THE COMPANIES (AMENDMENT) ORDINANCE, 2018 – AN ANALYSIS

[Mr. M. GOVINDARAJAN]

The President of India promulgated ‘the Companies (Amendment) Ordinance, 2018’ (‘Ordinance’ for short) on 02.11.2018.  The provisions of the ordinance came into effect from 02.11.2018.

Financial year

Section 2(41) of the Companies Act, 2013 (‘Act’ for short) provides for the change of financial year of a company.  This section defines ‘financial year’ in relation to any company or body corporate, means the period ending 31^st day of March every year.  The first proviso to this section provides that an application made by a company or body corporate which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied allow any period as its financial year whether or not that period is a year.

Section 2(a) of the ordinance changes the procedure and the power of change of financial year is transferred from Tribunal to the Central Government.   However the cases before the Tribunal before the date of commencement of this ordinance, the Tribunal is to decide such cases.

Commencement of business

The Companies Act, 2013 dispensed with the obtaining of commencement of business certificate.  Section 3 of the ordinance inserted a new section 10A which prescribes the procedure of commencement of business of a company.

Newly section 10A provides that a company incorporated after 02.11.2018, i.e., the implementation of the ordinance, and having a share capital shall not commence any business or exercise any borrowing power unless-

• a declaration is filed by a Director within 180 days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of shares agreed to be taken by him on the date of making such declaration; and
• the company has filed with the Registrar a verification of its registered office as provided in section 12 (2).

Penalty

If any default is made in complying with the provisions of this section, the company is liable to a penalty of ₹ 50,000/- .  Every officer-in-default is liable to a penalty of ₹ 1000/- for each day during which such default continues but not exceeding an amount of ₹ 1 lakh.

Where no declaration is filed as required in section 10A within 180 days and the Registrar is satisfied that the Registrar has reasonable belief that the company is not carrying any business or operations, he may initiate for the removal of the name of the company from the Register of companies.

Registered office of the company

Section 12 of the Act gives provisions relating to the registered office of the company.  Section 12(1) provides that a company shall, within 30 days of its incorporation and all times thereafter, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it.  Section 12(8) provides that if any default is made in complying with the requirements of this section the company and every officer who is in default shall be liable to be a penalty of ₹ 1000/- for every day during which the default continues but not exceeding ₹ 1 lakh.

Section 4 of the ordinance inserted section 12(9) provides that if the Registrar of Company has reasonable belief that the company is not carrying any business or operations he may cause a physical verification of the registered office and if any default is made in complying with section 12(1), he may initiate action for the removal of the name of the company from Register of Companies.

Conversion of a public limited company to a private company

A public limited company may be converted into a private company is to be got approved by the Tribunal.  Section 5 of the Ordinance changed this procedure.  Now such provision is to be approved by the Central Government.  The cases that are referred to the Tribunal before this ordinance,  the Tribunal shall dispose such cases.

Prohibition on issue of shares at discount

Section 53 provides prohibitions of issue of shares at discount.  Section 53(3) provides penalty for contravening the provisions of section 53.  The fine for such contravention is ₹ 1 lakh but which may extend to ₹ 5 lakhs.  Every officer in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than 6 months or with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 5 lakh or with both.

Section 6 of the ordinance substituted the provisions of section 53(3). The newly substituted section provides that where any company fails to comply with the provisions of section 53 such company and every officer of the company who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at discount or ₹ 5 lakhs whichever is less.  Further the company is also liable to refund all monies received with interest @ 12% per annum from the date of issue of such shares to the persons to whom such shares have been issued.

Alteration of share capital

Section 64(1) provides that where a company alters its share capital by an order made by the Government has the effect of increasing authorized capital of a company or a company redeems any redeemable preference shares, the company shall file a notice in the prescribed form with the Registrar within a period of 40 days of such alteration or increase or redemption, as the case may be, along with an altered memorandum.

Section 64(2) provides that if a company and any officer of the company who is in default contravenes the provisions of sub section (1), it or he shall be punishable with fine which may extend to ₹ 1,000/- for each dy during which such default continues or ₹ 5 lakhs, whichever is less.

Section 7 of the ordinance substituted section 64(2).  The newly substituted provision imposed penalty on both the company and the officer of the company who is in default.

