“Decriminalization Dilemma: Has the Companies Act Lost Its Balance?”

This article is written by Nisha kiran, BA-LLB, 2022, PRESIDENCY UNIVERSITY,BANGALORE during her internship at LeDroit India.

Abstract

Decriminalization, Companies Act, Ease of Doing Business: In recent years, India has embarked on a mission to decriminalize offences under the Companies Act, 2013https://ledroitindia.in/comparative-analysis-of-the-companies-act-1956-and-the-companies-act-2013/ as part of a broader push to enhance the ease of doing business. By reclassifying minor corporate compliance violations from criminal offences to civil penalties, the government aims to foster a more business-friendly regulatory climate. This abstract provides an overview of the initiatives to decriminalize company law offences and examines whether these reforms have tangibly improved India’s business environment. It summarizes key amendments (in 2019 and 2020) that removed or diluted criminal penalties for technical non-compliances, the rationale behind these changes, and their impact on corporate compliance and legal processes. The discussion also highlights illustrative cases and judgements, as well as opinions on whether easing punitive provisions has indeed reduced bureaucratic hurdles and encouraged investment, or if it risks weakening corporate governance. The analysis concludes with a critical assessment of how decriminalization has influenced India’s ease of doing business, using relevant keywords and case references to ground the findings in practical outcomes.

Introduction

The Companies Act, 2013 traditionally contained numerous penal provisions, reflecting a strict regulatory approach wherein failures to comply (even with procedural requirements) could trigger criminal prosecution. As of the Act’s original enactment, there were 134 sections imposing criminal liability for non-compliance. This punitive regime was rooted in the deterrence doctrine – the belief that fear of criminal sanctions would ensure corporate compliance. However, such a stance often made India’s corporate legal landscape compliance-heavy and intimidating for businesses. Minor lapses, like delayed filings or technical defaults, could result in court cases, contributing to protracted litigation and burdening special courts with a backlog of trivial offences. Critics pointed out that treating procedural missteps as crimes deterred entrepreneurship and investment, as even well-meaning companies faced the threat of jail terms or fines for marginal infractions.

In the past decade, the Government of India launched an aggressive reform agenda to improve the nation’s standing in the World Bank’s Ease of Doing Business index. India’s rank dramatically improved from 142 in 2014 to 63 in 2019 coinciding with numerous regulatory simplifications across various domains. Within corporate law, a central reform theme was “trust-based governance” – shifting from criminalizing compliance violations to encouraging voluntary compliance through civil enforcement mechanisms. This led to the decriminalization of many Companies Act offences, aiming to reduce fear of unwarranted prosecutions and to streamline dispute resolution. Decriminalization in this context does not mean legalizing wrongful acts; rather, it involves reclassifying certain offences as “civil wrongs” punishable with monetary penalties (adjudicated administratively) instead of criminal fines or imprisonment (which require court trials). Serious violations involving fraud or public interest harm remain criminal, but minor, technical or procedural defaults are now largely handled through an in-house adjudication mechanism instead of the criminal courts.

The driving philosophy behind these changes is to promote ease of doing business by treating entrepreneurs as “partners in growth” rather than potential criminals. By reducing the criminal law overhang, the government expects companies – especially startups and smaller enterprises – to operate with less fear of litigation, thereby focusing on innovation and growth. At the same time, the reforms aim to unclog the courts and NCLT (National Company Law Tribunal) by handling petty violations through quicker, administrative proceedings. The critical question is whether this decriminalization of Companies Act offences has indeed translated into a more conducive business environment, or if it merely provides cosmetic relief without substantial impact on the ground. To answer this, one must examine the specific amendments enacted, their implementation (including key case law outcomes), and the measurable effects on compliance and business operations.

