Dr Ujwala Bendale,  Dr Anuradha Dhadge Girme & Adv.Satya Singh

Introduction

The Companies Act, 2013 provides a list of compliances for companies. The Act also has provisions for penalties to ensure that companies do not make any default in following the secretarial standards and other compliances. Earlier, several penalties were of criminal nature. The directors or managers of the company engaged in fraudulent activities were also imprisoned based on the extent of the activities. However, certain activities have been decriminalized and the Ministry of Corporate Affairs (MCA) announced an in-house adjudicating mechanism for companies’ matters related to defaults. This blog discusses the quantum of penalties that can be imposed under the Companies Act, 2013 and analyzes the recent adjudicating orders passed by the Adjudicating Officers in various matters.

Corporate Governance and Penalties under the Companies Act

Corporate governance is defined as a set of rules and regulations that govern a company. The key objective of corporate governance is to ensure the maximization of shareholder’s wealth. That can happen when the companies are transparent about their actions and the shareholders are aware about their rights. Therefore, the Companies Act, 2013 provides for various disclosures and mandatory compliances by the Company. Also, to ensure that companies have standard procedures for corporate governance, the Institute of Companies Secretaries of Indian (ICSI) has framed certain secretarial standards for the companies related to powers and functions of the Board, meetings and notices, passing resolutions, risk management, analyzing the board performance, and others. Section 118 of the Companies Act, 2013 makes it mandatory for all companies to follow the secretarial standards related to holding general meetings and notices.

The concept of introducing penalties on companies for not following the compliances was first introduced by the Companies Act, 1956 on the recommendations of the Vaish Committee that submitted its report in 2005. One of the main purposes of hefty non-compliance penalties on corporations is to uphold corporate governance and promote the interests of the stakeholders.

The Committee recommended that not just the company but the people who run the company like the directors, CEOs, CFOs, company secretaries, or other people who directly control the affairs of the company should also be liable for penalties in case of defaults. As the company is an artificial person and it becomes impossible to imprison a company, the only possible way to ensure adherence to compliances is to impose monetary penalties on the key managerial personnel of the company. Therefore, the key managerial personnel shall also be held criminally liable for grave misconduct or fraudulent activities.

Another Committee was set up in July 2018 for reviewing offences under the Companies Act, 2013. It recommended that due to the heavy burden on special courts, certain offences including technical defaults and procedural lapses should be treated as civil offences and an in-house adjudicating mechanism should be established to deal with such matters. In its report, the Committee a

categorized compoundable offences by companies into 8 categories – non-compliance of orders/directions passed by NCLT/RoC/Central Government, default in maintenance of records, non-disclosure of interest of persons to the company, corporate governance defaults, technical defaults, defaults involving substantial provisions, defaults related to winding up of companies, and defaults not specifically punishable under any provision of the Companies Act, 2013.

With the notification of Companies Amendment Acts, 2019 and 2020 default under various provisions of the act were removed from the category of fines and brought within the ambit of penalties. These offences are no longer heard before the NCLT. They will be adjudicated by the Adjudicating Officer appointed under Rule 3(1) of Companies (Adjudication of Penalties) Rules, 2019. These provisions include Section 53 that prohibits issue of share at discount, annual return compliance under Section 92, related party transaction under Section 188, Section 203 for appointing key managerial personnel.

Quantum of Penalties on Companies

The category of penalties imposed on companies are usually segregated into defaults of two kinds, technical defaults and defaults on corporate governance. Technical defaults refer failure to submit documents or records by companies. Whereas, defaults related to matters of corporate governance include issuing shares at discounted price, not appointing key managerial personnel, and other defaults.

  1. Technical defaults:-The Review Committee for offences under Companies Act, 2013 discussed the scope of a civil liability framework for technical or procedural defaults by companies. It was recommended that certain penal provisions under the Companies Act, 2013 like Section 64 which is concerned with failure to provide a notice to the Registrar for alteration of share capital, Section 92, that is related to delay in filing annual returns of the company, default under Section 117 of filing resolutions and agreements with the Registrar.
  • Default in Corporate Governance:-As This includes defaults under five sections of the Companies Act, 2013, namely, issuing shares at discounted price, accepting directorships that exceed the stipulated limit, managerial remuneration, appointment of key managerial personnel, and payments to directors in cases of loss.

Factors for Determining the Quantum of Penalties

Under the Companies Act, 2013, adjudicating officers have to consider the following factors while determining the quantum of penalties to be imposed on companies.

