Highlights of the Companies (Amendment) Ordinance, 2019

Highlights of the Companies (Amendment) Ordinance, 2019

                                                                                     -by CS Megha Saraf
                                                                                      CS Smriti Wadehra
                                                                               corplaw@vinodkothari.com
                                                                                  Corporate Law Division

Introduction

The changes brought in the Companies Act, 2013 (“Act”) vide the Companies (Amendment) Act,
2017 were not sufficient enough and so the Ministry of Law and Justice (“MLJ”) has brought in
an 1Ordinance dated 2nd November, 2018 named as Companies (Amendment) Ordinance, 2018
(“Ordinance”) bringing amendment in 31 sections of the Act being enforced from the even date.
As an Ordinance comes with an expiry date i.e. 6 weeks from the re-assembly of the Houses of the
Parliament, it was necessary to pass the Ordinance by the Houses of the Parliament in order to
imbibe the amendments in the Act. The re-assembly of the Houses of the Parliament started from
11th December, 2018 and continued till 8th January, 2019 and the Ordinance got its approval from
the House of People on 4th January, 2019 but considering other exigent matters, it could not be
taken up for passing by the Council of States.
Therefore, as the Ordinance will cease to operate on 21st January, 2019, so in order to have a
continued effect of the amendments brought in by the Ordinance, the Ordinance have been
repealed by Companies (Amendment) Ordinance, 2019 (“Ordinance, 2019”) on 12th January,
2019.
The write-up covers the snapshot of the changes brought in the Act by the Ordinance which is
subsequently repealed and replaced by Ordinance, 2019.
      1. Section 2- Definition of “financial year”

      The authority to make application for adopting a different year as “financial year” has been
      shifted from “Tribunal” to “Central Government”.

      Existing applications pending before the Tribunal before 2nd November, 2018 shall be disposed
      off by the Tribunal as per the existing law.

      2. Section 10A- Insertion of a new section- Commencement of Business, etc.

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A company having share capital incorporated after the commencement of the Ordinance,
   has to ensure the following before commencing its business or exercising borrowing
   powers-

a. Director to file a declaration within a period of 180 days from the date of incorporation of
   the company in such form as is prescribed that every subscriber to the memorandum has
   paid the value of the shares as agreed for. Failure to file the declaration shall give reasonable
   cause to the RoC to remove the name of the company from the register of companies.
b. The company has verified its registered office in e-Form INC-22.

   Penal provisions-
   Company- Rs. 50000
   Officer-in-default- Rs. 1000 for each day to max. Rs. 1 lac.

3. Section 12- Registered office of company

Physical verification of the registered office may be done on reasonable cause to believe that
no business or operations is being carried out by the company. In case of any default found,
the RoC may remove the name of the company from the register of companies.

4. Section 14- Alteration of Articles

Authority to approve application for conversion of a public company to private shifted from
Tribunal to Central Government.

Existing applications are however, are required to be disposed off by the Tribunal in
accordance with existing applications.

5. Section 53- Prohibition on issue of shares at discount

Existing penal provisions provided for fine for the company and a punishment of imprisonment
and fine for every officer in default.

The Ordinance lays down that the company and every officer-in-default shall pay a penalty of
the amount raised through issue of shares at discount upto Rs. 5 lakhs, whichever is less
alongwith refunding the amount with interest at the rate of 12% p.a. from the date of issue of
shares to the respective persons to whom the shares were issued.

6. Section 64- Notice to be given to Registrar for alteration of share capital

Existing law provided for fine on the company and officer-in-default whereas the Ordinance
lays down for penalty on the Company and every officer-in-default with Rs. 1000 for each day
during default or Rs. 5 lakhs, whichever is less.

7. Section 77- Duty to register charges, etc.

a. Charges created before commencement of Ordinance- RoC to register charges within 300
   days of such creation;

    In case the charge is not registered within this time, then the charge shall be made registered
    within 6 months from the date of commencement of Ordinance on payment of additional
    fees.

b. Charges created after commencement of Ordinance- RoC to register charges within 60 days
   of such creation.

    In case the charge is not registered within this time, then RoC may on application, allow
    the registration of the charge within a period of further 60 days on payment of advalorem
    fees.

