Through the Ordinance dated 2nd November 2018, the Ministry of Law and Justice introduced amendments to 31 sections mentioned in the Companies Act, 2013. One of the important underlying aspects is that the Ordinance prescribes penalties and fines have been for businesses and concerned officials that default on the said sections of the Companies Act, 2013.
We have summarized below, the key changes that have been brought about by the Ordinance. All of these point in one direction – the need to operate your business in complete compliance with the laws of the land.
The Companies (Amendment) Ordinance 2018 (“2018 Ordinance“), issued on November 2, 2018 brought about significant changes to certain provisions of the Companies Act, 2013 (“Act“). The 2018 Ordinance was passed by the Lok Sabha, though could not be taken up by the Rajya Sabha and which was due to expire on January 21, 2019. In order to give continuity to the amendments introduced by the 2018 Ordinance, it was re-promulgated on January 12, 2019 by another ordinance i.e. the Companies Amendment Ordinance 2019 (“Ordinance“) on January 12, 2019 with its provisions effective from November 2, 2018.
Set forth below is an analysis of the key provisions of the Ordinance:
Re-introduction of Commencement of Business Declaration
The Ordinance has introduced Section 10A in the Act which mandates that every company incorporated after commencement of the Ordinance shall not commence business or exercise any borrowing powers unless it satisfies the following two conditions:(i) A declaration is filed by a director within a period of 180 days of the date of incorporation of the company with the Registrar in the prescribed form, stating that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making such declaration; and (ii) A declaration is filed by the Company with the Registrar furnishing verification of its registered office within a period of 30 days from its incorporation.
In case no declaration is filed within 180 days of incorporation and the Registrar has reasonable cause to believe that the Company is not conducting any business or operations, the Registrar may initiate the removal of the Company’s name from the register of companies.
Physical Verification of the Registered Office
Sub-section 9 to Section 12 has been introduced through the Ordinance. As per the same, if the Registrar has reasonable cause to believe that the Company is not carrying on any business or operations, he may cause a physical verification of the registered office of the Company in the prescribed manner. If any default is found to be made on such verification, the Registrar may initiate action for removal of the Company’s name from the register of companies.
Approval for Conversion of Public Company into a Private Company
The Ordinance provides that any alteration of articles of association having the effect of conversion of a public company into a private company will not be valid unless it is approved by an order of the Central Government on an application made in a prescribed manner. Earlier, National Company Law Tribunal (“NCLT“) was responsible for granting this approval. For applications pending with the NCLT as on the date of the Ordinance, NCLT only will be responsible for granting the approval.
Registration of Charges
Section 77 of the Act which talks about registration of charges has been amended through the Ordinance. As per such amendment, in case of charges created by the Company before November 2, 2018, the Registrar may on application by the company allow registration of the charge, within a period of 300 days of such charge creation. If the registration is not made within 300 days, the registration of the charge can be made within six months from the date of commencement of the Ordinance.
In case of charges created after November 2, 2018 the Registrar may on application by the Company allow registration of the charge within 60 days of such charge creation. If the charge is not registered within the aforesaid period, the registration shall be made within an additional period of 60 days after payment of such ad-valorem fees.
Significant Beneficial Ownership Disclosure
In case the rights of a shareholder have been suspended by the NCLT for not providing disclosure of beneficial interests as provided under the Act, the company or person aggrieved by its order may make an application to it for relaxation or lifting of restrictions within a period of 1 year from the date of order. In case no application is filed as prescribed herein, the underlying shares will be transferred to the Investor Education and Protection Fund.
Disqualification for Appointment of a Director
A new provision for disqualification of a person for appointment as a director has been introduced as per which if a person holds more than the total number of directorships allowed as per the Act, then he will be disqualified for being appointed as director of the Company. The Companies Act allows a person to hold not more than 20 directorships, out of which directorship in public companies cannot exceed 10.
Power of Regional Director to Compound Offences
Offences (excluding offences punishable with imprisonment or with imprisonment and fine), carrying maximum amount of fine not exceeding INR 25,00,000, will now be compounded by the Regional Director or any authorized officer of the Central Government. The earlier limit was up to INR 0.5 million only, and any matter beyond such limit had to be compounded by the NCLT.
Re-Categorisation of Certain Offences
Certain offences under the Companies Act 2013 have been re-categorised as defaults carrying civil liabilities to bring them under an in-house adjudication mechanism. Some of the key provisions amended are as follows:
|Relevant Provision||Old Penalty||Amended Penalty|
|Issue of shares at a discount by a company in contravention of the Act.||A fine ranging from INR 1-5 lakhs and every officer in default was punishable with imprisonment for a term upto 6 months or with fine ranging from INR 1-5 lakhs.||The company and every officer in default will be liable to a penalty upto an amount raised through the issue of shares at a discount or INR 5 lakhs, whichever is less. The company will be liable to refund all monies received with interest at the rate of 12% p.a. from the date of issue of such shares to the persons to whom such shares have been issued.
|Non-filing of annual return by a company within the due date||Punishable with a fine not less than INR 50,000 and upto maximum of INR 5 lakhs and every officer of the company in default was punishable with an imprisonment for a term upto 6 months or with fine not less than INR 50,000 and upto a maximum of INR 5 lakhs or with both.
|The company and every officer in default will be liable to a penalty of INR 50,000 and in case of continuing failure, with further penalty of INR 100 for each day during which such failure continues, subject to a maximum of INR 5 lakhs.
|Failure/delay by a company in filing financial statement||Punishable with fine of INR 1,000 for every day during which the failure continues but the total penalty not exceeding INR 10 lakhs.
The managing director and the CFO of the company, if any, and, in the absence of the managing director and the CFO, any director responsible for complying with the relevant provisions, and, in the absence of any such director, all the directors of the company, were punishable with imprisonment for a term extending upto six months or with fine of between INR 1-5 lakhs, or with both.
The managing director and the CFO of the company, if any, and, in the absence of the managing director and the CFO, any director responsible for complying with the relevant provisions, and, in the absence of any such director, all the directors of the company will be liable to a penalty of INR 1 lakh and in case of continuing failure, with further penalty of INR 1 hundred for each day after the first day during which such failure continues, subject to a maximum of INR 5 lakhs.
|Failure/delay in filing statement by the auditor after resignation||Penalty of INR 50,000 or the remuneration of the auditor, whichever is less but extending upto INR 5 lakhs||Penalty of INR 50,000 or an amount equal to the remuneration of the auditor, whichever is less and in case of continuing failure, a further penalty of INR 500 for each day after the first day, during which such failure continues, subject to a maximum of INR 5 lakhs.