Decriminalisation of corporate offences may be counterproductive

Decriminalising corporate offences
The government has taken several steps to improve the ease of doing business to boost sagging economic growth.

The Covid-19 pandemic had a massive impact on the economy. The government took several steps to provide relief to businesses by way of relaxation of compliances, relaxed filing deadlines, more liquidity in the system, and through the introduction of fast-track resolution of cases.

The changing dynamics is visible in the adjudication mechanism of criminal offences to civil by decriminalising offences under the Companies (Amendment) Act 2020 (2020 Act). On September 28, 2020, the Act received presidential assent. The government has taken similar steps earlier also. The presumptive negative intention (mens rea) existed under the erstwhile Foreign Exchange Regulation Act, 1973 with criminal offences punishable with imprisonment was replaced by the Foreign Exchange Management Act, 1999 which decriminalised offences relating to foreign exchange regulations.

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If we look back, the Companies Act, 1956 (1956 Act) was replaced by the Companies Act, 2013 (2013 Act) with a view to address the gaps present under the erstwhile law. The 2013 Act witnessed a plethora of changes in a span of 6 years of its coming into force. Within 5 years of the enactment of the new law in 2013, the ministry of corporate affairs (MCA) constituted a Company Law Committee (CLC) to further review the 2013 Act.

The CLC contemplated various changes to the 2013 Act in addition to the review of offences under it. These include introduction of a mechanism to reduce the burden on courts for effective disposal of case and improve the functioning of authorities as well as to promote ease of doing business.

Under the 1956 Act, all offences were criminal. Under the 2013 Act, 81 offences remained criminal till the year 2018 and 16 offences were recategorized into civil defaults pursuant to the enactment of Companies (Amendment) Act, 2019 (2019 Act). Not long after the 2019 Act, with the introduction of the 2020 Act only a few offences like fraud remain criminal. The 2020 Act incorporates amendments suggested by CLC report.

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The current provisions of the law provide that civil offences can only be adjudicated now, which means that offences punishable with penalty can no longer be compounded. In case of compounding of offences, the Regional Director/National Company Law Tribunal has the discretionary power to levy costs lesser than the fine prescribed in the Act, thereby protecting an innocent party/defaulter.

Availability of suo moto filing for compounding of an offence was a huge relief to corporates in case of an inadvertent error in compliance. However, adjudication has no provision for a suo moto filing and the party will have to wait for the adjudication process to take its own course. How do we intend to protect the small companies with a capital of Rs 1 lakh from a penalty of Rs 1 lakh if no room is left for an accidental error?

Criminal prosecutions are time-consuming and complex. For offences that remain criminal, punishment by way of imprisonment has been removed under the new provisions. This certainly is a huge relief for the officers in default. However, does doing away with imprisonment bring relief or encourage non-compliance remains questionable.

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By way of the 2013 Act, the lawmakers introduced imprisonment to deter the key managerial personnel of companies from abusing the law. If the loss to the management is made monetary only, will it prevent a related party transaction, or will the management be willing to pay the price which is much smaller when weighed against an otherwise hefty gain.

The changes have a significant potential to confer long-term benefits on stakeholders and investors by providing a swifter redressal and enforcement mechanism for corporate non-compliances. However, the laws are introduced to maintain order and to prevent chaos. The severity of punishment works as a deterrent. Though such changes undoubtedly protect law abiding citizens and compliant corporates, does this also not encourage scams and misuse of the loopholes that may not be so apparent now? Will this change lead to another amendment in the law over a period of few years only to swing back to a position that was always a serious concern for the government? Has the government passed on its ineffectiveness in dealing and disposing of criminal matters to the corporates? While the initiatives of the government to bring in ease of doing business are laudable, it must be wary of the trouble they may cause in the future.

(Anubha Agarwal is a Senior Associate at Corporate Law Group, a New Delhi-based law firm.)