The Companies (Amendment) Ordinance, 2018

– a move towards decriminalization of offences under the Companies Act, 2013!

Munmi Phukon | Principal Manager

Megha Saraf | Manager

Smriti Wadehra | Assistant Manager(corplaw@vinodkothari.com)

INTRODUCTION

The Ministry of Law and Justice has come out with an Ordinance dated 2nd November, 2018, further amending 31 provisions of the Companies Act, 2013 (“Act”) based on the recommendations of the Committee formed by the Ministry of the Company Affairs (“MCA”) under the chairmanship of Mr. Injeti Srinivas to review the offences under the Act. The amendments have been made effective from 2nd November, 2018 and the same primarily focus on the current prosecution structure under the Act and re-categorization of offences which are technical defaults or procedural lapses as civil default  and shift or transfer the proceedings of such case to in-house adjudication. The Article attempts to provide a detailed analysis of the amendments along with the impacts thereof.

THE AMENDMENTS AND IMPACT THEREOF

Section 2(41)- Definition of “financial year”

As per the existing section, the application for adopting a different financial year was to be made to “Tribunal” which shall henceforth be made to the “Central Government”.

Section 10A- Commencement of Business, etc.

This seems to be a reinstatement of the provisions of the erstwhile Companies Act, 1956 under Section 149 thereof though the same was applicable only to public companies. However, the Ordinance puts the restriction on every company having share capital (incorporated post commencement of the Ordinance), to not to commence its business or exercise borrowing powers unless the directors file a declaration within a period of 180 days from the date of incorporation in a prescribed form to the effect that every subscriber to the memorandum has paid the value of the shares as agreed for and the registered office is verified by filing necessary returns with the Registrar. Failure to comply with this Section may be an additional ground for Registrar to strike off of the name of the company.

Section 12- Registered office of company

The Registrar is now empowered vide a new sub- section i.e. sub- section (9) to physical verification of the registered office on reasonable cause to believe that no business or operations is being carried out by the company. In case of any non- compliance of sub- section (1) in respect of having such an office in place is found, the same may also be an additional ground for Registrar to strike off of the name of the company. The Ministry shall prescribe the relevant rules in this regard.

Section 14- Alteration of Articles

Existing provisions required the application for alteration of Articles to give effect to conversion of a public company to a private company to be made to the Tribunal which has now been shifted to the Central Government though the pending applications will be disposed off by the Tribunal.

Section 77- Duty to register charges, etc.

This is one significant amendment brought in by the Ordinance. Henceforth, the creation of charges has to be registered within 30 days of creation which, on an application, may be extended by the Registrar to additional 30 days (existing provisions provided 270 days on payment of additional fee). In case of failure to register within the additional time of 30 days, the Registrar may, on an application, allow an additional period of 60 days from the date of application for which an ad valoram fee shall be levied. The relevant rules awaited in this regard. Further, the existing charges pending registration shall get a timeline of 6 months from the effective date of the Ordinance to register on payment of additional fees. The amendment has significantly reduced the time line which is a major change.

Section 86- Punishment of contravention

Apart from the existing penal provisions on any contravention of the provisions of the chapter, any wilful furnishing of false or incorrect information or knowingly suppressing any material information pertaining to registration of charges shall tantamount to be a fraud and shall attract action under Section 447.

Section 87- Rectification by Central Government in register of charges

The Section has been re-drafted and merely a straightening of the language.

Section 90- Register of significant beneficial owners in a company

The limitation period of 1 year has been prescribed for the aggrieved party to make an application to the Tribunal against an order passed by the Tribunal restricting the rights attached to the relevant shares to relax or lift of such restrictions.  In case of failure to file the application within such timeline, then such shares shall mandatorily be transferred to IEPF.

Section 164 – Disqualifications of director

A new clause has been inserted under the Section linking Section 165 which shall be a ground for disqualification of a director, if he/ she breaches the limits of maximum directorship allowed thereunder. It is pertinent to note that falling under any of the clauses of Section 164 leads to automatic vacation of office that too, from all the existing companies. This is one of the significant provisions which needs immediate attention.

