De-Criminalizing Offences by Directors

On 19 November 2019, the Company Law Committee (the “Committee”) had submitted its report (“CLC Report”) to the Finance Minister and proposed to remove criminality in cases of default which can be determined objectively. It is reported that the government is in the process of introducing a new bill in the Parliament to implement these suggestions.

The Committee has proposed amendments in 46 penal provisions under Companies Act, 2013 to remove criminality, restrict the punishment to only fine and allow rectification of defaults through alternative methods. For example, the Committee has suggested amending the provision that imposes one-year imprisonment on directors for failure to maintain books of accounts of the company at its registered office and its inspection, and suggested that it should be punishable with fine up to Rs. 5,00,000 only.  Further, the Committee has noted the fine of up to Rs. 5,00,000 provided for the offence of continuing to hold office as a director even after being disqualified as a director is adequate and therefore, the imprisonment component of one year may be removed.

There are certain changes that the Committee has suggested taking up in the next phase. For example, the Act provides for disqualification in certain scenarios if a director is convicted and sentenced to imprisonment for not less than 6 months by a court in India. In this regard, the Committee felt that such conviction and sentencing of directors, when ordered by a foreign court, must also trigger a similar disqualification. However, it has suggested that changes in law for the same may be taken up in the next phase.

Prospective Application of Companies Act for Director Disqualification

Recently, the Delhi High Court has clarified the law on the disqualification of directors. In terms of section 164(2)(a) of the Companies Act, 2013, directors of a company which has not filed financial statements or annual return for any continuous period of three financial years are disqualified, and these directors cannot be re-appointed as directors of that company or any other company for a period of five years from the date on which the said company fails to do so.

The High Court, deciding on the question of whether the default with regard to the financial year prior to the Companies Act, 2013 came into force should be considered for the purpose of this Section 164(2)(a) or not, held that such prospective operation of Section 164 would include taking into account failure to file the financial statements with regard to the financial year ending 31 March 2014 on or before 30 October 2014. However, the penalty for the same shall not extend to defaults committed prior to 31 March 2014.

Additionally, the Court was of the view that the Central Government having framed the rules specifying the conditions in which a DIN may be cancelled, cannot cancel the same on any other ground and without reference to such rules.

This post has been contributed by Mr. Rishi Ahuja and Ms. Vasuvita Singh.

[DISCLAIMER:  This article is for academic purpose and is solely to provide readers with general information regarding developments in Indian law. The information contained herein does not constitute legal or a professional advice.]