Companies (Adjudication of Penalties) Amendment Rules, 2019

The Central Government’s Ministry of Corporate Affairs, on 19th February 2019, vide notification G.S.R. 131(E) notified the Companies (Adjudication of Penalties) Amendment Rules, 2019 to amend the Companies (Adjudication of Penalties) Rules, 2014.

The Rule No. 3 stands substituted and the new changes that it brings along are:  

  • As per Rule 3(2), before adjudging penalty, the adjudicating officer shall issue a written notice as per Section 20 of the Companies Act, 2013 and rules made thereunder.
  • For issuing the above stated notice, the details in respect of address (including electronic mail ID) provided in the KYC documents filed in the registry shall be used for communication under this rule.
  • Now, in addition to the company and the defaulting officer, any other person can also be served a notice.
  • Earlier the notice was sent to show cause why the inquiry should not be held against it/him, now after the amendment the notice sent shall be to show cause as to why the penalty should not be imposed on it/him.
  • As per Rule 3(3), now, in the above stated notice, it shall be mandatory to draw attention to the relevant penal provisions of the Company Act, 2013 and the maximum penalty which can be imposed on the company, and each of the officers in default or any other person.
  • As per Rule 3(4), now, the reply to such notice shall be filed only in electronic mode within the period as specified in the notice.
  • The period to show cause specified in the notice could be extended, after recording reasons in writing, up to 15 days if the company or officer satisfied the said officer that it had a sufficient cause for not responding to the notice within the stipulated period. Now in addition to this, the Rule 3(4) enables the adjudicating officer to extend this period to show cause even if the company or the officer or the person has not satisfied him with respect to the delay. However, such extension shall be made by the adjudicating officer only if he has reason to believe that the company or the officer or the person has received a shorter notice and did not have reasonable time to give reply.
  • As per the Rule 3(5) now, if after considering the reply submitted by such company, its officer, or any other person, as the case may be, the adjudicating officer is of the opinion that physical appearance is required, he shall issue a notice, within a period of ten working days from the date of receipt of reply fixing a date for the appearance of such company, through its authorised representative, or officer of such company, or any other person, whether personally or through his authorised representative. Earlier this limitation of 10 working days was not present.
  • Moreover as per the proviso to Rule 3(5), if any person, to whom a notice is issued under Rule 3(2), desires to make an oral representation, whether personally or through his authorised representative and has indicated the same while submitting his reply in electronic mode, the adjudicating officer shall allow such person to make such representation after fixing a date of appearance.
  • As per the proviso to Rule 3(6) after hearing, the adjudicating officer may require the concerned person to submit his reply in writing on certain other issues related to the notice under Rule 3(2), relevant for determination of the default.
  • As per Rule 3(7), now, the adjudicating officer shall pass an order:
    • within thirty days of the expiry of the period referred in Rule 3(2) or of such extended period as referred therein, where physical appearance was not required under Rule 3(5);
    • within ninety days of the date of issue of notice under Rule 3(2), where any person appeared before the adjudicating officer under Rule 3(5)
  • However, the proviso the Rule 3(7) states that in case an order is passed after the aforementioned duration, the reasons of the delay shall be recorded by the adjudicating officer and no such order shall be invalid merely because of its passing after the expiry of such thirty days or ninety days as the case may be.
  • As per Rule 3(8) every order of the adjudicating officer requiring the physical appearance under Rule 3(5) shall clearly state the reasons for the said order.
  • As per Rule 3(9) the adjudicating officer shall send a copy of the order passed by him to the concerned company, officer who is in default or any other person or all of them and to the Central Government and a copy of the order shall also be uploaded on the website.
  • As per Rule 3(10), the adjudicating officer, while exercising his power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case shall now be required to record reasons in writing before exercising this power of summoning and enforcing attendance.
  • As per Rule 3(11) if any person fails to reply or neglects or refuses to appear as required under Rule 3(5) or Rule 3(10) before the adjudicating officer, the adjudicating officer may pass an order imposing the penalty, in the absence of such person after recording the reasons for doing so.
  • As per Rule 3(12), from now, while adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely:-
    • size of the company;
    • nature of business carried on by the company;
    • injury to public interest;
    • nature of the default;
    • repetition of the default;
    • the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and
    • the amount of loss caused to an investor or group of investors or creditors as a result of the default:
  • However, the proviso to Rule 3(12) provides that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Companies Act, 2013.
  • As per Rule 3(13), in case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.
  • As per Rule 3(14), penalty shall be paid only through Ministry of Corporate Affairs portal.
  • As per the new rules, the requirement of submission of replies in electronic mode shall become mandatory after the creation of the e-adjudication platform.”

