SYMBIOSIS LAW SCHOOL, PUNE

SUBJECT: COMPANY LAW-II

TOPIC- Critical Evaluation of The Decriminalisation Of
Director’s Liability And Remuneration With Special Reference
To Company (Amendment) Act 2020

SUBMITTED BY:

NAME: VARUN MENON K

COURSE: B.A.L.L.B (2019-2024)

DIVISION: ‘E’

P.R.N. NUMBER: 19010125474

Critical Evaluation of The Decriminalisation Of Director’s Liability And Remuneration
With Special Reference To Company (Amendment) Act 2020
Abstract-

Directors are often terms as the mind of a company, who are responsible for overlooking its
day-to-day functioning. However, like any other human agency, they are fallible to
oppressive, abusive, or corrupt motivations which may put the company or/and its members
in jeopardy. This essay critiques the decriminalisation of director’s liability and looks into
new remuneration provision bought under the Company (amendment) Act 2020.
INTRODUCTION

A company is a considered a separate legal entity with a legally recognised juristic

personality having a ‘common seal’ and independence from its own members. However,
companies – with their independent juristic existences – do not work on their own and have
members and personnel inside them who work in and for them. Often, they (knowingly or
unknowingly) engage in criminal acts which a company cannot be held for. Thus, a question
arises: can the personnel working in company be held criminally liable for acts which violate
the late? This essay attempts to Critical evaluate the Decriminalisation of Director’s
Liability and remuneration with special reference to Company (Amendment) Act 2020.
On November 14, 2019, the Company Law Committee submitted its report. The Finance
Ministry has recommended some important changes to the Companies Act, 2013, based on
this study, in the Companies Amendment Bill, 2020, which was later passed by the
parliament.

NATURE OF DIRECTORS IN COMPANIES

Directors, unlike members of a corporation (such as shareholders) or workers, are
independent contractors engaged by the firm to oversee its day-to-day operations. It's difficult
to put their perspective into specific terms. Directors, on the other hand, have never been
deemed the company's "servants" or "employees" in the eyes of the law. Rather, they have
been labelled as agents, trustees, or even "managing partners," which entails a fiduciary
responsibility. In essence, they manage the trading activities of the firm they have been
entrusted to operate in accordance with the interests and wishes of the owners1.

The relationship between the Director and their firm is theoretically straightforward: the
company, despite being a separate legal entity, is unable to function on its own and, as a
1
HAHLO AND TREBILCOCK, HAHLO'S CASEBOOK ON COMPANY LAW 42 (2nd Edn); Robert B. Thompson,
Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise
result, must rely on the Director. As a result, the presence of Directors is required to operate
them as an agent2. As agents, they are supposed to act in the company's best interests, and as
trustees, they have the right to make choices about how the money is spent, how the
administration is handled, and so on. However, unless they expressly act in a fiduciary
position towards shareholders, directors are not agents and trustees of the shareholders, but of
the company itself3.

SCOPE OF LIABILITY

When a director acts on behalf of the firm, the latter is normally accountable for any
misdeeds or wrongdoings carried out in its name. Thus, if a director is negligent in his
handling of a maritime vessel, the company is held accountable Because the Director is
invariably the firm's alter ego. Directors, on the other hand, can be held accountable for their
actions, even if they did it in the company's name. Furthermore, Directors may be held
accountable for internal misdeeds or malfeasances in some circumstances. The (criminal)
liabilities of Directors must be examined considering these principles.4

Decriminalisation of Director’s Liability- Much needed change

The imposition of civil liability for procedural errors benefits both companies and regulators,
as it eliminates the need to prove men’s rea, which is a prerequisite in criminal cases. The
Supreme Court held in Director of Enforcement v. MCTM Corporation 5 that civil
responsibility is imposed for "blameworthy conduct" and that guilty intent is not a
requirement. Furthermore, the standard of proof for criminal offences is higher, since they
must be proven "beyond all reasonable doubt," whereas for civil responsibility, a
"preponderance of probability" is acceptable. The proposed amendments are also a boost for
special courts, which are overburdened with cases involving defaults under CA, 2013.

The Companies (Amendment) Act of 2020 eliminates the requirement of jail for some
infractions, replaces the fine with a penalty, and cuts the amount of penalty payable across
the board. Penal consequences for trivial omissions, for example, have been omitted.

