Recommendations of the Company Law Committee

Recommendations of the Company Law Committee
CompaniesAct.in

Nov 20, 2019

The Company Law Committee (CLC) was constituted by the Ministry of Corporate Affairs (MCA) in September, 2019, inter alia, to further decriminalise the provisions of the Companies Act, 2013 (Act) based on their gravity and to take other concomitant measures to provide further Ease of Living for corporates in the country. CLC submitted its report to the Hon’ble Union Minister of Finance and Corporate Affairs on 18th November, 2019.

The report proposes amendments in 46 penal provisions which will further declog the Special Courts and NCLT. In addition, it also addresses the need for certain other amendments so as to further improve ease of living for the corporates and other stakeholders of the country.

Shifting of 23 compoundable offences to an in-house adjudication framework	Limiting 11 compoundable offences to fine only	Omitting 7 compoundable offences

Changing in 6 existing penalty provisions	Ease of living related changes	Other recommendations which may be taken up in the next phase

The key recommendations of the Committee are as follows:

1) Re-categorising of 23 offences out of the 66 which are in the category of compoundable offences to an in-house adjudication framework wherein defaults would be subject to a penalty levied by an adjudicating officer. So essentially the word “fine” appearing in the penal provisions has been replaced by word “penalty”.

S. No.	Section	Nature of default
Category A Offences: Non-compliance of the orders of Central Government/NCLT/RD or RoC
1.	232(8)	Punishment for failure to comply with obligations imposed by Section 232 in relation to merger and amalgamation.
2.	405(4)	Punishment for non-compliance with orders of the Central Government directing companies to furnish certain information.
Category B Offences: Default in respect of maintenance of certain records in the registered office of the company
3.	56(6)	Failure to comply with the procedural requirements given in the Section for the manner in which the transfer of securities is required to be done.
4.	88(5)	Failure to maintain members’ register, debenture holders register and register of other security holders.
5.	90(11)	Failure on behalf of company to maintain a register of significant beneficial owners.
Category C Offences: Defaults on account of non-disclosures of interest of persons to the company, which vitiates the records of the company
6.	89(5)	Failure to make declaration the registered owner and the beneficial owner in respect of shares.
7.	90(10)	Failure to make declaration of interest by the significant beneficial owner.
8.	184(4)	Contravention of the provisions mandating disclosure of interest by the director in the first Board meeting every financial year or wherever there is any change in relation to any contract or arrangement.
Category E Offences: Technical defaults relating to intimation of certain information by filing forms with the RoC or in sending of notices to the stakeholders
9.	86(1)	Contravention of the provision of Chapter VI dealing with duty to register charges, to report their satisfaction within prescribed timelines and the duty to maintain register of charges.
10.	89(7)	Company to file a return with Registrar within the prescribed time after receiving a declaration of beneficial interest in shares from a person.
Category F Offences: Defaults involving substantial violations which may affect the going concern nature of the company or are contrary larger public interest or otherwise involve serious implications in relation to the stakeholders
11.	92(6)	Contravention of the requirements under this Section by a company secretary in practice certifying annual returns.
12.	105(5)	Fine for issuance of invitation to appoint proxies to any member entitled to attend a meeting in her name.
13.	124(7)	Failure to comply with the requirements given in this section for dealing with unpaid dividend etc.
14.	134(8)	Contravention of the requirements given in the Section for financial statements and board reports.
15.	135(7)	Contravention of provisions of corporate social responsibility and manner of dealing with any unspent amount under it.
16.	143(15)	Violation of the obligation to report fraud that she has come across in the course of performance of duties by auditor, company secretary in practice or cost accountant.
17.	178(8)	Contravention of the provisions relating to Audit Committee, Nomination and Remuneration Committee, and Stakeholders Relationship Committee.
18.	187(4)	Contravention of the provisions regarding holding of investment by a company.
19.	188(5)	Punishment for contravention of provisions regarding related party transactions by a director or employee of company.
20.	204(4)	Contravention of provisions mandating secretarial audit for certain classes of companies.
21.	247(3)	Contravention of provisions relating to valuation by valuer.
Category H Offences: Defaults not specifically punishable under any provision, but made punishable through an omnibus clause
22.	172	Punishment for contravention of any provisions relating to appointment and qualifications of directors.
23.	450	Fine for contravention of any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act.

