Companies (Amendment) Act, 2020 – A Refreshing Change

I. Introduction

In the first part[1] of the two-part series, we analysed the doctrine of corporate criminal liability and its evolution in India specifically with regard to the provisions of the Companies Act, 2013 (Act). In our analysis, we noted that the legislators were required to water down the unrealistic standards prescribed under the Act for the purposes of enhancing the ease of doing business while still addressing the rising issue of corporate criminal liability. In light of the same, the Companies (Amendment) Act, 2020[2] (Amendment Act) was passed by the Lok Sabha on 19-9-2020 decriminalising nearly 46 provisions under the Act after taking into account the concerns raised by the Company Law Committee (Committee) in its Report dated 14-11-2019. The primary objective of the Amendment Act was to enhance the ease of doing business, reduce the existing burden on courts from the backlog of cases, effective disposal of cases and to improve smooth functioning of judicial and quasi-judicial bodies under the Act.

In part one of our article, we discussed mens rea as a concept in Indian jurisprudence, and how a corporation may be held liable for its actions and inactions that result in commission of a punishable offence. In the second part, in light of the recommendations of the Committee we discuss that while corporate criminal liability may exist in the Indian jurisprudence, the procedural, technical and minor non-compliances, especially the ones not involving subjective determinations, may be dealt with through civil penalty as oppose to imposing criminal liability[3]. We also discuss and analyse the amendments introduced under the Amendment Act to assess if the objective for introducing the Amendment Act is likely to be achieved.

II. Changes under the Amendment Act

  • The Amendment Act is a new phase in the development of the jurisprudence on corporate criminal liability in India. The Act prior to its amendment had adopted a stricter approach while regulating and affixing corporate criminal liability on various key individuals within a corporation, compared to the erstwhile provisions under the Companies Act, 1956 and certain special legislations. Pertinently, the strict imposition of corporate criminal liability under the Act prior to the amendment had resulted in disincentivising various individuals within the corporation from taking up ownership and accountability of various actions and compliance requirements prescribed under the Act. The Amendment Act diluted the impact of criminal liability as was present under the Act and brought with it series of changes inter alia regarding decriminalising various offences and shifting the reference of various offences under the in-house adjudication mechanism.
  • Before analysing the key amendments introduced vide the Amendment Act, it is noteworthy to understand the guiding principles that were adopted by the Committee for considering decriminalisation of certain offences, stated as follows[4]:

(a) Offences that are appropriate to be dealt with under special laws should be decriminalised under the Act.

(b) Offences that do not result in grave loss or irreparable injury should be subject to only monetary punishment limited by fine.

(c) Offences that are not serious violations under the Act should be, at the first instance, referred to in-house adjudicating mechanism before knocking the doors of courts/tribunals.

(d) Offences involving substantial non-compliances resulting in serious consequences requiring detailed adjudication should not be decriminalised under the Act.

  • Guided by the above principles the Amendment Act: (i) recategorised 23 offences out of the 66 compoundable offences; (ii) eliminated 7 compoundable offences; (iii) limited the punishment for 11 compoundable offences to only fine by removing provision for imprisonment; (iv) recommended 5 offences be dealt under alternative frameworks (such as in-house adjudication mechanism); (v) reduced the gravity of penalties in respect of 6 provisions, which are shifted to the in-house adjudication framework through the recently passed Companies (Amendment) Act, 2019; and (vi) maintained status quo in case of the non-compoundable offences under the Act.
  • In light of the above approach it may be noteworthy to analyse the key changes introduced under the Amendment Act to assess if the proposed changes are likely to achieve the objective under the Amendment Act:

(a) Pertinently, one of the most important changes was to shift certain offences to in-house adjudication mechanism. The in-house adjudication mechanism is a mechanism for levy of civil penalties through proceedings by adjudication officers (AO) appointed by the Central Government. The orders of the AO may include penalties for defaults or non-compliances as well as directions to the company or its officers to rectify the default.[5]

(b) Section 128(6) of the Act deals with failure on part of the companies to maintain books of accounts at its registered office for inspection thereof by any director of the company. The Amendment Act amends the said provision by diluting the punishment from passing the sentence of imprisonment of 1 year to imposition of monetary fine of less than Rs 50,000 extendable to Rs 5,00,000. Keeping in mind, the emerging trends in the manipulation of books of accounts by various companies, the maintenance and inspection of the books of accounts plays a vital role in preserving the interest of the stakeholders and to ensure transparency within the company and before the various regulators. However, requirement to maintain the same at the registered office at any given time may be harsh under certain circumstances, especially during the Covid-19 pandemic. Therefore, diluting the punishment for such offences may result in enhancing the overall ease of doing business within the corporation without instilling fear of imprisonment within the officers of the company.

