Companies (Amendment) Act, 2020: A Critical Analysis

Introduction

On 28 September 2020, the Companies (Amendment) Act, 2020 (CAA, 2020), received the President’s assent to come into life. The guiding force for the said Amendment is the Report of the Company Law Committee, which was in pursuance of the objective of decriminalizing “non-compliances of minor, technical or procedural nature and facilitate and promote ease of doing business for corporates in the country”. Earlier, the Companies (Amendment) Act, 2019 has already been introduced to incorporate the suggestions made by the committee. The CAA, 2020 indicates the constant efforts made by the central government to ease off the penal provisions for the corporate sector. Further, it aims to discharge the National Company Law Tribunal (NCLT), the criminal justice system, and small companies from prolonged litigation.

Key Changes

The CAA, 2020 has introduced several changes, but the notable ones are listed below:

  • Under Section 2(52), the Act empowers the Centre in consultation with the SEBI, to exclude companies issuing specified classes of securities from the definition of “Listed Company”.
  • Under Section 117, the exemption from filing certain resolutions and agreements with the Registrar of companies has been extended to registered nonbanking financial companies and housing finance companies. The Act already exempts banking companies which are providing loan, guarantee, and security in connection with loan in its ordinary course of business.
  • Under Section 135, the 2013 Act mandates companies to constitute CSR Committees and spend 2% of their average net profits in the last three financial years, towards its CSR policy. The CAA, 2020 exempt companies with a CSR liability of up to Rs 50 lakh a year from setting up CSR Committees. Moreover, companies spending any amount in excess of their CSR obligation in a financial year can set off the excess amount in subsequent financial years.
  • Section 197(3) has been aligned with Section 149(9) to bring Non-Executive Directors and Independent Directors within the ambit of remuneration payable as per Schedule V in case a company has no profits or inadequate profits.
  • Section 129A has been inserted, which empowers the Central Government to require classes of unlisted companies to prepare and file periodical financial results and to complete the audit or review of such results.
  • Section 418A has been inserted to establish benches of the National Company Law Appellate Tribunal, ordinarily in New Delhi.
  • Section 23 has been amended to empower the central government to allow certain classes of public companies to list classes of securities in foreign jurisdictions.
  • Chapter XXIA has been inserted which extensively deals with Producer Companies.
  • Changes to offences
    • The CAA, 2020 makes three changes in this regard. First, it removes the penalty for certain offences. Second, it removes imprisonment in certain offences. Third, it reduces the amount of fine payable in certain offences.
    • Further, under Section 446B, One Person Companies, Small Companies, start-up company or Producer Company are only liable to pay up to 50% of the penalty for certain offences subject to a maximum of two lakh rupees.

Critical Analysis

The offences under the Companies Act, 2013 can be classified into three types based on penal provisions prescribed for them. These three types are; offences attracting only civil liability, compoundable offences and non-compoundable offences. According to the Black’s Law Dictionary, civil liability is the obligation arising from private rights. It is an obligation to compensate for the damage caused to a third party by the company’s representatives, over the course of work.

Compounding of an offence is a mechanism of settlement which makes the non-compliance good, by providing an option to the offender to pay money in lieu of his prosecution, thereby avoiding prolonged litigation. Under the 2013 Act, any offence which is punishable with fine or penalty only under any specific section is compoundable. Further, any offence which is punishable with imprisonment only or with imprisonment and fine or penalty only under any specific section is non-compoundable.

The CAA, 2020 has decriminalised 48 sections by removing or reducing penal provisions and omitting imprisonment for various offences that were procedural and technical in nature. The attempts to decriminalize business laws started long back just after the liberalization of the economy. However, today, such an amendment has increased relevance. The companies are under stress due to the ongoing pandemic. In such a scenario, CAA, 2020 is expected to bring some respite for the companies.

Criminal cases require the standard of proof to be beyond reasonable doubt, a threshold higher than the balance of probabilities standard adopted for civil wrongs.[1] Therefore, the efficiency of criminal law in dealing with corporate wrongs has been questioned time and again. Further, it is an undeniable fact that India’s criminal justice system is heavily burdened, and it usually takes years to reach an outcome. Relying on the above grounds, the Ministry of Corporate Affairs has attempted to de-clog the criminal justice system through this amendment. However, the law needs to strike a balance between criminal and civil sanctions. Excessive decriminalisation of the provisions may lead to businesses treating civil penalties as part of running cost, consequently, it may not prove to be deterrent enough. Further, a businessman will not respond to a threat if the consequences of ignoring that threat do not affect his lifestyle. However, the fear of actual economic deprivation, loss of privileges, stigmatization can make a corporate executive more responsive.[2]

The central government has stressed upon the fact that there will be no relaxation for serious offences, including fraud and those that cause injury to public interest or deceit. Further, it has also been assured that the number of “non-compoundable” offences under the Act will remain the same at 35. However, the persistent efforts of the Government to decriminalize the provisions can make the Act toothless. It is to be noted that in the last amendment to the Companies Act, the government had decriminalised 16 sections. Both of these amendments have been derived from similar objectives. Further, it is quite unusual that CAA, 2020 was proposed less than a year after the previous amendment was notified. Such a short time period between both the amendments seems inadequate to assess the impacts of legislative changes on the corporate entities.

Conclusion

The central government’s approach of decriminalizing business laws is not restricted to the Companies Act, it has also planned to decriminalize various provisions of the Limited Liability Partnership Act. These amendments are expected to promote ease of doing business. However, the legislature will have to preserve the deterrence effect provided by the original Act. The offences that involve the misuse of a substantial amount of public money must still be dealt with under the criminal justice system. Lastly, the balance which is quintessential to attain the overall objectives of the Act, must not be lost.

(This post has been authored by Yagya Sharma. Yagya is a fourth year law student at Institute of Law, Nirma University and is a member of the Editorial team at TCLF)

References

  1. Polidori P. & Teobaldelli D., Corporate Criminal Liability, Encyclopaedia of Law and Econ. (2017) https://doi.org/10.1007/978-1-4614-7883-6_701-1.

  2. Stephen A. Yoder, Criminal Sanctions for Corporate Illegality, 69 J. Crim. L. & Criminology 40 (1978).

Cite as: Yagya Sharma,  ‘Companies (Amendment) Act, 2020: A Critical Analysis’ (The Contemporary Law Forum, 22 October 2020) <https://tclf.in/2020/10/22/companies-amendment-act-2020-a-critical-analysis> date of access.  

Leave a Comment

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.