Contributed by Arnav Sinha and Pratyush Pandey

Introduction

The Companies Act, 2013, a cornerstone in the legal framework governing corporate entities, provides for a structured mechanism of adjudication of penalties under section 454. However, the right to appeal against the orders promulgated under this framework has been a subject of considerable debate and concern. Primarily, the issue revolves around whether the current appellate framework, which grants executive authorities the power to adjudicate penalties under Section 454, effectively balances the need for swift resolution of corporate non-compliance with the right to a fair appeal, or if there is a need to include the National Company Law Tribunal (“NCLT”) to ensure a more robust appellate mechanism.

The concern over the appellate framework is intensifying as the decriminalization of corporate offences has gradually shifted power towards executive authorities, encroaching on the judicial domain. This article critically examines this concern under the Companies Act, 2013, and emphasizes the need for a more robust appellate framework to ensure fairness efficiency and transparency in corporate adjudication through a comparative analysis with the sections of Income Tax Act.   

Existing Appellate Mechanisms Under Companies Act

Section 454(1) of the Companies Act, 2013, lays down a simple framework for adjudicating penalties for non-compliance. The Central Government appoints officers, not below the rank of Registrar, as Adjudicating Officers (“AO”) to impose these penalties. The AOs so appointed have jurisdiction specified by the government and they may impose penalties on companies and defaulting officers of such companies after identifying violation, provided that, the penalty so imposed is monetary in nature and not otherwise. If any person or party is aggrieved by the order given by the AO, then that person or party can appeal to the Regional Director (“RD”) within 60 days from the date on which the copy of the order made by the AO is received by them. The RD, after hearing both sides, may confirm, modify, or set aside the AO’s order. However, beyond the appeal to the RD, no further appellate procedure is provided for under the Companies Act.

The Impact of Decriminalization on the Adjudication Process

The Companies Act 2013 has evolved significantly since its inception, shifting from a deterrence-based approach to one that prioritizes ease of doing business. In 2017, the government formed a committee, led by Mr. Injeti Srinivas, to assess whether certain offences under the Act could be decriminalized and treated as civil violations. Based on the committee’s recommendations, the decriminalization process began in two phases: in the first phase, 16 compoundable offences were decriminalized through the Companies (Amendment) Act of 2019, and in the second phase, nearly 46 provisions were decriminalized through the Companies (Amendment) Act of 2020.  

The offences were decriminalised in three ways firstly imposing penalties as a civil wrong which were earlier criminal wrongs. These changes can be seen in section 56(6), 86(1),
88(5). Secondly, imposition of Fine in lieu of Imprisonment in sections 8(11), 26(9), 40(5),68(11). Lastly, Omission of Offences 48(5), 59(5), 66(11) etc.

The adjudication of these decriminalized offences is handled by AOs through the In-House Adjudicating Mechanism (IAM) under Section 454 of the Act. The IAM enables AOs to levy penalties for civil violations, with appeals against their decisions directed to the RD, who provides administrative oversight. These amendments have expanded the IAM’s jurisdiction from 18 to 35 sections through the 2019 and 2020 amendments, thus increasing the powers of AOs and the RD. The committee’s proposals also addressed changes to sections like 242(8), 243(2), 128(6), and 8(11), further extending the power to the administrative authorities.

The Plight of Appeal 

Over the past year, only a small number of cases have been filed before the High Court to challenge orders issued by the RD under Section 454 of the Companies Act. This low volume of cases can be largely attributed to the fact that pursuing writ petitions is often perceived as an expensive and time-consuming process. Additionally, Section 454(8) of the Act imposes strict penalties for non-payment of fines within ninety days, adding further pressure on companies and officers to avoid lengthy legal battles in the High Court. Given the stringent consequences and the fact that the average pendency of cases in Indian High Courts is around three years, many companies and officers may be discouraged from seeking further legal recourse. This highlights the need for a more accessible and streamlined appellate mechanism within the Companies Act framework.  

The Need for NCLT in the Appellate Process

The appellate mechanism under the Companies Act can be made more accessible and streamlined, both in terms of time and cost, by introducing the NCLT and the National Company Law Appellate Tribunal (“NCLAT”) into the process. A comparison of case pendency underscores the advantages of shifting appeals to specialized tribunals. As of January 2023, the NCLT and NCLAT had only 21,000 pending cases, while the High Courts were burdened with a massive backlog of 42.64 lakh civil cases, including 2.45 lakh pending for over 20 to 30 years. This significant disparity indicates that redirecting appeals from the RD to tribunals like the NCLT and NCLAT could substantially reduce delays and litigation costs linked with writ petitions in the High Courts.

The need for the inclusion of these tribunals in the appellate process under the Companies Act is further supported by the recommendations of the Company Law Committee Report. The report advocates for an additional layer of appeal, allowing challenges against the RD’s orders to be heard by the NCLT, with further appeals against NCLT orders directed to the NCLAT. This, according to the report, would make the appellate mechanism more efficient and accessible, while also easing the burden on the High Courts.

A Comparative Analysis: Learning from the Income Tax Act

To effectively implement the proposed reforms, valuable insights can be drawn from the Income Tax Act, which provides a multi-layered appellate structure contrasting sharply with the framework under the Companies Act.

Section 454 of the Companies Act merely provides for a provision to appeal the AO’s order to the RD. However, under the Income Tax Act, an aggrieved person or party, generally an assessee or deductor, can firstly appeal to the Commissioner of Income Tax (Appeals). If the aggrieved person party is dissatisfied with this decision, then a second appeal can be initiated before the Income Tax Appellate Tribunal. If the person or party is still not satisfied with the decision of the appeal then subsequent appeals can be made before the High Court and finally to the Supreme Court.

The access to tribunals before approaching the court, which the Companies Act lacks, significantly empowers parties by providing a pathway to fair and expedited justice, as tribunals consist of both judicial and administrative members, allowing for balanced and informed deliberation of cases.

Conclusion: Toward a Fair and Efficient Appellate System

The appellate mechanism under Section 454 of the Companies Act 2013, exhibits significant shortcomings that hinder the pursuit of fair and timely justice in corporate matters. The limitations imposed by the existing structure, particularly the reliance on the RD as the sole appellate authority, create barriers that discourage parties from seeking judicial recourse. The increasing decriminalization of corporate offences further complicates the adjudication process, necessitating a re-evaluation of how appeals are managed within this legal framework. Introducing the NCLT and the NCLAT would enhance efficiency and accessibility, alleviating the burden on High Courts. Learning from the more structured and tiered appellate system of the Income Tax Act and the recommendations of the Company Law Committee offers a promising solution in this regard.