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Reducing the Burden on India’s Justice System from Corporate Technical Offenses

Reducing the Burden on India’s Justice System from Corporate Technical Offenses

24.07.2020 | JULY 23, 2020 11:00:56 PMNishant Tiwari and Alankrita Singh Edited by: Tim Zubizarreta | 716

The Central Government, in continuation of its efforts to facilitate greater ease of doing business in India, has yet again announced the plans to decriminalize various minor technical and procedural defaults under the Companies Act, 2013, amid the COVID-19 pandemic. Under this, seven compounding offenses will be completely eliminated, while five others will be dealt with under an alternative framework. Further, since the Companies (Amendment) Bill, 2020 (CAB 2020) is already pending in Parliament on account of the pandemic and the consequent lockdown. The Finance Minister Nirmala Sitharaman on May 17, 2020, also indicated that the government is keen to promptly implement the amendments proposed in CAB 2020 including by way of promulgating an ordinance, if required.

Over the past year, this will be the second attempt by the Ministry of Corporate Affairs (MCA) to decriminalize offenses under the Companies Act, 2013, the first being the passing of the Companies (Amendment) Act, 2019, (CAA 2019). Under the plan announced, Decriminalized violations would include-

  • Shortcomings in CSR reporting
  • Inadequacies in the board report
  • Non-compliance in filing
  • Delays in holding annual general meetings

With an attempt to fix the issue of pendency and delays, the MCA has come out with a plan of shifting the majority of the compoundable offenses sections to Internal Adjudication Mechanism (IAM) and to enhance the powers of Regional Directors for compounding. Moreover, now 58 sections will be dealt with by the IAM, in place of 18 sections.

In this article, we will analyze how the decision of the Indian governmental authorities will help in removing the obstruction from the Criminal Courts (courts) and the National Company Law Tribunal (NCLT). Thus, the article discusses two mechanisms which will be beneficial for reducing the burden on the justice system.

The Internal Adjudicating Mechanism (IAM) is one of the key changes introduced by the CAA 2019 under Section 454 of the Act. The main objective of this amendment was to modify the manner of dealing with certain compoundable offenses. Basically, these offenses were shifted from the jurisdiction of civil courts to the IAM, whereby Adjudicating Officers (AO) appointed by the Central Government have the power to determine the offenses. Therefore, this shift of levying of penalties from courts to IAM would enable companies to promptly communicate, represent, and resolve disputes. Also, it would ease the communication between the AO and the company and its officers.

Furthermore, the decriminalization of compoundable offenses would lead to the imposition of fines and penalties, which, in turn, will not require adjudicating officers to establish the mens rea element. It will make the process of imposing penalties faster than criminal prosecution. By adopting this mechanism, the NCLT’s would also be able to focus only on the defaults involving public interest.

Also, this mechanism is beneficial as it brings more transparency since the entire process is conducted through an online portal and the physical presence of the defaulters is not mandatory. Moreover, for easy accessibility, the orders of the adjudicating officers are published on the website mainly on MCA21. This framework of IAM is a substitute for the process of appeal and adjudication before NCLT and allows rectification of the default first before imposing a penalty, which ultimately helps in attaining better compliance. Another mechanism for freeing-up the overburdened courts and the NCLT is enlarging the jurisdiction of Regional Directors (RD).

The compounding of offenses under Section 441 of the Act is clearly a short cut method to avoid litigation. It is a mechanism wherein the defaulter is relieved of major legal consequences by providing him/her the opportunity to remit a sum of money to escape prosecution. Furthermore, the more this mechanism is used the more number of defaulters will be relieved from the painstaking formalities of the courts like time, effort, goodwill and finances. Also, the defaulter would only be required to remit a compounding fee that would be within the maximum amount of fine limit that can be imposed under the aforementioned section.

At present, the maximum amount of fine which may be imposed by the RD or any officer authorized by the Central Government for an offense does not exceed 25 lakhs. Therefore, the enhancement of pecuniary jurisdiction will definitely allow RD’s to take up more cases, which consequently will free-up the overburdened courts and NCLT.

As a result, the set of reforms laid down by the government to enhance the powers of regional directors for compounding will be advantageous in the following ways-

  1. It will reduce the procedural requirements.
  2. Compounding is a less time-consuming process.
  3. The defaulter can be released from his responsibility by paying certain fees that cannot be more than the fees prescribed under the act and cannot be treated as a fine either.

Thus, the first and most important step in compounding is to make the default good, by giving the defaulter an option of paying money instead of prosecuting, thus avoiding prolonged litigation. Hence, the enhancement of power will allow more defaulters to benefit from this mechanism.

The changes are expected to significantly enhance Indian corporates’ confidence in the government’s resolution to provide greater ease of doing business and to give the highest respect to honest wealth creators in the country and reduce the burden on the justice system.

The recent decision decriminalizing the offenses and altering the penalties is a step in the right direction, making the whole process simpler as compared to that of the court proceedings. The decriminalization is likely to garner benefits in the form of protection of the benevolence of a company that could otherwise get diminished by criminal sanctions being imposed for minor, technical, or inadvertent lapses. Also, decriminalization of compoundable offenses that are technical or procedural in nature is inherently beneficial to all stakeholders involved.

Further, while the pandemic will inevitably have a wide-ranging impact on companies in India, the government is looking forward with hope that timely amendments would foster faith, improve corporate compliance, and facilitate investments.


Nishant Tiwari is a third-year B.A. LL.B. (Hons.) student at the National University of Study and Research in Law, Ranchi, India.

Alankrita Singh is a third-year B.A. LL.B. (Hons.) student at the National University of Study and Research in Law, Ranchi, India.

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