The Companies (Amendment) Bill, 2019 (“Bill”) was introduced in Lok Sabha on July 25, 2019 by the Minister of Finance, Ms. Nirmala Sitharaman. The Bill was passed by the Parliament on July 30, 2019 and was later published in the Gazette on July 31, 2019. It amends the Companies Act, 2013 and is now a Companies (Amendment) Act, 2019 (“Amendment Act”).
The Bill was introduced to override the Companies Amendment (Second) Ordinance, 2019 (“Ordinance”) which sought to amendment certain provisions of the Companies Act, 2013 (“Act”). The Ordinance was introduced by the Ministry of Corporate Affairs (“MCA”) on 21st February 2019. A review committee formed by the MCA to re-analyze the provisions of the Act led to the introduction of the aforesaid Amendment Act.
THE AMENDMENTS
The amendments introduced by way of the Amendment Act are largely those which were also part of the Ordinance. This article recapitulates the amendments (which were already part of the Ordinance) including the certain additional amendments that have been included in the Amendment Act. The Amendment Act focuses on categorization of certain offences as civil defaults, provide ground for disqualification of directorship, grounds for striking off the name from the Register of Companies (“ROC”), change in functions from National Company Law Tribunal (“NCLT”) to the Government including reduction in timeline for creation and modification of charges.
The Amendment Act has empowered the Central Government to allow certain companies to have a different financial year[1]. For every company incorporated after promulgation of the Companies (Amendment) Act, 2019, the directors are required to file a declaration within a period of 180 days from the date of incorporation stating that every subscriber to the memorandum has paid the value of the shares as agreed for in order to commence its business or exercise borrowing powers and the company has filed a verification of its registered office with the ROC. Such declarations seek to be safeguard against the misuse of provisions for evading tax or laundering money for illegal purpose[2]. Failure to comply with the requirements of this provision may lead to imposition of penalty[3].
Further, the ROC has also been empowered to carry out physical verification of the registered office if it has reasons to believe that no business or operations are being carried out by the company, it may initiate action for the removal of the name of the company from its register[4].
The Amendment Act empowers the ROC to initiate action for removal of name of the company from register of companies if the company is not carrying on any business or operation in accordance with the provisions of the Act[5].
Other new changes introduced through this Amendment Act include a new ground for disqualification of directorship in case if a person breaches the maximum limit of directorship allowed under the Act[6]. Such disqualification would lead to automatic vacancy of the office from all existing companies.
Previously, the adjudicating officer was empowered to impose penalty on the company and the officer who are in default in accordance with the provisions of the Act. The amendments have increased its ambit by substituting it with any other person thereby expanding the power of the authority[7]. Any alteration with respect to conversion of public into private company would be valid on the order of the Central Government and not NCLT[8]. The ROC has been empowered to grant extension of time to companies for registration of charges on payment of additional fees[9]. Further, power has been given to the Central Government to extend time for the intimation of payment or satisfaction of charge to rectify any misstatement or omission in case of delay or discrepancy in the previous filling which were accidental in nature[10]. Likewise, if any person willfully furnishes any false or incorrect information or knowingly suppresses any material information required to be furnished for registration of charges would tantamount to fraud, if found guilty[11].
The Amendment Act has ensured strict acquiescence of provisions by increasing the penalty in case of defaults under various provisions. Penalty of twice the amount, as was there earlier has been imposed, in case of repeated defaults by companies or any person who had already been subjected to penalty under the Act. Repeated default means the same has been repeated within 3 years from the date of order imposing penalty for earlier default[12].
Also, the Amendment Act now only requires making the filing of prospectus with the ROC mandatory as against earlier requirements for its registration[13]. The unlisted companies are now required to hold or transfer securities only in dematerialized form[14].
Further, the Amendment Act mandates a declaration by the person who holds minimum of 25% of beneficial interest in company or exercises significant control and influence over company. Any person or company aggrieved by the order of NCLT regarding the notice for declaring beneficial interest in the company is permitted to file an application for relaxation or lifting of restrictions imposed by the NCLT order. In this regard, the penalty has been revised including provision for imprisonment has been included incase such person fails to make a declaration regarding beneficial interest[15]. Additionally, the limit for compounding fee for such offence has been increase from five lakhs to twenty five lakhs[16]. Only time will tell whether the increase in compounding limits will reduce the burden on special courts and NCLT or not?