8. Section 86- Punishment of contravention- Insertion of a subsection

Wilful furnish of false or incorrect information or knowingly suppressing any material
information w.r.t chapter VI pertaining to registration of charges shall be liable to fraud and
attract action under Section 447.

9. Section 87- Rectification by Central Government in Register of charges- Section
   substituted

CG on satisfaction that-

a. Omission in giving intimation to the ROC regarding satisfaction of charge within the
prescribed time,
b. Omission or misstatement of an particulars w.r.t. any such charge or modification of charge
or w.r.t any memorandum of satisfaction or other entry made u/s 82 or 83,

was accidental or inadvertently made may direct for extending the time for intimating about the
satisfaction of charge and rectification of the misstatement or omission made.

10. Section 90- Register of significant beneficial owners in a company

a. Aggrieved party to make an application to the Tribunal within 1 year from date of such
   order

In case no application made within this time, then such shares shall be transferred to IEPF.

  b. Person failing in making declaration shall be imprisoned for 1 year along with the fine
     applicable and may even be levied fine and imprisonment both.

   11. Section 92- Annual Return

   Penal provisions instead of levying fine for failure in filing annual return-

   Company and ever officer-in-default- Rs. 50000 and in case of continuing default, further
   penalty of Rs. 100 for each day upto max. Rs. 5 lakhs.

   12. Section 102- Statement to be annexed to notice

    Penal provisions instead of levying fine-

   Promoter, director, manager, KMP in default- Rs. 50000 or 5 times the amount of benefit
   accruing to promoter, director, manager, KMP or his relatives, whichever is higher.

   13. Section 105- Proxies

   Moving from fine to penalty and levying a penalty of Rs. 5000.

   14. Section 117- Resolutions and agreements to be filed

Failure to file resolution within time shall attract a penalty on-
Company- Rs. 1 lakh and in case of continuing failure, Rs. 500 for each day upto max. Rs. 25
lakhs;
Officer-in-default (including liquidator)- Rs. 50000 and in case of continuing failure, Rs. 500 for
each day upto max. Rs. 5 lakhs

   15. Section 121- Report on Annual General Meeting

Failure to file the report shall attract a penalty of-
Company- Rs. 1 lakh and in case of continuing default, Rs. 500 for each day upto max. 5 lakhs
Officer-in-default- Rs. 25000 and in case of continuing default, a further penalty of Rs. 500 each
day upto max. Rs. 1 lakh.

   16. Section – 137- Filing of Financial Statements
The erstwhile provisions of section 137 provided that if a Company fails to file financial statements
with the Registrar it shall be punishable with fine and the officers of the Company shall be
prosecuted.

The Ordinance has categorised such default as a ‘civil default’ by substituting fine with penalty.
   17. Section – 140 – Resignation of Auditor
If an auditor fails to file e-Form ADT-3 within 30 days of his resignation he shall be liable for a
penalty of Rs. 50,000 or his/her remuneration whichever is lower, with an everyday penalty of Rs.
5000 if the failure continues.

As the default is merely a technical lapse, the same has been shifted from criminal prosecution to
penalty.

   18. Section 157(2)- Intimation of DIN

The fine under section 157 for not furnishing DIN to the Registrar has been substituted with
penalty.

However, the sub-section now specifically provides that if the default continues a further penalty
of rupees one hundred shall be levied everyday.

   19. Section 159 – Punishment for contravention of sections 152, 155 and 156

Section 152, 155 and 156 of the Act list downs the provisions for appointment of director,
allotment of DIN and intimation of DIN. The penalty for contravention of these section has been
shifted to civil liability i.e. the word fine is substituted with penalty.

