By: Vartika Jain
It is often said that “let the result of an act be what it may, but we hold a person liable simply on the ground of his intention, and the same ground may be used to prove his innocence.” Here comes into play the concept of mens rea, the guilty mind, which lays down the foundation of the criminal justice system in any country. Now, the question arises that whether a corporation, a separate legal entity, can be held criminally liable. The answer to this question, in many jurisdictions around the globe, is yes. The rationale for adopting this view is that if a body corporate can benefit from the skills of its human element, then it should also bear the liability arising out of any criminal conduct of any of its human elements. This concept of corporate criminal liability has been well adopted in Indian corporate law but remains highly debatable.
A Corporate Law Committee (‘the Committee’) was set up by the Ministry of Corporate Affairs on September 18, 2019, having Shri Injeti Srinivas as its Chairman, with an aim to promote ease of doing business in India. The Committee analysed the efficiency of the concept of corporate criminal liability and was of a view that it, apart from clogging the courts and being cost and time consuming, has reduced the chances of rightfully prosecuting the corporations because of the complex procedure followed in criminal trials. Therefore, the Committee decided to strike a balance between the civil and the criminal liability of a company.
The committee observed that after the amendment in the Companies Act, 2013 (‘the Act’), a vigorous in-house adjudication (‘IAM’) framework, under Section 454 of the Act, under which an Adjudicating Officer (‘AO’) shall be appointed by the Central Government, and may impose civil penalties. However, such orders are appealable to the Regional Director. The IAM framework has been developed with an intention to be cost-effective, objective and time-efficient. Therefore, it decided to analyse the remaining compoundable offences and scrutinise whether they are suitable to be treated under the IAM framework rather than as criminal offences.
In order to identify such remaining compoundable offences, the committee adopted a principle-based approach. The committee recommended that all those offences that relate to minors or are less serious, which predominantly involve objective determinations, have to be referred to the IAM framework. The degree of public interest involved shall also be looked into. The committee finally recommended 23 provisions to be shifted to the IAM framework.
Following are those offences which have been referred to be shifted to the IAM:
|NATURE OF OFFENCE||SECTION||DETAILED REASON|
|No Subjective Determination||56(6)||Punishes any violation of obligations imposed by Section 56(1) to (5) in relation to transfer or transmission of securities. The timelines for such transfer or transmission are provided in Section 56(4).|
|187(4)||Provides for punishment in case investments are not held in the name of the company concerned. Such lapses can be established through the company’s records and financial statements.|
|88(5)||Relates to maintenance of registers, the format of which is prescribed in subordinate legislation.|
|90(11)||Relates to maintenance of registers, the format of which is prescribed in subordinate legislation.|
|86(1)||Punishment for contravention. Sub-clause (2) has been inserted so that recourse could be taken to Section 447, involving serious transgression.|
|92(6)||Punishment in case of wrongful certification by a CS of annual return and the format and procedure as laid down under the Act.|
|134(8)||Punishment if the company contravenes with the provisions regarding filing of financial statement and board’s report. The format and procedure as laid down under the said Act.|
|143(15)||Punishment for auditor, cost accountant or company secretary. The format and procedure as laid down under the said Act.|
|204(4)||Relates to secretarial audit for bigger companies. The format and procedure as laid down under the said Act.|
|188(5)||Non- compliance would give rise to a lapse and such contracts would be voidable at the option of the board or the shareholders, as the case may be. Additionally, the company can also proceed against errant individuals. And such thresholds are very well laid out under the Act.|
|178(8)||Provides punishment for contravention of Section 177. To be made civil in nature to promote quick and efficient disposal of cases.|
|Not So Serious Offences||105(5)||Requires that the company should not be acting as an agent of the member in the matter of appointment of proxies.|
|124||Provides for requirements w.r.t. transfer of dividends and shares to “IEPFA”. The disclosures of details of the claimants are also mandated therein. Annual filing is also made in respect of such unpaid dividends by the companies. The Committee observed that these compliances are not of such nature that criminal punishment is required for them.|
|247(3)||Punishment for the valuer. However, its proviso, shall not be referred to IAM, as it punishes valuer, if he contravenes with an intention to defraud.|
|172||Broader ambit and may contain may non-compliances, thus not so serious.|
|450||Broader ambit and may contain may non-compliances, thus not so serious.|
|Where the Nature of Provisions is Harmonious with the Design of IAM Framework||90(10)||Subjects a significant beneficial owner who fails to make a declaration as per Section 90(1) to a fine. However, the company may approach the NCLT to impose restrictions on the assets of a significant beneficial owner defaulting on her disclosure obligations.|
|Where Previous Punishment is too Harsh||89(5)||If the registered owner and beneficial owner of shares failed to make certain disclosures, then he shall be subject to criminal punishment and cannot enforce any of her rights in relation to such shares.|
|184(4)||Relates to the disclosure of interest by the director. However, those who are subject to punishment under Section 184(4) of the 2013 Act, are also subject to vacation of office under Section 167 for the same non-compliance.|
|As based on directions of NCLT||232(8)||Provides punishment for failure to comply with obligations imposed by Section 232 in relation to merger and amalgamation of companies.|
|Because of the general nature of the orders||405(4)||Provides punishment for non-compliance with orders of the Central Government directing a company or companies to furnish certain information.|
|Right of a person having a beneficial interest in shares is protected if he makes a declaration of such interest, then no filing of such declaration will not affect the rights of the beneficial interest-holder.||89(7)||Provides punishment for failure of a company in filing of declarations of beneficial interest in shares with the RoC.|
|On recommendation of the high-level committee on CSR||135||Corporate social responsibility.|
Note: The data has been taken from the report of the Company Law Committee, 2019.