2) Limiting 11 compoundable offences to fine only (i.e. removing the imprisonment part).

S. No.	Section	Nature of default
1.	8(11)	Failure of the company to comply with the requirements imposed on Section 8 companies.
2.	26(9)	Contravention of matters prescribed to be stated in prospectus.
3.	40(5)	Default in complying with the requirements for a public offer.
4.	68(11)	Default in complying with requirements for buy-back
5.	128(6)	Failure to maintain books of accounts of the company at its registered office and its inspection thereof by any director of the company.
6.	147	Default in complying with provisions of Chapter X
7.	167(2)	Punishment for continuing to act as director even upon becoming liable for vacation of office under the Section.
8.	242(8)	Powers of the NCLT to pass an order when an application has been made for relief in a case of oppression and mismanagement.
9.	243(2)	Default in complying with directions of the NCLT regarding termination or modification of certain agreements.
10.	347(4)	Contravention of directions of the Central Government in relation to disposal of books and papers of the company which has been wound up.
11.	392	Punishment for contravention of provisions related to foreign companies

3) *Omitting 7 compoundable offences:

S. No.	Section	Nature of default
1.	48(5)	Variation of the rights of shareholders of any class with consent of three-fourth of the holders.
2.	59(5)	Grievance before NCLT regarding entries in register of members.
3.	66(11)	Publication of order of the NCLT confirming reduction of share capital.
4.	71(11)	Non-compliance with order of the NCLT regarding failure to redeem debentures on maturity or in payment of interest.
5.	302(4)	Dissolution of company by the NCLT.
6.	342(6)	Prosecution of delinquent officers and members of company.
7.	348(6) & (7)	Contravention of provisions regarding information related to pending liquidations by Company Liquidator.

*it needs to be seen whether the residuary penal provisions will be applicable in case specific penal provisions are being deleted.

4) Reduction of monetary amount in 6 existing penal provisions:

S. No.	Section	Nature of default	Changes proposed
1.	64(2)	Failure/delay in filing notice for alteration of share capital	The penalty in case of continuing default may be reduced to Rs. 100 per day instead of Rs. 1,000 per day and maximum penalty may be capped at Rs. 2 lakhs in case of company and Rs. 50,000 in case of officer in default. Presently, capping of maximum penalty is Rs. 5 lakh on company as well as on officer in default.
2.	92(5)	Failure/delay in filing annual return.	The penalty amount at the first instance may be reduced to Rs. 10,000 instead of Rs. 50,000 and the maximum penalty may be capped at Rs. 2 lakhs in case of company and at Rs. 50,000 in case of officer in default. Presently, capping of maximum penalty is Rs. 5 lakh on company as well as on officer in default
3.	117(2)	Failure/delay in filing certain resolutions	The penalty amount at the first instance may be reduced to Rs. 10,000 instead of Rs. 1 lakh and the maximum penalty may be capped at Rs. 2 lakh for the company and Rs. 50,000 for the officer in default instead of Rs. 25 lakh and Rs. 5 lakh respectively. The penalty in case of continuing default may be kept at Rs. 100 for each day’s default instead of Rs. 500.
4.	137(3)	Failure/delay in filing financial statement	The penalty amount at the first instance may be fixed at Rs. 10,000 instead of Rs. 1 lakh and the maximum penalty may be capped at Rs. 2 lakh in case of company and Rs. 50,000 in case of officer in default instead of Rs. 10 lakh and Rs. 5 lakh respectively. In case of continuing default, a penalty of Rs. 100 for each day’s default may be kept instead of Rs. 1,000 per day.
5.	140(3)	Failure/delay in filing statement by auditor after resignation	The maximum amount of penalty may be reduced to Rs. 2 lakh instead of Rs. 5 lakh.
6.	165(6)	Accepting directorships beyond specified limits	The penalty for each day’s default may be reduced to Rs. 1,000 instead of Rs. 5,000 and a maximum penalty of Rs. 2 lakh rupees on the defaulting directors may be provided. Presently, there is no capping on maximum penalty.

