The Companies (Amendment) Bill, 2020: The Impact on Ease of Doing Business

The article studies the main features of The Companies (Amendment) Bill, 2020 which has been enacted to ease doing business by organisation during the COVID-19 19 Pandemic situation. This write-up also analyses those amendments.
Estimated Reading Time: 6 minutes

Introduction

The Companies Act originally enacted in 1956 was the primary legislation for the formation and regulations of companies in India. The Act was further amended in 2013 as well. Due to COVID-19 pandemic, companies are under a constant stress. To reduce such burden and to ease the business, the Ministry of Corporate Affairs has come up with a bill in 2020, to further amend the Act. A major amendment of the Bill is decriminalisation of various sections and thus reducing penal provisions to 124 in spite of 134 as under the 2013 Act. This is done by reducing or removing penal provisions and omitting imprisonment for various offences that were otherwise considered procedural and technical in nature; this is a move that will help corporates in ease of doing business.[1] The Bill proposed by Finance and Corporate Affairs Minister Nirmala Sitharaman, also aims at reducing the litigation burden on small firms.

The Companies (Amendment) Bill, 2020      

The report of the Company Law Committee constituted vide order No. 2/1/2018-CL-V dated 13.07.2018,[2] made certain recommendations which resulted in The Companies (Amendment) Bill, 2020. The committee chaired by the Secretary of Ministry of Corporate Affairs, Mr. Injeti Srinivas, submitted its report in November 2019. The Bill got President’s assent on September 28, 2020. The report as mentioned earlier, made recommendations for re-categorizing of certain offences into’ civil wrongs’, de-clogging the NCLT and also touched upon certain essential elements of corporate governance. On the basis of recommendations made by such Committee and passage of the Companies (Amendment) Act, 2019, relevant changes have been made to the Companies Act, 2013. This amendment was done to ensure effective disposal of cases, improving functioning of various authorities under the Act, and suggesting other changes with the objective of promoting ease of doing business in India.

The bill added a proviso to Sec. 2(52) which defines a listed company as a company which has any of its securities listed on any recognised stock exchange. The new clause reads, “Provided that such class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with the Securities and Exchange Board, shall not be considered as listed companies.”[3]

Key Amendments

  1. Decriminalisation of offences where there is no element of fraud.
  2. Sec. 8 (11) of the 2013 Act, penalised non profitable companies for not following the provisions of the section. The bill omitted imprisonment under the section.
  3. Sec. 26 deals with the issues which have to be mentioned in the prospectus. Subsection 9 penalised imprisonment for every person who is ‘knowingly a party to the prospectus’ in contravention of the section, which has been omitted now.
  4. Sec. 40 requires every company before making public offer to make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges. Sec. 40(5) punishes a company defaulting the provisions of the section with imprisonment for a term which may extend to one year, which is omitted.
  5. Sec. 66 deals with a company limited by shares or limited by guarantee. Such companies may, reduce the share capital by a special resolution. Such reduction shall be confirmed by a tribunal and the order shall be published by the company in such manner as the Tribunal may direct as per sub section (40), which otherwise was penalised under subsection (11). The new bill omitted the section.
  6. Removal of penalty
  7. Certain offences which could be dealt under other statutes like Insolvency and Bankruptcy Code were omitted.
  8. Reduction of penalty
  9. Exempt companies with a CSR liability of up to Rs.50 lakh a year from setting up CSR Committees. Those Companies which spend an amount which is in excess of their actual CSR obligation in a financial year can set off the excess amount towards their CSR obligations in subsequent financial years. Penalty for default in transfer of unspent amount to the respective funds: On the company- twice the amount required to be transferred or Rs.1 crore whichever is lower, and on every officer in default- 1/10th of the amount required to be transferred in the respective funds or Rs.2 lakhs, whichever is lower.
  10. A maximum penalty limit has been fixed for start-ups and one-person company at Rs 200,000.
  11. The Bill also sets to reduce the penalties for certain offences such as non-maintenance of register of members, failure to file annual return within the prescribed timelines, failure to file resolutions and agreements in terms of the Act and non-compliance of provisions relating to unpaid dividend account and such modifications to the Act have been proposed as a part of providing a further ease of living and working to the corporate employees in the country.
  12. Alternative Framework
  13.  If a company fails to abide by the order of the Regional Director under Section 16(1) of the Act, (rectification of the name of the company on the grounds that such name is identical or similar to an existing company, or a registered trademark), within 3 months of passing of such order, then in place of imposing civil liability on the company, an auto-generated name shall be assigned to such company, which name the company shall be bound to use until it gets it changed through due process as per the provisions of the Act. The other provisions of the Act where such alternate mechanisms have been proposed, include provisions relating to non-compliance with order of compounding of the Tribunal or the Regional Director, non-cooperation of promoters, directors and employees with the company liquidator and company liquidator not serving the order of dissolution to Registrar of Companies.
  14. Removal of defaults
  15. The Bill aims to substitute sub-section (6) of Section 348 of the Act which imposes monetary penalties on the company liquidator for non-compliance of the provisions relating to information on pending liquidation as set out in Section 348 of the Act, by a new provision that if a company liquidator, who is an insolvency professional, is in default in complying with the provisions of the aforesaid Section, then the default shall be deemed to be a contravention punishable under the Code, and the rules and regulations framed thereunder. The Bill further seeks to omit the penalty imposed on the company liquidator for conduct of audit by a person not qualified to act as auditor from the Act.[4]
  16. Constitution of NCLAT Benches