Registration of charges

Section 77(1) provides that a company shall register the particulars of the charge signed by the company and the charge holder together with the instruments, if any, creating such charge in such form, on payment of such fees within 30 days of its creation.

The first proviso to this section provides that the Registrar may allow such registration to be made within a period of 300 days of such creation on payment of such additional fees.  The second proviso provides that even if it is not filed within 300 days, the company shall seek extension of time in accordance with section 87.

Section 8 of the Ordinance substituted the first and second provisos.  According to the newly substituted provisos-

• the charges created before 02.11.2018 can be created within 300 days of such creation subject to the condition that it should be created within 6 months from 02.11.2018, i.e., the date of implementation of this ordinance with additional fees and different fees may be prescribed for different companies;
• after 02.11.2018 it should be created within 60 days on payment of additional fees;
• the Registrar may allow further extension of 60 days after payment of such ad valorem fee as may be prescribed.

 Punishment for contravention of provisions relating to charges

Section 86 of the Act provides punishment for contravening the provisions of Chapter VI (Registration of Charges).  Section 9 of the Ordinance inserted new sub clause 86(2) which provides that if any person willfully furnishes any false or incorrect information or knowingly suppresses any material information, required to be registered in accordance with the provisions of section 77, he shall be liable for action under section 447.

 Rectification by Central Government in register of charges

Section 87 provides the procedure for rectification by Central Government in register of charges.  Section 10 of the Ordinance substituted section 87 which provides that the Central Government on being satisfied that-

• the omission to give intimation to the Registrar of the payment or satisfaction ofa charge, within the time required under this Chapter; or
• the omission or mis statement of any particulars with respect to any such change or modification or with respect to any memorandum of association or entry made in pursuance of section 82 or 83,

was accidental or due to inadvertence or some other sufficient cause or it is not of a nature to prejudice the position of creditors or shareholders of the company, it may, on the application of the company or any person interested and on such terms and conditions as the Central Government deems just and expedient, direct that the time for the giving of intimation of payment or satisfaction shall be extended or, as the case may require, that the omission or misstatement shall be rectified.

Significant beneficial owners in a company

Section 90 of the Act provides for maintenance of Register of significant beneficial owners of a company.  Section 90(8) of the Act provides that the Tribunal may restrict the rights attached with the shares.  Section 90(9) provides that the company or the person aggrieved by the order of the Tribunal may file an application before the Tribunal for relaxation or lifting of the restrictions placed under sub-section (8).

Section 11 of the Ordinance substituted section 90(9).  The newly substituted section provides the time limitation for filing application before the Tribunal i.e., within one year from the date of the order.  The proviso to this section provides that if such application is not filed within one year such shares shall be transferred to the authority constituted under section 125(5) of the Act.

Section 90(10) of the Act provides that if any person fails to make a declaration he shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 10 lakhs.

Section 11 of the Ordinance add additional punishment of imprisonment for a term which may be extended to one year or both the imprisonment or penalty.

Annual Return

Section 92(5) provides for punishment for failing to file annual return by the company before the expiry period.

Section 12 of the Ordinance substituted Section 92(5).  According to the newly substituted 92(5)  if any company fails to file annual return within the prescribed period, such company and its every officers who is in default shall be liable to a penalty of ₹ 50,000/- and in case of continuing failure, with further penalty of ₹ 100/- for each day during which such failure continues, subject to a maximum of ₹ 5 lakhs.

 Statement to be annexed to notice

Section 102 provides that the notice to general meeting be annexed with a Statement which shall contain the material facts concerning each item of special business to be transacted.  Section 102 (5) is a penal provision.   It provides that if any default is made in complying with the provisions of this section, every promoter, director, manager or other key managerial personnel who is in default shall be punishable with fine which may extend to ₹ 50,000/- or five times the amount of benefit accruing to the promoter, director, manager or other key managerial personnel or any of his relatives, whoever is more.

Section 13 of the Ordinance substituted a new section for 102(5). The new section provides penalty ₹ 50,000/-.