ARBITRABILTY OF OFFENCES
The law regarding the arbitrability of disputes varies subjectively according to public policies of each jurisdiction. The question often arises that whether all matters can be referred to arbitration or arbitration in certain matters is restricted. Russell answered this by saying that “not all disputes are arbitrable, rather the disputes which affect civil rights can be referred to arbitration”. Thus, it can be said that arbitrability of any dispute is determined by the nature of rights involved in it. The disputes involving right in rem are per se non-arbitrable, as it raises public policy concerns.
The Bombay High Court in the case of Rakesh Malhotra v. Rajinder Malhotra held that the matter which involves oppression and mismanagement before Company Law Board invokes its statutory power, which cannot be exercised by any civil court. The civil courts are vested with the power to entertain an action in oppression and mismanagement, which are narrow when compared to those vested with the Company Law Board (‘CLB’). Therefore, the disputes in oppression and mismanagement cases demand the exercise of wide powers of the CLB under Section 402 of the Companies Act, 1956. They cannot be adjudicated by a civil court, certainly not by an arbitral forum, as arbitral tribunals are considered as substitutes for civil courts. However, if it is found that the petition filed is malafide, vexatious or dressed up to avoid arbitration, then such matters can be referred to arbitration.
The Company Law Committee 2019, in its first phase, has recategorised 23 offences out of 66, from the compoundable category to be adjudicated by in-house adjudication process. The aim is to enhance corporate governance but in India, the possibility of opportunistic behaviour is quite normal and far-reaching. What if a corporate entity deliberately violates a law under the impression that the penalty imposed would be less when compared to the benefits obtained from such violations. No one is disputing the principle of decriminalization, but the government shall make efforts to ensure that no corporate house misuses this vast decriminalisation of offences and take the legislation very lightly. Such measure could be: a) appointment of an independent person (independent referee), as court and other regulators may not always be perfect, b) to have a steep monetary policy for the offences whose monetary penalties are not scary enough, just like FEMA has done it by imposing five times the amount.
One appreciable recommendation of the Committee is that while deliberating upon the extension of the scope of Section 446B to all civil penalties, the Committee, taking into consideration the nature of small and one-person companies, proposed that the scope of Section 446B shall be extended to all the provisions relating to one person and small companies.
These recommendations of the Committee are likely to find a place in the legislation and are yet to be tabled in the winter session of the Parliament. This move is expected to reduce the number of cases reaching the Company Law Tribunals, in a significant number.
 Frederic P. Lee, Corporate Criminal Liability, Columbia Law Review, Vol. 28, No. 1 (Jan., 1928), pp. 1-28
 A Pinto QÇ and M Evans Corporate Criminal liability (2nd ed, 2008, Sweet & Maxwell) at 39
 Report of the Company Law Committee 2019, Ministry of Corporate Affairs, Government of India.
 Id, at pg. 15.
 Id, at pg. 16.
 D Sutton and J Gill Russell on Arbitration (22nd edn Sweet & Maxwell Publications), p. 28.
– Vartika is currently an undergraduate at Institute of Law, Nirma University. Her interest lies in arbitration and corporate law.