   20. Section 164 – Disqualifications of Director
In sub-section (1) a new sub-clause (i) has been inserted.
If a director does not comply with the number of directorships i.e. maximum ten public companies
and maximum twenty in other companies he/she shall be disqualified under section 164 of the Act.
   21. Section 165- Number of Directorships
If a director contravene the maximum limit of directorship as provided in section 165 of the Act,
he/she shall be punishable with a penalty of rupees five thousand everyday till the contravention
continues.
On similar lines, the default under this section has been categorised as a ‘civil default’ with the
defaulting company and officers liable to penalty only.
   22. Section 191- Payment to director for loss of office
The punishment for default under this section has been shifted to civil liability. Accordingly, the
director shall be punishable with penalty of rupees one lakh for any contravention under this
section.
   23. Section 197- Overall maximum managerial remuneration in case of inadequacy of
profits

a) The provisions of section 197 of the Act provided:
“(7) Notwithstanding anything contained in any other provision of this Act but subject to the
provisions of this section, an independent director shall not be entitled to any stock option and
may receive remuneration by way of fees provided under sub-section (5), reimbursement of
expenses for participation in the Board and other meetings and profit related commission as
may be approved by the members”
As per the erstwhile provisions of the Act, the Independent Director was not entitled to any stock
options. Accordingly, the remuneration of IDs included only sitting fees for Board and committee
meetings and other profit related commission. The aforesaid sub-section has been omitted by the
Ordinance.
However, the provisions of section 149(9) still provides:
“Notwithstanding anything contained in any other provision of this Act, but subject to the
provisions of sections 197 and 198, an independent director shall not be entitled to any stock
option and may receive remuneration by way of fee provided under sub-section (5) of section
197, reimbursement of expenses for participation in the Board and other meetings and profit
related commission as may be approved by the members.”
Hence, the omission under section 197(7) shall have no impact on the existing payment mechanism
of IDs and they shall still not be entitled for stock options.
b) If company contravenes the provisions of this section it shall be liable for minimum penalty of
rupees one lakh which may extend upto five lakhs.
    24. Section 203 – Appointment of KMP
The penal provisions under this section shifted from fine to penalty. Further, a new insertion has
been introduced which provides that a further penalty of rupees one thousand shall be levied
everyday till the default continues however the same shall not exceed rupees five lakh
    25. Section 238 – Registration of offer of schemes involving transfer of shares
The fine provided under this section has been substituted with a penalty of rupees one lakh.
    26. Section 248 – Power of the Registrar to remove the name of the company
The erstwhile provisions of the Act provided the following situations in which the Registrar can
remove the name of the Company from the register of companies:
a) It has failed to commence its business within one year of incorporation
b) Is not carrying out any business or operations for a period of two years
c) Is a dormant company under section 455
However, the Ordinance has introduced two new clauses for removal of name of the Company:

i) if the subscribers of MoA of the Company have not paid the subscription amount and have not
furnished a declaration in this regard within 180 days
ii) if the Company is revealed to not having any registered office after physical verification of
registered office.
    27. Section 441- Compounding of offences
a) The pecuniary jurisdiction of RD for compounding of offence under section 441(1)(b) has been
from Rs.5 lakhs to Rs. 25 lakhs. Considering the major bulk of cases handled by NCLT at present
and the significance of the report of ROC, it is rightfully justified to give greater jurisdiction to
RD.
b) Ordinance has provided clarification that offences which are punishable with imprisonment only
or with imprisonment and fine shall not be compoundable
    28. Section 446B- Application of fines
The penal provisions for any default in the annual return of a OPC or small company has been
shifted from fine to penalty.
    29. Section 447- Punishment for Fraud
The section provided that where the fraud involves an amount less than Rs. 10 lakh or 1% of the
turnover of the company and did not involve public interest the defaulter shall be punishable with
imprisonment for a term which may extend to 5years and the maximum fine under section 447 has
be increased from Rs.20 lakhs to Rs. 50 lakhs.
    30. Section 454- Adjudication of penalties
a) Adjudicating officer can now impose penalty on company, officer in default, or any other person
b) can provide any direction to the company or officer in default or any other person
The erstwhile provisions only provided for officer in default. We assume that introduction of the
word ‘any other person’ shall widen the power of the adjudicating officer.
    31. Section 454A- Penalty for repeated default
New section inserted
For repeated default within 3 years double penalty shall be imposed.

Conclusion

The amendments introduced by the Ordinance is a implementation of Injeti Srinivas Committee
constituted for revisting penal provisions of the Act. Mostly, the penal provisions have been
liberalised granting scope to companies to settle it in house rather than thrive in the long
drawn processes. The Hon’ble NCLT had been formed with an objective of providing speedy

redressal to company related matters. Declogging NCLT will perhaps help it focus on more
technical cases rather than mere procedural matters.