  1. Loss to the investors and Unfair advantage to the company:-The two most important factors that Adjudicating Officers consider while deciding the quantum of penalties on the companies is the loss that the investors had to bear and the unfair advantages or gains received by the company due to default in adhering to the secretarial standards. The Adjudicating Officer checks the nature of the default, and the amount of loss the investors will have to incur. The penalty for fraudulent activities of companies due to which the shareholders suffer losses is much higher than the fine imposed on companies for procedural defaults.
  • Type of Company:-While deciding the penalty, the Adjudicating Officer considers the paid-up capital and the turnover to determine the type of company. Companies Act, 2013 provides for a lesser amount of penalties for certain companies like one person companies, small companies, startups, and producer companies. For example, In the matter of M/S Tunwal E-Vehicle India Private Limited, the Adjudicating Officer had imposed a total fine of 4 lakh Rs., one lakh to be paid by the company and its three directors. The paid-up capital of the company was Rs. 4.9 crores and its turnover was Rs. 38.50 crores. The order states that since the company is not a small company, it rules out the possibility of imposing a lesser penalty.

However, in the matter of Urbanpiper Technology Pvt. Ltd., the total penalty as determined by the Adjudicating Officer was almost 16 lakhs due to failure to follow the compliances under Section 117 of the Companies Act, 2013. The paid-up capital of the company was around 6 lakhs, whereas its turnover was Rs. 4.83 crores. Moreover, since the company was not a subsidiary of any other company, it came within the category of small companies. Therefore, even though the total penalty was nearly 16 lakhs, the maximum penalty was restricted to Rs. 5 lakhs to be paid by the companies and its three directors.

In another matter of M/S Eco Pallet Private Limited, wherein, the company had defaulted the mandatory compliance under Section 117, the Adjudicating Officer imposed a hefty fine of almost Rs. 25 lakhs for non-compliance. The company had a paid-up share capital of nearly Rs. 70 lakhs and a turnover of Rs. 36 lakh. Since the company was not a small company, the provision for lesser penalties was inapplicable. Hence, the company along with directors were directed to pay Rs. 26 lakh.

The provision for lesser penalties for small companies, startup companies, one-person companies, and producer companies is provided under Section 446B of the Act. According to the provision, the maximum penalty that can be imposed on theabove-mentioned companies for any offence mentioned under the Act shall not exceed lakh 2 lakh Rs. in case of the company and 1 lakh Rs. for directors and key managerial personnel (KMP). Earlier, the provision provided for lesser penalties only in the case of OPC and small person companies. However, the Companies Amendment Act, 2020 brought startup companies also within the scope of section 446B.

  • Repetition of default:- Section 454A of the Companies Act, 2013 added by the Companies Amendment Act, 2019 lays down the provision for imposing penalties on companies for repeating the default. Where defaults are of continuous nature, penalties are imposed on a per day basis. However, in case of subsequent defaults within 3 years from the date of imposing the first penalty, the adjudicating officer or the regional officer will have to pay twice the amount of the penalty. The purpose of this Section is not only to impose a penalty for the default but to also make good the default.

Analyzing the adjudicating orders of the RoC

The earlier provisions of the Companies Act, 2013 provided for criminal liabilities and imprisonment of KMP even in cases of minor default. However, several offences were decriminalized and made civil offences. The main purpose of decriminalizing certain offences was to promote ease of doing business in India and attract foreign investment. The Amendment provided for in-house adjudication of civil offences by an adjudicating officer. Even though the provisions for criminal liability of companies have been reduced, there is still a heavy burden of maintaining the mandatory secretarial standards.

If we go by the figures, in the fiscal year 2020-21, the names of approximately 13,000 companies were striked from the Register of Companies. This number is extremely high in comparison to the year 2019-20, during which the names of around 3000 companies were striked from the Register of companies. In the past 5 years, the names of 3,96,585 companies had been removed from the Register on the grounds of non-compliance under the Companies Act, 2013. Even though startups and OPCs are provided with relaxed norms, the hefty penalties on non- compliances and the heavy burden to maintain corporate governance in India are creating hassles for companies. For instance, as mentioned above, a company with a paid-up capital of Rs. 70 lakh and a turnover of Rs. 36 lakh is directed to pay a penalty of Rs. 25 lakhs.

In another matter of M/s. Tatva Chintan Pharma Chem Limited, the Adjudicating Officer imposed a fine of Rs. 1 crore on the company and 1 crore on the directors for non-compliance with the requirements of Section 203(1)(iii) of the Companies Act, 2013. The company had accepted the share application amounts in its general bank account rather than collecting the amount in a separate bank account in a scheduled bank.