Key Reforms: Decriminalization under Companies (Amendment) Acts 2019 and 2020

Many decriminalization measures were introduced in two phases: first in the https://indiankanoon.org/doc/257409/Companies (Amendment) Act, 2019 and then more extensively by the Companies (Amendment) Act, 2020. These amendments were driven by expert penal ’ recommendations. In 2018, the Ministry of Corporate Affairs (MCA) set up a panel chaired by Mr. Injeti Srinivas to review offences under the Act and suggest which could be decriminalized. The panel (Company Law Committee, or CLC) identified dozens of minor and technical offences suitable for reclassification as civil infractions. Acting on these recommendations, the 2019 Amendment Act re-categorized 16 sections  from criminal offences to civil penalties This was only the start; a second Company Law Committee in 2019 examined 66 remaining compoundable offences and recommended a sweeping decriminalization affecting 46 provisions. The result was the Companies (Amendment) Act, 2020, which implemented most of these recommendations.

Key aspects of the 2019 and 2020 amendments include:

• In-house Adjudication Mechanism (IAM): Sixteen minor offences were shifted from the courts to an in-house adjudication framework via the 2019 amendment. Under Section 454 of the Act, central government-appointed officers (not below ROC rank) can now adjudicate and levy penalties for designated defaults. The 2020 Act expanded this by moving 23 more offences to the IAM system. For example, authorities now impose monetary penalties through the Registrar of Companies (ROC) for failing to register a share transfer (Section 56) or for not maintaining a register of members (Section 88), instead of pursuing fines or imprisonment through a court trial.The adjudication process is largely electronic, enabling companies to communicate with the officer and rectify defaults remotely, saving time and resources.
• The amendments remove incarceration as a punishment for many offences that authorities deem not to involve fraud or cause public harm. The CLC classified offences by severity and determined that those involving subjective judgment but not serious wrongdoing should be punishable with fine only (no jail). Accordingly, the 2020 Act eliminated imprisonment for 11 offences and limited punishment to fines. For instance, contraventions of certain corporate governance norms or failure to file resolutions now incur only fines (or penalties) instead of potential imprisonmentt.
• Even where fines remain, lawmakers often reduced their quantum to make penalties more proportionate.
• Omitting Redundant Offences: Lawmakers completely removed seven compoundable offences that they considered redundant or better addressed under other laws. This streamlining prevented authorities from penalizing companies twice for the same lapse and ensured that trivial provisions did not trigger prosecutions. For example, lawmakers deleted certain offences related to non-compliance with orders, since courts or tribunals could handle such matters through their contempt powers instead of treating them as separate criminal offences under the Act.
• Alternative Sanctions Framework: In a few cases (five instances, as noted by the CLC), lawmakers neither decriminalized nor retained the offences in their original form but instead shifted them to alternative framework. For example, authorities now handle violations of NCLT orders under the NCLT’s contempt jurisdiction instead of treating them as criminal offences under the Companies Act.
• This ensures a more fitting response to specific non-compliances without overburdening criminal courts.

These reforms collectively decriminalized or diluted punishment for over 60 offences (16 in 2019, ~46 in 2020), marking a substantial shift in the enforcement philosophy of company law. Minor violations (like late filing of annual return, missing a deadline for financial statement submission, not updating certain registers, etc.) no longer make company officials potential “criminals”. Instead, such lapses result in civil penalties adjudicated summarily by the ROC, often resolved by paying a prescribed amount. This reduces mens rea considerations and procedural complexities – as the Supreme Court observed in Director of Enforcement v. MCTM Corporation, penalties under regulatory laws impose liability for “blameworthy conduct” without requiring proof of guilty intent.