The Bill seeks to introduce a new section 418A in the Act in order to provide for constitution of benches of the National Company Law Appellate Tribunal (“NCLAT”) which will ordinarily sit in New Delhi or such other place, as the Central Government may in consultation with the chairperson, notify. Such introduction of benches to NCLAT is with the view to enable creation of specialized benches of the NCLAT considering the variety and number of matters that are to be dealt with by the NCLAT.

Analysis

The relaxations are applicable for civil offences which are compoundable in nature. This facilitates to try such cases before an in-house adjudicating mechanism without approaching the courts. The new proposed relaxations, however, will be not allowed as a relaxation for those serious offences, including fraud and those that cause “injury to public interest or deceit”. This was clarified by the Finance Minister. Also, the number of “non-compoundable” offences under the new Act remains at 35, which is same as that of the previous one. By allowing such decriminalisations only for non-compoundable offences, government is cautious as well. The bill also gives authority to central government to allow specific public companies to list certain classes of securities in foreign stock exchanges to raise capital.

The Companies Act has a provision under Sec. 450, which penalises offences where no punishment is prescribed. The section resorts to any vacuum which is created because of the deletion of an offence from the relevant Section of the Act.

Conclusion

The bill in addition to companies, extend to all start-up companies and producer companies which will aid the agricultural sector as well. Also, as per the amendment, One Person Companies or small companies are only liable to pay up to 50% of the penalty for certain offences. The bill has reduced penal provisions to 124 which was earlier, 134. By reducing penal provisions and by decriminalising some, it will greatly help small businesses to maintain a profitable business. Also, the time in litigation will also be reduced.

The main aim of the Government through this bill is nothing but to promote ease of doing business in the country which will contribute to ease in living. Since there is a downfall of business due to COVID-19, this bill has come up at the right time and thus it will provide a relief to businesses in India.


[1] Ruchika Chitravanshi, ‘Govt decriminalises Companies Act to promote greater ease of doing business’, Business Standard, (September 21, 2020), Available at https://www.business-standard.com/article/economy-policy/govt-decriminalises-companies-act-to-promote-greater-ease-of-doing-business-120092000398_1.html.

[2] F.No.2/1/2018-CL-V, Government of India, Ministry of Corporate Affairs, Available at http://www.mca.gov.in/Ministry/pdf/ConstitutionCLC_18092019.pdf.

[3] S 2, The Companies (amendment) Act, 2020 (no. 29 of 2020).

[4] Saurav Kumar , Swathi Sreenath and Neha Balodh, Highlights of The Companies (Amendment) Bill, 2020, Induslaw, (15 August 2020).

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