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Companies (Amendment) Ordinance, 2019: An Overview

The Companies (Amendment) Ordinance, 2019 was promulgated to replace the Companies (Amendment) Ordinance, 2018 which brought about amendments to 31 provisions of the Act. The need for re-promulgation of an ordinance arose due to the fact that the Companies Amendment Bill, 2019 which was to replace the 2018 Ordinance was passed by the Lok Sabha on 4.01.2019 and was pending before the Lok Ssabha for its approval. The Bill had not yet been taken up for consideration despite the fact that the 2018 Ordinance was to cease to operate on 21.01.2019. Hence, the 2019 Ordinance was promulgated by the President for giving continuing effect to the 2018 Ordinance.

The 2018 Ordinance was a result of the recommendations of the Committee formed by the Ministry of Corporate Affairs under the chairmanship of Mr. Injeti Srinivas to review the offences from under the Act.

The ordinance has been promulgated with two main objectives. i.e, promote ease of doing business in India as well as to ensure better compliance of laws by the corporate giants. The Ordinance seeks to achieve these goals through the following amendments to the Companies Amendment Act, 2013:

  • Declaration by the Director  under Section 10A

The Ordinance seeks to introduce Section 10-A which mandates the director of any company incorporated after the commencement of the Ordinance to make a declaration that every subscriber to the memorandum has paid the value of shares agreed to be taken by hi. The declaration is to be made  within 180 days, before commencing any business and shall be verified by the registrar. In case of default, the Company will be penalized with a fine of INR 50000.

  • Removal of Company’s name from the register

The Ordinance empowers the Registrar to remove a company’s name from the register of companies if he has sufficient reason to believe that a company is not carrying on business, after a physical verification of the registered office under Section 12 of the Act. Failure to comply with provision will result in striking off the name of the company from the Register.   This has been done with the objective to tackle the increasing menace of ‘shell’ companies.

  • Penalty for issuing shares at a discount

The Ordinance imposes penalty for issuing shares at a discount under Section 53 of the Act. The Company will have to pay a penalty equivalent to the amount raised by the issue of such shares or five lakh rupees, whichever is less. The Company will also have to refund the amount with 12% shares.

  • Duty to register charges

The Ordinance seeks to reduce the time period provided for registration of charges under Section 77. Section 77 of the Act has been amended to the effect that charges created before the commencement of the Ordinance are to be registered within 300 days.  In case the charge is not registered within the time, the Ordinance provides an additional time of six months from the date of commencement within which the charge ought to be registered after payment of additional fees. In case the charges are created after the commencement of the Ordinance, the Charges are to be registered within 60 days of their creating. If the charge is not registered within the given time period, the Registrar can allow the registration of the charge within a period of further 60 days on payment of ad valorem fees.

Furthermore, Section 86 has been amended to the effect that any willful furnishing of false information or suppressing any material information pertaining to registration of charges will attract Section 447 of the Act, dealing with fraud.

  • Filing of resolutions and agreement

In order to improve transparency, the Ordinance  amended S. 117 (2) to impose a penalty of INR 1,00,000 as penalty on companies that fail to file resolutions and agreements before the specified time. In case of continuing failures, the penalty will be INR 500 per day subject to a maximum amount of 25 Lakh.

  • Enhancement of penalties

The Ordinance seeks to enhance the penalties levied under several sections. This has been done with a view to impose stringency in terms of companies complying with the Act.

  • Shifting of jurisdiction of certain Corporate Offences

The Ordinance seeks to institute an in-house system for adjudication of certain offences.  The Ordinance seeks to shift jurisdiction of 16 corporate offences from Special Courts to In-house. For this purpose, the offences which were earlier considered to be compoundable offences have been re-categorized as technical defaults, carrying civil liability. This has been done with an objective to reduce the case load of special courts, so as to enable them to deal with serious offences.

  • Reduction in penalty imposed on small companies and OPCs

In order to encourage the business activities of small companies, the Ordinance has also reduced the penalty imposed on small companies and OPCs to half of what is applicable to normal companies.

  • Efforts to reduce the load on NCLT

The Ordinance seeks to reduce the increasing load on NCLT in the following manner:

  1. The pecuniary jurisdiction of Regional Director for compounding of offences under Section 441 has been enhanced to INR 25 Lakh as opposed to the earlier limit of INR 5 Lakh so as to reduce the load on the Tribunal.
  2. The Ordinance amended Section 12 of the Act to mandate the approval of the Central Government vide an Order as a pre-requisite for conversion of a Public Company to a Private Company. Prior to the promulgation of the Order, the power to issue such Orders was with the Tribunal.
  3. The Ordinance vests power on the Central Government to change the financial year of a company incorporated outside India, if it requires to follow a different financial year for consolidation of its accounts outside India (Section 2(41) of the Act). Prior to the Ordinance, the same rested with the Tribunal and continues to do so in cases pending before the Tribunal

  • Substitution of the term, ‘Punishment’ with ‘Penalty’

The Ordinance has substituted the term, ‘Punishment’ with ‘Penalty’ in Ss. 105, 117 121 137, 140 so as to convert the criminal offences to civil penalties.

  • Disqualification of directors

The Ordinance also added an additional ground for disqualification of director under S. 164. After the promulgation of the Ordinance, directors who contravene the maximum number of directorship mandated under the law (20 for private companies and 1 for public companies) shall be liable for disqualification.

  • Penalty for repeated defaults

The Ordinance inserted a new Section 454A, wherein a company, its officer or any person already having subjected to penalty for default commits such default again, within a period of 3 years of date of order of imposing the penalty shall be liable to pay a penalty that is twice the amount of penalty provided under the Act.

Conclusion

The Ordinance is the need of the hour as it  seeks to streamline the procedures so as to ensure  the enhancement of ease of doing business in India. It also introduces stringent penalties so as to take strict action against companies that do not take compliance seriously. If implemented rigorously, the Ordinance has the potential to strengthen corporate governance and enforcement framework by increasing transparency in compliance and disclosures.

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