In 2021, there many orders passed by the Adjudicating Officers imposing hefty penalties on the company and their directors went on appeal before the regional directors who reduced the quantum of penalty. For instance, in the matter of M/s Jivrom Technologies Private Limited, the Adjudicating Officer had imposed a penalty of Rs. 5,00,000 on the company and Rs. 56,000 on the directors under Section 10A of the Companies Act for non-filing e-form within the stipulated time. The final penalty imposed by the regional director in this matter was reduced to Rs. 15,000 on the Company and Rs. 12,500 on each director. In another matter of Gaffino Resorts and Motels Private Limited, the Adjudicating Officer had imposed a penalty of Rs. 6,04,000 on the company and its each officer in default for non-filing of annual return. The regional director had reduced the final penalty to Rs. 12,080 on the company and its officers.

In the matter of CF Pharmaceuticals Limited that was also related to non-filing of annual returns, the Adjudicating Officer had imposed a fine of Rs. 1,17,400 on the company whereas the regional director had reduced the final penalty to Rs. 11,740. In Tokyo Finance Limited, the Adjudicating Officer had imposed a penalty of Rs. 5,00,000 on the company and Rs. 1,67,000 under Section 203 of the Companies Act, 2013. However, the regional director considered the appeal of the company that it was a first time default and the company was not financially sound. The final penalty imposed in this case was Rs. 1,25,000 on the company and Rs. 11,750 on the officer in default.

The orders passed by the Adjudicating Officers imposing hefty penalties on companies are usually appealed before the regional director. The recent order of M/s. Tatva Chintan Pharma Chem Limited, as mentioned above, that imposes a penalty of Rs. 1 crore and other orders with severe penalties on the companies might also be appealed before the regional director. This creates another burden on the companies.

While the country recently celebrated its first National Startup Day on 16th January, the heavy penalties in the majority of the cases may discourage budding entrepreneurs and companies. It also creates a heavy burden on the companies that have less paid-up capital and turnover. The Review Committee had submitted in its report that in case of the same offences, it is impossible to list different penalties for different companies. Therefore, the standard amounts of fine mentioned in the Companies Act should not be changed. However, in the light of the recent adjudicating orders that have imposed hefty penalties on companies and their directors, there is a dire need for re-reviewing the factors on which the Adjudicating officers impose penalties. In some cases the adjudicating officers have not provided a reasonable explanation for high amounts of penalties. While upholding the interests of the shareholders, the adjudicating officers cannot negate the interests of the defaulting companies. The officers may consider plausible deniability before passing orders imposing hefty penalties on companies. They should confirm whether the company has failed to follow compliances with a fraudulent intention or other for other reasons like technical defaults or procedural lapses. While decriminalization of technical defaults and procedural lapse was the need of the hour, imposing hefty fines on the companies is detrimental in nature.

Conclusion

Companies are necessary for the economic growth of the country. Therefore, secretarial standards for companies play an important role in establishing standard procedures for the companies, protecting the interests of the shareholders, and preventing fraudulent activities. At the same time, imposing penalties or fines for not following the secretarial standards is also crucial for corporate governance and upholding the interests of the shareholders. However, the recent adjudicating orders that have imposed penalties of lakhs and crores on the companies and their directors is troublesome.

References

1)https://taxguru.in/corporate-law/corporate-governance-objective-elements-secretarial- standards.html?amp 2)https://www.mca.gov.in/Ministry/pdf/ReportCommittee_28082018.pdf&ved=2ahUKEwiJ0Kv C3deCAxUP1jgGHQVpA_IQFnoECBMQAQ&usg=AOvVaw22D5eH5jKJlSwr4LcWtQzh 3)https://www.lexology.com/commentary/corporate-commercial/india/clasis- law/decriminalisation-of-offences-under-companies-act-need-of-the-hour 4)https://ibclaw.in/section-454a-of-the-companies-act-2013-penalty-for-repeated-default/ 5)https://ibclaw.in/section-454a-of-the-companies-act-2013-penalty-for-repeated-default/ 6)https://ibclaw.in/section-454a-of-the-companies-act-2013-penalty-for-repeated-default/ 7)https://www.lexology.com/commentary/corporate-commercial/india/clasis- law/decriminalisation-of-offences-under-companies-act-need-of-the-hour 8)https://www.mca.gov.in/Ministry/pdf/AdjBang11_03072020.PDF 9)https://corporate.cyrilamarchandblogs.com/2022/10/key-managerial-personnel-appointments- applicability-of-section-203-of-the-companies-act-2013-to-private-companies-does-the-nclat- order-cast-the-net-too-wide/

10)https://cleartax.in/s/key-managerial-personnel-kmp-under-companies-act-2013 11)https://ca2013.com/454-adjudication-of- penalties/#:~:text=Where%20a%20company%20or%20an,the%20Regional%20Director%2C%2 0as%20the