Section 197- Overall maximum managerial remuneration in case of inadequacy of profits

Sub- section (7) of the Section has been removed which pertained to a prohibition on entitlement of stock option by independent directors. However, this omission shall not have any impact as Section 149 (9) also provides similar prohibition.

Further, the existing penal provision of payment of fine has been replaced with penalty of the equivalent amount of fine as provided in the existing provisions.

Section 248 – Power of the Registrar to remove the name of the company

In view of the newly inserted provisions of Section 10A and 12(9) as discussed aforesaid, the relevant amendments have been made in Section 248 of the Act in order to provide a reference to the aforesaid new Sections.

Section 441- Compounding of offences

The Ordinance has increased the limit of offence for compounding before the Regional Director from 5 Lakhs to 25 Lakhs.

Section 454- Adjudication of penalties

The existing section empowered the adjudicating officer to impose penalty, by an order, on the company and the officer who is in default in case of any non- compliance or default of the provisions of the Act. Such an order may henceforth be included any other person too, hence the same expands the power of the adjudicating officer. Further, the order of the adjudicating officer may also provide for rectification of the default by the concerned person. The penal provisions as provided in sub- section (8) shall apply to violation in compliance of the said order also.

Section 454A- Penalty for repeated default

The newly inserted section provides for penalty of twice the amount of penalty in case of repeated defaults by companies or any person who had already been subjected to penalty under the Act. However, the subsequent default has to be repeated within 3 years from the date of order imposing penalty for earlier default.

CHANGES IN THE PENAL PROVISIONS

The changes that have been brought in the penal provisions have been consolidated in the following table for ready reference:

 

Section No. Default Penal provisions as per the erstwhile Section Recommendations of Injeti Srinivas Committee Penal provisions as per the Ordinance
Section 10A- Commencement of Business, etc Failure to furnish declaration under the section No such provision No such recommendation Company:

Rs. 50000

 

Officer- in- default: Rs. 1000 for each day to max. Rs. 1 lakh.

 

Section 53-Prohibition of issue of shares at Discount Issue of shares at a discount Company:

Minimum Fine of Rs. 1 Lakh

Maximum Fine of Rs. 5 Lakh

 

Officer in Default:

Minimum Fine of Rs. 1 Lakh

Maximum Fine of Rs. 5 Lakh

As technical in nature should be brought under in-house adjudication Company & Officer in Default

Amount raised or Rs. 5 Lakh

 

Company

Shall also be required to refund the money raised through such issue at a rate of interest of 12% p.a. from the date of issue of shares.

 

Section 64- Notice for alteration of share capital Non-filing of notice with Registrar for alteration of share capital of the Company Company & Officer in default:

Minimum Fine of Rs. 1000 per day

Maximum Fine of Rs. 5 Lakh

As technical in nature should be brought under in-house adjudication Company & Officer in default:

Minimum Fine Penalty of Rs. 1000 per day

Maximum Fine Penalty of Rs. 5 Lakh

 

Section 90- SBO Person fails to make declaration No such provision The Committee recommended that contravention of the provisions of section 90 should include prosecution and should not be limited to only penalty/fine.

 

Imprisonment of 1 year or with the fine applicable and may even be levied fine and imprisonment both.

 

Section 92- Annual Return Non-filing of Annual Return (MGT-7) Company:

 

Minimum Fine of Rs. 50,000

Maximum Fine of Rs. 5 Lakh

 

Officer in default:

 

Imprisonment of 6 months

Or

Minimum Fine of Rs. 50,000

Maximum Fine of Rs. 5 lakh

These defaults are substantial violations which directly affects the status of the Company, therefore, involves large public interest. Hence this cannot be brought under the regime of in-house adjudication. However, the Ordinance did not accept the recommendation of the Committee. Company & Officer in default:

 

