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THE NEW COMPANIES (AMENDMENT) BILL - A STEP TOWARDS ENHANCING THE EASE OF DOING BUSINESS IN INDIA

Updated: Jul 29

[Authored by Sharanya Gupta, a 3rd year B.B.A. LL.B. (Hons.) student at Vivekananda Institute of Professional Studies.]

As India is becoming a force to reckon with, it has secured the 63rd position in the World Bank Ease of Doing Business Report for 2020, which is a significant jump from 2019’s 77th position. The new CAB 2020 (Companies Amendment Bill) is a stepping stone towards the vision of making our country reach into Top 50 in the Global Ease of Doing Business Ranking, with several modifications and additions suggested which would not only benefit new players wanting to enter the market but also relieve the existing companies and LLP’s from certain stringent provisions of the Companies Act 2013.


This bill was introduced in Lok Sabha on 17th of March 2020 and while the legislature has been adjourned in the wake of COVID-19, the continuous efforts of the government towards facilitating measures, for ease of doing business for companies operating in India, have been relentless in a good way so much so that they are now considering to implement the amendments suggested in CAB 2020 via the promulgation of an ordinance, if need be. The highlights of CAB 2020 have been discussed below which involve a change in dealing with non-compliances by switching from criminal consequences to civil ones or getting rid of criminality sections for some provisions/non-compliances.


The amendments proposed by CAB, 2020 concerning decriminalization of compoundable offenses can be categorized as the omission of criminal offenses from the act and omission of imprisonment, re-categorization of offenses, limiting some compoundable offences to fine only and alternate frameworks for offences. The Company Law Committee Report[1]noted that in case of civil wrongs, the wrongful action does not consist of any intention to cause harm, i.e., mens rea,which is an accepted predominant element in any criminal action. It is based on this principle that CAB 2020 aims to rectify the violation of this well enunciated legal principle and offers that what can be assessed by a prima facie objective evaluation be recategorized as civil offences (instead of being treated as criminal actions) under the Companies Act and default can thus be rectified by payment of a prescribed penalty.


OMISSION OF 9 COMPOUNDABLE OFFENCES


Multiplicity of laws can create unnecessary challenges for the enforcement system so the matters which can be dealt with by The National Company Law Tribunal (NCLT) which is a specialised tribunal constituted for it, should altogether be removed from the Companies Act. These 9 compoundable offences include consequences of non-compliance to NCLT’s orders- matters relating to winding-up of companies[2], default in the publication of NCLT order relating to the reduction of share capital[3], rectification of registers of security holders[4], payment of interest and redemption of debentures[5], changes in rights of shareholders[6], etc. Matters which can be governed by the Insolvency and Bankruptcy Code 2016 such as those of winding up[7] and liquidation should also be resolved under it now without needing to find a place in the Companies Act 2013. The intention behind this is to reduce the burden on company tribunals and courts, prevent multiplicity of laws and aid in decreasing the rigors of compliance for companies.


LIMITING 11 COMPOUNDABLE OFFENCES TO FINE ONLY - Omitting Punishment of Imprisonment and Limiting the Penalties of Certain Offences


The nature of monetary compensation levied in 11 sections of the act[8] has been suggested to be changed from criminal fine to civil penalty. It is proposed that offences which are substantial enough to warrant liability but lack a mala fide intention i.e., do not harm public interest, should not warrant incarceration punishment upon conviction. The offences for which omission of imprisonment has been amended are those related to contravention of provisions relating to public offering of securities by a company[9], buy-back of securities[10], preparing and submission/approving of financial statements of companies[11], significant beneficial owners[12], Corporate Social Responsibility[13] and Oppression and mismanagement[14] among more. Furthermore, section 446B[15] has been amended to mention that non-compliance by one-person companies, small companies, producer companies or start-up companies will face liability in their respective provisions to the maximum extent of Rs.2,00,000 in case of companies and up to Rs.1,00,000 in case of a person which is only one-half of what they would otherwise be liable for.


PROPOSITION OF ALTERNATE FRAMEWORK FOR 5 OFFENCES


Alternate frameworks like in-house adjudication can be more effective to achieve the aim of penal provisions, like those for non-cooperation by promoters and distributors[16], etc. with the company liquidators or inserting relevant provisions about these in IBC. Similarly, the maximum permissible fine for the initial offence for which a compounding application has been made is doubled for non-compliance with orders of NCLT or regional director of compounding by an officer or employee of the company.

Conclusion

The aforementioned recommendations and main intention of CAB 2020 is an endeavour to simplify and accelerate the processes of rectifying defaults by paying penalties, instead of fighting a criminal trial. They have the potential of conferring long term benefits on stakeholders and investors by facilitating ease of doing business and providing a more swift redressal plus enforcement mechanism for corporate non-compliances in India. The benefits of it are multi-fold which can mainly be chalked out as- benefit to the State by reducing the burden on courts and allowing them to focus on more grave criminal offences, reducing the burden on company courts, ensuring investor interests, and facilitating ease of doing business. In addition to these, decriminalization will yield intangible benefits in form of protection of goodwill of a company that could otherwise get tarnished by criminal sanctions being imposed for minor, technical or inadvertent lapses on behalf of the company as criminal sanctions are more serious and permanent in nature in comparison to cost of civil penalties. However, the one thing that is worth deliberating upon is that it needs to be ensured that these changes should not encourage an unbridled corporate culture where corporations can indulge in defaults and purge them by merely expanding funds, as this will simply defeat the legislative intent behind CAB 2020. The corporate sector cannot become a breeding ground for non-compliances so while these relaxations have been suggested, the system and implementation still needs to be one of strong checks and controls.

[1] The Report of Company Law Committee (2019). [2] Section 271, The Companies Act (2013). [3] Id, Section 66, [4] Id, Section 59. [5] Id, Section 71. [6] Id, Section 173. [7] Sections 33-54, 59, Insolvency and Bankruptcy Code 2016 [8] The Companies Act 2013. [9] Supra note 2, Sections 26(9), 40(5) [10] Id, Section 68 (11). [11] Id, Sections 134(8), 137(3). [12] Id, Sections 90(10), 90(4). [13] Id, Section 135(5). [14] Id, Sections 242(8), 243(2). [15] Id, Section 446B. [16] Section 284, The Companies Act 2013 and Section 70, Insolvency and Bankruptcy Code 2016.

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