Illustrations and Case Law: Implementation of Decriminalization

Examples and subsequent judicial rulings best illustrate the impact of these amendments. A landmark instance involves how courts treated pending prosecutions for offences decriminalized by the 2020 amendment. The Madras High Court’s 2023 decision in M/s. Shine School of Excellence Pvt. Ltd. v. Registrar of Companies The case before the Registrar of Companies is instructive. In that case, authorities prosecuted the company’s directors for failing to file the annual return and financial statements for the year 2016–17, which the Companies Act classified as offences under Sections 92(5) and 137(3). While the criminal case was ongoing, lawmakers enacted the 2019 Amendment, changing the law and reclassifying these offences (failure to file annual returns or financials) as mere “penalties” adjudicated by the ROC instead of crimes. The petitioners asserted that continuing the criminal trial after the amendment would be unjust, especially since they had already filed the documents and paid the late penalties to the ROC. Citing the Supreme Court’s doctrine from T. Barai v. Henry Ah Hoe (1983) that beneficial amendments reducing punishment should apply to pending cases, the High Court agreed.

In Shine School (2023), Justice Sunder Mohan emphasized that the legislature intended the 2019/2020 amendments to ease doing business and reduce prosecutions for technical defaults. The Court noted that what was once an “offence” triable by a Special Court had become a “default” punishable with a monetary penalty under an administrative regime. Therefore, it held that the pending prosecution could not continue, since the act was “no longer an offence” in view of the amendment. The judge ordered that all such prosecutions be withdrawn and the matters be transferred to the adjudicating authority (ROC) for levying penalties as per Section 454. This judgment explicitly recognized the decriminalization amendment’s retrospective protective effect:

“Parliament had made amendments for the purpose of easing the doing of business and reducing prosecutions…

There is no reason the authorities cannot apply the amendment in favour of the accused in pending prosecutions. The amendment softens the severity of punishment; Therefore, the court must apply this beneficial construction to pending cases and withdraw all prosecutions, transferring them to the adjudicating authority under Section 454.

As a result, the ROC spared the directors in the Shine School case from a criminal trial and instead imposed a late fee or penalty for their default. This case clearly demonstrates how decriminalization improved the ease of doing business — it replaced a lengthy court proceeding with a swift administrative resolution, enabling the entrepreneurs to refocus on their school business after paying the due penalty.

Has Ease of Doing Business Improved?

These reforms suggest a clear answer: yes, decriminalizing Companies Act offences has improved ease of doing business in India. By removing criminal threats for minor compliance issues, India has created a more relaxed, trust-based regulatory environment that allows honest entrepreneurs to operate without fear of imprisonment for inadvertent lapses. Several specific outcomes bolster this conclusion:

• Authorities now resolve corporate defaults that previously led to court cases (taking years to conclude) within a few months through adjudication orders. The surge in ROC orders (157 in 2019 to 765 in 2023) shows that thousands of cases have been diverted away from courts. Businesses can simply pay a monetary penalty and “move on after paying the penalty rather than fighting prosecution”, as officials observed. This agility directly contributes to ease of doing business – management time and legal expenses are saved, and the uncertainty of criminal proceedings is avoided.
• Reduced Litigation and Lower Compliance Costs: Decriminalization has significantly reduced the number of prosecutions the government pursues. The MCA’s withdrawal of over 7,000 pending cases in 2023 is evidence of a lighter litigation footprint. Less litigation means lower legal costs for companies and less diversion of resources towards handling court cases. As mundane disputes move out of courts, the judicial system can focus on serious corporate frauds and insolvency matters, potentially yielding faster outcomes there too. For companies, compliance now often means a financial consequence (penalty) rather than entanglement with criminal lawyers and court appearances. This more predictable and business-like handling of defaults improves confidence in the regulatory regime.
• Focus on Substance over Form: A critical benefit is that corporate officers can focus on substantive business operations and governance, rather than being overly occupied with procedural compliance to avoid jail. The decriminalized regime maintains accountability (through financial penalties) but is more forgiving of technical or venial breaches. This allows businesses to allocate resources and attention to innovation, expansion and sound governance practices. For instance, the removal of the mandatory company seal and other such small compliance burdens were steps in the same direction. In essence, regulators have recalibrated the burden to make it more reasonable. Companies can correct honest mistakes or delays by paying a fee, while authorities continue to impose harsh punishment for deliberate fraud — a balanced approach.