Minimum Fine Penalty of Rs. 50,000

Further Penalty of Rs. 100 per day

Maximum Fine Penalty of Rs. 5 Lakh

Section 102-Statement to be annexed to the Notice Mis-statement in Explanatory statement Every promoter, director, manager or other KMP who is in default shall be punishable with fine which may extend to Rs. 50,000 or 5 times the amount of benefit accruing to the promoter, director, manager or other key managerial personnel or any of his relatives, whichever is more. As technical in nature should be brought under in-house adjudication Every promoter, director, manager or other KMP who is in default shall be punishable with fine Penalty which may extend to Rs. 50,000 or 5 times the amount of benefit accruing to the promoter, director, manager or other key managerial personnel or any of his relatives, whichever is more.
Section 105- Proxies Notice of General Meeting to contain clause for proxies

 

Company and Officer in Default:

 

Fine of Rs. 5000

As technical in nature should be brought under in-house adjudication Company and Officer in Default:

 

Fine Penalty of Rs. 5000

Section 117- Resolutions and agreements to be filed Non-filing of MGT-14 Company:

 

Minimum Fine of Rs. 1 Lakh
Maximum Fine of Rs. 25 Lakh

 

Officer in default:

 

Minimum Fine of Rs. 50,000

Maximum Fine of Rs. 5 Lakh

As technical in nature should be brought under in-house adjudication Company:

 

Minimum Fine Penalty of Rs. 1 Lakh

Further Penalty of Rs. 500 everyday
Maximum Fine Penalty of Rs. 25 Lakh

 

Officer in default:

 

Minimum Fine Penalty of Rs. 50,000

Further Penalty of Rs. 500 per day

Maximum Fine Penalty of Rs. 5 Lakh

Section 121- Report on Annual General Meeting Non-filing of MGT-15 Company:

 

Minimum Fine of Rs. 1 Lakh

Maximum Fine of Rs. 5 Lakh

 

Officer in default:

 

Minimum Fine of Rs. 25000

Maximum Fine of Rs. 1 Lakh

As technical in nature should be brought under in-house adjudication Company:

 

Minimum Fine Penalty of Rs. 1 Lakh

Further Penalty of Rs. 500 per day

Maximum Fine Penalty of Rs. 5 Lakh

 

Officer in default:

 

Minimum Fine Penalty of Rs. 25000

Further Penalty of Rs. 500 per day

Maximum Fine Penalty of Rs. 1 Lakh.

 

Section-137-Filing of Financial Statements Failure in filing financial statements with the Registrar Company:

 

Fine of Rs. 1000 everyday

Maximum Fine of Rs. 10 Lakh

 

Officer in default:

 

Imprisonment of term of 6 months

Minimum Fine – Rs. 1 Lakh Maximum Fine – Rs. 5 Lakh

As technical in nature should be brought under in-house adjudication Company:

 

Fine Penalty of Rs. 1000 everyday

Maximum Penalty of Rs. 10 Lakh

 

Officer in default:

 

Minimum Fine Penalty- Rs. 1 Lakh

Further Penalty- Rs 100 per day

Maximum Fine Penalty- Rs. 5 Lakh

 

Section- 140- Resignation of Auditor Non-filing of e-Form ADT-3 Auditor:

 

Minimum Fine of Rs. 50,000 or amount equal to remuneration of auditor, whichever is less

Maximum Fine of Rs. 5 Lakh

 

As technical in nature should be brought under in-house adjudication Auditor:

 

Minimum Fine Penalty of Rs. 50,000 or amount equal to remuneration

Further penalty of Rs. 500 every day

Maximum Fine Penalty of Rs. 5 Lakh

Section 157(2) – Intimation of DIN Failure to intimate DIN of directors to the Registrar Company:

 

Minimum Fine of  Rs. 25,000

Maximum Fine of Rs. 1 Lakh

 

Officer in default:

 

Minimum Fine of Rs. 25,000

Maximum Fine of Rs. 1 Lakh

 

As technical in nature should be brought under in-house adjudication Company:

 

Minimum Fine Penalty of  Rs. 25,000

Maximum Fine Penalty of Rs. 1 Lakh

Further Penalty of Rs. 100 per day

 

Officer in default:

 

Minimum Fine Penalty of  Rs. 25,000

Maximum Fine Penalty of Rs. 1 Lakh

 

Section 159- Punishment for contravention of sections 152, 155, and 156 Punishment for contravention of sections 152, 155, and 156 Individual or Director:

 

Imprisonment of 6 months

Or

Minimum Fine of Rs. 50,000

Further Fine of Rs. 500 per day

 

As technical in nature should be brought under in-house adjudication Individual or Director:

 

Imprisonment of 6 months

Or

Minimum Fine Penalty of Rs. 50,000

Further Fine Penalty of Rs. 500 per day.

