The Union Cabinet chaired by Prime Minister Narendra Modi has approved the Promulgation of the Companies (Second Amendment) Ordinance 2019 and for replacement of the said Ordinance in Parliament by a replacement Bill. It is based on the recommendations of the Committee to review offences under the Companies Act, 2013, so as to fill critical gaps in the corporate governance & compliance framework as enshrined in the Companies Act 2013, while simultaneously extending greater Ease of Doing Business to law abiding corporates.   This will incentivize compliance of law while simultaneously meting out exemplary punishment for serious violations.

Details:

The Companies (Amendment) Bill, 2018 later renamed as the Companies (Amendment) Bill, 2019) was introduced in the Lok Sabha on 20th December, 2018 and was considered and passed by the Lok Sabha on 4th January, 2019. The Bill was transmitted to the Rajya Sabha but it could not be considered and passed in the Upper House in the Winter Session or in the Budget Session.

A total of 29 sections were amended and 2 new sections were inserted through the earlier ordinances, which were promulgated on 2nd November, 2018 (Ordinance 9 of 2018) and on 12th January, 2019 (Ordinance 3 of 2019).

The amendments have been brought in to address the need to impose civil liability for technical & procedural defaults of a minor nature & to plug gaps in the corporate governance & enforcement framework covering a wide range of issues such as:

a.  Re-categorization of 16 minor offences as purely civil defaults which will de-clog special courts.   

b.  Transfer of certain routine functions from NCLT to the central government

such as dealing with applications for change of financial year and conversion from public to private companies.

c.    Making    non-maintenance    of    registered    office    and    non-reporting    of commencement   of   business   grounds   for   striking   of   from   register   of companies.

d.   Stringent provisions with reduced timelines for creation and modification of charges

e.   Breach of ceiling on directorships being made a ground for disqualification.

Impact:

The changes are expected to lead to greater compliance by corporates, de-clogging of the special courts, de-clogging of the NCLT and effective enforcement. At present around 60 percent of the 40,000 odd cases pending in courts pertain to sections dealing with procedural lapses that are proposed to be shifted to in-house adjudication mechanism thereby incentivizing compliance by corporates. As a result of the amendments brought in, in future, the compounding cases load on NCLT will also come down significantly. The existing cases will be withdrawn from special courts by bringing out an amnesty scheme as there are inherent benefits in prescribing civil liabilities for procedural lapses instead of undertaking a criminal trial. 

Analysis of data available demonstrates that most of the cases initiated/ pending relate to procedural lapses such as non-filing of financial statements and non-filing of annual returns etc. It was felt that if such violations are re-categorized and allowed to be adjudicated in an in-house mechanism through payment of monetary penalties, the burden on special courts would be drastically reduced and more effective and speedy progress of the more serious cases would be possible. This would also allow ROCs to more effectively pursue action against serious offences, it is also proposed to amend the Rules to ensure that adjudicating officers (Registrar of companies) dispose-of adjudicating proceedings within stipulated time limits which would have to be rigorously followed.

Decriminalization of minor corporate offences shifts routine defaults to civil in house adjudication, easing tribunal and court burden. The Companies (Second Amendment) Ordinance, 2019 re-categorizes specified minor procedural offences as civil defaults to be resolved through an in-house adjudication mechanism administered by Registrars of Companies with prescribed timelines; reallocates certain routine functions from the tribunal to the central government; adds grounds for striking companies off the register for non-maintenance of registered office and non-reporting of commencement of business; tightens charge creation and modification timelines; and makes breach of directorship ceilings a disqualification ground, coupled with an amnesty scheme to withdraw existing criminal cases for re-categorized defaults.