The author is a second year student of National Law Institute University, Bhopal and a member of CBCL.
Recently in March 2020, the Union Cabinet approved certain amendments (“Companies Act Amendment, 2020” or “the Amendment”) put forth by the Injeti Srinivas Committee (“the Committee”) in November 2019 (“Srinivas Committee Report, November 2019”). The Srinivas Committee Report built upon another report that had been submitted by the same Committee in August 2018 (“Srinivas Committee Report, August 2018”) which was formed to review offences under the Companies Act, 2013 (“the Act”). Among the other recommendations, the Committee suggested decriminalization of minor offences involving either procedural or technical lapses under the Act.[i]
The objective behind the inclusion of these amendments is to unburden the National Company Law Tribunals (“NCLT”) by decreasing the amount of cases concerning minor offences directed towards them; and thereby facilitating ease of doing business in India. For doing so, two main propositions were suggested. First, include an in-house adjudication mechanism with regional directors presiding over them and Second, lay down the plan of compounding minor offences from fines or imprisonments to penalties.[ii]
This blog post focuses on the second proposition and analyses the disadvantages of imposing fixed penalties. It further lays down certain suggestions by which the amendment can be implemented without any pit-falls.
Difference between ‘Fine’ and ‘Penalty’
Fines and penalties are often used interchangeably; however, the two are altogether different concepts. While the former (i.e. fines) are imposed when a petition is filed in a court of law, the latter can be imposed by any authority, not necessarily a court or tribunal, when any law, rule or regulation is broken.[iii] Penalties are usually fixed, whereas fines have a range. Referring to the current scenario, this can be explained through an example. Under the pre-amended Companies Act, 2013, cases of non-filing of resolutions and agreements by a company would cost them a fine ranging between 5,00,000 to 25,00,000 INR.[iv] However, after the 2020 Amendment, non-violation of the same compliance would directly lead to an imposition of a fixed penalty of 1,00,000 INR by a Regional Director (“RD”) under the Ministry of Corporate Affairs (“MCA”). Moreover, repeated contravention of the same would lead to an additional penalty of 500 INR per day up to the limit of 25,00,000 INR.[v]
Drawbacks of the Amendments
It is pertinent to refer to the case of Adamji Umar Dalal v. the State of Bombay,[vi] wherein the Hon’ble Supreme Court of India held that circumstances related to an event should be taken into account while deciding a certain penalty for a particular offence. If not, there can be cases with exceptional circumstances, which if not considered would lead to an excessive penalty being imposed, thereby causing irreparable harm to the person.
Thus, the author contends that the imposition of ‘fixed’ penalties by regional directors might have certain drawbacks, as elaborated below.
1. Fixed monetary penalties are biased towards companies with large turnovers
It is well established that different companies have different turnovers, from anywhere between 50 thousand to 50 thousand crores. Hence, the imposition of fixed penalties for all companies can have varied consequences on them, as for some, it may cost them their entire annual earnings and for the others, it shall only serve as a “fee” to earn their desired profits. A penalty can only be effective if it carries the repercussions of “punishment” for committing a particular offence. This can be understood by the following example; if a company has an annual turnover of 1 crore INR, a penalty of 50,000 INR would have no value to them, in fact, if the particular offence leads to a profit of 20 lakhs, it shall only act as a ‘fee’ to earn the desired profit. However, the same penalty shall lead to overspilling for companies with lesser turnovers who shall face chronic cash shortages and hence leave them with no incentives to save the firm. Moreover, the penalties for repeated offenders also remain fixed, thereby incentivizing the large firms to plan their ‘fines’ beforehand for their desired profits.
Furthermore, as held in the Adamji case, there can be exceptional situations influenced by external circumstances which lead to the causation of an offence. In such cases, small companies shall suffer huge financial losses for no fault of their own. Hence, it is of paramount importance to take into consideration the turnovers of companies while deciding the penalties rather than fixing one for all regardless of their size.