 

Section 165- Number of directorships Non-compliance of permissible number of directorship by director Director:

 

Minimum Fine of Rs. 5000

Maximum Fine of Rs. 25,000

Offences under this section are technical and can be penalised by initiating a summary proceedings. Hence, such offences should be shifted to in-house adjudication.

 

Director:

 

Penalty of Rs. 5000 per day

Minimum Fine of Rs. 5000

Maximum Fine of Rs. 25,000

Section 191- Payment to Director for loss of office Contravention of the section Director:

 

Minimum Fine of Rs. 25,000

Maximum Fine of Rs. 1 Lakh

Offences under this section are technical and can be penalised by initiating a summary proceedings. Hence, such offences should be shifted to in-house adjudication.

 

Director:

 

Minimum Fine of Rs. 25,000

Maximum Fine Penalty of Rs. 1 Lakh

Section 197- Overall maximum managerial remuneration in case of inadequacy of profits

 

Non-compliance of the provisions of the section Minimum Fine of Rs. 1 Lakh

 

Maximum Fine of Rs. 5 Lakh

As technical in nature should be brought under in-house adjudication Minimum Fine  Penalty of Rs. 1 Lakh

 

Maximum Fine Penalty of Rs. 5 Lakh

Section 203- Appointment of KMP Default in appointment of Key Managerial Personnel Company:

 

Minimum Fine of Rs. 1 Lakh

Maximum Fine of Rs. 5 Lakh

 

Director/KMP/Officer in default:

 

Minimum Fine of Rs. 50,000

Further Fine of Rs. 1000 everyday

As technical in nature should be brought under in-house adjudication. Company:

 

Minimum Fine of Rs. 1 Lakh

Maximum Fine Penalty of Rs. 5 Lakh

 

Director/KMP/Officer in default:

 

Minimum Fine Penalty of Rs. 50,000

Further Fine Penalty of Rs. 1000 everyday

Maximum Penalty of Rs. 5 Lakh

 

Section 238- Registration of offer of schemes involving transfer of shares Contravention of the section Director:

 

Minimum Fine of Rs. 25,000

Maximum Fine of Rs. 5 Lakh

As technical in nature should be brought under in-house adjudication Director:

 

Minimum Fine of Rs. 25,000

Maximum Fine of Rs. 5 Lakh

Penalty of Rs. 1 Lakh

Section 446B- Application of Fines Default in filing annual return by OPC and small company ½ of fine or imprisonment or both as may be specified in section 92(5) of the Act No such recommendations ½ of fine penalty or imprisonment or both as may be specified in section 92(5) of the Act
 Section 447- Punishment for fraud Penal provisions for fraud involving Rs. 10 lakh or 1% of turnover and does not involve public interest Any person guilty:

 

Imprisonment of 5 years

Or

Fine of Rs. 25 Lakh

The committee recommended that the maximum fine under section 447 be increased from Rs.20 lakhs to Rs. 50 lakhs. Any person guilty:

 

Imprisonment of 5 years

Or

Fine of Rs. 25 50 Lakhs

CONCLUSION

To conclude it may be said that the amendments introduced in the Ordinance are primarily to re-categorize the existing penal provisions as civil defaults for those provisions which are more likely of administrative nature as recommended by the Injeti Srinivas Committee. In view of the amendments, it is definitely a welcome step towards ensuring corporate compliance in a systematic manner.

 

 

 

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To view this article, please visit https://www.moneylife.in/article/implementation-issues-of-compulsory-demat-for-wholly-owned-subsidiaries/55381.html

 

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