Wednesday, September 30, 2015

The Seven “Punishments” in the Companies Act 2013

The Seven “Punishments” in the Companies Act 2013

CS Bilu Balakrishnan, Founder, CIER

This write-up invites the attention of readers to the seven sections / provisions (Sections 447 to 453) in the Companies Act 2013 (which replaces the 1956 Act). It’s very essential to understand these seven sections; and reading of this write-up will be useful for every professional, student and all stakeholders too.

The new parent corporate law “The Companies Act 2013” is mostly implemented by the Ministry of Corporate Affairs (MCA), Govt. of India. Apart from knowing and learning the direct and indirect provisions affecting your interest of topic, like: accounts, audit, directors, KMP, loans etc., it’s very essential to know and learn the sword sections (heavy consequences) in the Act. I had picked 7 such sections ranging from Section 447 to Section 453 in the Companies Act 2013 (hereinafter “2013 Act” for brevity). I am limiting my write-up to the provisions to the Act, and I request the readers to refer relevant rules, if any, before forming an opinion.

Section 447 – Punishment for fraud:

One of the most frequently quoted sections in the 2013 Act is the Section 447 dealing with “Punishment for fraud”. The term fraud is a commonly used one, but the new law for company has a clear explanation for the term “fraud”, which is explained below:

“fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.”
Interestingly the law also explains the terms “any wrongful gain or wrongful loss”, which runs as under:

 “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;

 “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

Thus, as per Section 447, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Section 448 – Punishment for false statement:

This section corresponds Section 628 of the 1956 Act, and one of the very important provision for the practising professionals like CA, CS and CMAs who do pre-certification work and attestation / audit assignments.
Section 448 says that, if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this 2013 Act or the rules made there under, any person makes a statement,—

(a) which is false in any material particulars, knowing it to be false; or

(b) which omits any material fact, knowing it to be material,

the, such person be liable under section 447.

Thus every professional who gives / signs / attests / certifies a return, report, certificate, financial statement etc. under the 2013 Act will be punishable u/s.447 if the criteria stated in Section 448 are attracted.

Section 449 – Punishment for false evidence:

This section corresponds Section 629 of the 1956 Act, and one of the very important section for individuals giving an evidence under the 2013 Act.

Section 449 states that, if any person intentionally gives false evidence—

(a) upon any examination on oath or solemn affirmation, authorised under this Act; or

(b) in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise in or about any matter arising under this Act,

he shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years and with fine which may extend to ten lakh rupees.

Section 450 – Punishment where no specific penalty or punishment is provided:

You may find many Sections in the 2013 Act, where there is no specific penalty or punishment are stated. It’s not happy news, as far as you come to know about Section 450, which specifies penalty or punishment in such cases. This section corresponds Section 629A of the 1956 Act.

According to Section 450, if a company or any officer of a company or any other person contravenes any of the provisions of 2013 Act or the rules made there under, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day (*penalty doubled from 1956 Act) after the first during which the contravention continues.

Section 451 – Punishment in the case of repeated defaults:

“Excellence should be a Habit”, but not in the case of offences / defaults in the 2013 Act.  “Default should not be a habit” says the new law !

As per Section 451 of the 2013 Act, if a company or an officer of a company commits an offence punishable either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.

Section 452 – Punishment for wrongful withholding of property:

Section 452 corresponds Section 630 of the 1956 Act. According to Section 452 of the 2013 Act, if any officer or employee of a company—

(a) wrongfully obtains possession of any property, including cash of the company; or

(b) having any such property including cash (*introduced in the 2013 Act) in his possession, wrongfully withholds it or knowingly applies it for the purposes other than those expressed or directed in the articles and authorised by this Act,

he shall, on the complaint of the company or of any member or creditor or contributory thereof, be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

The Court trying an offence may also order such officer or employee to deliver up or refund, within a time to be fixed by it, any such property or cash wrongfully obtained or wrongfully withheld or knowingly misapplied, the benefits that have been derived from such property or cash or in default, to undergo imprisonment for a term which may extend to two years.

Thus, this Section intends to safeguard the assets / properties of the company, including cash, from wrongful withholding or misapplication.

Section 453 – Punishment for improper use of “Limited” or “Private Limited”:

Section 453 is similar to that of Section 631 of 1956 Act, which states that if any person or persons trade or carry on business under any name or title, of  which the word “Limited” or the words “Private Limited” or any contraction or imitation thereof is or are the last word or words, that person or each of those persons shall, unless duly incorporated with limited liability, or unless duly incorporated as a private company with limited liability, as the case may be, punishable with fine which shall not be less than five hundred rupees but may extend to two thousand rupees (*introduced in the 2013 Act) for every day for which that name or title has been used.

Thus, only companies incorporated under the Act, shall use the words “Limited” or “Private Limited” in the trade name.

To conclude, the most interesting part of the above seven punishments in the new law is that, it casts huge responsibility on the professionals and stakeholders dealing with the company, and as you can see the penalty is also kept as high, when compared to the 1956 law. Introducing the concept of “fraud” and giving an explanation in the Act is a welcoming step. I am sure that the job of pre-certification, attestation, audit and reporting will be a more hectic task in the light of few of the above cited punishments in the Companies Act 2013.

The knowledge of such punishments in the 2013 Act are also significant for company directors / officers and all stakeholders in general !



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