC Report recommends decriminalisation of certain compoundable offences under Section 441 of the Companies Act, 2013 which defines compoundable offences as those that are punishable with imprisonment only or with imprisonment and a fine. The CLC Report is based on a set of principles that determine the severity of the wrong committed and weigh it against the punishment prescribed in this regard. Less serious or minor offences are to be resolved using an in-house adjudication mechanism (IAM). For this purpose, a set of rules for adjudication of decriminalised offences has been notified by the Ministry of Corporate Affairs (MCA). Officers appointed under these rules, ‘Adjudicating Officers’ have the authority to sanction punishments to persons liable under the Act. Any person aggrieved with the decision of such officers can file an appeal with the Regional Director who is also appointed by the MCA. However, there is no provision with regards to further appeal to NCLT at this stage. Furthermore, offences for which punishments are prescribed in other acts shall be omitted from the Companies Act, 2013, offences for which alternate sanctioning is available, will be resolved using such measures and violations that are not too severe shall be resolved by imposition of an adequate quantum of fine. Moreover, for certain offences of serious nature like acceptance and repayment of deposits, financial statements and the rest status quo will be maintained and the same shall continue to maintain its criminal character.
The Corporate Affairs Secretary and the Chairman of the committee emphasised that the basic theme behind decriminalisation of minor offences is to raise compliance levels and promote the ease of conducting business. The recommendations provided by the committee are in alignment with the Government’s goal of improving the ease of doing business in India.
A noteworthy recommendation in the CLC Report was to remove the 3 years imprisonment and fine with respect to Corporate Social Responsibility which is not yet notified. Similarly, provisions relating to failure of declaration of significant beneficial ownership under Section 90 which initially attracted merely civil penalties but is treated as a fraud under the 2019 amendment is recommended under the CLC report to be decriminalised. Moreover, decriminalisation of offences pertaining to matters to be mentioned in the prospectus, related part transactions and those affecting largescale public interests should not be decriminalised. This makes us wonder whether the CLC has given enough thought to such recommendations. Such an overturn in their recommendations could lower their credibility to some extent.
While criminalisation of offences may not be the most efficient way of resolving corporate misconduct, civil penalties may not create the requisite impact in ensuring that the deterrent effect of the punishment is maintained. 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. Therefore, it is crucial that an adequate balance is maintained between civil and criminal sanctioning to ensure effective disposal of cases.
Upon the analysis of the recommendations of the CLC read with the Companies (Amendment) Bill, 2020, it can be deduced that the basis of such recommendations, namely to ease business processes in India and to de-clog the Indian judiciary is well justified by the committee. Accordingly, any attempt to decriminalize offences which are of technical or procedural nature would be favorable for the stakeholders. Disposal of cases by Adjudicating Officers speeds up the process of justice as it would not involve proving of mens rea (i.e. guilty mind) beyond reasonable doubt as in the case of a criminal prosecution. That being said, any further dilution relating to non-compoundable offences or offences of serious nature like fraud would not be optimal. It is extremely vital to ensure that the goals of promoting the ease of doing business are not met at the cost of a weakened corporate governance system under the act.