Proxy

Section 105 (3) provides that if default is made in complying with the provisions of section 105(2), every officer of the company who is in default shall be punishable with fine which may extend to ₹ 5000/-

Section 14 of the Ordinance amended section 105(3) which provides penalty ₹ 5000/-

Resolutions and agreements to be filed

Section 117 (2) provides that if a company fails to file the resolution or the agreement before the expiry of the period, the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 25 lakhs.  Every officer of the company who is in default, including the liquidator of the company, if any, shall be punishable with fine which shall not be less than ₹ 50,000/- but which may extend to ₹ 5 lakhs.

Section 15 of the Ordinance substituted section 117(2).  The new section provides that if a company fails to file the resolution or the agreement before the expiry of the period, such company shall be liable to a penalty of ₹ 1 lakh and in case of continuing failure, with further penalty of ₹ 500/- for each day after the first during which such failure continues, subject to a maximum of ₹ 25 lakhs.  Every officer who is in default including the liquidator of the company, if any, shall be liable to a penalty of ₹ 50,000/-  and in case of continuing failure, with further penalty of ₹ 500/- for each day after the first during which such failure continues, subject to a maximum of ₹ 5 lakhs.

Report on the annual general meeting

Section 121(3) provides penalty for the company failing to file report with the Registrar within 30 days of the conclusion of the annual general meeting with such fees as may be prescribed, the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 5 lakh and every officer of the company who is in default shall be punishable with fine which shall not be less than ₹ 25,000/- but which may extend to ₹ 1 lakh.

Section 16 of the ordinance substituted the section 121(3).  The newly substituted section provides that if a company fails to file the report before the expiry of the period, such company shall be liable to a penalty of ₹ 1 lakh and in case of continuing failure, with further penalty of ₹ 500/- for each day after the first during which such failure continues, subject to a maximum of ₹ 5 lakhs.  Every officer who is in default including the liquidator of the company, if any, shall be liable to a penalty of ₹ 25,000/-  and in case of continuing failure, with further penalty of ₹ 500/- for each day after the first during which such failure continues, subject to a maximum of ₹ 1 lakh.

Copy of financial statement to be filed with Registrar

Section 137(3) provides that if a company fails to file the copy of the financial statement before the expiry of 30 days the company shall be  punishable with fine of ₹ 1000/-  for every day during which the failure continues but which shall not be more than ₹ 10 lakhs and the Managing Director and the Chief Financial Officer of the company, if any, in the absence of Managing Director and the Chief Financial Officer any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of such director, all the directors of the company shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 5 lakhs or with both.

Section 17 of the Ordinance amended section for 173(3).  It provides that  if a company fails to file the copy of the financial statement before the expiry of 30 days the company shall be  liable to a penalty of ₹ 1000/-  for every day during which the failure continues but which shall not be more than ₹ 10 lakhs and the Managing Director and the Chief Financial Officer of the company, if any, in the absence of Managing Director and the Chief Financial Officer any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of such director, all the directors of the company shall be liable to penalty of ₹ 100/-  for each day after the first during which such failure continues subject to a maximum of ₹ 5 lakhs.

Removal, resignation of Director

Section 140(2) provides that the auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.  Section 140(3) provides that if the auditor does not comply with sub-section (2), he or it shall be punishable with fine which shall not be less than fifty thousand rupees or the remuneration of the auditor, whichever less is, but which may extend to five lakh rupees.

Section 18 of the Ordinance substituted Section 140(3).  The newly substituted section provides that if the auditor does not comply with the provisions of section 140(2) he or it shall be liable to a penalty of ₹ 50,000/-  or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of ₹ 500/- for each day after the first during which such failure continues subject to a maximum of ₹ 5 lakhs.

Company to inform DIN to Registrar

Section 157 (2) provides that if a company fails to furnish Director Identification Number under sub-section (1), the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

Section 19 of the Ordinance substituted section 157(2).  The said section provides that if a company fails to furnish Director Identification Number under sub-section (1), the company shall be punishable with fine ₹ 25,000/- and in case of continuing failure, with further penalty of ₹ 100/-  for each day after first during which such failure continues  but which may extend to ₹ 1 lakh  and every officer of the company who is in default shall be punishable with fine which shall not be less than ₹ 25,000/- and in case of continuing failure, with further penalty of ₹ 100/-  for each day after first during which such failure continues  but which may extend to ₹ 1 lakh.

Contravention of section 152, 155 and 156

Section 152 deals with the appointment of directors.  Section 155 deals with the prohibition to obtain more than one Director Identification Number and section 156 provides that the Director is to intimate the DIN to the company.