(c) Section 147 of the Act deals with default in complying with provisions of Chapter X (Audit and Auditors). The Amendment Act amends the said provision by eliminating punishment to be levied on any director/officer of the company of offence from imprisonment of 1 year to imposition of fine of Rs 1,00,000. It is relevant to note that Section 447 of the Act already provides for punishment for commission of fraud. Therefore, any fraud perpetrated by the officers/directors of the company under Chapter X of the Act can be punished with imprisonment under Section 447 of the Act. In order to keep the punishment under the section limited to fine, the Amendment Act removes the imposition of imprisonment up to one year from the section. Such proposed change will result in providing flexibility to the officers while complying with Chapter X of the Act thereby enhancing the overall ease of doing business.

(d) Section 188(5) of the Act imposes punishment on the director/officer of a company for contravention of provisions pertaining to a related party transaction. The Amendment Act amends and substitutes the punishment with imposition of monetary penalty of up to Rs 25,00,000. Pertinently, non-compliance in case of related party transaction would render the relevant agreements/contracts voidable at the option of the Board of Directors of the company. Therefore, there is no mandate to increase the existing burden on the directors/key officers of the company by imposition of stricter punishment in commercial transactions.

(e) Section 232(8) of the Act imposes punishment for non-compliance of obligations in relation to scheme for merger and amalgamation. The Amendment Act amends and substitutes the punishment by levying penalty of up to Rs 3,00,000. Pertinently, under erstwhile provision of the Companies Act 1956, there was no punishment prescribed for such non-compliance in the scheme for merger and/or amalgamation. It is relevant to note that any such non-compliances on part of the key officials/directors can be raised before the National Company Law Tribunals and therefore imposition of serious consequences need not be prescribed for under the Act.

(f) Section 242(8) deals with powers of the National Company Law Tribunal to pass any appropriate order to meet the ends of justice when a petition by a minority shareholder has been initiated to seek reliefs in a case of oppression and mismanagement. The Amendment Act amends and substitutes the punishment from imprisonment of 6 months to levying a fine of Rs 1,00,000. Pertinently, adjudication of oppression and mismanagement on merits arises from assessment of series of acts resulting in oppression and mismanagement by the majority shareholders and directors respectively.[6] Dispute resolution cases of oppression and mismanagement are often disposed of after several years. During such time period various directors/majority shareholders usually exit the company in order to avoid any liability under the Act. As a result, imposition of imprisonment in case of oppression and mismanagement may not be effective in ensuring that the interest of the company and minority shareholders and directors is balanced. Therefore, imposition of fine would not only result in avoiding any vexatious litigation especially in cases of oppression and mismanagement but also in protecting the interest of the minority shareholders.

III. Conclusion

From the above, we understand that under the Act it was crucial step to be adopted by the legislator for the purposes of balancing the interest of various stakeholders in a company while imposing civil and criminal liabilities on the directing minds of the company. The legislators have observed that that, unreasonable punishment in the form of imprisonment on the officers of the corporations, specifically for minor defaults and non-compliances, is having a cascading effect on the ease of doing business in India. In our view, the introduction of the Amendment Act also recognises the new norm emerging in the wake of Covid-19 in India pursuant to which corporations are ensuring greater flexibility in their operations and functioning it is also important for the legislature to ensure modification under the Act for minor defaults and non-compliances. In our view, the Act introduced to reduce the burden of backlog of cases and to enhance the ease of doing business is likely to be perceived as a refreshing change for the directing minds working within the corporation as well as for the criminal justice system in India.


* Partner,  Cyril Amarchand Mangaldas.

** Partner,  Cyril Amarchand Mangaldas.

*** Senior Associate, Cyril Amarchand Mangaldas.

† Associate, Cyril Amarchand Mangaldas.

†† Associate, Cyril Amarchand Mangaldas.

[1] Part I – Corporations: Legal Fiction or an Unborn Predator, available at <HERE >.

[2] <http://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf>.

[3] Report of the Company Law Committee dated 14-11-2019

[4] Id.

[5] Id.

[6] Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd., 1964 SCC OnLine Guj 66 : (1964) 5 GLR 804

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