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This post is authored by Poojan Bulani and Aryan Gupta, Digital Editor and Copy Editor at RGNUL Financial and Mercantile Law Review (RFMLR), respectively.
1. INTRODUCTION
In the past few years, the Indian Government has increasingly focused on the decriminalization of corporate offences, with the larger purpose of promoting greater ease of doing business in India. A series of steps have been taken in this regard in the form of the establishment of committees, the release of consultation papers, and the promulgation of various ordinances and amendments. While the overall impact of such measures is envisaged to be positive, the challenges and limitations associated with it cannot be overlooked. Through this article, the authors aim at documenting and analyzing the proposed changes in the Limited Liability Partnership Act, 2008 ("LLP Act"), as well as the changes that have already been made in other legislations.
2. PAST AMENDMENTS
In July 2018, the Ministry of Corporate Affairs ("MCA") constituted a ten-member high-level committee, headed by Mr. Injeti Srinivas, to review offences under the Companies Act, 2013 ("Act"). The committee, among other suggestions, recommended that 16 out of the 81 compoundable offences under the act be decriminalized and resolved through an In-house Adjudication Mechanism ("IAM"). Accordingly, the IAM would consist of an Adjudicating Officer ("AO"), who would be appointed by the Central Government and would not be below the rank of a Registrar. The AO would be the authority for adjudication of penalties. The government accepted this recommendation and promulgated two ordinances (first and second) to this effect, which were followed by the enactment of the Companies (Amendment) Act, 2019 in July 2019. The 2019 Amendment re-categorized those 16 offences into civil violations subject to levy of a penalty in case of default, using the IAM, which was incorporated under Section 454 of the Act.
Since further reforms were required in this regard, the MCA then constituted the Company Law Committee ("CLC") in September 2019, again headed by Mr. Injeti Srinivas, to suggest steps that could be taken to "promote greater ease of doing business for law-abiding corporates". The CLC submitted its report in September that year, and with regard to decriminalization, recommended that 46 more compoundable offences be rationalized in different manners. On this basis, the government then brought in the Companies (Amendment) Act, 2020 in September 2020, which re-categorized 23 offences under the Act to the IAM, completely omitted 7 offences, removed the provision for imprisonment under 11 offences, and provided an alternate framework for 5 offences.
Apart from the reports on and amendments to the Act, the government is in the process of decriminalizing minor offences under other legislations as well. In June 2020, a plan proposing decriminalization under 19 legislations, such as the Reserve Bank of India Act, 1934, and the Negotiable Instruments Act, 1881 was put up for public comments. It is important to note that all the offences that have already been and are in the process of being decriminalized are minor offences, i.e., they are procedural or technical in nature, devoid of any mala fide intentions, and do not involve any public interest.
3. DECRIMINALIZING THE LLP ACT
The latest step in the series of amendments is the proposed decriminalization of compoundable offences under the LLP Act. In January 2021, an expert panel of the MCA proposed decriminalization of 12 offences, and removal of 1 penal provision under the LLP Act. In furtherance of this, a test was conducted to identify the criminal violations under the LLP Act that did not meet the mens rea principle, or did not injure/ taint public interest. The proposed changes also seek to promote ease of doing business in India by providing an improved corporate structure to emerging businesses. The main suggestion of the expert committee was to impose fines on violations through the civil framework and amend the provisions that lay down criminal penalties but also include the introduction of provisions for the classification of "Small LLP" for standard regulation.
Decriminalization of such minor offences is especially important as in the case of Director of Enforcement v. MCTM Corporation, the Hon’ble Supreme Court held stated that the standard of preponderance of liability is lower in instances of corporate malfeasance than those of criminal liability, thereby implying that imposing fines in place of penalizing the wrongdoers is more plausible. Consequently, the monetary compensation collected could both serve as a deterrent against violations, as well as be utilized towards developing a robust corporate structure.
Furthermore, although the objective of the proposed changes is to protect the existing entities from redundant litigation and to redirect the resources and time towards other underdeveloped corporate nooks, in doing so, it also raises certain red flags. For instance, the quasi-judicial nature of the IAM can be contended on the grounds of accountability, owing to its constitution as an independent body. Therefore, the proper implementation of these changes will be key to prospective reforms.
4. CONCLUSION
The proposed amendments are meant to declutter the dispute resolution system, remove unnecessary deterrents to ease of doing business, and serve as a catalyst to foster economic growth and restore corporate governance. At this juncture, it is significant to note that reforming the corporate structure via decriminalizing certain offences in no way takes away the criminal sanctions placed on offences like fraud, deceit, etc., which would still be punishable under the Act. It is incumbent upon the regulators to penalize certain defaulters and therefore, the CLC has made recommendations to carry on with the status quo for offences that violate norms of corporate discipline.
It remains to be seen as to when the recommendations regarding the LLP Act will be implemented by the government. However, their intent is clear as in the Budget 2021 Speech itself, the Finance Minister told the Parliament that the decriminalization of the Companies Act, 2013 is now complete, and the next step is the decriminalization of the LLP Act.
It is to be understood that the new changes are proposed to be added in alignment with the structural modifications that carried the effect of decriminalization. While the Companies Amendment Act, 2020 dealt with modifications that impacted the governance framework of corporate law, the aforementioned amendment proposes to obliterate the notion of criminality from actions that do not carry any malicious spirit.