Priya and Akshay are 3rd year students from SLS Pune and ILS Law College respectively.
Companies Act, 2013 is an important legislation for regulating the corporate world. It includes the provisions from regulating the incorporation of company till the dissolution or strike off of the company. In the wake of scams, the provisions were made burdensome which hampered with the ease of doing business in India. With the increase in the transaction involving mergers, acquisitions and insolvency, there were volumes of pending cases with NCLT. Thus, the need was felt to amend the prevailing provisions in the act. The ordinance was introduced on 2ndNovember 2018 with the intention to ease the reporting and compliance needed by the companies act, 2013 and promote the ease of doing business in India. The commentary encompasses the changes brought forward by the ordinance under the four headings – (a) Re-categorisation of offences (b) De-clogging of NCLT (c) Tackling shell companies and lastly, (d) In-house adjudication. The authors discuss the amendments at length and compare it with earlier provision. The intent of the authors is to make ordinance easily understandable. Further, the authors discuss the impact of the ordinance and its inherent benefit.
The Companies (Amendment) Ordinance, 2018 received the President’s assent on 2ndNovember, 2018[i]and it came into force at once. The ordinance is in consonance with the Government’s approach to ease the business regulation in India and at the same time tighten the regulations for serious offences. The twin objective of the ordinance is Ease of doing business and better corporate compliance.
But firstly, we need to understand why this ordinance was needed. Several committees have observed that the Companies Act, 1956 was very lenient with the offences committed by the companies. The penalties were nominal and offences were easily compoundable. Therefore, in the wake of scams, the legislators came up with Companies Act, 2013 which deliberately made the serious offences non-compoundable. However, due to the overprotective intent, the act introduced cumbersome compliances and onerous reporting which made the business in India a hectic job. It was observed by the committees that there was need to re-categorize the offences in order to de-burden the NCLT, and introduction of online platform for e-adjudication or e-proceedings, thus this ordinance.
The aims of the ordinance are (a) Re-categorisation of offences (b) De-clogging of NCLT (c) Tackling shell companies and lastly, (d) In-house adjudication. We need to understand the changes according to these four aims.
Firstly, re-categorisation of offences was much needed as the NCLT was burdened with cases. Here, the recommendation laid down in Report of Committee on Review of Offences under Companies Act, 2013 was taken into consideration. The committee analysed the heterogeneous nature of offences and recommended that there should be civil penalty framework for procedural or technical defaults. Therefore, the ordinance makes number of changes in the penal provisions. In some of the cases, the imprisonment part has been omitted such as under Section 53 (Prohibition on issue of shares on discount). In civil penalty framework, the adjudicating officer will levy the penalty and the case will be closed.
Secondly, with the introduction of Insolvency and Bankruptcy Code, 2016, the NCLT is now burdened with lots of pending cases relating to insolvency along with company law and merger and acquisition cases. Therefore, the ordinance makes certain changes to remove the load from NCLT. The change has been brought under section 2(41) in which the power to change the financial year of the company has now been vested with Central Government. Under section 14 (Alteration of Article), the power to approve the conversion of private company to public company or vice versa has been vested with Central Government. However, any application pending before the commencement of the ordinance will be done by NCLT according to earlier provision. Last but not the least the pecuniary jurisdiction of Regional Director has been increased from 5 Lakhs to 25 Lakhs. Also the provision in relation to permission of Special Court regarding compounding of offences has been omitted (Section 441 (6)).
Thirdly, in order to tackle the Shell Companies and to make better compliance, the ordinance makes following changes. A new section 10A has been inserted. Here, the director needs to file an application to Registrar of Companies (‘RoC’) stating that subscribers of the memorandum of association have paid the value of shares taken by them and the application for registered office has been filed with RoC as required under section 12. This application should be filed within 180 days from incorporation of the company. Also, in case of contravention of the provision, the company will be liable to pay Rs. 50,000 and every defaulting officer will pay Rs. 1000 per day till contravention to the maximum amount of One Lakhs. In the case where the director does not file an application within 180 days and where the Registrar has reasons to believe that the company is not carrying the business, he/she can strike off the name of the company from RoC. Another major change is that now the Registrar under Section 12(9) has the power to physically verify the registered office. The ordinance also makes changes under section 77 (Register of charges) of Companies Act, 2013. Earlier, 300 days were given to the companies for creation and modification of charges; however now the time limit of 60 days (30 days normal + 30 days with additional fees) is given. Additional 60 days can be given after the additional ad-valorem fees. However after 120 days, there cannot be any creation or modification of charges. Also the punishment has been enhanced for contravention of this provision. The ordinance adds another ground of disqualification for the Independent Director wherein if the Independent Director accepts more than permissible directorship, he/she can be disqualified.
Fourthly, the changes have been done under section 454 regarding the additional power given to the adjudicating officer. Now the adjudication officer can direct rectification of the default in addition to levying penalty. Also, a new section 454(a) has been inserted to prevent the commission of repeated offence.
In addition to the above discussed changes, the ordinance has amended certain provisions such as under section 86, the punishment has been prescribed for giving false or incorrect information which is asked under section 77 of companies act, 2013. The time limit of one year has been given for removing the restriction on transfer of share under section 90; otherwise the share will be automatically transferred to Investor Education and Protection Fund (IEPF). Further the penalty under section 447 has been increased from 20 Lakhs to 50 Lakhs.
Therefore, from the above changes we can see that the intent of the ordinance is to promote the object of ease of doing business in India. It amends provisions in such a way that it removes unnecessary burden from the NCLT and includes civil penalty framework. This will help the NCLT to focus on more serious offences. There will be speedy trial of offences as the procedural and technical defaults have been re-categorized. With the civil liability framework, the requirement of proving mens rea as required in the criminal trial will be removed. Restricting the time limit for creation or modification of charges will protect the interest of creditors and other stakeholders at the time of winding up. Insertion of section 10A and modification in the power of Registrar is a welcome step as it will assist in early prevention of inactive or shell companies. Hence, the ordinance was much needed to assist in improving judicial efficiency and promote better compliance.