Section 159 provides punishment for contravention of sections 152, 155 and 156 by any person or any director of the company.  Section 20 of the Ordinance substituted section 159.  The newly inserted section provides the penalty up to ₹ 50,000/-.  If the failure continues  a further penalty which may extend to ₹ 500/- for each day after the first during which such default continues.  

Disqualifications for appointment of Director

Section 164(1) provides the grounds on which the director maybe disqualified.  Section 21 of the Ordinance inserted an additional ground – he has not qualified with the provisions of section 165(1) which provides that no person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time.

Contravention of section 165(1)

Section 165(6) provides that if a person accepts an appointment as a director in contravention of sub-section (1), he shall be punishable with fine which shall not be less than five thousand rupees but which may extend to twenty-five thousand rupees for every day after the first during which the contravention continues.

Section 22 of the Ordinance changes the punishment in section 165(6), a fine of ₹ 5000/- for each day after the first during which the contravention continues.

Restriction on non-cash transactions involving directors

Section 23 of the ordinance substitutes section 191(5) which provides that if a director of the company makes any default in complying with the provisions of this section, such director shall be liable to a penalty of ₹ 1 lakh.

Managerial remuneration

Section 197 of the Act deals with the overall maximum managerial remuneration and managerial remuneration in case of inadequacy of profits.  Section 197(7) provides that an independent director shall not be entitled to any stock option and may receive remuneration by way of fees, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.  This sub section has been omitted by Section 24(a) of the ordinance.

Section 197(15) provides that if any person contravenes the provisions of this section, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Section 24(b) of the Ordinance substituted section 197(5).  The newly substituted section provides that if any person makes any default in complying with the provisions of this section he shall be liable to a penalty of ₹ 1 lakh and where any default has been made by a company the company shall be liable for a penalty of ₹ 5 lakhs.

Appointment of key managerial personnel

Section 203(5) of the Act provides for punishment for contravention of section 203 which deals with the appointment of key managerial personnel.

Section 25 of the Ordinance substituted section 203(5).  The newly substituted section provides that If a company contravenes the provisions of this section, such company shall be liable to a penalty of ₹ 5 lakhs and every director and key managerial personnel of the company who is in default shall be liable to a penalty of ₹ 50,000/- and where the contravention is a continuing one, with a further penalty of ₹ 1000/- for each day  after the first during which the contravention continues but not exceeding ₹ 5 lakhs.

Registration of offer of schemes involving transfer of shares

Section 248 of the Act deals with the registration of offer of schemes involving transfer of shares.  Section 27 of the Ordinance inserted clause (d) and (e) after section 238(1)(c) which provides as follows-

(d) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company and declaration to this effect has not been filed within 180 days  of its incorporation under section 10A(1); or

(e) the company is not carrying any business or operations, as revealed after the physical verification carried out under section 12(9).

Compounding of offences

Section 28(1) of the Ordinance enhanced the power of Regional Director to compound the offence where maximum amount of penalty imposed is ₹ 25 lakhs.  This limit is raised from ₹ 5 lakhs.

Section 28(2) of the Ordinance substituted section 441 (6).  The newly substituted section provides that any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.

Lesser penalties for One Person Companies or small companies

After the amendment in the Ordinance, section 446B, one person company and small companies shall be liable to a penalty which shall not be more than 50% of the penalty specified in such sections.

Adjudication of penalties

Section 31(i) of the Ordinance substituted the section 454 (3).  The newly substituted section provides that the Adjudicating Officer may by an order-

• impose the penalty on the company, the officer who is in default, or any other person, as the case may be, starting therein any non compliance or default under the relevant provisions of this Act; and
• direct such company, or officer who is in default, or any other person, as the case may be to rectify the default, wherever he considers fit.

Penalty for repeated default

Section 32 of the Ordinance inserted a new section 454A.  This section provides that where a company or an officer of a company or any other person having already been subjected to penalty for default under any provisions of this Act, again commits such default within a period of three years from the date of order imposing such penalty passed by the Adjudicating Officer or Regional Director, it or he will be liable for the second and subsequent defaults for an amount equal to twice the amount of penalty provided for such default under the relevant provisions of this Act.