5) Ease of living related changes:

S. No.	Recommendations	Proposals
1.	Power to exclude certain class of companies from the definition of ‘Listed Company’, in consultation with SEBI	The definition of a ‘listed company’ under Section 2(52) of the 2013 Act should be amended to exclude certain classes of companies, listing such classes of securities, as may be prescribed by the Central Government in consultation with SEBI. The proposal aims to ease the compliances in case of companies whose debt is only listed. As of now a company whose equity or debt is listed, is subject to same level of compliances.
2.	Reduction of timelines for speeding up rights issue under section 62 (Further issue of share capital)	CLC has recommended that section 62(1) of the Act be amended to enable the Central Government to prescribe a shorter time period than the mandatory 15 days’ time period provided in the provision for opening period of rights issue.
3.	Exclusion of certain companies from section 89 (Declaration in respect of beneficial interest in any share)	CLC agreed that section 89 should be amended to allow the Central Government to exempt application of this provision to a class or classes of persons, as may be prescribed.
4.	Review of penalty for delay in filing the Annual Return/ Financial Statement	CLC opined and recommended that a provision similar to Section 73(8) of the CGST Act should be inserted to provide for a scenario where penalty would not be required to be paid if the pending documents are filed within 30 days. CLC felt that this measure would go a long way in encouraging compliance in respect of filing of annual returns and financial statements in a timely fashion.
5.	Extending exemptions for filing of certain resolutions to NBFCs under section 117 (Resolutions and agreements to be filed)	CLC agreed that certain classes of NBFCs registered under Chapter III-B of the RBI Act, 1934, in consultation with the RBI be exempted from filing resolutions under Section 117.
6.	Enabling power to modify thresholds which trigger applicability of CSR provisions.	CLC recommended insertion of suitable provisions in the Section 135(1), which would enable the Central Government to enhance the limits for determining the applicability of CSR provisions through Rules.
7.	Provisions for allowing payment of remuneration to Non-executive directors in case of inadequacy of profits	CLC has recommended appropriate amendments in sections 149 and 197 to provide provisions for payment of remuneration to non-executive directors in case of loss or inadequacy of profits.
8.	Exclusion of certain class of body corporate from chapter XXII (Companies Incorporated outside India)	CLC has recommended suitable amendments be made to the Act to enable the Central Government to prescribe classes of bodies corporate (including foreign companies) which would be exempt from applicability of Chapter XXII.
9.	Relaxation of provisions relating to payment of additional fees under the third proviso to section 403(1) (Fee for filing, etc.)	CLC has recommended relaxing of third proviso to Section 403(1), which provides for levying twice additional fees in case of default on two or more occasion.
10.	Proposing setting up of benches of the National Company Law Appellate Tribunal (NCLAT)	In order to ease access to judicial remedy, CLC has recommended empowering the Central Government to set up benches of NCLAT, through notification. As of now, NCLAT can’t have benches.
11.	Extending applicability of section 446B (Lesser penalties for OPC and small companies)	CLC has recommended that in addition to OPC and Small Companies, amendments be made in Section 446B, to allow start-up company, producer company to enjoy the benefit of lesser penalties.
12.	Clarity on jurisdiction in matters falling under section 452 (Punishment for wrongful withholding of property)	CLC opine that section 435 (Special Courts) of the Act may be amended to exclude section 452 (Punishment for wrongful withholding of the property) from its ambit. This would make section 436 inapplicable to offences triable under section 452 and, therefore, the jurisdiction in such cases would be determined in accordance with the CrPC.
13.	Inclusion of provisions of Part IXA of the 1956 Act on producer companies	As of now, producer companies continue to govern in accordance with provisions of Part IXA of 1956 Act. While section 465 (Repeal of certain enactments and savings) of the 2013 Act envisages a separate statute for governing producer companies, such statute has not yet been enacted. Since the government is keen on promoting producer companies, therefore it is recommended to make the said chapter as a part of the Act in form of Chapter XXIA.

6) In addition, CLC while deliberating on certain other issues, felt that wider consultation would be necessary and recommended that the following be taken up in due course, at a later stage:

S. No.	Recommendations
1.	Allowing appeal against the orders of the RD before NCLT.
2.	Exemption for certain private placement requirements for QIPs.
3.	Revision of provisions on disqualification of directors.
4.	Review of provisions in respect of debarment of Audit firms.