Further, certain amendments to the existing provisions have been introduced in case of non-compliance regarding- issuance of notice to ROC on the alteration of share capital[17], filing of annual return[18], statement disclosing material facts with the notice of general meeting[19], statement regarding proxies[20], filing of resolutions[21], filing of report on Annual General Meeting[22], copy of financial statement to be filed with ROC[23], notice of resignation of auditor[24], company to inform Director Identification Number to ROC[25], appointment of directors, Director Identification Number and intimation by director of his DIN[26], number of directorships[27], payment to director for loss of office in connection with transfer of undertaking or property or shares[28], overall maximum managerial remuneration to the director[29], appointment of key managerial personnel[30] and registration of offer of schemes involving transfer of shares[31].
The Amendment Act also empowers the National Financial Reporting Authority constituted by the Central Government to function through divisions and executive body[32]. The Amendment Act also brought clarity to the unspent CSR amount. Now the companies which fall under the CSR mandate can carry forward the unspent CSR amount to a special amount with the requirement to spend the same within three financial years and transfer the unspent funds to designated fund account[33].
Another important amendment introduced by the Amendment Act is that it empowers the central Government to approach NCLT to issue order against the persons who are connected with the conduct and management of the company as not fit and proper persons for acts committed by them which amount to mismanagement. The provisions also seek to debar such persons for a period of five years from the date of decision of NCLT in this regard[34].
Further, a revision in respect of the jurisdictions of the officer to make an arrest and the court before which such person can be produced has been revised. Serious Fraud Investigation Office has also been empowered to request the NCLT directing the director, key management person or any other officer of the company for disgorgement of asset, property or cash or any other undue advantage received by such person[35].
By virtue of the amendments, the role of the Government and strategic bodies has been reinforced with the aim to de-clog NCLT, impose liability for various procedural defaults and fill the gaps in corporate governance framework, which should serve as a measure for stringent compliance and ease of doing business in India.
The author is a Corporate and M&A lawyer at Sarin Partners Advocates & Legal Consultants. The views in the article should not be construed as legal advice. Please contact the author for any clarification.
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[1] Section 2 (41), Companies Act, 2013
[2] Section 10A (1), Companies Act, 2013
[3] Section 10A (2), Companies Act, 2013
[4] Sections 10A (3) and 12 (9), Companies Act, 2013
[5] Section 12, Companies Act, 2013
[6] Section 164, sub-clause (i) read with Section 165(1), Companies Act, 2013
[7] Section 454, Companies Act, 2013
[8] Section 14, Companies Act, 2013
[9] Section 77, Companies Act, 2013
[10] Section 87, Companies Act, 2013
[11] Section 86, Companies Act, 2013
[12] Section 454A, Companies Act, 2013
[13] Section 26 and 35, Companies Act, 2013
[14] Section 29, Companies Act, 2013
[15] Section 90, Companies Act, 2013
[16] Section 53(3), Companies Act, 2013
[17] Section 64, Companies Act, 2013
[18] Section 92, Companies Act, 2013
[19] Section 102, Companies Act, 2013
[20] Section 105, Companies Act, 2013
[21] Section 117, Companies Act, 2013
[22] Section 121, Companies Act, 2013
[23] Section 137, Companies Act, 2013
[24] Section 140, Companies Act, 2013
[25] Section 157, Companies Act, 2013
[26] Section 159, Companies Act, 2013
[27] Section 165, Companies Act, 2013
[28] Section 191, Companies Act, 2013
[29] Section 197, Companies Act, 2013
[30] Section 203, Companies Act, 2013
[31] Section 238, Companies Act, 2013
[32] Section 132, Companies Act, 2013
[33] Section 135, Companies Act, 2013
[34] Section 241, 242 and 243, Companies Act, 2013
[35] Section 212, Companies Act, 2013