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October 13, 2020

Proposed Decriminalization Of Compoundable Offences Under The Limited Liability Partnership, 2008 By MCA: Need For A Calibrated Approach

Author: Abhimanyu Kumar

With a focus to increase and promote ease of doing business in India, the Government has in the past adopted numerous steps to attract foreign investments, including decriminalization of non-compliances and minor offences under the various laws including the Companies Act, 2013 (“Companies Act”), Foreign Exchange Management Act, 1999, etc. As per a recent report of the World Bank, India ranked 63rd amongst 190 countries on the ease of doing business index in 2020.

A major impediment for companies in attracting foreign investment is the risk of criminal action and imposition of heavy fines for actions or non-compliances which are not necessarily fraudulent. Many critics have questioned the efficiency of criminal law in dealing with corporate misconduct. With respect to corporate misconduct, the recurring issue is that the imposition of criminal sanction involves various complexities in criminal trials, which are time-consuming, cost-intensive and require that the onus and burden of proof be established beyond reasonable doubt. All of these factors, on one hand, reduce the chances of successfully prosecuting companies due to the complex nature of criminal trials and on the other hand, causes undue hardship to companies where the offence may have been committed by inadvertence, or where violations are not grave enough to cause injury to public interest. These factors act as a deterrent and are one of the major reasons which hinder investment from within and outside India and incidentally have an impact on the economy as a whole.

Given that the judicial system is heavily overwhelmed due to pendency of criminal matters and consequent delays in dispute resolution, various legislative measures have to be considered to boost business in India. A balanced approach needs to be taken between civil and criminal liabilities so that grave misconduct and mala fide intent is punished whereas minor and less serious offences are compounded.

The Department of Financial Services under the Ministry of Finance had issued on June 8, 2020 a Statement of Reason titled  “Decriminalisation of Minor Offences For Improving Business Sentiment And Unclogging Court Processes’ (refer here) ,  which proposed review by way of re-classification and de-criminalization of offences under various legislations and has also laid out the following principles, which are reproduced as follows:

Criminalizing procedural lapses and minor non-compliances increases burden on businesses and it is essential that one should re-look at provisions which are merely procedural in nature and do not impact national security or public interest at large. The following principles should be kept in mind when deciding on reclassification of criminal offences to compoundable offences: (i) Decrease the burden on businesses and inspire confidence amongst investors; (ii) Focus on economic growth, public interest and national security should remain paramount; (iii) Mens rea (malafide/ criminal intent) plays an important role in imposition of criminal liability, therefore, it is critical to evaluate nature of non-compliance, i.e. fraud as compared to negligence or inadvertent omission; and (iv) The habitual nature of non-compliance.” 

By virtue of an amendment in 2019, 16 offences in the Companies Act were re-categorized to civil defaults. The Companies (Amendment) Bill, 2020 decriminalizes several sections of the Companies Act. Recently, on September 19, 2020 the Lok Sabha passed the Companies (Amendment) Bill, 2020 in which 48 sections have been amended thereby de-criminalizing them and 17 sections have also been amended to improve ease of doing business. Moreover, many of the compoundable offences under the Companies Act will be dealt through an in-house adjudicating mechanism.

Taking the lead from the reforms aimed at decriminalizing the provisions of the Companies Act,  the Ministry of Corporate Affairs (“MCA”) had issued a Statement of Reason dated June 19, 2020 titled ‘Decriminalisation of Compoundable Offences under the Limited Liability Partnership (LLP) Act, 2008, for Greater Ease of Doing Business for law abiding LLPs and Declogging of Criminal Justice system’ (refer here), which identified and listed out 20 sections of the Limited Liability Partnership Act, 2008  (“LLP Act”)and decided to review the penal provisions therein with a view to decriminalize compoundable offences involving minor, procedural or technical violations of the LLP Act, or offences which may not involve any harm to public interest.  Comments have also been invited by stakeholders on the 20 sections which cover provisions such as those pertaining to registration or change of designated partners, maintaining books of accounts, duty of partners to produce documents and evidence,  duty of limited liability partnership to file its annual returns, etc. The reason behind MCA’s proposed changes to the LLP Act is to provide better procedural leverage for companies in conducting their businesses and decrease the burden on criminal courts by reducing criminal liability.

In order to meet the above objectives, in appropriate cases, ‘criminal fine’ should be changed to ‘civil penalty’. In the Companies Amendment Act 2019, the term ‘fine’ was replaced with the term ‘penalty’ in an effort to reduce the hardship of companies. Under the Companies Act, there is a difference between the two terms viz. fine and penalty. Fines are levied by courts for non-compliance of certain statutory provisions of the Companies Act and involve a trial. On the other hand, penalties are levied by the executive body of the MCA after a summary proceeding and is usually adjudicative in nature. Levying a penalty involves a far quicker process than the imposition of a fine.

In K. Singh Deo v. Jenson And Nicholson India Ltd., (1985 CriLJ 464), the Calcutta High Court observed that “…there is a gulf of difference between “punishment” and “penalty”. In Section 53,I.P.C., various types of punishments have been described of which fine is one. It is doubtful if liability to pay fine makes an act or omission an offence. Imposition of fine may be treated as a penalty. Because penalty generally means payment of a fine for breach of law, rule or contract ; and in sports it means a disadvantage imposed on a competitor for breaking a rule ; the essence of penalty is payment of money interrorem by the party at fault. Such observation cannot be made with regard to punishment the effect of which is not preventive in so far as the offender is concerned.

In Adamji Umar Dalal vs The State Of Bombay; (AIR 1952 SC 14) Supreme court opined that the magnitude of an offence needs to be considered when deciding the quantum of penalty. The Supreme court observed that “The determination of the right measure of punishment is often a point of great difficulty and no hard and fast rule can be laid down, it being a matter of discretion which is to be guided by a variety of considerations, but the courts has always to bear in mind the necessity of proportion between an offence and the penalty. In imposing a fine it is necessary to have as much regard to the pecuniary circumstances of the accused persons to the character and magnitude of the offence, and where a substantial term of  imprisonment is inflicted, an excessive fine should not accompany it except in exceptional cases.” (emphasis supplied)

The MCA’s Statement of Reason for Decriminalisation of Compoundable Offences under the Limited Liability Partnership (LLP) Act, 2008is a welcome measure, which is intended to benefit the stakeholders and the investors by facilitating ease of doing business, which is more important than ever given the negative economic impact of COVID-19. The re-categorization of offences and the use of  an in-house adjudication mechanism, have the ability to help to reduce protracted criminal proceedings and reduce the existing backlogs in the judicial system. Instances of non-compliance due to inadvertent omission(s) can be quickly resolved by imposition of penalties instead of fines. Further, no element of mens rea needs to be established, for imposition of penalties by the adjudicating officer designated by MCA, thus making the resolution process faster than a criminal prosecution.  

On the flipside, if decriminalisation of certain offences under the LLP Act is not rightly implemented, many of the provisions which are sought to be de-criminalized may turn out to be a toothless measure which may not act as a good deterrent and may not ensure compliance of the statutory provisions by the companies. In order to fulfil the objective of the proposed measures, speedy disposal of cases will be imperative. Since decriminalization also has the potential to encourage an uninhibited corporate culture of purging defaults by merely expending funds, due deliberation needs to be undertaken by the legislators. Therefore, a balanced approach is required to be adopted by the Government before taking steps towards de-criminalization.

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

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