Major Aspects of decriminalisation; -

2
MacDougall v. Gardiner, (1875) 1 Ch. D. 13
3
Thomas K. Cheng, The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the U.S.
Corporate Veil Doctrines,
4
AVTAR SINGH, COMPANY LAW 254 (2019) [“Avtar Singh”].
5
AIR 1996 SC 1100
1. Omission of Certain Provisions- Certain offences have been omitted from the
Companies (Amendment) Act, 2020, which relate to non-compliance with NCLT
orders, such as orders relating to variation of shareholders rights, rectification of
members' registers, publication of NCLT orders for reduction of Share Capital,
redemption of debentures on maturity or payment of interest, and so on. Furthermore,
offences under Section 342(6) of the Companies Act, 2013 relating to the penal
provisions relating to non-cooperation by the Liquidator or any current or former
officer of the Company are deleted, leaving it up to the prosecuting court to compel
cooperation.
2. Removal of Imprisonment- Removing the penalty of jail and just imposing a fine The
legislature has removed imprisonment for certain listed offences while keeping the
criminal liability to a fine only, such as contravention of the matters prescribed or to
be stated in the prospectus as per Section 26, failure of the Company to comply with
the requirements of the special licence given to Section 8 companies, and failure to
comply with buy-back agreements, based on the CLC's recommendation, Section 68
requirements, for example
3. Offenses are being reclassified- The Companies (Amendment) Act, 2020 attempts to
enforce and adopt a principle-based approach in abolishing the imposition of punitive
penalties in cases of minute and technical defaults, keeping in mind the general
pendency of proceedings in courts and in an attempt to ease the load of such courts.
Furthermore, as authorised under the Act, the imposition of such monetary penalties
can now be adjudicated by In-House Adjudication Mechanisms (IAM). without
having to go through the criminal justice system, under section 454 of the Companies
Act of 2013.
4. Section 446B's application has been expanded-The Companies (Amendment) Act,
2020 expanded the application of Section 446B, which provides for lower fines for
small and one-person businesses, to all provisions of the Companies Act, 2013, that
impose monetary penalties, as well as Producer Companies and start-ups.
5. Offenses for which a different mechanism is available- The amendment has also
introduced a new framework or mechanism for the supervision of certain provisions,
such as non-compliance with the RD's order directing the change of the company's
name. The criminal fine provided under Section 16(3) has been replaced by allowing
the Central Government to allot a new name to the deterrent company and directed the
Registrar to enter the new name in the register of companies in place of the old name
and issue a fresh certificate.

indicting the Companies appears to be the rule, whereas indicting the directors appears to be
the exception, based on the explanation above. This is consistent with the principle of a
company's distinct legal identity. Furthermore, there are effective safeguards against
oppressive and abusive uses of authority by directors through criminal action, as understood
by the analysis provisions such as Section 447 of the Act.

DIRECTOR’S REMUNERATION UNDER THE NEW AMENDMENT

Managerial Personnel Remuneration within Limits: Section 197 and Schedule V deal with the
remuneration of managerial personnel. Schedule V Part II Section I – When a company has
sufficient profits to pay remuneration, it is subject to Section 197(1) of the Companies Act,
2013, which states that the total managerial remuneration payable by a public company to its
directors, including managing director and whole-time director, and its manager in respect of
any financial year shall not exceed 11% of the company's net profits for that financial year.

Currently, under Section 197(3) of the Companies Act, 2013 (2013 Act), a business is not
authorised to pay any remuneration (other than a sitting fee) to its directors, including the
managing director, whole-time director, or manager, unless Schedule V to the 2013 Act
provides otherwise. The Companies (Amendment) Act, 2020 (2020 Amendment Act) made
changes to Sections 149 and 197 of the 2013 Act, allowing non-executive directors, including
independent directors, to be compensated in the same way as executive directors in the event
of a profit shortfall. The President of India gave his assent to the 2020 Amendment Act on
September 28, 2020. On the 21st of December 2020 and the 22nd of January 2021, many
portions of the 2020 Amendment Act were notified.

CONCLUSION

Directors undoubtedly hold a vital position and are required to discharge important duties
touching upon the day-to-day administration of the company. While penal sanctions should
undoubtedly be discouraged, often Directors tend to get influence by power or intra-
company politics. Sufficient checks against oppression, mismanagement and abuse are thus
essential. Without them, the working of a company can potentially become undemocratic
and perhaps even against the interest of shareholders. To begin with, the Act's relaxations
can assist businesses in not just reducing compliance expenses but also allowing them to
focus on their core business activities. Companies will find it easier to correct their errors,
pay the penalty, and become compliant, which coincides with the goal of encouraging ease
of doing business.

While corporations in India are likely to embrace the decriminalization of some offences,
other groups on the other end of the spectrum may believe that the Bill went too far because
some of the non-compliance that was intended to be decriminalized may have harmed the
public interest. Adding more NCLT benches and raising the judge cap to the full strength of
the bench will help to reduce the backlog and make it simpler for plaintiffs to reach the
appeals body. It is critical to note that the Bill aspires to give the Central Government
significant powers, exercisable as appropriate after consultation with the authorities, to grant
exemptions and preferential treatment to categories of entities deemed appropriate under the
Act. It will be fascinating to see how the Indian Parliament adopts the Bill in its ultimate
form, as well as whether any additional amendments to the Act are made in light of the
present pandemic.