The new Rule 3 reads as follows:

Adjudication of Penalties. –

(1) The Central Government may appoint any of its officers, not below the rank of Registrar, as adjudicating officers for adjudging penalty under the provisions of the Act.

(2) Before adjudging penalty, the adjudicating officer shall issue a written notice in the specified manner, to the company, the officer who is in default or any other person, as the case may be, to show cause, within such period as may be specified in the notice (not being less than fifteen days and more than thirty days from the date of service thereon), why the penalty should not be imposed on it or him.

(3) Every notice issued under sub-rule (2), shall clearly indicate the nature of non-compliance or default under the Act alleged to have been committed or made by such company, officer in default, or any other person, as the case may be and also draw attention to the relevant penal provisions of the Act and the maximum penalty which can be imposed on the company, and each of the officers in default, or the other person.

(4) The reply to such notice shall be filed in electronic mode only within the period as specified in the notice :

Provided that the adjudicating officer may, for reasons to be recorded in writing, extend the period referred to above by a further period not exceeding fifteen days, if the company or officer in default or any person as the case may be, satisfies the adjudicating officer that it or he has sufficient cause for not responding to the notice within the stipulated period or the adjudicating officer has reason to believe that the company or the officer or the person has received a shorter notice and did not have reasonable time to give reply.

(5) If, after considering the reply submitted by such company, its officer, or any other person, as the case may be, the adjudicating officer is of the opinion that physical appearance is required, he shall issue a notice, within a period of ten working days from the date of receipt of reply fixing a date for the appearance of such company, through its authorised representative, or officer of such company, or any other person, whether personally or through his authorised representative :

Provided that if any person, to whom a notice is issued under sub-rule (2), desires to make an oral representation, whether personally or through his authorised representative and has indicated the same while submitting his reply in electronic mode, the adjudicating officer shall allow such person to make such representation after fixing a date of appearance.

(6) On the date fixed for hearing and after giving a reasonable opportunity of being heard to the person concerned, the adjudicating officer may, subject to reasons to be recorded in writing, pass any order in writing as he thinks fit including an order for adjournment :

Provided that after hearing, adjudicating officer may require the concerned person to submit his reply in writing on certain other issues related to the notice under sub-rule (2), relevant for determination of the default.

(7) The adjudicating officer shall pass an order,-

(a) within thirty days of the expiry of the period referred in sub-rule (2) or of such extended period as referred therein, where physical appearance was not required under sub-rule (5);

(b) within ninety days of the date of issue of notice under sub-rule (2), where any person appeared before the adjudicating officer under sub-rule (5):

Provided that in case an order is passed after the aforementioned duration, the reasons of the delay shall be recorded by the adjudicating officer and no such order shall be invalid merely because of its passing after the expiry of such thirty days or ninety days as the case may be.

(8) Every order of the adjudicating officer shall be duly dated and signed by him and shall clearly state the reasons for requiring the physical appearance under sub-rule (5).

(9) The adjudicating officer shall send a copy of the order passed by him to the concerned company, officer who is in default or any other person or all of them and to the Central Government and a copy of the order shall also be uploaded on the website.

(10) For the purposes of this rule, the adjudicating officer shall exercise the following powers, namely:-

(a) to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case after recording reasons in writing;

(b) to order for evidence or to produce any document, which in the opinion of the adjudicating officer, may be relevant to the subject matter.

(11) If any person fails to reply or neglects or refuses to appear as required under sub-rule (5) or sub-rule (10) before the adjudicating officer, the adjudicating officer may pass an order imposing the penalty, in the absence of such person after recording the reasons for doing so.

(12) While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely:-

(a) size of the company;

(b) nature of business carried on by the company;

(c) injury to public interest;

(d) nature of the default;

(e) repetition of the default;

(f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and

(g) the amount of loss caused to an investor or group of investors or creditors as a result of the default:

Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act.

(13) In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.

(14) Penalty shall be paid through Ministry of Corporate Affairs portal only.

(15) All sums realised by way of penalties under the Act shall be credited to the Consolidated Fund of India.

Explanation 1.- For the purposes of this rule, the term “specified manner” shall mean service of documents as specified under section 20 of the Act and rules made thereunder and details in respect of address (including electronic mail ID) provided in the KYC documents filed in the registry shall be used for communication under this rule.

Explanation 2.- For the purposes of this rule, it is hereby clarified that the requirement of submission of replies in electronic mode shall become mandatory after the creation of the e-adjudication platform.”

Copy of notification: G.S.R. 131(E)

-Tushar Kaushik

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