The criminal justice system in Indian has been clogged with huge number of cases and is overburdened. To reduce this burden on the Indian judiciary, the government has been making efforts to decriminalize offences which can be dealt with in some other way. There are many offences which can be put to an end by imposing fines or penalties and do not require to be prosecuted. These offences are not serious and are mostly defaults for unintentional omissions.
As per the data furnished by the National Company Law Tribunal (NCLT) as many as 21,259 cases were pending before the (NCLT) as of December 31, 2020, and more than 2,278 cases were filed before the tribunal under the insolvency law during the period April-December, 2020, according to the government.
Hence, the Indian government has been taking time and again steps to declog the judicial system. The recent announcement being decriminalization of certain provisions of the LLP Act. It a win-win situation for the Government and the corporate eco system as it reduces the burden on the Courts and provide ease of business or functioning of the companies.
1. THE LLP AMENDMENT BILL, 2021
The LLP Amendment Bill, passed by India’s upper house of parliament on August 4, 2021. Under the proposed bill, as many as 12 offenses under the existing law are set to be decriminalized. The penal provisions will be reduced to 22 from the existing 24, compoundable offenses will be reduced from 21 to 7, and there will be only three non-compoundable offenses.
With the proposed amendments, the total number of penal provisions under the LLP Act will be reduced to 22, compoundable offences will be 7, non-compoundable offences will be 3 and the number of defaults to be dealt under the In-House Adjudication Mechanism (IAM) will be only 12.
‘So, a total of 12 offences are to be decriminalized for LLPs. Three sections are (to be) totally omitted,’ these changes would help bring LLPs on an equal playing field with corporates that come under the Companies Act. Concept of “Small LLPs” similar to “Small Company” under the Companies Act 2013 has been introduced for the first time.
Offences that relate to minor procedural lapses are proposed to be shifted to the In-House Adjudication Mechanism (IAM) framework instead of being treated as criminal offences.
Section 34A is inserted which empowers the Government in consultation with National Financial Reporting Authority (NFRA) constituted under the Companies Act 2013 to prescribe the “Accounting Standards” or “Auditing Standards” for certain classes of LLPs.
Further, offences that are more appropriate to be dealt with under other laws are proposed to be omitted from the LLP Act.
2. THE COMPANIES AMENDMENT ACT 2020
Major thrust of the Amendment Act is decriminalization of more than 48 offences under the Companies Act, 2013 and lightening rigour of penalties.
Reconsidering fine amounts
Section 446B has been substituted to provide for payment of lessor monetary penalty by a start-up company, Producer Company, One Person Company or small company on failure to comply with provisions of the Act which attract monetary penalties.
Producer and Start up company is defined. This is a remarkable provision as Smaller companies are provided leniency taking into account that public funds are not involved and their bandwidth to deal with penalties.
A window has been provided under Section 454 (3) within which penalties shall not be levied for delay in filing annual return and financial statements in certain cases. It will reduce the chances of monetary penalty being levied where the default is made good within a defined time.
Introducing in-house adjudication mechanism
The civil offences that are compoundable will be first referred to an in-house adjudication mechanism rather than court. It would be headed by an adjudicating officer that would be Registrar of company, any party aggrieved by the order of adjudicating authority can prefer an appeal to Regional Director.
3. IBC PRE-PACK SCHEME
A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors. This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe. Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
As at the end of March 2021, 79% of the ongoing insolvency cases had crossed the 270 day threshold.
As per the ordinance, a corporate debtor can initiate the process with the 60% approval of financial creditors, and the entire proceeding from commencement to the approval of the resolution plan will have to be completed in 120 days.
The base resolution plan which will be generated by out of the court negotiations would have to be submitted before the Committee of Creditors (CoC) within the two days of commencement of the process.
The most significant difference is that, unlike the general bankruptcy provisions, it will allow the management of defaulting company to be in control of its business operations.
Decriminalization of compoundable offences that are technical or procedural in nature is inherently beneficial to all stakeholders involved. The Government’s steps over the last few years will help direct the NCLT’s focus and resources only on defaults involving elements of public interest. At the same time, the company or officer in default involved is not made subject to a criminal proceeding for a technical or procedural lapse. The Decriminalization exercise is not just limited to few Acts like Companies Act/LLP Act/IBC. The Government is revisiting all economic laws to find the statues where criminality can be done away with. This will further strengthen India’s position in terms of ease of doing business and Investor sentiment.
However, it is imperative that an optimum balance be maintained between the goals of promoting greater ease of doing business and strengthening the corporate governance framework under the Act.