2. Penalties directed towards a ‘company’ fails to distinguish between the lawbreaker and the innocent victim
The principle of a company being a distinct legal entity from its shareholders, promoters and directors was originated by the English Court in the case of Saloman v. Saloman and it has been followed by the Indian courts ever since.[vii] This principle reinstates that a company is an artificial ‘person’ and can hold its own assets, make deals etc. In spite of the incorporation of this principle, the fact that it is run by an association of persons who are its real beneficiaries cannot be disregarded.[viii] In several instances, these beneficiaries driven out of their own underlying motive commit offences to gain a larger profit. In order to ensure that they do not hide behind a company’s envelope and face appropriate punishments, the doctrine of “lifting of corporate veil” was introduced which affirmed holding the corporate personalities liable instead of the companies itself. The current amendment riddles with this concept as it imposes liabilities on companies along with the officers. For example, if a company defaults in filing the return of allotment within a prescribed period the ‘company’ along with its promoters and directors are liable to pay a penalty of 10,000 INR. Moreover, disregard of this doctrine by the imposition of a fixed penalty towards a ‘company’ directly targets the value of shares, the economic brunt of which has to be borne by the innocent shareholders. It might be argued that the shareholders, while buying stocks of a company agree to face these charges, however, this would just be a legal gamble along with the economic risk that they already undertake. Hence, it is concluded that the amendment by contravening the principle of lifting of corporate veil fails to differentiate between the actual law breaker and the sufferer of the punishment, thereby making it unjust in law.
Henceforth, it is of utmost importance to rectify these drawbacks for improvement in the corporate law regime, rather than implementing an unjust amendment.
Some ways in which the amendments can be revised are by penalizing companies for the offence committed based on their turnovers. For example, a company with a turnover between 1,00,000 – 10,00,000 INR can be subjected to a lesser penalty than a company with a turnover between 10,00,000-20,00,000 INR and this can continue up till the maximum penalty permitted. Moreover, for habitual offenders, the court must be given the discretion for deciding the appropriate fines/punishments depending upon the case to case basis. These suggestions will be helpful in making this amendment fair for all companies irrespective of their size thereby removing any sort of arbitrariness. Furthermore, in order to curb the second pit-fall, only the liable officers should be subjected to pay the penalties. By doing this, the shareholders shall not bear the economic brunt of penalties and this way the amendment shall also uphold the principle of ‘lifting of corporate veil’. By taking these considerations into account, the amendment shall refrain itself from adding two other complications and hence shall fulfill its objective in the most unerring way.
The Doing Business Report while calculating ‘ease of doing business’ in a country has certain fixed parameters which it relies upon for its determination. One such parameter is the ‘protection of investors’. The current amendment by imposing fixed penalties on ‘Companies’ contravenes this parameter as has already been explained above. Henceforth, it is concluded that the amendment if not revised, shall cause even more obstacles in running a business in India rather than facilitating its process, thereby nullifying its entire purpose of implementation. Moreover, this Report examines the effects of Regulations on businesses as well. Therefore, implementation of the current amendment has the potential of lowering India’s rank on the report on the basis of non-fulfillment of a parameter, which can further discourage entrepreneurs from starting their own businesses and can lead to a huge impact on India’s economy altogether. Thus, it is hereby contended that the current amendments should be revised by the same Committee by taking into account its pit-falls, as it is only then that it can achieve its foreseen objective unfailingly.
[i]Injeti Srinivas, Report of the Company Law Committee, (Nov. 14, 2019), http://www.mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf.
[iii] Divesh Goyal, Difference between Fine and Penalty Companies Act, 2013 and Companies Ordinance, 2018, http://www.legalserviceindia.com/legal/article-440-difference-between-fine-and-penalty-companies-act-2013-and-company-ordinance-2018.html.
[iv] See, Section 117, The Companies Act, 2013
[vi] Adamji Umar Dalal v. State of Bombay, AIR 1952 SC 14.
[vii] Rodrigo, The Doctrine of Separate Legal Entity: A Case of Soloman v. Soloman & Co, Ltd, the Write Pass Journal, (Nov.8, 2016), https://writepass.com/journal/2016/11/the-doctrine-of-separate-legal-entity-a-case-of-salomon-vs-salomon-co-ltd/.
[viii] Pratik Sharavi, Lifting of Corporate Veil vis –a-vis the determination of enemy character of a Company, IPleaders, (Jul.12, 2018), https://blog.ipleaders.in/lifting-corporate-veil-2/.