De-criminalisation of company law will help?

Controversy characterises the government’s latest move to de-criminalise minor offences under the Companies Act 2013 within 30 days suggests that there is a hurry to push through the reform process. Does the government have a vested interest in the matter or is it trying to favour a few business houses? The possibility that malpractices would escalate because de-criminalisation defangs the existing law and enables minor offenders to pay their way through may have the potential to distort the business environment in the country.

The proposal to de-criminalise minor offences under the Companies Act 2013 (CA 2013) to avoid accumulation of cases could otherwise be dealt with monetary penalties. Company law itself was revamped after a 56-year gap after the Companies Act 1956 that logically progressed to become CA 2013. The de-criminalisation comes only five years after the enactment of CA 2013 which has already undergone three amendments earlier.

Today, the challenge for the National Company Law Tribunal (NCLT), which is the platform to resolve disputes related to company affairs already has 9,000 pending cases before its 11 benches across the country. Considering there are 15,22, 900 registered companies with various turnovers and human resources in the country, the NCLT with only 62 judicial and technical members to discharge their duties proves a time consuming and cumbersome process. How exactly would de-criminalisation of minor offences under the CA 2013 impact jurisdiction of the Securities Exchange Board of India (Sebi)? The Sebi also enjoys jurisdiction over listed companies and therefore the potential for a clash of interests would arise between the Sebi and NCLAT to uphold the law. Who will ensure the interests of minority shareholders in the event of a dispute?

The CA 2013 replaced the erstwhile law the Companies Act 1956 to strengthen corporate governance through increased accountability. Company law is about legal practice or the theory of corporations which describes matters related to the birth, development, capital infusion, administration and management and finally closing down operations. It regulates how stakeholders like investors, creditors, employees, consumers and the community which interact with each other in the business environment.

Over six decades transformation of the business environment made the CA 1956 anachronistic with the introduction of state- of- the- art technologies and availability of capital from the market and institutions. Besides, the democratisation of the investor community as more people began to invest, led to an expansion of the capital markets across the country. As a result, the CA 2013 took shape.

The country’s economy prospered after the 1991 New Economic Policy with a liberalised business environment which led to scams due to the lack of strong regulatory mechanisms. In 2009, the Satyam Computer Services, a leading Indian outsourcing company that supported over a third of the Fortune 500 companies, significantly inflated its earnings and assets for several years. Perhaps, such loopholes in the regulatory mechanisms led to the CA 2013.

The question therefore arises how would the NCLT differentiate between serious and minor defaults? While this could perhaps be classified in value terms, the challenge for the government is to establish the intentions of the defaulter. In the event the defaulter’s intentions were mala fide then it would be overlooked and the matter settled solely through monetary compensation. In the long term, this would not prove beneficial to the business community and the defaulter would be incentivised to repeat such financial misdemeanours.

Another proposed move aims to replace the criminal liability of an offence with compounding feature. This refers to enable the guilty party to plead guilty and pay an additional fine to avoid the cumbersome litigation process which consumes the time of the stakeholders.

As of now, powers to compound certain offences lie with regional directors, NCLT and special courts. However, the proposed move will only increase the number of compounding matters. To that extent, there would be a geometric progression of cases that judicial bodies would have to deal with. Considering the existing law restricts compounding of two similar offences with a three-year period, this clause would also need to be amended.

The entire exercise to decriminalise offences aims to lower the burden of cases; on the other hand, compounding matters is likely to increase the number of cases and thereby increase the load in a different manner.

The only solution for the government to avoid such a situation is to establish a separate body exclusively to deal with compounding matters. Under the existing statute, provision already exists for the maintenance of the panel of experts to facilitate mediation and conciliation between two parties. In view of this, de-criminalisation of company law in order to lower the burden on courts, the government can take recourse to such alternate dispute resolution mechanisms.

(The writer is an Assistant Professor at School of Law, Christ University, Bengaluru)