Nonetheless, it is important to temper the optimism with some critical observations. Decriminalization is not a remedy, and its success in improving the business climate depends on effective implementation and maintaining a balance so as not to undermine corporate governance:

• Oversight Challenges of the New Regime
• Shifting many compliance decisions to ROCs and adjudicating officers (executive officials) raises concerns about consistency and oversight. Some warn that replacing judicial review with executive adjudication might cause uneven enforcement or the potential for corruption without proper supervision.
• Ensuring Fairness and Avoiding Pitfalls
• The government must ensure that adjudicating officers act transparently and fairly, and that companies have sufficient appeal avenues (appeals go to Regional Directors under Section 454(5)). If the in-house system becomes too lenient or too strict, it could either encourage non-compliance or create new bottlenecks, jeopardizing the ease-of-business improvements. So far, the MCA’s data—showing thousands of penalties—suggests the mechanism is active, and the lack of public controversy indicates it’s currently working well.
• Still, regulators must continuously monitor the system to maintain the right balance between facilitation and enforcement.

Decriminalization: Impact on India’s Business Environment

The decriminalization of Companies Act offences has positively affected the ease of doing business in India. This reform has reduced unnecessary criminal proceedings, sped up compliance resolutions, and fostered a more investor-friendly regulatory environment.

References

1. Press Information Bureau (MCA) – “MCA approves withdrawal of another 7,338 prosecutions pending before various courts…” (Press Release, 14 July 2023)pib.gov.inpib.gov.in. (Announces withdrawal of prosecutions in light of decriminalization drive.)
2. Arun Kumar, IndiaCorpLaw Blog – “Decriminalisation of Company Law: A Welcome Change” (Jan 7, 2020)indiacorplaw.inindiacorplaw.in. (Discusses the 2019 CLC report and rationale for civil liability vs criminal liability in corporate law, citing Director of Enforcement v. MCTM Corporation.)
3. Madras High Court – M/s Shine School of Excellence (P) Ltd. v. ROC, Crl. O.P. No. 30374 of 2019, judgment dated 6 April 2023. (Available on Indian Kanoon & Casemine)taxmanagementindia.comtaxmanagementindia.com. (Held that 2019/2020 amendments apply to pending cases; ongoing prosecutions for decriminalized offences were quashed and transferred to ROC adjudication.)
4. Livemint (G.C. Prasad) – “How RoCs raised the game after company law decriminalization” (23 Nov 2023)livemint.comlivemint.com. (Reports fivefold jump in ROC penalty orders from 2019 to 2023 and quotes officials on decriminalization improving ease of doing business.)
5. Companies (Amendment) Act, 2020 – Key Provisions Summary, Ministry of Corporate Affairstaxtmi.comtaxtmi.com. (Converted 23 offences to in-house penalties, removed imprisonment for 11 offences, omitted 7 offences, etc., to promote ease of doing business.)
6. Blog.iPleaders – “Decriminalisation of Offences under Companies Act” (May 21, 2022)agamalaw.inagamalaw.in. (Analyzes the basis of decriminalization, with pros/cons and impact on ease of doing business, corporate governance, CSR, etc.)
7. Supreme Court of India – Director of Enforcement v. MCTM Corporation Pvt. Ltd., (1996) 2 SCC 471indiacorplaw.in. (Held that mens rea is not required for imposing civil penalties for regulatory breaches – a principle supporting the shift to civil enforcement in company law.)
8. Supreme Court of India – Hindustan Steel Ltd. v. State of Orissa, (1970) 25 STC 211 (AIR 1970 SC 253). (Established that penalty for technical statutory defaults should not be imposed in a routine manner, especially when the default is trivial or due to bona fide reasons – echoing the ethos behind decriminalization of minor company law offences.)